Okay, this is an excellent follow-up!

I will now provide detailed, exam-ready answers for each of

the important questions you identified, keeping the mark allocations, clarity, and learning tricks
in mind.

UNIT 1: Conceptual Framework of Corporate Governance (18 Marks)

Question 1:​
a) Define Corporate Governance. Discuss its significance and key principles in the
modern business environment. (10 Marks)

Answer:

a) Corporate Governance: Definition, Significance, and Principles

Definition of Corporate Governance:​

Corporate Governance refers to the system of rules, practices, and processes by which a
company is directed and controlled. It essentially involves balancing the interests of a
company's many stakeholders, such as shareholders, senior management executives,
customers, suppliers, financiers, the government, and the community.​
The Cadbury Committee Report (UK, 1992) provided a widely accepted definition: "Corporate
governance is the system by which companies are directed and controlled."​
In essence, it's about ensuring that the business is run well, ethically, and for the long-term
benefit of its stakeholders.

Significance of Corporate Governance:​

In the modern business environment, effective corporate governance is crucial for several
reasons:

1.​ Enhanced Investor Confidence: Good governance practices build trust among
investors, assuring them that their capital is secure and being used efficiently. This
attracts more investment, both domestic and foreign.
2.​ Improved Market Reputation and Brand Image: Companies known for strong
governance are viewed more favorably by the public, customers, and potential partners,
enhancing their brand value.
3.​ Sustainable Business Development: Governance frameworks encourage long-term
strategic thinking over short-term gains, leading to sustainable growth and profitability.
4.​ Better Access to Capital: Financial institutions and markets are more willing to provide
capital to companies that demonstrate transparency, accountability, and sound
management.
5.​ Increased Shareholder Value: By ensuring efficient operations, risk management, and
ethical conduct, good governance ultimately contributes to higher shareholder returns.
6.​ Reduced Risk of Fraud and Malpractice: Strong internal controls, oversight, and
ethical codes minimize the chances of corporate scandals and financial irregularities.
 7.​ Effective Decision Making: Clear roles, responsibilities, and processes lead to more
informed and effective strategic decisions.

Key Principles of Corporate Governance:​

The core principles that underpin effective corporate governance include:

1.​ Transparency: Ensuring that information about the company's operations, financial
performance, and governance structures is disclosed accurately, adequately, and in a
timely manner to all stakeholders. This includes clear communication channels.
2.​ Accountability: Making sure that the board of directors and management are
accountable to shareholders and other stakeholders for their decisions and actions. This
involves clearly defined roles and responsibilities.
3.​ Fairness: Protecting the rights of all shareholders, including minority shareholders, and
ensuring equitable treatment. It also extends to fair treatment of all other stakeholders
like employees, customers, and suppliers.
4.​ Responsibility: The board must accept the responsibility for overseeing the
management of the company and ensuring that it operates in the best interests of the
company and its stakeholders, including compliance with laws and ethical standards.
5.​ Integrity: Adherence to strong moral principles and ethical conduct in all business
dealings.

(Learning Trick for Principles of CG: TAFRI)

●​ Transparency
●​ Accountability
●​ Fairness
●​ Responsibility
●​ Integrity​
(Think: "TAFRIbute to good governance" - Attributes to good governance)

b) Briefly explain any two theories of Corporate Governance (e.g., Agency Theory and
Stewardship Theory). (8 Marks)

Answer:

b) Theories of Corporate Governance

Several theories help explain the relationships and dynamics within corporate governance. Two
prominent theories are:

1. Agency Theory:

●​ Core Idea: This theory views the relationship between the owners of a company
(principals, i.e., shareholders) and the managers (agents, i.e., directors and executives)
 as an "agency" relationship. The principals delegate decision-making authority to the
agents to act on their behalf.
●​ The "Agency Problem": A potential conflict of interest arises because agents may have
different goals than principals. Agents might prioritize their personal benefits (e.g., higher
salary, job security, perquisites) over maximizing shareholder wealth. This divergence of
interests is known as the "agency problem."
●​ Minimizing Agency Costs: To align interests and reduce the agency problem,
principals incur "agency costs." These include:
○​ Monitoring Costs: Costs of overseeing agents' actions (e.g., audits, board
oversight).
○​ Bonding Costs: Costs incurred by agents to assure principals they will act in
their interest (e.g., performance-based contracts).
○​ Residual Loss: The loss in value despite monitoring and bonding efforts.
●​
●​ Governance Mechanisms: Agency theory suggests mechanisms like independent
boards, performance-based compensation, and shareholder activism to monitor
managers and align their interests with shareholders.

