CERTIFICATE

I, Nadirshaw .K. Dhondy, Advocate Supreme Court, have examined the

Thesis of Mr. Mohit Jain who is enrolled in School of Pharmacy and
Technology Management, NMIMS, Mumbai for the academic years
2006-2011 in the “MBA Pharmatech” Programme.
The project has been verified by me and the information in the project is
true and original to the best of my knowledge.

This thesis is prepared under my guidance and is completed solely a

result of his individual efforts. The project topic is “Corporate
Governance”. He has been rated to receive grade, dated
20th of December 2009.

Signature Signature

Name: Mohit Jain Nadirshaw K. Dhondy

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 ACKNOWLEDGEMENT

The project report on Corporate Governance is a combined effort of all

those who gave their time and direction for the purpose of its
accomplishment. The report consists of knowledge and experience of
those people. I would like to dedicate this project to all those who are
directly or indirectly involved in the making of this report and all those
workmen who have lost their lives while earning their livelihood
working hard.
I would also like to thank such people for their sincere effort and
guidance. Although every one contributed a lot but I would like to
own my special thanks to my project coordinator Adv. N. K. Dhondy
without whom this project wouldn’t have been possible. He imparted
me with lots of knowledge and direction whenever required, and
empowered me.
I would also like to thank Mr. Amrish Patel Chancellor SVKM, Dr.
Rajan Saxena, Vice-Chancellor NMIMS University, Dr. P.K. Garg Dean
Technology management.

Lastly I would like to apologize for any indifferent behavior while

dealing with any of the related person.

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PREFACE
Corporate governance is the set of policies, people, laws, regulations and
reporting of corporate business entities. It is a primary focus of regulators in
today’s world. Sound corporate governance brings prosperity to the masses in the
economy by raising investor confidence and proper management of the
investments. Good corporate governance is vital for organisations to survive.

Corporate governance is the system by which organizations are directed and

controlled. The corporate governance structure specifies the distribution of rights
and responsibilities among different participants in the corporation such as board,
managers, shareholders, and other stakeholders, and spells out the rules and
procedures for making decisions on corporate affairs. By doing this, it also
provides the structure through which the company objectives are set and the
means of attaining those objectives and monitoring performance.

Corporate governance is about international, legal and cultural arrangement

shaping the scope of the activities; the sources of control; and the manner in
which the risk and the returns are allotted.

Increasing expectations of various stakeholders and shareholders have put

increased pressure on Indian corporations for better corporate governance.
Better governance requires high degree of professionalism of boards, vigilant role
of nominee directors, transparent operations and disclosures through fairness in
accounting and reporting of business operations.

So, the major components of corporate government are; the Board of Directors,
the Executive Offices, Regulators, Reports, Upper Management, and Company
Policies. The flow of corporate governance comes from the top through the
board, it is moulded into the organisation through the CEO and reflected in the
reporting process with transparency. The overall flow is influenced by external
stakeholders.

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 Table of Contents

Corporate Governance 7
An Overview……………………………………………………………………………………………………………..
7
Historical Perspective……………………………………………………………………………………………….
8
Principles………………………………………………………………………………………………………………….
10
Mechanisms and controls……………………………………………………………………………………….
.12
Internal corporate governance controls……………………………………………………………….
12
External corporate governance controls………………………………………………………………
.13
Components of Corporate Governance……………………………………………………………………
14
The board of directors……………………………………………………………………………………… 14
The CEO, company secretary and CFO…………………………………………………………………
15

The regulators……………………………………………………………………………………………………….
16

Other external stakeholders……………………………………………………………………………………

17

Reporting and meetings ………………………………………………………………………………… 17

Organization for economic co-operation and development……………………………………

20
OECD principles 21
Basis for effective corporate governance………………………………………………………
22

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 Rights of shareholders and key ownership functions………………………………………
22

Equitable treatment of shareholders………………………………………………………………

24

Role of stakeholders…………………………………………………………………………………………
25

Disclosure and transparency…………………………………………………………………………

25

The responsibilities of the board……………………………………………………………………

27

Various Models for corporate governance…………………………………………………………………

29
Carver Model… 29

Anglo-American Model……………………………………………………………………………………………
30

Non- Anglo-American Model…………………………………………………………………………………

31

Tripartite System…………………………………………………………………………………………………
31

Shareholder and stakeholder model……………………………………………………………………

32

The Indian context……………………………………………………………………………………………………………….

34
Corporate governance in India……………………………………………………………………………………
36

Structure of corporate India 37

Clause 49…………………………………………………………………………………………………………………..
40

Clause 49 requirements in a nutshell………………………………………………………………

42

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 Loopholes in clause 49……………………………………………………………………………………
43
Various committees in India………………………………………………………………………………………
44
Kumar Mangalam Birla committee…………………………………………………………………
44
Comparison of the recommendations by various committees………………………
48

Corporate governance in India- Regulatory landscape………………………………………………

53

Corporate governance concerns……………………………………………………………………………….

56

Factors to improve corporate governance………………………………………………………………….

59

Corporate governance in Infosys……………………………………………………………………………..

