The emerging middle-class, cost-competitiveness and large talent pool together make India one of the most preferred destinations for investors and businesses. However, recent headlines have been dominated by scams, graft, corruption, enforcement, and whistleblowers.
Fraud, bribery and corruption continue to challenge even organisations with the most robust compliances. Regulators across the globe are focusing on corporate and individual misconduct. The challenge for businesses is further compounded by the uncertain macroeconomic situation, coupled with the rupee’s fall and inflation.
Good governance
Companies Bill 2013 promises to improve corporate governance standards. In EY India’s 2013 survey ‘Bribery and corruption: Ground reality in India’, two-third of the respondents said that new regulations such as the Companies Bill can reduce fraud, bribery and corruption.
Besides defining fraud, the Bill aims to deter corporate crime and related offences. On the regulatory side, the measures include conferring more powers on the Serious Fraud Investigation Office, establishing special courts and tribunals, and listing penalties.
In terms of self-regulation, the Bill defines the liability of the Board and senior management in the event of fraud. It explicitly sets out guidelines for professional conduct, and the functions and duties of independent directors.
It elaborates that an independent director should maintain integrity and exercise his/her responsibilities in a bona fide manner, and should not abuse the position to the detriment of the company. He/ she should assist the Board in implementing best corporate governance practices. The onus is on independent directors to report fraud or unethical acts in the company.
For investors, the Bill introduces the concept of class action suits, giving them the right to claim damages, or demand other suitable action from or against the company or its directors for any fraudulent or unlawful act. The Bill also makes it mandatory for listed companies to establish a vigil mechanism for directors and employees to report genuine concerns in a prescribed manner.
Undercutting competition
A large number of the survey respondents said their companies lost business to competitors due to the latter’s unethical conduct.
The most worrying aspect of this revelation is the likely negative impact on the losing parties. Under pressure to “deliver”, they may indulge in corrupt practices to win business. This invariably leads to seeking out-of-turn approvals and non-compliances leading to bribery. Concealment of bribes, and misleading or false accounting are the other likely fallout.
Another worrying discovery is that doctoring of financial statement is a common fraudulent practice, for reasons ranging from hiding poor performance to routing bribes and misleading investors. Questionable transactions may be disguised in the books as genuine business transactions.
Strengthening laws
Despite all the misgivings, the Government’s move to improve corporate governance standards is encouraging, and garnering the support of investors, corporates and the public. The Government is also considering amending the Indian Penal Code to make bribing in the private sector a criminal offence attracting stringent punishment.
Although many organisations are aware of the risks involved, and have intensified their compliance initiatives, much more needs to be done.
Companies will have to ensure transparency in business dealings and resist bribery.
Once the Companies Bill is signed into law, compliance with the prescribed statutes will raise corporate governance standards, and force companies to do business the right way.
The author is Partner and Leader – Fraud Investigation and Dispute Services, EY India