2. Stewardship Theory:

●​ Core Idea: In contrast to agency theory, stewardship theory posits that managers are
"stewards" who are intrinsically motivated to act in the best interests of the company and
its owners (shareholders). They are driven by a sense of duty, responsibility, and a
desire to achieve organizational goals, rather than purely by self-interest.
●​ Alignment of Interests: Stewards identify their own success with the success of the
organization. They derive satisfaction from achieving high performance and contributing
to the company's growth.
●​ Trust and Empowerment: This theory suggests that principals should trust their
stewards and empower them with sufficient authority and discretion to run the company
effectively. Overly restrictive controls can stifle initiative and performance.
●​ Governance Mechanisms: Stewardship theory emphasizes governance structures that
foster trust and collaboration, such as combining the roles of CEO and Chairman, having
a majority of inside directors, and promoting a culture of shared values and
organizational commitment. The focus is on empowering managers rather than
controlling them.

(Learning Trick for Theories: Agency vs. Steward)

●​ Agency: Think "Agent = Self-Interest" (Needs monitoring)

●​ Stewardship: Think "Steward = Service & Trust" (Needs empowerment)

UNIT 2: Recent Issues and Challenges of Corporate Governance (18 Marks)

Question 1:​
a) Explain the role and responsibilities of the Board of Directors in ensuring effective
corporate governance. (8 Marks)

Answer:

a) Role and Responsibilities of the Board of Directors

The Board of Directors (BoD) is the cornerstone of effective corporate governance. It acts as the
primary link between the company's owners (shareholders) and its management. The Board's
overarching role is to ensure the company is managed in a way that protects and enhances
shareholder value while considering the interests of other stakeholders.

Key roles and responsibilities include:

1.​ Strategic Guidance and Oversight:

○​ Reviewing and guiding corporate strategy, major plans of action, risk policy,
annual budgets, and business plans.
○​ Setting performance objectives and monitoring implementation and corporate
performance.
○​ Overseeing major capital expenditures, acquisitions, and divestitures.
2.​
3.​ Selection, Evaluation, and Compensation of Senior Management:
○​ Appointing, monitoring, and, if necessary, replacing the Chief Executive Officer
(CEO) and other senior executives.
○​ Ensuring a robust succession plan for key management positions.
○​ Determining appropriate levels of remuneration for senior executives, often
through a remuneration committee, aligning it with company performance and
shareholder interests.
4.​
5.​ Ensuring Integrity of Financial Reporting and Internal Controls:
○​ Overseeing the integrity of the company's accounting and financial reporting
systems, including independent audits.
○​ Ensuring that appropriate systems of internal control are in place, particularly
systems for risk management, financial and operational control, and compliance
with the law and relevant standards.
6.​
7.​ Risk Management Oversight:
○​ Identifying key risks faced by the company (financial, operational, reputational,
etc.).
○​ Ensuring that management has implemented an effective risk management
framework to mitigate these risks.
8.​
9.​ Ensuring Compliance and Ethical Conduct:
 ○​ Monitoring the effectiveness of the company's governance practices and making
changes as needed.
○​ Ensuring compliance with applicable laws, regulations, and the company's own
code of conduct.
○​ Promoting a culture of ethical behavior throughout the organization.
10.​
11.​Protecting Shareholder Rights:
○​ Ensuring that the rights of shareholders are protected and that they are treated
fairly.
○​ Communicating effectively with shareholders and providing them with necessary
information.
12.​
13.​Stakeholder Engagement:
○​ Considering and balancing the legitimate interests of all stakeholders, including
employees, customers, suppliers, and the community.
14.​

(Learning Trick for Board Responsibilities: SCRIPT-S)

●​ Strategic guidance
●​ CEO selection & compensation
●​ Risk management
●​ Integrity of financial reporting & internal controls
●​ Protecting shareholder rights
●​ Thics and Compliance (Ensuring Ethical Conduct)
●​ Stakeholder engagement

b) Discuss the composition, role, and significance of the Audit Committee as per SEBI
(LODR) Regulations, 2015. (10 Marks)

Answer:

b) Audit Committee: Composition, Role, and Significance (SEBI LODR, 2015)

The Audit Committee is a crucial sub-committee of the Board of Directors, playing a vital role in
financial oversight and ensuring the integrity of a company's financial reporting process. The
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, lay down specific
requirements for its composition and functioning for listed entities in India.

