Gitanjali Diwakar, Surbhi Kapur, Nimmy Sara Zachariah

A year ago, Paytm was lauded by the Prime Minister for its contributions to India’s digital finance landscape. Today, one of its premiere products struggles to revive itself after failing to fulfil certain mandatory compliances.

As a results its share price has plummeted and its reputation has taken a hit. With a series of setbacks, Byju’s is also in a similar spot — from layoffs to mismanaged funds and more. At this juncture, it would be worthwhile to analyse these situations from a legal lens.

Both scenarios mentioned above present a compelling case for the appropriate application of corporate law principles. To begin with, Paytm and Byju’s did not imbibe the essence of fiduciary duty. The term originates from the Latin word ‘Fiducia’ (which means ‘trust’). The principle emphasises on the duty that must be fulfilled by those entrusted with company’s affairs. The conduct of the heads of Paytm and Byju’s depicts a deviation from this principle.

The incidents also throw light upon the proper purpose rule — i.e. the powers bestowed upon an individual must be used only for a specific purpose. The misuse of this power by the leadership of both enterprises led to a decline in their valuation. Consequently, Byju’s saw a downfall in the infusion of funds by investors. Paytm’s Co-founder, on the other hand, attributed his actions to the wisdom of his advisor. But ignorance of the law is not an excuse.

More importantly, there was a lack of accountability. Each of the key players steered away from the provisions related to directors’ duties (Section 166, Companies Act, 2013). It must be remembered that these obligations not only extend to the company but also to the shareholders, other stakeholders (such as creditors, investors etc.) and even the environment. There was no sense of loyalty or care exercised by them.

Justice, people, and sustainability

These episodes have led to discussions regarding ways to seek justice by parties affected by such developments. However, the obvious options are not as simple as some consider them to be. The law provides for a range of methods to ensure fairness in the corporate governance mechanisms of a venture. But most of these approaches are bound by the Court’s powers. This implies litigation spanning over long periods.

To begin with, shareholders can vote to oust the director for his conduct at an Annual General Meeting (AGM). They could also lawfully call for an extraordinary general meeting (EGM) to decide on similar aspects. The aggrieved can also seek temporary injunctions or stay orders against the heads of such organisations.

Courts can punish these authorities for various malpractices or direct them to disclose secret profits and instances involving unfair utilisation of the company and its resources. Arbitration and mediation are also cost-effective options.

The key to a successful enterprise is the human connect. Despite setbacks, companies can always rekindle the bond with the customer by resorting to unconventional methods. The scope of fiduciary duties and shareholders rights is vast and continues to expand. Hence, the law would favour such ways if they are fair and ensure accountability within the corporate governance system.

For example, companies can update their financial information on their mobile apps and websites. This automatically establishes a sense of transparency and is likely to instill faith in the company’s functioning. It also ensures accessibility to the company’s progress and allows shareholders and investors to make wiser and informed decisions. More importantly, it paves way for greater participation by the company’s stakeholders.

Enterprises can also use various communication channels such as emails, WhatsApp groups, and Telegram channel. These avenues are easily accessible and enhances customer engagement. Companies must not hesitate to reveal their financial position through individual correspondence, despite this being a costly option.

Insider trading policies must be reassessed. The internet thrives on information related to share trading and investments. But there is precious little transparency about the sources of such insights. Effective and meaningful regulations in this regard would, therefore, be beneficial. The public must push for their speedy implementation. Negative connotations surrounding insider trading must be curbed as this practice could benefit investors too.

Although Byju’s recent rights issue has been given the ‘green signal’, one must remember that 45 per cent of its board members voted to oust the CEO at the latest AGM. Paytm’s future has been debated intensely after its Co-Founder resigned from the board of Paytm Payments Bank. Such incidents could have been prevented had these companies prioritised their consumers over profits.

Sustainable businesses are an interplay between customer satisfaction and leadership. Entrepreneurs must not exploit the regulatory grey zones in the fintech and edtech sectors and strive to maintain high corporate governance standards. Therefore, enterprises must be designed to work fairly and lawfully with their customers to ensure a healthy business environment.

Kapur is Professor, Zachariah is Assistant Lecturer, and Diwakar is Independent Researcher at OP Jindal University, Sonipat