60

Bank of Maharashtra…………………………………………………………………………………………………
66

Case Laws………………………………………………………………………………………………………………………….
74

UOI v/s Satyam computers ltd (C I T AT I O N : 2009 (2) C O M LJ 293) ……………………

74

Analysis 78

Niulab Equipment Co. (P) Ltd. Vs. Ashco Industries Ltd…………………………………………….

82

Analysis…………………………………………………………………………………………………………..
101

Ketan Parekh v/s SEBI…………………………………………………………………………………… 102

Analysis 127

Conclusion 129

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 Epilogue………………………………………………………………………………………………………………………..
132

Bibliography 133

CORPORATE GOVERNANCE- AN
OVERVIEW
The term “corporate governance” derives from an analogy between the government of cities,
nations or states and the governance of corporations.

As per the 1999 definition from the OECD:

“Corporate governance is the system by which business corporations are directed and
controlled. The corporate governance structure specifies the distribution of rights and
responsibilities among different participants in the corporation, such as the board, managers,
shareholders and other stakeholders, and spells out the rules and procedures for making
decisions on corporate affairs. By doing this, it also provides the structure through which the
company objectives are set, and the means of attaining those.”

The term corporate governance refers to all the activities, policies, personnel, regulations and
reporting which is related to the control of the company’s actions. Corporate governance is
done through all those individuals who have a controlling influence in a corporation such as
creditors or stock holders. It focuses on reducing principal-agent problems and undermines
stakeholders view in company operations.

Corporate governance is at the centre of attention in today’s business world. This is greatly due
to the large number of stakeholders whose wealth and interests are at stake in the business.
What has further highlighted corporate governance today has been the increasing influence
and awareness of these stake holders. Without sound corporate governance a business cannot
survive.

Corporate governance is not just related to core business activities. Good corporate governance
caters to various other issues present in the society. Corporations today have developed a
concept of corporate social responsibility. The major components of corporate governance

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comprise of company policies, Board of Directors, the role of the CEO, creditors, Stockholders,
regulators, reporting and maintaining overall transparency about the business operations.

Corporate governance can be both good and bad. The Securities and Exchange Commission
try’s to ensure that sound corporate governance is maintained in all businesses by regulating
corporations. Further business expansion is also dependent on sound corporate governance.

H ISTORICAL P ERSPECTIVE OF C ORPORATE G OVERNANCE :

The seeds of modern corporate governance were probably sown by the Watergate scandal in
the United States. The global movement for better corporate governance progressed in fits and
starts from the mid-1980s up to 1997. There were the odd country-level initiatives such as the
Cadbury Committee Report in the United Kingdom (1992) or the recommendations of the
National Association of Corporate Directors of the US (1995). It would be fair to say, however,
that such initiatives were few and far between. And while there were the occasional
international conferences on the desirability of good corporate governance, most companies –
both global and Indian knew little of what the phrase meant, and cared even less for its
implications. More recently, the first major stimulus for corporate governance reforms came
after the South-East and East Asian crisis of 1997-98. This was no classical Latin American debt
crisis. Here were fiscally responsible, healthy, rapidly growing, export-driven economies going
into crippling financial crises. Gradually, governments, multilateral institutions, banks as well as
companies began to understand that the devil lay in the institutional, microeconomic details –
the nitty-gritty of transactions between companies, banks, financial institutions and capital
markets; the design of corporate laws, bankruptcy procedures and practices; the structure of
ownership and crony capitalism; sharp stock market practices; poor boards of directors showing
scant regard to fiduciary responsibility; poor disclosures and transparency; and inadequate
accounting and auditing standards.

Suddenly, ‘corporate governance’ came out of dusty academic closets and moved centre stage.
Barring Japan and possibly Indonesia, countries in Asia recovered remarkably fast. By the year
2001, Thailand, Malaysia and Korea were on the upswing and on course to regain their
historical growth rates. With such rapid recovery, corporate governance issues s were in the
danger of being relegated to the back stage once again. There were projects to be executed,
under-value assets to be bought, and profits to be made. International investors were again
showing bullishness. In such a milieu, there seemed no urgent need to impose concepts like
better accounting practices, greater disclosure, and independent board oversight. Corporate

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governance once again settled into a phase of extended inactivity. India’s experience was
somewhat different from this Asian scheme of things. First, unlike South-East and East Asia,
the corporate governance movement did not occur due to a national or region-wide macro –
economic and financial collapse. Indeed, the Asian crisis barely touched India.

Secondly, unlike other Asian countries, the initial drive for better corporate governance and
disclosure, perhaps as a result of the 1992 stock market ‘scam’, and the onset of international
competition consequent on the liberalization of economy that began in 1990, came from all-
India industry and business associations, and in the Department of Company Affairs.

Thirdly, it is fair to say that, since April 2001, listed companies in India are required to follow
some of the most stringent guidelines for corporate governance throughout Asia and which
rank among some of the best in the world.

Even so, there is scope for improvement. For one, while India may have excellent rules and
regulations, regulatory authorities are inadequately staffed and lack sufficient number of skilled
people. This has led to less than credible enforcement. Delays in courts compound this
problem. For another, India has had its fair share of corporate scams and stock market scandals
that has shaken investor confidence. Much can be done to improve the situation.