Composition (as per SEBI LODR, 2015):

1.​ Minimum Members: The audit committee shall have a minimum of three directors.
 2.​ Independent Directors: At least two-thirds of the members of the audit committee shall
be independent directors. In case of a listed entity having outstanding SR (Superior
Rights) equity shares, all members must be independent directors.
3.​ Financial Literacy: All members of the audit committee shall be financially literate, and
at least one member shall have accounting or related financial management expertise.
○​ "Financially literate" means the ability to read and understand basic financial
statements (balance sheet, profit and loss account, and statement of cash flows).
○​ "Accounting or related financial management expertise" means the member has
professional certification in accounting or finance, or has relevant experience in
accounting, finance, or as a chief financial officer.
4.​
5.​ Chairperson: The chairperson of the audit committee shall be an independent director
and shall be present at the Annual General Meeting to answer shareholder queries.
6.​ Company Secretary: The Company Secretary shall act as the secretary to the audit
committee.

Role of the Audit Committee (as per SEBI LODR, 2015):​

The role of the audit committee is extensive and includes:

1.​ Oversight of Financial Reporting: Overseeing the company’s financial reporting

process and the disclosure of its financial information to ensure that the financial
statement is correct, sufficient, and credible.
2.​ Recommendation for Appointment of Auditors: Recommending the appointment,
remuneration, and terms of appointment of statutory auditors and internal auditors.
3.​ Review of Auditor Performance and Independence: Reviewing and monitoring the
auditor’s independence and performance, and effectiveness of the audit process.
4.​ Approval of Related Party Transactions: Granting omnibus approval for related party
transactions (RPTs) that are in the ordinary course of business and on an arm's length
basis, and reviewing significant RPTs.
5.​ Scrutiny of Inter-Corporate Loans and Investments: Scrutinizing inter-corporate
loans and investments.
6.​ Valuation of Undertakings/Assets: Valuation of undertakings or assets of the listed
entity, wherever it is necessary.
7.​ Evaluation of Internal Financial Controls and Risk Management Systems: Ensuring
that robust internal financial controls and risk management systems are in place and
functioning effectively.
8.​ Review of Financial Statements: Reviewing with management the quarterly,
half-yearly, and annual financial statements and the auditor's report thereon before
submission to the board for approval.
9.​ Whistle-Blower Mechanism: Reviewing the functioning of the whistle-blower
mechanism and ensuring adequate safeguards.
10.​Review of Internal Audit Function: Reviewing the adequacy of the internal audit
function, including its structure, reporting process, and scope.
Significance of the Audit Committee:​
The Audit Committee is highly significant for several reasons:

1.​ Enhances Credibility of Financial Information: It acts as an independent check on the

financial reporting process, increasing the reliability and credibility of financial statements
for investors and other stakeholders.
2.​ Strengthens Internal Controls: By overseeing internal controls and risk management,
it helps prevent errors, fraud, and mismanagement.
3.​ Improves Auditor Independence: It acts as a buffer between management and
external auditors, safeguarding auditor independence and objectivity.
4.​ Facilitates Compliance: It ensures compliance with accounting standards, listing
requirements, and other legal and regulatory provisions.
5.​ Builds Investor Confidence: A well-functioning audit committee signals to the market
that the company is committed to transparency and good governance, thereby boosting
investor confidence.
6.​ Early Warning System: It can identify potential financial or operational problems early,
allowing for timely corrective action.

(Learning Trick for Audit Committee Role: O-A-R F-I-S-H) (This is a bit stretched, but tries to
capture core themes)

●​ Oversight of Financial Reporting

●​ Auditor (Appointment & Performance)
●​ Related Party Transactions
●​ Financial Statements (Review)
●​ Internal Controls & Risk Management
●​ Scrutiny of Loans & Investments
●​ Hhistle-Blower Mechanism (Whistle-blower)

UNIT 3: Global Corporate Failures and International Codes (18 Marks)

Question 1:​
a) Discuss the key recommendations of the Cadbury Committee Report (UK, 1992). (8
Marks)

Answer:

a) Key Recommendations of the Cadbury Committee Report (UK, 1992)

The Cadbury Committee was set up in the UK in 1991, chaired by Sir Adrian Cadbury, primarily
in response to a series of corporate scandals and collapses in the late 1980s and early 1990s.
Its report, "The Financial Aspects of Corporate Governance," published in 1992, aimed to raise
standards of corporate governance and restore investor confidence. It introduced the "Code of
Best Practice."
Key recommendations of the Cadbury Committee Report included:

1.​ The Board of Directors:

