Model Answer
0 min readIntroduction
The Satyam Computer Services scandal of 2009, involving a massive accounting fraud orchestrated by its chairman Ramalinga Raju, shook the Indian corporate world and exposed significant weaknesses in corporate governance. The scandal, where fictitious revenues were reported, eroded investor confidence and highlighted the need for stricter regulations. Prior to this, India’s corporate governance framework was largely based on the recommendations of committees like the Kumar Mangalam Birla Committee (2000) and the Naresh Chandra Committee (2003). The Satyam episode acted as a catalyst for substantial reforms aimed at enhancing transparency, accountability, and protecting stakeholder interests.
The Satyam Scandal: A Brief Recap
Satyam Computer Services, once a leading IT firm, was found to have inflated its revenues and profits for several years. Ramalinga Raju confessed to manipulating account books to the tune of ₹14,000 crore. This fraud was discovered when the company attempted to acquire Maytas Properties, another firm controlled by Raju’s family, using Satyam’s funds. The scandal led to the arrest of Raju and other key executives, and ultimately, the company was acquired by Tech Mahindra.
Changes in Corporate Governance Post-Satyam
1. Amendments to the Companies Act, 2013
The Companies Act, 2013, was a landmark legislation that significantly strengthened corporate governance norms. Key provisions include:
- Independent Directors: Increased the number of independent directors required on company boards and defined their roles and responsibilities more clearly. At least one woman director is also mandated.
- Audit Committees: Enhanced the role and responsibilities of audit committees, requiring them to oversee the financial reporting process and internal controls.
- Related Party Transactions: Introduced stricter regulations governing related party transactions, requiring greater disclosure and shareholder approval.
- Corporate Social Responsibility (CSR): Mandated CSR spending for certain profitable companies.
2. SEBI Regulations & Listing Agreements
The Securities and Exchange Board of India (SEBI) played a crucial role in strengthening corporate governance through various regulations:
- Clause 49 of the Listing Agreement: This clause, initially introduced in 2000, was significantly strengthened post-Satyam. It mandates requirements related to audit committees, independent directors, and corporate governance reporting.
- SEBI (Prohibition of Insider Trading) Regulations: These regulations were amended to enhance the prevention of insider trading and ensure fair market practices.
- Enhanced Disclosure Requirements: SEBI increased the disclosure requirements for companies, including details about management remuneration, related party transactions, and risk management practices.
3. Role of Independent Directors
The Satyam scandal highlighted the failure of independent directors to effectively oversee the company’s operations. Post-Satyam, emphasis was placed on:
- Director Independence: Stricter criteria were established to ensure the independence of directors, preventing conflicts of interest.
- Director Training: SEBI mandated training programs for independent directors to enhance their understanding of corporate governance principles and their responsibilities.
- Liability of Directors: Increased the liability of directors for fraudulent activities and negligence.
4. Strengthening the Audit Profession
The role of auditors came under scrutiny following the Satyam scandal. Measures taken included:
- Audit Rotation: Mandatory audit firm rotation was introduced to prevent long-term relationships between auditors and companies, which could compromise independence.
- Peer Review: Enhanced peer review mechanisms were implemented to assess the quality of audit work.
- National Financial Reporting Authority (NFRA): Established in 2018, NFRA is the regulator for the auditing profession, overseeing the quality of audits and ensuring compliance with accounting standards.
Comparison of Pre and Post-Satyam Governance
| Feature | Pre-Satyam (2008) | Post-Satyam (2013 onwards) |
|---|---|---|
| Independent Directors | Limited requirements, often lacked expertise | Increased number, stricter independence criteria, mandatory training |
| Audit Oversight | Weak audit committees, limited audit rotation | Strengthened audit committees, mandatory audit rotation, NFRA establishment |
| Disclosure | Limited disclosure of related party transactions | Enhanced disclosure requirements for related party transactions and other key information |
Conclusion
The Satyam scandal served as a wake-up call for India’s corporate governance framework. The subsequent amendments to the Companies Act, SEBI regulations, and increased focus on independent director responsibilities have significantly improved transparency and accountability. However, challenges remain, including effective enforcement of regulations, ensuring the genuine independence of directors, and fostering a culture of ethical behavior within corporations. Continuous monitoring and further reforms are necessary to maintain investor confidence and promote sustainable corporate growth.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.