Just as the global corporate governance movement was going into a bit of hibernation, there
came the Enron debacle of 2001, followed by other scandals involving large US companies such
as WorldCom, Qwest, Global Crossing and the exposure of lack of auditing that eventually led to
the collapse of Andersen. After having shaken the foundations of the business world, that too
in the stronghold of capitalism, these scandals have triggered another more vigorous phase of
reforms in corporate governance, accounting practices and disclosures – this time more
comprehensively than ever before.

As a US – based expert recently put it, “Enron and WorldCom have done more to further the
cause of corporate transparency and governance in less than one year, than what activists
could do in the last twenty.”

This is truly so. In June 2002, less than a year from the date when Enron filed for bankruptcy,
the US Congress introduced in record time the Sarbanes-Oxley Bill. This piece of legislation
(popularly called SOX) brought with it fundamental changes in virtually every area of corporate
governance – and particularly in auditor independence, conflicts of interest, corporate
responsibility and enhanced financial disclosures. The SOX Act was signed into law by the US
President on 30 July 2002. While the US Securities and Exchanges Commission (SEC) is yet to
formalize most of the rules under various provisions of the Act, and despite there being
rumbles of protest in the corporate world against some of the more draconian measures in the

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new law, it is fair to predict that the SOX Act will do more to change the contours of board
structure, auditing, financial reporting and corporate disclosure than any other previous law in
US history.

Although India has been fortunate in not having to go through the pains of massive corporate
failures such as Enron and WorldCom, it has not been found wanting in its desire to further
improve corporate governance standards. On 21 August 2002, the Department of Company
Affairs (DCA) under the Ministry of Finance and Company Affairs appointed this Committee to
examine various corporate governance issues.

P RINCIPLES :
Key elements of good corporate governance principles include honesty, trust and integrity,
openness, performance orientation, responsibility and accountability, mutual respect, and
commitment to the organization.

Of importance is how directors and management develop a model of governance that aligns
the values of the corporate participants and then evaluate this model periodically for its
effectiveness. In particular, senior executives should conduct themselves honestly and ethically,
especially concerning actual or apparent conflicts of interest, and disclosure in financial reports.

Commonly accepted principles of corporate governance include:

 Rights and equitable treatment of shareholders: Organizations should respect the rights
of shareholders and help shareholders to exercise those rights. They can help
shareholders exercise their rights by effectively communicating information that is
understandable and accessible and encouraging shareholders to participate in general
meetings.

 Interests of other stakeholders: Organizations should recognize that they have legal and
other obligations to all legitimate stakeholders.

 Role and responsibilities of the board: The board needs a range of skills and
understanding to be able to deal with various business issues and have the ability to
review and challenge management performance. It needs to be of sufficient size and
have an appropriate level of commitment to fulfill its responsibilities and duties. There
are issues about the appropriate mix of executive and non-executive directors.

 Integrity and ethical behavior: Ethical and responsible decision making is not only
important for public relations, but it is also a necessary element in risk management and

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 avoiding lawsuits. Organizations should develop a code of conduct for their directors
and executives that promotes ethical and responsible decision making. It is important to
understand, though, that reliance by a company on the integrity and ethics of
individuals is bound to eventual failure. Because of this, many organizations establish
Compliance and Ethics Programs to minimize the risk that the firm steps outside of
ethical and legal boundaries.

 Disclosure and transparency: Organizations should clarify and make publicly known the
roles and responsibilities of board and management to provide shareholders with a level
of accountability. They should also implement procedures to independently verify and
safeguard the integrity of the company's financial reporting. Disclosure of material
matters concerning the organization should be timely and balanced to ensure that all
investors have access to clear, factual information.

Issues involving corporate governance principles include:

 internal controls and internal auditors

 the independence of the entity's external auditors and the quality of their audits

 oversight and management of risk

 oversight of the preparation of the entity's financial statements

 review of the compensation arrangements for the chief executive officer and other
senior executives

 the resources made available to directors in carrying out their duties

 the way in which individuals are nominated for positions on the board dividend policy

Nevertheless "corporate governance," despite some feeble attempts from various quarters,
remains an ambiguous and often misunderstood phrase. For quite some time it was confined
only to corporate management. That is not so. It is something much broader, for it must include
a fair, efficient and transparent administration and strive to meet certain well defined, written
objectives. Corporate governance must go well beyond law. The quantity, quality and frequency
of financial and managerial disclosure, the degree and extent to which the board of Director
(BOD) exercise their trustee responsibilities (largely an ethical commitment), and the
commitment to run a transparent organization- these should be constantly evolving due to
interplay of many factors and the roles played by the more progressive/responsible elements
within the corporate sector. John G. Smale, a former member of the General Motors board of
directors, wrote: "The Board is responsible for the successful perpetuation of the corporation.

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That responsibility cannot be relegated to management."
In India, a strident demand for evolving a code of good practices by the corporation, written by
each corporation management, is emerging.