○​ Clear Division of Responsibilities: Recommended a clear division of
responsibilities at the head of a company, ensuring that no single individual has
unfettered powers of decision. This often led to separating the roles of Chairman
and CEO.
○​ Non-Executive Directors (NEDs): Emphasized the crucial role of NEDs, stating
they should bring an independent judgment to bear on issues of strategy,
performance, resources, including key appointments, and standards of conduct.
○​ Sufficient Calibre of NEDs: NEDs should be of sufficient calibre and number for
their views to carry significant weight in the board’s decisions.
○​ Formal Selection Process: Recommended a formal and transparent procedure
for the appointment of new directors to the board.
2.​
3.​ Audit Committee:
○​ Establishment: Recommended that all listed companies should establish an
audit committee.
○​ Composition: The audit committee should be composed of at least three NEDs,
with a majority being independent NEDs. The chairman of the audit committee
should be an independent NED.
○​ Role: The committee should have written terms of reference dealing with its
authority and duties, including reviewing the scope and results of the audit, the
independence and objectivity of the auditors, and the company's internal financial
controls.
4.​
5.​ Reporting and Controls:
○​ Directors' Responsibility Statement: Directors should report on the
effectiveness of the company's system of internal financial controls.
○​ Going Concern Statement: Directors should state in the annual report whether
the business is a going concern, with supporting assumptions or qualifications as
necessary.
○​ Auditors' Role: Auditors should report on the directors' statement about internal
controls and the going concern status.
6.​
7.​ Shareholders' Rights:
○​ Dialogue with Institutional Investors: Encouraged greater dialogue between
companies and institutional shareholders.
○​ Use of Voting Rights: Urged institutional investors to make considered use of
their votes and engage with companies on matters of concern.
8.​
9.​ Compliance with the Code:
○​ "Comply or Explain": Introduced the "comply or explain" approach. Companies
listed on the London Stock Exchange were required to state in their annual report
 whether they complied with the Code of Best Practice and to provide an
explanation for any areas of non-compliance. This flexible approach allowed
companies to adapt principles to their specific circumstances rather than
imposing a rigid set of rules.
10.​

Significance:​
The Cadbury Report was a landmark document that significantly influenced corporate
governance reforms worldwide. Its "comply or explain" principle became a model for many other
countries.

(Learning Trick for Cadbury Recommendations: B-A-R-S-C)

●​ Board structure (NEDs, Chairman/CEO split)

●​ Audit Committees (establishment, composition)
●​ Reporting & Controls (internal controls, going concern)
●​ Shareholder rights (dialogue, voting)
●​ Comply or Explain principle

b) Explain the main provisions and objectives of the Sarbanes-Oxley Act (USA, 2002). (10
Marks)

Answer:

b) Sarbanes-Oxley Act (SOX) (USA, 2002): Main Provisions and Objectives

The Sarbanes-Oxley Act of 2002 (often shortened to SOX or Sarbox) is a United States federal
law enacted in response to a number of major corporate and accounting scandals, most notably
those involving Enron and WorldCom. The Act aimed to protect investors from fraudulent
accounting activities by corporations and to improve the accuracy and reliability of corporate
disclosures.

Objectives of SOX:

1.​ Restore Investor Confidence: To rebuild public trust in corporate financial reporting
and the accounting profession after high-profile scandals.
2.​ Enhance Corporate Responsibility: To hold corporate executives more accountable
for the accuracy of financial statements.
3.​ Improve Accuracy and Reliability of Corporate Disclosures: To ensure that financial
information provided to investors is transparent, complete, and accurate.
4.​ Strengthen Auditor Independence: To reduce conflicts of interest and enhance the
independence of external auditors.
5.​ Increase Penalties for Corporate Fraud: To impose stricter criminal penalties for
white-collar crimes and securities fraud.
Main Provisions of SOX:

1.​ Public Company Accounting Oversight Board (PCAOB) (Section 101):

