With a large chunk of news headlines revolving around corporate scams, pervasive corruption, cases of graft and whistle-blowers, there is a dire need for stronger compliance procedures in the Indian corporate practice.

Popular belief states that the new Companies Act, 2013 (“the new Act”) will bring improved corporate governance practices, transparency in functioning of companies and enhance investor protection and disclosure norms.

The new Act will also enable friendly corporate regulations and provide a structured mechanism to curtail fraudulent activities as it covers loopholes by prescribing stricter compliances and disclosure norms.

In 2014, the new Act made a series of sweeping changes. These changes were in the realm of governance, transparency, disclosures, responsibilities of auditors and directors, class action suits and empowerment of the Serious Fraud Office by conferring a statutory status, and they are expected to attract exacting punishments in the event of any breach. To elude these, it would be desirous, if not an absolute requirement, to implement certain changes in polices and functioning of every company, to foster healthy governance practices.

While the true impact of the new Act can only be gauged with time, and much remains to be implemented, companies have shifted from being complacent to playing a more compliant role. They are proactively promoting good governance, transparency and advocating ethical corporate practices.

Undoubtedly, it can be stated that due to the stringent nature of the new legislation and the penal provisions prescribed therein, 2014 will see a dramatic change in good governance practices for the better progress of Corporate India.

Whistle blowing policies The corporate sphere has become increasingly inter-linked and networked. While the senior management today are more tuned into the pulse of the organisation, the concept of vigilance needs to go beyond the boardroom and trickle down to the employee level.

According to EY’s India Fraud Survey 2012, out of the 58 per cent companies that witnessed fraudulent activities last year, 62 per cent indicated that whistle-blowing tips helped in their detection. Globally, organisations have already realised and recognised the benefits of institutionalising a whistle blowing framework.

India Inc. is on the right path as well, primarily triggered by the provisions of the Companies Act 2013.

In 2014, the new Act is set to get the ball rolling toward higher standards of transparency, leading to the prevention and deterrence of fraud in Corporate India.

This is primarily because the Act comprises a provision, making it mandatory for listed entities to establish a ‘vigil mechanism’ for reporting ‘genuine concerns’ The implementation of such a framework is expected to propel organisations toward actually deep diving in case of any wrong doing, rather than merely considering it a tick in the box.

With the rapid increase in risks around fraud and corruption, the compulsory implementation of the vigil mechanism comes at a very opportune time.

The vigil mechanism will act as an enabler to safeguard the critical assets of the organisation and mitigate losses around reputation, productivity and monetary damage.

Class wars in the US Enron used accounting loopholes, special purpose entities (SPE) and poor financial reporting to hide billions of dollars in debt. CFO and other executives misled board and audit committees.

Enron shareholders filed a $40 billion lawsuit after the company’s stock price, which achieved a high of $90.75 per share in mid-2000, plummeted to less than $1 by November 2001. The case was settled for about $7.2 billion.

Beginning year 2000, telecommunications industry was declining and WorldCom’s aggressive growth strategy suffered a setback when it was forced by the US Justice Department to abandon its proposed merger with Sprint.

WorldCom used fraudulent accounting methods to disguise its decreasing earnings. This case involved recovery of $6.2 billion for investors.

Nortel was a leading supplier of fibre-optic equipment and networking solutions to internet companies. The dotcom bust caused the company’s sales to vanish. Nortel started creating false accounting entries to show steady sales and profit.

When the fraud was uncovered, its stock eventually fell to $0.47 from a high of $124.

Besides other payments, Nortel paid out $575 million and 629 million common shares to settle the class-action lawsuit. Tyco manufactured, inter alia , telecommunications equipment, medical devices, and home alarm systems.

On January 28, 2003, a 330-page Consolidated Securities Class Action Complaint was filed against Tyco alleging that the company and others involved made false and misleading public statements about Tyco’s finances during the Class Period. Total settlement amount of this case was $3.2 billion.

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