M ECHANISMS AND CONTROLS

Corporate governance mechanisms and controls are designed to reduce the inefficiencies that
arise from moral hazard and adverse selection. For example, to monitor managers' behaviour,
an independent third party (the external auditor) attests the accuracy of information provided
by management to investors. An ideal control system should regulate both motivation and
ability.

Internal corporate governance controls:

Internal corporate governance controls monitor activities and then take corrective action to
accomplish organizational goals. Examples include:

 Monitoring by the board of directors: The board of directors, with its legal authority to
hire, fire and compensate top management, safeguards invested capital. Regular board
meetings allow potential problems to be identified, discussed and avoided. Whilst non-
executive directors are thought to be more independent, they may not always result in
more effective corporate governance and may not increase performance. [6] Different
board structures are optimal for different firms. Moreover, the ability of the board to
monitor the firm's executives is a function of its access to information. Executive
directors possess superior knowledge of the decision-making process and therefore
evaluate top management on the basis of the quality of its decisions that lead to
financial performance outcomes, ex ante. It could be argued, therefore, that executive
directors look beyond the financial criteria.

 Internal control procedures and internal auditors: Internal control procedures are
policies implemented by an entity's board of directors, audit committee, management,
and other personnel to provide reasonable assurance of the entity achieving its
objectives related to reliable financial reporting, operating efficiency, and compliance
with laws and regulations. Internal auditors are personnel within an organization who
test the design and implementation of the entity's internal control procedures and the
reliability of its financial reporting.

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  Balance of power: The simplest balance of power is very common; require that the
President be a different person from the Treasurer. This application of separation of
power is further developed in companies where separate divisions check and balance
each other's actions. One group may propose company-wide administrative changes,
another group review and can veto the changes, and a third group check that the
interests of people (customers, shareholders, employees) outside the three groups are
being met.

 Remuneration: Performance-based remuneration is designed to relate some proportion

of salary to individual performance. It may be in the form of cash or non-cash payments
such as shares and share options, superannuation or other benefits. Such incentive
schemes, however, are reactive in the sense that they provide no mechanism for
preventing mistakes or opportunistic behavior, and can elicit myopic behavior.

External corporate governance controls:

External corporate governance controls encompass the controls external stakeholders exercise
over the organization. Examples include:

 competition

 debt covenants

 demand for and assessment of performance information (especially financial

statements)

 government regulations

 managerial labour market

 media pressure takeovers

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COMPONENTS OF CORPORATE
GOVERNANCE
Corporate governance is not just related to human elements. As mentioned earlier, it comprises
of all the policies, practices, activities, individuals and stakeholders of the business. The Major
components of corporate governance could be stated as:

 The Board of Directors

 The Upper Management

 The Stock holders

 The Regulators and other Stakeholder institutions

 Reporting

 Company Policy

 Company Activity

 The CEO, Company Secretary, and CFO

 Meetings

T HE B OARD OF D IRECTORS (BOD):

Good corporate governance is always trickled down from the top of the organization. Therefore
the role of the board of directors plays a significant role in the overall corporate governance of
any organization. The BOD is responsible for developing policies and communicating the
company objectives to the operational levels. These objectives must be developed in line with
the regulations and demands of the various stake holders. The BOD appoints a chief executive

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officer (CEO) to play an intermediary role between the principal (Owners) and the Agents
(Management and Employees) in order to achieve company goals.

The BOD must be of sufficient size and must be fully aware of shareholder and other
stakeholder objectives apart from the business environment. The BOD primarily is consisting of
individuals who have a significant share of ownership in the entity. However other directors
maybe hired if felt necessary. Those members of the BOD who are also shareholders are
termed ‘Non-Executive Directors’, whereas the directors who are specifically hired on the basis
of need and are not shareholders to the business are called ‘Executive directors’. There is no
specified mix of the number of executive and non-executive directors in the board. However
the regulators have assigned the minimum number of directors to a specified number which
varies from country to country. The selection of the Directors is done through elections at
company meetings on defined time intervals.

T HE CEO, C OMPANY S ECRETARY AND CFO:

Three of the most crucial executive offices are; Chief Executive, Chief Financial Officer (CFO),
and the Company secretary. These offices are run through high ranked personalities who posses
sound knowledge of running corporations. The regulators keep close checks on these officers
and their selection process is the outcome of several scrutinizing procedures. The selection of
these individuals is done through an election process and the final approval is given by the
regulators after assessing the various eligibility requirements such as qualification and
experience. All of these individuals have tremendous responsibility and are to be held
accountable for approximately all of the company activities. They are also given the highest
remunerations and authority. They must be well aware of all the rules and regulations defined
in the country’s corporate law.

The CEO plays the most significant role in managing the organisation and the principal-agency
relationship. The CEO is the highest paid individual and is responsible and accountable for all
business activities and performance. A good CEO is pivotal for the prosperous functioning of the
organisation. An effective CEO must possess sufficient qualification and skill to communicate
Board objectives to the lower layers of the hierarchy and to execute them in to performance.

The appointment of the CEO is done by the BOD, however once the BOD has selected a CEO he
is finally approved by the relevant regulatory body. Much scrutiny is done on the character,
skills and abilities, qualification and experience of the CEO before he is appointed. The CEO is

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accountable to the directors and should be held responsible for all performances of his
subordinates.