○​ Established the PCAOB to oversee the audits of public companies.
○​ The PCAOB sets auditing standards, inspects accounting firms, and can impose
sanctions.
2.​
3.​ Auditor Independence (Title II, Sections 201-209):
○​ Restricts non-audit services that accounting firms can provide to their audit
clients (e.g., bookkeeping, internal audit outsourcing, management functions).
○​ Mandates audit partner rotation (lead audit partner and reviewing partner must
rotate every five years).
○​ Requires a "cooling-off" period of one year before an audit firm employee can
take a key financial position (CEO, CFO, CAO) at an audit client.
4.​
5.​ Corporate Responsibility (Title III, Sections 301-308):
○​ Audit Committees: Requires public company audit committees to be composed
entirely of independent directors and be responsible for hiring, compensating,
and overseeing the work of external auditors. One member must be a "financial
expert."
○​ CEO/CFO Certification (Section 302): Requires the CEO and CFO to
personally certify the accuracy of their company's financial statements and the
effectiveness of internal controls. False certifications can lead to criminal
penalties.
○​ Prohibition of Loans to Executives (Section 402): Generally prohibits personal
loans from the company to its executives and directors.
○​ Forfeiture of Bonuses and Profits (Section 304): If a company has to restate
its financials due to misconduct, the CEO and CFO must forfeit bonuses and
profits from stock sales received during the 12 months following the initial filing.
6.​
7.​ Enhanced Financial Disclosures (Title IV, Sections 401-409):
○​ Internal Control Report (Section 404): Requires management and the external
auditor to report on the adequacy of the company's internal control over financial
reporting (ICFR). This is one of the most costly and complex provisions.
○​ Disclosure of Off-Balance Sheet Transactions: Mandates disclosure of
material off-balance sheet transactions and arrangements.
○​ Real-time Disclosures: Requires companies to disclose material changes in
their financial condition or operations on a rapid and current basis.
8.​
9.​ Corporate and Criminal Fraud Accountability (Title VIII & IX, Sections 801-906):
○​ Increased Criminal Penalties: Significantly increased criminal penalties for
securities fraud, mail fraud, wire fraud, and destruction or alteration of
documents.
 ○​ Whistleblower Protection (Section 806 & 1107): Provides protection to
employees of public companies who report fraudulent activities.
10.​

Significance:​
SOX has had a profound impact on corporate governance and financial reporting globally. While
criticized for its compliance costs, it is widely credited with improving the quality of financial
reporting and strengthening accountability.

(Learning Trick for SOX Provisions: P-A-C-E-F)

●​ PCAOB (Public Company Accounting Oversight Board)

●​ Auditor Independence
●​ Corporate Responsibility (CEO/CFO certification, Audit Committees)
●​ Enhanced Financial Disclosures (Internal Controls - Sec 404)
●​ Fraud Accountability (Criminal Penalties, Whistleblower protection)​
(Think: Companies must keep "PACE" with SOX to avoid "Fraud")

UNIT 4: Corporate Governance Regulatory Framework in India (18 Marks)

Question 1:​
a) Discuss the significant recommendations of the Kumar Mangalam Birla Committee
(1999) on corporate governance. (8 Marks)

Answer:

a) Significant Recommendations of the Kumar Mangalam Birla Committee (1999)

The Securities and Exchange Board of India (SEBI) constituted the Kumar Mangalam Birla
Committee in 1999 to promote and raise the standards of corporate governance in India. The
committee's report, submitted in early 2000, made several significant recommendations, many
of which were incorporated into Clause 49 of the Listing Agreement for listed companies.

The recommendations can be broadly categorized as mandatory and non-mandatory.

Key Mandatory Recommendations:

1.​ Board of Directors:

○​ Composition: The board should have an optimum combination of executive and
non-executive directors, with not less than 50% of the board comprising
non-executive directors.
○​ Independent Directors: If the Chairman is an executive director, at least half of
the board should be independent directors. If the Chairman is a non-executive
director, at least one-third of the board should be independent.
 ○​ Definition of Independence: Provided a definition for 'independent director'.
○​ Frequency of Meetings: At least four board meetings should be held in a year,
with a maximum gap of four months (later revised) between two meetings.
2.​
3.​ Audit Committee:
○​ Mandatory Establishment: All listed companies with paid-up capital of Rs. 3
crore and above (threshold later revised) should set up a qualified and
independent audit committee.
○​ Composition: Minimum three members, all non-executive, with a majority being
independent, and at least one having financial and accounting knowledge. The
Chairman should be an independent director.
○​ Role and Powers: Defined the powers, role, and responsibilities, including
oversight of financial reporting, review of internal controls, and liaison with
auditors.
4.​
5.​ Remuneration Committee:
○​ Recommended the constitution of a Remuneration Committee for deciding the
remuneration packages of executive directors, though initially this was
non-mandatory for all.
6.​
7.​ Shareholder Information and Rights:
○​ Disclosures: Specified extensive disclosures on directors' remuneration, related
party transactions, and material financial and commercial transactions where
directors have a pecuniary interest.
○​ Half-Yearly Reporting: Recommended that companies provide unaudited
financial results on a half-yearly basis to shareholders.
○​ Board Procedures: Information like quarterly results, minutes of board
meetings, etc., should be placed before the board.
8.​
9.​ Management Discussion and Analysis (MD&A):
○​ A separate section on MD&A should form part of the annual report, covering
industry structure, opportunities and threats, segmental performance, risks,
internal controls, etc.
10.​
11.​Report on Corporate Governance:
○​ A separate section on corporate governance in the annual report, with a detailed
compliance report.
○​ A certificate from auditors or practicing company secretaries regarding
compliance with corporate governance provisions.
12.​

