The principles of corporate governance have over the years been embedded in the legal framework of India. A long-term approach towards the management of the company is arguably an essential element of corporate governance. The recent incidents in the corporate world namely, the Gensol Engineering case (unfolding like a corporate thriller!) and the IndusInd’s Bank’s derivatives portfolio crisis have sparked thoughts and debates in the legal fraternity as to what should could be considered as proper and adequate standards of corporate governance to avert fraud, mismanagement and negligence in the corporate sector.

The country’s regulatory framework already prescribes several safeguards, like fiduciary duties of the Board, independent audits, reporting of related party transactions and so on, however question remains before us is whether the company boards and the management, are vigilant enough to oversee and enforce compliance. The Board of Directors is mandated under the company law to act in a fiduciary capacity, and to oversee the conduct of management and ensure adherence to governance norms. It is the Board’s duty to scrutinise significant transactions, especially related-party ones, to ensure they are in the best interests of the company.

The Companies Act, 2013 provides that any fraud is punishable with imprisonment of up to 10 years and fines up to three times the amount involved. Both the Companies Act and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, require disclosure of material financial discrepancies. The regulations also provide that promoters can be disqualified from holding directorships and debarred from accessing the stock markets. Further, under the statute, legal remedies for investors include class action suits, complaints to the National Company Law Tribunal (NCLT), or approaching the Securities and Exchange Board of India (SEBI). In the case of privately held companies, investors often require clauses like “event of default” and “clawback” clauses to be embedded into shareholder agreements so as to maintain promoter accountability and ensure investor protection. Moreover, provisions of the Foreign Exchange Management Act (FEMA) can also be triggered in case of alleged financial misconduct and diversion of funds. Therefore, there are ample safeguards under Indian legal and regulatory framework but yet the incidents like that of the Gensol Engineering pose serious doubts and questions before the legal fraternity regarding their implementation and enforcement.

Legal experts now agree that a blended strategy of targeted regulatory enhancements and sensitisation of the directors and management by inculcating a culture of training and ethical governance could be the correct approach and the way forward, which perhaps would be a long term sustainable solution. As a step ahead, training and sensitisation about sustainable and ethical governance and a compliance culture should not only be restricted to the big corporates but should be made a part of the start-up ecosystem also. MSMEs, and start up companies which are new in business are in need of founders who understand the importance of compliance in business operations and how investment in compliance can achieve sustainable growth instead of impracticable short-termism. With ESG (environmental, social and governance) metrics being included more and more globally as part of corporate governance scheme, the above no longer seems like an option but the only viable way to drive sustainable growth. Further, usage of upcoming technology like Artificial Intelligence can have a huge potential in fraud detection and prevention by the authorities as well as the private sector and may also aid to avert mismanagement and misappropriation or siphoning of funds in the corporate sector.