The Company Secretary is another key figure in the corporate governance structure of an
organisation. The company secretary is primarily responsible for ensuring that shareholder
interaction with the regulator and company offices are in line with the rules and regulations laid
out in the corporate law. The company secretary is also responsible for maintaining interaction
with shareholders and regulators, the CS must communicate to the relevant members the
schedules of meetings, elections, results and other announcements.

The regulators have defined certain qualifications for a person to be legible as a candidate for
Company secretary.

The Chief Financial Officer is perhaps the most important post after the CEO. The CFO has a
significant amount of power and say in the company and is in charge, accountable and in
control of all the company’s financial activities. The CFO must also be approved by the
Securities and Exchange Commission, and is also required to possess suitable financial
qualifications in order to hold the office of CFO. CFO’s are usually the second highest ranked
officers in organisations and receive a healthy remuneration.

T HE R EGULATORS
The regulators are usually comprised of a number of government institutions which try to
ensure that the best methods of corporate governance are being practiced in an organisation.
The Regulators are of two types; 1) Primary Regulatory Bodies, 2) Secondary Regulatory Bodies.

Primary Regulatory Bodies are those regulators that are the same for all businesses regardless
of the industry. The securities and exchange commission of Pakistan (SECP) is one such
example. The SECP is the primary regulator for limited liability companies. Each corporation
must register itself with the SECP in Pakistan. The companies are also obliged to provide a
number of documents and information to the SECP.

Secondary regulators are those regulators which are industry specific. For example the State
Bank of Pakistan for the Banking industry. These regulators are responsible for developing rules
and regulations in order to maintain best practices in the respective industry. e.g. the ‘ Food
and Drug administration’ is the regulator for the companies in the food and drug industry of the
United States, or the Karachi Port Trust as a regulator for all shipping lines calling the Karachi

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Port. The primary task of all regulators is to monitor, generate and enforce laws, and to take
suitable action for any deviations from the defined laws and codes of governance.

O THER E XTERNAL S TAKE H OLDERS

Apart from the BOD, Executives, Regulators and upper Management there are various other
elements which play a key role in a company’s corporate governance. The extent of their role is
defined by the influence or controlling interest they hold in the organization. Some of the major
indirect corporate governors are:

 Creditors

 Customers

 Society

 Media

 The general public

 Other rights groups

Many provisions are provided in the corporate law to increase in the influence of these stake
holders in the corporate governance of the company. The provisions are based on the
magnitude of the stake these parties possess. e.g. the creditors are given a right to assign their
candidate on the BOD just to ensure that the money of the creditors is being utilized properly.
Similarly, minority shareholders are also allowed to nominate their candidate for a Board Seat.

R EPORTING AND M EETINGS

Reporting company performance is an essential element for good corporate governance. The
best corporate governance practices require a comprehensive and transparent reporting
system.

There are some conflicts in this regard occurring between the various components of the
corporate governance. The cost of mailing reports to each and every shareholder is seen at
times burdensome, especially when it is of reporting to a small shareholder.

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Reporting nonetheless is considered as a very important part of corporate governance. The
companies have to report about company performance not only to shareholders, but to almost
all the relevant stake holders. e.g. the Regulators, Creditors, general public and other rights
groups. The regulators have made certain reports mandatory to be published and delivered to
concerned individuals and institutions on specified time intervals.

Some of the major reports that are published are:

 Annual Reports

 Quarterly reports

 Reports for the regulators

 Reports for the stock exchanges

 CSR Reports

 Marketing Reports

 Investment Reports

 Performance evaluation Reports

The Annual report and quarterly reports are considered to be the most significant reports for all
stake holders. They provide a thorough financial analysis, performance analysis and information
that is vital for investors, regulators and the general public.

Contents of the annual and quarterly reports are:

 Financial statement

 Auditors report

 Directors, CEO and CFO’s Report

 Statement of ownership equity

 Dividend Policy disclosures

 Any other reports considered to be necessary for the stake holders

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The CFO plays a crucial role in the reporting process. The financial statement are the major part
of the report and consist of the Balance Sheet, the Income Statement, statement of cash flows,
statement of owners equity, financial derivatives and notes attached to the report which assist
in comprehending the report, the dividend policy must also be elaborated in the report. These
statements have to be approved by both the CFO and CEO, however they are more relevant to
the CFO.

Maintaining transparency and integrity in the reports is what is considered as the key feature
for good corporate governance practices. Timely publication; delivery to the relevant
institutions and individuals, and report presentation are vital elements for good reporting.
There is increasing debate on the extent to which the reports are window dressed and
influenced by biasness.

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OECD (ORGANIZATION FOR
ECONOMIC CO-OPERATION AND
DEVELOPMENT)
“Corporate governance is the system by which business corporations are directed and
controlled. The corporate governance structure specifies the distribution of rights and
responsibilities among different participants in the corporation, such as, the board, managers,
shareholders and other stakeholders, and spells out the rules and procedures for making
decisions on corporate affairs. By doing this, it also provides the structure through which the
company objectives are set, and the means of attaining those objectives and monitoring
performance.”