Key Non-Mandatory Recommendations (initially):

1.​ Role of Chairman: Advocated for separating the posts of Chairman and CEO.
 2.​ Remuneration Committee for All: Setting up a remuneration committee for all listed
companies.
3.​ Shareholder Rights: Postal ballot for critical decisions to enable wider shareholder
participation.
4.​ Sale of Assets: Sale of a whole or substantially whole of the undertaking only with
shareholder approval.

Significance:​
The Kumar Mangalam Birla Committee recommendations were a landmark step in formalizing
corporate governance norms for Indian companies. They laid the foundation for subsequent
reforms and significantly improved transparency, accountability, and investor protection in the
Indian capital market.

(Learning Trick for Birla Committee: B-A-R-S-M)

●​ Board Composition (Independent Directors)

●​ Audit Committee (Mandatory, Composition)
●​ Remuneration (Committee, Disclosures)
●​ Shareholder Information & Rights (Disclosures)
●​ Management Discussion & Analysis (MD&A)

b) Explain the key provisions relating to Board composition and responsibilities of

Directors under the Companies Act, 2013. (10 Marks)

Answer:

b) Board Composition and Directors' Responsibilities under Companies Act, 2013

The Companies Act, 2013, brought significant changes to corporate governance in India,
particularly concerning the composition of the Board of Directors and the duties and
responsibilities imposed upon them.

Key Provisions Relating to Board Composition:

1.​ Minimum and Maximum Number of Directors (Section 149(1)):

○​ Public Company: Minimum 3 directors.
○​ Private Company: Minimum 2 directors.
○​ One Person Company (OPC): Minimum 1 director.
○​ Maximum: All companies can have a maximum of 15 directors. This can be
increased by passing a special resolution.
2.​
3.​ Woman Director (Section 149(1), Proviso):
 ○​ Certain classes of companies (e.g., every listed company, every other public
company having paid-up share capital of ₹100 crore or more, or turnover of ₹300
crore or more) must appoint at least one woman director.
4.​
5.​ Resident Director (Section 149(3)):
○​ Every company shall have at least one director who has stayed in India for a total
period of not less than 182 days during the financial year.
6.​
7.​ Independent Directors (Section 149(4)):
○​ Listed public companies must have at least one-third of the total number of
directors as independent directors.
○​ The Central Government may prescribe the minimum number of independent
directors for other classes of public companies.
○​ The Act provides a detailed definition of "independent director" (Section 149(6)),
criteria for independence, their tenure (not more than two consecutive terms of
five years each, requiring a special resolution for reappointment for a second
term), and a code of conduct (Schedule IV).
8.​
9.​ Small Shareholder Director (Section 151):
○​ A listed company may have one director elected by small shareholders (holding
shares of nominal value not more than ₹20,000) upon notice from a specified
number of small shareholders.
10.​

Key Responsibilities and Duties of Directors (primarily Section 166):​

Section 166 of the Companies Act, 2013, codifies the duties of directors, which were previously
largely based on common law. These include:

1.​ Duty to Act in Accordance with Articles: A director must act in accordance with the
company's articles of association.
2.​ Duty to Act in Good Faith and Promote Company Objects: A director must act in
good faith to promote the objects of the company for the benefit of its members as a
whole, and in the best interests of the company, its employees, shareholders, the
community, and for the protection of the environment.
3.​ Duty of Due Care, Skill, and Diligence: A director must exercise his duties with due
and reasonable care, skill, and diligence, and shall exercise independent judgment.
4.​ Duty to Avoid Conflicts of Interest: A director shall not involve in a situation in which
he may have a direct or indirect interest that conflicts, or possibly may conflict, with the
interest of the company. This includes not achieving any undue gain or advantage for
themselves or their relatives.
5.​ Duty Not to Make Undue Gain: A director shall not achieve or attempt to achieve any
undue gain or advantage either to himself or to his relatives, partners, or associates. If
found guilty of making any undue gain, he shall be liable to pay an amount equal to that
gain to the company.
 6.​ Duty Not to Assign Office: A director shall not assign his office, and any assignment so
made shall be void.
7.​ Other Responsibilities:
○​ Attending board meetings diligently.
○​ Ensuring compliance with statutory requirements.
○​ Disclosing their interest in any contract or arrangement.
○​ Maintaining confidentiality of sensitive company information.
8.​

