What Can Companies Learn From Recent Corporate Governance Scandals In India?

The Spanish – American philosopher George Santayana in his book 'The Life of Reason: Reason in Common Sense' had famously said, “Those who do not learn from history are condemned to repeat it”.

Reasons for Governance Failures:

An analysis of recent, high-profile corporate governance scandals –BharatPe, DHFL (Dewan Housing Finance Ltd), GoMechanic or even the watershed moment in recent Indian financial history, the Satyam Computers scandal – reveals certain common themes in each of these. These have been distilled into the following broad heads:

1. Unauthorised use of investor funds:

A common theme that runs through all of the aforementioned controversies is the unauthorised use and diversion of funds raised from investors and other stakeholders. Let us for example take the case of DHFL. In this instance funds were allegedly diverted through fake home loan accounts and shell companies. In the case of car service start-up - GoMechanic, revenue numbers were allegedly inflated in a bid to attract more funding. In the recent Gensol/Blusmart case, funds earmarked for business expansion were allegedly routed through various companies controlled by the promoters themselves to fund lifestyle purchases.

2. Related- Party Transactions:

The non-disclosure of related-party transactions is another common ruse. Opaque, complex and often circular transactions, are often used to mask the true end-use of the funds raised. The Gensol case is a textbook example of this – Funds raised from investors were allegedly routed through multiple shell, or promoter-controlled companies and were used to fund luxury residences and lifestyle services, instead of being used to purchase electric vehicles, which was why money was raised in the first place. Instances such as these have created both confusion and mistrust among investors and the people at large.

3. Incorrect Financial Reporting

Another common theme across various corporate governance failures is the falsified reporting of financial numbers. This goes hand-in-hand with the submission of forged or misleading documents to regulators, financial institutions or even credit rating agencies. A glaring example of this is the Satyam scam which was an audit-cum-accounting scandal. Recent examples are GoMechanic - where fabricated revenue numbers to project a healthier business than the reality, and Gensol/Blusmart – where forged documents were allegedly submitted to credit rating agencies.

4. Insufficient Board supervision:

The purpose of a Board is to protect the interests of shareholders and ensure sufficient checks and balances to prevent governance lapses. However, a recurring theme that ties most corporate governance failures is the presence of a weak Board - whose decision-making is often dominated by the promoters themselves, with minimal independent representation. If there were any independent directors, they either lacked the power or the information to effectively act as a counter-balance. This structure allows for unchecked ambition and inadequate scrutiny of major transactions.

5. Absence of Robust Compliance Frameworks

Each of the governance failures listed reveals a lack of an effective compliance framework. This lack of internal control mechanisms leaves little room to detect and address red flags promptly, creating an environment for unethical practices to proliferate unchecked.

6. Information Asymmetry and Inadequate Due Diligence

In most cases, investors and other key stakeholders often receive misled or provided incomplete information about the company's operations or financial health. In the Gensol/Blusmart case, for instance, investors had lent large sums of money relying on the representations made by the promoters about the company's financial health and future expansion plans, without conducting suitable and independent verification on these claims.

Practical Solutions:

The Gensol-BlueSmart implosion is yet another result of ignored governance fundamentals. Some practical measures all companies can adopt to avoid such situations could be:

1. Even if not mandated by law, companies must constitute a Board or some sort of governing council that can be independent, competent and empowered to act as a counter-balance to any unchecked acts of power.
2. Implement a structured compliance management system that ensures adherence to all applicable laws and regulations. Compliance must be monitored in real time and any irregular or non-compliant activity must be flagged. This allows for prompt corrective action before issues escalate into larger problems.
3. Establish a clear, tiered decision-making framework and separation of duties within financial operations.
   This framework must include a decision-making matrix mandating escalating levels of review and approval based on the financial magnitude and strategic importance of each transaction.
4. Implement a structured cadence of external financial audits, progressing from annual financial reviews to comprehensive audits by reputed accounting firms. Mature businesses should establish an independent audit committee to examine and verify financial transactions.
5. Have written policies delineating permissible corporate expenditures from personal financial obligations. Implement tiered approval thresholds, mandatory documentation requirements, and periodic compliance reviews to mitigate the risk of fund misappropriation. Ensure these policies are board-approved and available to all personnel with financial authority.
6. Institute standardised quarterly reporting cycles to investors with audited financial metrics and operational KPIs to ensure transparency.
7. Develop and implement a comprehensive whistle-blower policy enabling anonymous reporting of potential violations, with independent investigation protocols and anti-retaliation safeguards complying with relevant statutory provisions.
8. Maintain clear records of strategic resolutions, including dissenting opinions and risk assessments.
9. Develop a reporting system, requiring executives and board members to formally
   disclose all potential conflicts of interest.
10. Establish a multi-tiered approval process or procedures requiring executive abstention for transactions involving related-party transactions, requiring independent director review and audit committee ratification.

In the rush to scale and disrupt, too many companies overlook the foundational discipline of governance. Sustainable growth isn't just about the destination, but building a safe road to get there.

• For founders, it's time to see governance not as a checkbox or investor imposition, but as a strategic edge.
• For investors, it's a call to diligence, in both pitch and practice.
• For regulators, it's a moment to strengthen - not stifle - India's innovation story with clear, fair safeguards.

The lessons from recent scandals must serve as a catalyst for change, not just to prevent the next crisis, but to build a culture where integrity is as prized as ingenuity. Only then can Indian companies truly earn the trust of their stakeholders and realize their full potential on the global stage.

Author: Aastha Abhya, Founder And Managing Partner, Atreus Law Firm (Ex-General Counsel: M2P Fintech). Views are personal.