The definition given by OECD means that corporate governance is an arrangement which
manages the corporations. The configuration of corporate governance defines the duties and
obligations of all the members of the corporation, gives the structure of setting the objectives
and the method of attaining the set

In short all the definitions stated above implies that corporate governance is a mode by which
the management is motivated to work for the betterment of the real owners of the corporation
i.e. the shareholders.

In other words corporate governance can be defined as the relationship of a company to its
shareholders or more broadly the relationship of the company to the society.

Corporate governance thus refers to the manner in which a company is managed and states the
rules, laws and regulation that affect the management of the firm. It also includes laws relating
to the formation of the firm, establishment of the firm and the structure of the firm. The most

21 | P a g e
important concern of corporate governance is to ensure that the managers and directors act in
the interest of the firm and for the shareholders.

OECD P RINCIPLES OF C ORPORATE G OVERNANCE :

The OECD Principles of Corporate Governance were originally developed in response to a call by
the OECD Council Meeting at Ministerial level on 27-28 April 1998, to develop, in conjunction
with national governments, other relevant international organizations and the private sector, a
set of corporate governance standards and guidelines. Since the Principles were agreed in 1999,
they have formed the basis for corporate governance initiatives in both OECD and non-OECD
countries alike. Moreover, they have been adopted as one of the Twelve Key Standards for
Sound Financial Systems by the Financial Stability Forum. Accordingly, they form the basis of
the corporate governance component of the World Bank/IMF Reports on the Observance of
Standards and Codes (ROSC). The OECD Council Meeting at Ministerial Level in 2002 agreed to
survey developments in OECD countries and to assess the Principles in light of developments in
corporate governance. This task was entrusted to the OECD Steering Group on Corporate
Governance, which comprises representatives from OECD countries. In addition, the World
Bank, the Bank for International Settlements (BIS) and the International Monetary Fund (IMF)
were observers to the Group. For the assessment, the Steering Group also invited the Financial
Stability Forum, the Basel Committee, and the International Organization of Securities
Commissions (IOSCO) as ad hoc observers.

In its review of the Principles, the Steering Group has undertaken comprehensive consultations
and has prepared with the assistance of members the Survey of Developments in OECD
Countries. The consultations have included experts from a large number of countries which
have participated in the Regional Corporate Governance Roundtables that the OECD organizes
in Russia, Asia, South East Europe, Latin America and Eurasia with the support of the Global
Corporate Governance Forum and others, and in co-operation with the World Bank and other
non-OECD countries as well. Moreover, the Steering Group has consulted a wide range of
interested parties such as the business sector, investors, professional groups at national and
international levels, trade unions, civil society organizations and international standard setting
bodies. A draft version of the Principles was put on the OECD website for public comment and
resulted in a large number of responses. These have been made public on the OECD web site.

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On the basis of the discussions in the Steering Group, the Survey and the comments received
during the wide ranging consultations, it was concluded that the 1999 Principles should be
revised to take into account new developments and concerns. It was agreed that the revision
should be pursued with a view to maintaining a non-binding principles-based approach, which
recognizes the need to adapt implementation to varying legal economic and cultural
circumstances. The revised Principles contained in this document thus build upon a wide range
of experience not only in the OECD area but also in non-OECD countries.

I. E NSURING THE B ASIS FOR AN E FFECTIVE C ORPORATE G OVERNANCE

F RAMEWORK
“The corporate governance framework should promote transparent and efficient markets, be
consistent with the rule of law and clearly articulate the division of responsibilities among
different supervisory, regulatory and enforcement authorities”

A. The corporate governance framework should be developed with a view to its impact on
overall economic performance, market integrity and the incentives it creates for market
participants and the promotion of transparent and efficient markets.

B. The legal and regulatory requirements that affect corporate governance practices in a
jurisdiction should be consistent with the rule of law, transparent and enforceable.

C. The division of responsibilities among different authorities in a jurisdiction should be clearly

articulated and ensure that the public interest is served.

D. Supervisory, regulatory and enforcement authorities should have the authority, integrity and
resources to fulfil their duties in a professional and objective manner.

Moreover, their rulings should be timely, transparent and fully explained.

II. T HE R IGHTS OF S HAREHOLDERS AND K EY O WNERSHIP F UNCTIONS

“The corporate governance framework should protect and facilitate the exercise of
shareholders’ rights”

A. Basic shareholder rights should include the right to:

1) Secure methods of ownership registration;

2) Convey or transfer shares;

3) Obtain relevant and material information on the corporation on a timely and regular basis;

23 | P a g e
4) Participate and vote in general shareholder meetings;

5) Elect and remove members of the board; and

6) Share in the profits of the corporation.

B. Shareholders should have the right to participate in, and to be sufficiently informed on,
decisions concerning fundamental corporate changes such as:

1) Amendments to the statutes, or articles of incorporation or similar governing documents of

the company;

2) The authorization of additional shares; and

3) Extraordinary transactions, including the transfer of all or substantially all assets which result
in the sale of the company.