Penalties for Breach:​

If a director contravenes the provisions of Section 166, such director shall be punishable with a
fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

(Learning Trick for Director's Duties (Sec 166): A-Good-CARE-Gain-Assign)

●​ Act per Articles

●​ Good Faith (promote objects, benefit of company & stakeholders)
●​ CARE (Due Care, Skill, Diligence, Independent Judgment)
●​ Avoid Conflicts of Interest & Not make Undue GAIN
●​ Not ASSIGN Office​
(Think: Directors must "A-Good-CARE-Gain-Assign" to fulfill their duties effectively)

UNIT 5: Corporate Failures and Scams in India (18 Marks)

Question 1:​
a) Analyze the corporate governance failures and ethical issues in the Satyam Computer
Services scam. What were its implications for the Indian corporate sector? (10 Marks)

Answer:

a) Satyam Computer Services Scam: Governance Failures, Ethical Issues, and

Implications

The Satyam Computer Services scam, which came to light in January 2009, was one of India's
largest corporate frauds. The company's chairman, Ramalinga Raju, confessed to manipulating
the company's accounts for years, inflating revenues, profits, and cash balances.

Corporate Governance Failures:

1.​ Dominant and Unscrupulous Promoter/Chairman: Ramalinga Raju, as the

founder-chairman, wielded excessive power and influence, overriding internal controls
and checks. This concentration of power was a key enabler of the fraud.
2.​ Ineffective Board of Directors:
 ○​ Lack of Independence: While the board had independent directors, their
independence and effectiveness were questionable. They failed to scrutinize
management's actions or challenge Raju's decisions.
○​ Poor Oversight: The board did not exercise adequate oversight over financial
reporting and internal controls, allowing the manipulation to continue undetected
for years.
3.​
4.​ Failure of the Audit Committee: The Audit Committee, which is supposed to be the
primary watchdog for financial integrity, failed miserably. It did not detect the gross
irregularities in the financial statements.
5.​ Auditor Collusion/Negligence: The statutory auditors (Price Waterhouse) failed in their
duty to conduct a thorough and independent audit. There were allegations of collusion
or, at best, gross negligence in not identifying the large-scale financial manipulations.
6.​ Weak Internal Controls: The internal audit function and internal control systems were
either non-existent, weak, or deliberately bypassed to facilitate the fraud.
7.​ Lack of Whistle-Blower Protection/Mechanism: There was no effective mechanism
for whistle-blowers to report wrongdoing without fear of reprisal, or if there was, it was
not effective.
8.​ Misleading Financial Disclosures: The company consistently published falsified
financial statements, misleading investors, regulators, and other stakeholders about its
true financial health.

Ethical Issues:

1.​ Breach of Trust: Raju and the involved executives breached the trust placed in them by
shareholders, employees, customers, and the wider community.
2.​ Deception and Fraud: The core of the scam was deliberate deception through
falsification of accounts and misrepresentation of financial performance.
3.​ Lack of Integrity and Honesty: The actions demonstrated a profound lack of personal
and professional integrity on the part of the perpetrators.
4.​ Greed: The motive behind the fraud appeared to be maintaining a high stock price,
personal enrichment, and projecting a false image of success.
5.​ Failure of Fiduciary Duty: Directors and auditors failed in their fiduciary duty to act in
the best interests of the company and its shareholders.

Implications for the Indian Corporate Sector:

1.​ Erosion of Investor Confidence: The scam severely damaged investor confidence in
the Indian stock market and the credibility of Indian corporate governance practices,
especially concerning promoter-driven companies.
2.​ Regulatory Overhaul: It acted as a wake-up call for regulators, leading to:
○​ Strengthening of corporate governance norms under Clause 49 of the Listing
Agreement.
○​ The Companies Act, 2013, which introduced stricter provisions for board
accountability, auditor rotation, independent directors, and internal controls.
 ○​ Increased scrutiny by SEBI and other regulatory bodies.
3.​
4.​ Enhanced Role of Independent Directors and Audit Committees: The scam
highlighted the critical need for truly independent and vigilant directors and effective
audit committees.
5.​ Focus on Auditor Accountability: It brought the role and accountability of auditors
under intense scrutiny, leading to calls for stricter oversight of the auditing profession.
6.​ Increased Importance of Whistle-Blower Policies: Companies began to realize the
importance of establishing robust whistle-blower mechanisms.
7.​ Reputational Damage for India Inc.: The scandal tarnished the image of Indian
businesses globally, raising questions about transparency and ethical standards.

