More than four-and-a-half-years ago India was rocked by possibly its biggest corporate scam when a company’s owner-chairman confessed that he had doctored the firm’s books. The revenue figures were inflated to keep share prices high and package a shaky business as rosy. His alleged accomplices in the game were the auditors. The government, waking up to the larger consequences of the scandal, had invoked the special provisions of a nearly six-decade old law to acquire control of the company and eventually had to find a rescuing suitor. The enormity of the situation brought to the fore the gaping cracks in India’s corporate governance framework with the fraud rattling lakhs of small shareholders. Now their long wait for greater rights has ended with Parliament enacting the Companies Bill, ending years of discussions to legislate a framework to make board room decisions transparent, hold auditors and directors more accountable and prevent corporate frauds by firms’ owners by manipulating accounts and other such diversions.
The law will create a more business-friendly environment with an emphasis on self regulation and minimal State interference. New forms of organisation such as ‘one person-company’ and ‘small company’ concepts would get legal recognition making the business law environment more contemporary. All companies will have to move to a uniform financial year ending March 31. It will allow shareholders’ associations to take legal action against companies’ promoters and management through ‘Class Action Suits’. This will act as a deterrent to carrying out a fraud by tailoring and influencing board decisions only to suit promoters’ and managements’ interests. It also contains provisions defining rules for inter-corporate loans and norms for the creation of a web of subsidiaries. The proposed law, which will replace the 57-year-old Companies Act 1956, will empower the Serious Fraud Investigation Office, an agency mandated to investigate corporate scams, with a statutory status armed with the authority to impose punitive measures and in specific instances, even arrest persons found guilty of corporate crimes.
Any modern corporate governance framework should aid self-regulation with greater disclosure levels as opposed to a “government approval-based regime,” which limits entrepreneurial growth. The new law seeks to achieve this. For a country that is battling to lure precious dollars, the new law should act as a strong catalyst. The proximate risks of the roiling investor sentiments are to two principal factors: policy inconsistency and political instability. India is ranked 132 among 185 economies in the World Bank’s ‘Doing Business’ report. A contemporary corporate law framework with clear rules, besides preventing scams, will also greatly help India’s image as an investment destination.