C. Shareholders should have the opportunity to participate effectively and vote in general
shareholder meetings and should be informed of the rules, including voting procedures that
govern general shareholder meetings:

1. Shareholders should be furnished with sufficient and timely information concerning the date,
location and agenda of general meetings, as well as full and timely information regarding the
issues to be decided at the meeting.

2. Shareholders should have the opportunity to ask questions to the board, including questions
relating to the annual external audit, to place items on the agenda of general meetings, and to
propose resolutions, subject to reasonable limitations.

3. Effective shareholder participation in key corporate governance decisions, such as the

nomination and election of board members, should be facilitated.

Shareholders should be able to make their views known on the remuneration policy for board
members and key executives. The equity component of compensation schemes for board
members and employees should be subject to shareholder approval.

4. Shareholders should be able to vote in person or in absentia, and equal effect should be
given to votes whether cast in person or in absentia.

D. Capital structures and arrangements that enable certain shareholders to obtain a degree of
control disproportionate to their equity ownership should be disclosed.

E. Markets for corporate control should be allowed to function in an efficient and transparent
manner.

24 | P a g e
1. The rules and procedures governing the acquisition of corporate control in the capital
markets, and extraordinary transactions such as mergers, and sales of substantial portions of
corporate assets, should be clearly articulated and disclosed so that investors understand their
rights and recourse. Transactions should occur at transparent prices and under fair conditions
that protect the rights of all shareholders according to their class.

2. Anti-take-over devices should not be used to shield management and the board from
accountability.

F. The exercise of ownership rights by all shareholders, including institutional investors, should
be facilitated.

1. Institutional investors acting in a fiduciary capacity should disclose their overall corporate
governance and voting policies with respect to their investments, including the procedures that
they have in place for deciding on the use of their voting rights.

2. Institutional investors acting in a fiduciary capacity should disclose how they manage
material conflicts of interest that may affect the exercise of key ownership rights regarding their
investments.

G. Shareholders, including institutional shareholders, should be allowed to consult with each

other on issues concerning their basic shareholder rights as defined in the Principles, subject to
exceptions to prevent abuse.

III. T HE E QUITABLE T REATMENT OF S HAREHOLDERS

“The corporate governance framework should ensure the equitable treatment of all
shareholders, including minority and foreign shareholders. All shareholders should have the
opportunity to obtain effective redress for violation of their rights”

A. All shareholders of the same series of a class should be treated equally.

1. Within any series of a class, all shares should carry the same rights. All investors should be
able to obtain information about the rights attached to all series and classes of shares before
they purchase. Any changes in voting rights should be subject to approval by those classes of
shares which are negatively affected.

2. Minority shareholders should be protected from abusive actions by, or in the interest of,
controlling shareholders acting either directly or indirectly, and should have effective means of
redress.

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3. Votes should be cast by custodians or nominees in a manner agreed upon with the beneficial
owner of the shares.

4. Impediments to cross border voting should be eliminated.

5. Processes and procedures for general shareholder meetings should allow for equitable
treatment of all shareholders. Company procedures should not make it unduly difficult or
expensive to cast votes.

B. Insider trading and abusive self-dealing should be prohibited.

C. Members of the board and key executives should be required to disclose to the board
whether they, directly, indirectly or on behalf of third parties, have a material interest in any
transaction or matter directly affecting the corporation.

IV. T HE R OLE OF S TAKEHOLDERS IN C ORPORATE G OVERNANCE

“The corporate governance framework should recognize the rights of stakeholders established
by law or through mutual agreements and encourage active co-operation between corporations
and stakeholders in creating wealth, jobs, and the sustainability of financially sound
enterprises”

A. The rights of stakeholders that are established by law or through mutual agreements are to
be respected.

B. Where stakeholder interests are protected by law, stakeholders should have the opportunity
to obtain effective redress for violation of their rights.

C. Performance-enhancing mechanisms for employee participation should be permitted to

develop.

D. Where stakeholders participate in the corporate governance process, they should have
access to relevant, sufficient and reliable information on a timely and regular basis.

E. Stakeholders, including individual employees and their representative bodies, should be able
to freely communicate their concerns about illegal or unethical practices to the board and their
rights should not be compromised for doing this.

F. The corporate governance framework should be complemented by an effective, efficient

insolvency framework and by effective enforcement of creditor rights.

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V. D ISCLOSURE AND T RANSPARENCY
“The corporate governance framework should ensure that timely and accurate disclosure is
made on all material matters regarding the corporation, including the financial situation,
performance, ownership, and governance of the company”

A. Disclosure should include, but not be limited to, material information on:

1. The financial and operating results of the company.

2. Company objectives.

3. Major share ownership and voting rights.

4. Remuneration policy for members of the board and key executives, and information about
board members, including their qualifications, the selection process, other company
directorships and whether they are regarded as independent by the board.

5. Related party transactions.

6. Foreseeable risk factors.

7. Issues regarding employees and other stakeholders.

8. Governance structures and policies, in particular, the content of any corporate governance
code or policy and the process by which it is implemented.

B. Information should be prepared and disclosed in accordance with high quality standards of
accounting and financial and non-financial disclosure.