(Learning Trick for Satyam Failures: D-BOARD-A-W)

●​ Dominant Promoter
●​ Board Ineffective
●​ Oversight (Lack of)
●​ Audit Committee Failure
●​ Reliance on Auditors (who failed)
●​ Disclosures (Misleading)
●​ Weak Internal Controls/Whistle-blower​
(Think: "The D-BOARD was A-Wful" in preventing the Satyam scam)

b) Briefly discuss the common governance problems observed in major corporate

failures in India. (8 Marks)

Answer:

b) Common Governance Problems in Major Indian Corporate Failures

Major corporate failures in India, such as Satyam, Kingfisher Airlines, IL&FS, Yes Bank, and
PNB, have often exhibited a recurring set of corporate governance problems. These common
issues highlight systemic weaknesses that can lead to significant financial and reputational
damage.

1.​ Over-Dominant Promoters/CEOs:

○​ In many Indian companies, promoters or a single powerful CEO often exercise
excessive control, overriding board decisions and internal controls. This
concentration of power can lead to decisions that benefit the promoter/CEO
personally rather than the company and its diverse stakeholders.
○​ Example: Ramalinga Raju in Satyam, Rana Kapoor in Yes Bank.
2.​
3.​ Ineffective or Compliant Boards:
 ○​ Boards may lack truly independent directors or those who are willing to challenge
the dominant promoter/management.
○​ Directors may lack the necessary expertise, diligence, or courage to question
dubious transactions or strategies.
○​ "Rubber-stamp" boards fail to provide effective oversight.
○​ Example: Boards in Kingfisher Airlines and IL&FS were criticized for lack of
oversight.
4.​
5.​ Weak Audit Committee and Internal Controls:
○​ Audit committees may not be sufficiently independent or diligent in scrutinizing
financial statements and internal audit reports.
○​ Internal control systems are often weak, poorly implemented, or deliberately
bypassed, allowing fraudulent activities or mismanagement to go undetected.
○​ Example: Satyam's audit committee and internal controls failed spectacularly.
6.​
7.​ Auditor Lapses (Negligence or Collusion):
○​ Statutory auditors, who are meant to be independent gatekeepers, have
sometimes failed to detect gross irregularities or have even colluded with
management.
○​ Lack of auditor rotation (before it became mandatory for certain classes) could
lead to complacency or overly close relationships with management.
○​ Example: Auditors' role was questioned in Satyam and IL&FS.
8.​
9.​ Non-Transparency and Poor Disclosures:
○​ Companies may engage in opaque accounting practices, hide related-party
transactions, or provide misleading information to investors and regulators.
○​ Lack of timely and accurate disclosure of material information prevents
stakeholders from making informed decisions.
○​ Example: IL&FS had a complex web of subsidiaries and transactions that lacked
transparency.
10.​
11.​Aggressive Accounting Practices and Window Dressing:
○​ To project a rosy picture of financial health, companies may resort to aggressive
revenue recognition, capitalization of expenses, or other accounting
manipulations to inflate profits and assets.
○​ Example: Satyam's fictitious revenue and bank balances.
12.​
13.​Excessive Risk-Taking and Poor Strategic Decisions:
○​ Sometimes, failures are driven by overly ambitious expansion plans, unrelated
diversification, or high-risk ventures undertaken without proper due diligence or
board approval.
○​ Example: Kingfisher Airlines' aggressive expansion and debt-fueled growth.
14.​
15.​Inadequate Whistle-Blower Mechanisms:
 ○​ Lack of robust and credible whistle-blower policies often means that internal red
flags are not raised or are suppressed, allowing problems to fester.
16.​

(Learning Trick for Common Governance Problems: D-BOARD-AWW)

●​ Dominant Promoters/CEOs
●​ Board Ineffective/Compliant
●​ Opaque Disclosures (Non-Transparency)
●​ Audit Lapses (Committee & External Auditors)
●​ Risk-Taking (Excessive) / Poor Strategy
●​ Dubious Accounting (Aggressive/Window Dressing)
●​ Absence of Strong Internal Controls
●​ Whistle-blower (Inadequate Mechanisms)
●​ Weak Stakeholder Protection (Implicit)​
(Think: "D-BOARD was A-W-Wful" again, highlighting the repeated patterns in failures)

I hope these detailed answers, complete with learning tricks, are helpful for your exam
preparation! Remember to understand the concepts rather than just memorizing them. Good
luck!