[Arya and Sanya are students at Symbiosis Law School, Pune.]
Corporate governance is a system under which transparency, accountability, and fairness are ensured in the functioning of a company through rules, regulatory frameworks, and best practices. The nature of corporate governance is that of a guideline, ensuring ethical management of the company and integrity in its interaction with stakeholders.
With the recent PTC India Financial Services (PFS) debacle, the corporate governance framework of India has come under the spotlight for the wrong reasons. The Securities and Exchange Board of India (SEBI) received over 4,000 complaints across 1,551 companies about a myriad of corporate governance violations in the last 4.5 years. The volume of grievances underscores systemic deficiencies that threaten to erode investor confidence and undermine the capability of the financial markets.
PFS serves as a poignant exemplar of such issues, where corporate governance infringements have brought to light the dire necessity for accountability, transparency, and equity in corporate practices across jurisdictions. The present case piques the authors’ interest to delve into the issue of the status of corporate governance in India.
Key Issues and Corporate Governance Violations
Interpreting the case
The corporate governance violations by PTC India Financial Services Ltd. came to light from the SEBI order dated 12 June 2024. Three independent directors of PFS and one independent director of PTC India Ltd. resigned between 19 January - 21 January 2022. In their resignation letters, they alleged corporate governance violations, including obstruction in the appointment of Mr Ratnesh as the Whole Time Director and Director-Finance even after the approval by the board of directors of PFS (PFS Board) and delayed disclosure of the Forensic Audit Report-2018 (FAR-2018) to the PFS Board even after a time gap of 2 years. Additionally, inaction on corporate governance issues highlighted by the former Chairman, Mr Deepak Amitabh, change in condition of loans granted without the approval of the PFS Board, disregard for the suggestions of the independent directors, and non-disclosure of crucial information from the PFS Board further underlined the flouting of fair corporate practices by PFS.
The investigation highlighted that the PFS Board appointed Mr Ratnesh after following due procedure, but Mr Pawan Singh (MD and CEO of PFS) misused his position and obstructed his appointment. Post investigation, SEBI observed that Mr Pawan Singh violated the provisions of Regulation 4(2)(f) of the SEBI Listing Obligations and Disclosure Requirements Regulations 2015 (LODR) by not providing operational transparency, subverting the board’s decision to appoint Mr Ratnesh and non-disclosure of critical information. His actions detrimentally affected the interests of the company and its stakeholders.
There were lapses on the part of Mr Pawan Singh as he ignored the red flags and delayed disclosure of FAR-2018 of the loan extended to Nagapatnam Power and lnfratech Private Limited. During financial investigations, it was found that the same played a role in the decline of PFS’s assets from INR 13,193 crores in FY 2019 to INR 7,634 crores in FY 2023. Mr Singh also violated Regulations 4(2)(f) and Clauses 4 and 5 of the Code of Conduct framed by PFS, read with Regulation 26(3) of the LODR. There was a delay in scheduling the audit committee meetings to discuss the matter. Moreover, there was 3 months delay even after the PFS board consultation in reporting it to the RBI as ‘suspected fraud’.
Supplementary corporate governance violations
Further, there was inaction on the corporate governance issues highlighted by Mr Deepak Amitabh. There was a unilateral change in the terms and conditions of the loan granted to Patel Darah-Jhalawar Highway Private Limited without consultation with the PFS Board. Independent directors, namely, Mr Santosh Nayar, Mr Rakesh Kacker, Mr Thomas Mathew and Mr Kamlesh Vikamsey, stated in their resignation letters that their suggestions were being blatantly ignored. During the investigation, SEBI found additional lapses, including misinformation in the corporate governance report, non-cooperation with the forensic auditor, contradictions in the functioning of the audit committee, and conducting board meetings without a valid quorum. SEBI observed that Mr Rajib Kumar Mishra acted as an accomplice. As the Chairman of PFS, he was obligated to look into the effective functioning of the company and had a duty to provide a conducive environment for the Independent Directors to work autonomously. However, the corporate governance norms were violated due to inaction by the Chairman, disregarding the interests of the stakeholders.
Penalty imposed
SEBI imposed penalties on Mr Pawan Singh and Mr Rajib Kumar Mishra of INR 25,00,000 and INR 10,00,000, respectively, under Section 15HB of the SEBI Act 1992 (SEBI Act). Additionally, under Sections 11 and 19 of the SEBI Act, read with Rule 5 of the Adjudication Rules 1995, SEBI restrained Mr Pawan from holding any key managerial persons (KMP) position for 2 years and Mr Rajib for 6 months in any listed company or intermediary registered with SEBI.
Contemporary and commercial ramifications of the order
The SEBI order acts as a caveat for companies with poor corporate governance practices. The order is likely to shake the trust of the investors of the company but it may lead to better performance in the future due to improved governance. The verdict will lead to investor activism and the investors will become more aware of ethical business practices. SEBI held the KMPs accountable for their actions. Mr Pawan and Mr Rajib will face monetary fines and damage of reputation in the market. Additionally, the ban on holding the KMP position will negatively impact their future appointments and career trajectory.
