[India,
a nation notoriously rife with graft and bribery, was partly motivated to pass
the legislation in the wake of an accounting scandal that has been
called India’s Enron. In 2009, B. Ramalinga Raju, the chairman of a
prominent outsourcing company, Satyam Computer
Services, confessed to overstating company assets and earnings by
more than $1 billion, and then resigned. The fact that one company could
defraud shareholders of such a large sum despite regular audits made painfully
obvious the need for greater oversight in corporate India.]
By Jen Swanson
 |
European Press photo Agency
India’s Central Bureau of Investigation looked
into the fraud at Satyam Computer Systems, which became known as India’s Enron |
MUMBAI, India
— In the
wake of global scandals involving kickbacks and accounting fraud, one unlikely
country, India, is aiming to set a tone in overhauling its corporate oversight
laws.
This month, the nation’s upper house of
Parliament passed the Companies Bill, 2012, sweeping legislation meant to
overhaul auditing, impose stiffer penalties for fraud and create more
government oversight of businesses.
The lower house had passed the bill last year.
Once India’s president, Pranab Mukherjee, signs it into law, it will replace
India’s 57-year-old corporate legislation that critics say had failed to keep
up with changes in business practices.
India, a nation notoriously rife with graft
and bribery, was partly motivated to pass the legislation in the wake of an accounting
scandal that has been
called India’s Enron. In 2009, B. Ramalinga Raju, the chairman of a
prominent outsourcing company, Satyam Computer
Services, confessed to overstating company assets and earnings by
more than $1 billion, and then resigned. The fact that one company could
defraud shareholders of such a large sum despite regular audits made painfully
obvious the need for greater oversight in corporate India.
But some four years after that startling case,
little change in corporate laws had taken place until now.
The new legislation will affect all companies
doing business in India, regardless of their size, structure or ownership,
including the estimated 8,000 corporations listed on three national stock
exchanges.
Yet while hopes remain high that the bill will
appeal to foreign investors, and kick-start India’s economic growth, nearly a
decade of revisions has left a watered-down measure lacking structure. Much of
the bill depends on new committees and rules that have yet to be drafted, so
legal experts have doubts about its ability to police corporations.
“It started off trying to make things easier
for corporates, but somewhere along the line, it became more about corporate
governance and transparency,” said Nilanjana Singh, a partner at the Mumbai
office of AZB & Partners, one of India’s leading corporate law firms.
Legislators were further motivated to pass
meaningful changes after Reebok India accused two
former executives last year of embezzling 8.7 billion rupees,
or $157 million. Reebok’s parent brand, Adidas,
discovered during an audit that its former India managing director and chief
operating officer amassed their fortune through years of falsifying sales
receipts, faked storage facilities and circular trading.
Businesses say such problems are rife in corporate
India. In a 2012 report by
the global consulting firm KPMG, more than half
of respondents reported that their companies had experienced
fraud or theft in the past two years. Most of the respondents considered fraud
an inevitable cost of doing business in this country, and many Indian companies
were setting aside a portion of their turnover to offset anticipated losses.
The new legislation will take some time to put
in place, but some accounting officials are hopeful that real progress could be
made in reforming India’s arcane systems. Nitin Kini, a partner at KPMG in
India, said he believed that the bill could only bolster India’s recent
economic woes that have included a free-falling
rupee.
“Do we live with the current act and be happy
with it, or do we look at this draft of the bill?” he asked. “Between the two,
the new bill is good. It is a step in the right direction.”
The Companies Bill sets tough sanctions for
embezzlement, including mandatory jail time and hefty fines for offenders. To
prevent additional cases like Satyam — where Indian auditors failed to notice
discrepancies despite auditing the company for years — the measure calls for
the mandatory rotation of auditors and their firms.
Among other moves, a new committee, the
National Financial Reporting Authority, will be created to prescribe and
monitor accounting and auditing standards the first time.
The Serious Fraud Investigation Office, an
agency that played a leading role in both the Satyam and Reebok cases, will be
empowered to start investigations and frame charges. Until now, its authority
had been limited mainly to inspecting documents and was diluted by the bevy of
other investigative government agencies, all of which had overlapping areas of
authority.
A new judiciary, the National Company Law
Tribunal, will be created to allow swifter justice, removing corporate cases
from high courts so backlogged that petitions linger there for
years. The Company Law Board, a quasi-judiciary panel that also
heard cases related to the older act, will be dissolved.
Companies in India will also be required to
adopt uniform financial years from April to March. The bill also introduces
protections for whistle-blowers, class-action suits, and provisions to prevent
conflicts of interest and insider trading.
The new measure allows for greater flexibility
in cross-border mergers and acquisitions, but it also requires companies to
employ at least one resident director, creating a problem for many
foreign-owned companies. Stock buybacks, a favored strategy to bolster share prices
that is currently permitted every six months, will be restricted to once a
year.
One of the most controversial clauses asks
larger enterprises — like those with net profits of at least 50 million rupees,
or $815,000 — to donate 2 percent of their net profits to corporate social
responsibility programs.
“The problem is that some of the changes
they’ve made are quite retrograde,” Ms. Singh said. For instance, the efforts
to limit a company’s number of subsidiaries didn’t address substantive
problems, she said. “Why should the government should care how a company
structures?”
Bharat Vasani, chief legal and group general
counsel for Tata Sons Limited, the holding company behind India’s
multibillion-dollar conglomerate Tata Group,
said the bill had many shortcomings. Among those, he said, it fails to
adequately address corporate insolvency, stressing that ailing Indian companies
desperately need protections like the Chapter 11 bankruptcy rules in the United
States.
Removing the jurisdiction of the High Court
was also a mistake, he said, because now the bill depends entirely on the
efficiency of the tribunal.
“India’s experience with tribunals has not
been very great,” said Mr. Vasani, explaining that they rarely receive the
proper infrastructure, financial support or manpower.
“This entire legislation was drafted by the
bureaucracy, and they’ve never experienced how corporate India functions,” he
said.
And so far, investors in Indian stocks have
greeted the passage of the bill with little enthusiasm. The S.&P. B.S.E.
Sensex 500-stock index is down 7.55 percent this year, and little has changed
since the passage of the bill this month.
But in time, it may pave the way for greater
governance, Mr. Kini, the KPMG partner, said. Other provisions prevent the
government from interfering in daily business decisions, he said.
“So in that sense, it simplifies how an
organization can govern itself, but also puts enough scope for oversight,” he
said. “But it will take time.”