Recent Corporate Governance Issues Addressed by SEBI
While the present case pertains to the wrongful interference in the decision of the board on the appointment of a director, other cases of poor corporate governance have also recently burgeoned in our country. In April 2024, the SEBI’s ruling in the case of LEEL Electricals Limited raised serious apprehensions about the corporate governance of the company. The case pertained to the role of independent directors and liabilities when financial malfeasance is discovered within a company. In the present case, the former promoter approached the independent directors and asked them to join the company’s Board of Directors (BoD) as independent directors with a promise of bare minimum engagement in any policy decision and that they need not possess any prerequisite knowledge in finance or law as members of the Audit Committee. As a result, SEBI levied a penalty of INR 10,00,000 on 2 independent directors for failing to execute their statutory duties as members of the Audit Committee and preserving the shareholders’ interests.
The securities market regulator also penalized Shapoorji Pallonji and Company with INR 7,00,000 for contravention of multiple SEBI disclosure requirements in September 2023. In the matter of Shapoorji Pallonji and Company Private Limited, the SEBI determined that Shapoorji Pallonji and Company failed to get the prerequisite stock exchange permission for converting non-convertible debentures into a term loan in March 2021. Additionally, SEBI stated in its judgment pointed out that the company failed to provide a plethora of compliance documents including an auditor’s certificate on fund utilization, a half-yearly certificate on asset cover maintenance, and an annual report to the debenture trustee. Furthermore, the company was also found liable for failing to fulfil its obligation to update specific information on its website as mandated by the LODR.
Corporate Governance: The International Regulatory Landscape
The recent corporate governance lapses in India necessitate an examination of the corporate governance trends in other jurisdictions to understand potential vulnerabilities, best practices, and supervisory frameworks that can alleviate such failures and enhance accountability. Scrutinizing corporate governance practices in the US and the UK offers valuable comparative perspectives, like the Sarbanes-Oxley Act in the US, which provides a comprehensive framework on internal audit and compliance. These jurisdictions have well-established frameworks that offer stakeholders to benchmark against global standards and identify areas for improvement in India’s corporate governance structure.
In the UK, the Corporate Governance Code 2018 (UK Code) stipulates that the BoD must form a Nomination Committee, comprising Independent Directors in majority for the appointment of other directors. Moreover, it states that such an appointment must be sanctioned by the BoD and the shareholders by way of an ordinary resolution. Further safeguards are specified through the UK Listing Rules, which provide for a two-fold approval mechanism for appointment of an independent director in case of a listed company having a controlling shareholder (greater than 30% voting power). In such an instance, the appointment of an independent director must be approved by all the shareholders and by the independent shareholders separately.
Furthermore, one of the contemporary developments in the field can be witnessed in the US, where the Supreme Court of the US, in the case of Macquarie Infrastructure Corp. v. Moab Partners, provided clarity on the corporate disclosure requirements under the Exchange Act of 1934 and the US Securities Exchange Commission (SEC)'s Regulations. In the relevant case, the Supreme Court emphasised the requirement of truthful and material disclosures to the SEC. The case revolved around § 299.303 of the S-K Regulation of the SEC, commonly referred to as Item 303, which requires disclosure of management’s discussion and analysis of the financial condition and results of operations. This decision emphasized the preponderance of disclosures and the obligations of corporations to provide unambiguous and complete information in their statements. It also highlighted the need for investors to comprehend the legal complexities of the SEC’s disclosure requirements.
Conclusion
SEBI has reinforced the need to implement corporate governance. With the increase in corporate governance fiascos, like the PFS case, the authors believe India needs to introduce a corporate governance code. It will enable dealing with corporate governance violations swiftly and efficiently. India can draw inspiration from the UK Code and the SEC disclosure requirements. The corporate governance code in India will enhance transparency, investigations, identification of violations, and accountability.
In the present case, the violations came to light after the allegations were highlighted in the resignation letters by the independent directors. The violations and the unjust decisions were occurring for several months. The actions were taken after huge losses took place. The unilateral actions by the CEO of PFS in declaring the defaulting company to RBI after a delay of 3 months further harmed the interests of the stakeholders. There is an urgent need to strengthen the capabilities of SEBI to detect and act more swiftly. KMPs often evade significant liability by paying minimal amounts relative to the damage inflicted on stakeholders and the company. Consequently, there should be stricter penalties and the possibility of civil imprisonment to deter such misconduct by KMPs.
The authors are of the view that the policies for protecting whistle-blowers should be strengthened. This will enable them to disclose the violations and wrongdoings without much fear. Furthermore, independent regulatory bodies can be established to maintain checks. It can keep a vigil over suspicious acts and conduct investigations without interference from the management. Technological advancements like artificial intelligence can be further developed and used to detect gaps and inconsistencies in disclosure requirements.
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