C. An annual audit should be conducted by an independent, competent and qualified, auditor in

order to provide an external and objective assurance to the board and shareholders that the
financial statements fairly represent the financial position and performance of the company in
all material respects.

D. External auditors should be accountable to the shareholders and owe a duty to the company
to exercise due professional care in the conduct of the audit.

E. Channels for disseminating information should provide for equal, timely and costefficient
access to relevant information by users.

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F. The corporate governance framework should be complemented by an effective approach
that addresses and promotes the provision of analysis or advice by analysts, brokers, rating
agencies and others, that is relevant to decisions by investors, free from material conflicts of
interest that might compromise the integrity of their analysis or advice.

VI. T HE R ESPONSIBILITIES OF THE B OARD

“The corporate governance framework should ensure the strategic guidance of the company,
the effective monitoring of management by the board, and the board’s accountability to the
company and the shareholders”

A. Board members should act on a fully informed basis, in good faith, with due diligence and
care, and in the best interest of the company and the shareholders.

B. Where board decisions may affect different shareholder groups differently, the board should
treat all shareholders fairly.

C. The board should apply high ethical standards. It should take into account the interests of
stakeholders.

D. The board should fulfil certain key functions, including:

1. Reviewing and guiding corporate strategy, major plans of action, risk policy, annual budgets
and business plans; setting performance objectives; monitoring implementation and corporate
performance; and overseeing major capital expenditures, and acquisitions.

2. Monitoring the effectiveness of the company’s governance practices and making changes as
needed.

3. Selecting, compensating, monitoring and, when necessary, replacing key executives and
overseeing succession planning.

4. Aligning key executive and board remuneration with the longer term interests of the
company and its shareholders.

5. Ensuring a formal and transparent board nomination and election process.

6. Monitoring and managing potential conflicts of interest of management, board members and
shareholders, including misuse of corporate assets

7. Ensuring the integrity of the corporation’s accounting and financial reporting systems,
including the independent audit, and that appropriate systems of control are in place, in

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particular, systems for risk management, financial and operational control, and compliance with
the law and relevant standards.

8. Overseeing the process of disclosure and communications.

E. The board should be able to exercise objective independent judgment on corporate affairs.

1. Boards should consider assigning a sufficient number of non-executive board members

capable of exercising independent judgment to tasks where there is a potential for conflict of
interest. Examples of such key responsibilities are ensuring the integrity of financial and non-
financial reporting etc.

2. When committees of the board are established, their mandate, composition and working
procedures should be well defined and disclosed by the board.

3. Board members should be able to commit themselves effectively to their responsibilities.

F. In order to fulfill their responsibilities, board members should have access to accurate,
relevant and timely information.

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VARIOUS MODELS FOR CORPORATE
GOVERNANCE:
C ARVER M ODEL :
A good model of governance will enable the board to:

 Cradle the vision

 Explicitly address fundamental values

 Force an external focus

 Enable an outcome-driven organising system

 Separate large issues from small ones

 Force forward thinking

 Enable proactivity

 Facilitate diversity and unity in board composition and opinion

 Describe relationships to relevant constituencies

 Define a common basis for discipline within the board (ie sticking to the job)

 Delineate the boards role in common topics (ensuring the board’s specific contribution
to any topic is clear).

 Determine what information is needed

 Balance over-control and under-control (ie neither be rubber-stamper or meddler)

 Use board time efficiently.

In the Carver Model the board is responsible for:

1. Linkage to ownership: The board acts in trusteeship for "ownership" ie, members.

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2. Explicit governing policies: The values and perspectives of the whole organization are
encompassed by the board's explicit enunciation and proper categorization of broad policies.

3. Assurance of executive performance: Although the board is not responsible for the staff's
performance, it must ensure that staff members meet the criteria it has set. In this way, its
accountability for that performance is fulfilled.

A NGELO -A MERICAN M ODEL OR THE LIBERAL MODEL :

There are many different models of corporate governance around the world. These differ
according to the variety of capitalism in which they are embedded. The liberal model that is
common in Anglo-American countries tends to give priority to the interests of shareholders.
The coordinated model that one finds in Continental Europe and Japan also recognizes the
interests of workers, managers, suppliers, customers, and the community. Each model has its
own distinct competitive advantage. The liberal model of corporate governance encourages
radical innovation and cost competition, whereas the coordinated model of corporate
governance facilitates incremental innovation and quality competition. However, there are
important differences between the U.S. recent approach to governance issues and what has
happened in the UK. In the United States, a corporation is governed by a board of directors,
which has the power to choose an executive officer, usually known as the chief executive
officer. The CEO has broad power to manage the corporation on a daily basis, but needs to get
board approval for certain major actions, such as hiring his/her immediate subordinates, raising
money, acquiring another company, major capital expansions, or other expensive projects.
Other duties of the board may include policy setting, decision making, monitoring
management's performance, or corporate control.

The board of directors is nominally selected by and responsible to the shareholders, but the
bylaws of many companies make it difficult for all but the largest shareholders to have any
influence over the makeup of the board; normally, individual shareholders are not offered a
choice of board nominees among which to choose, but are merely asked to rubberstamp the
nominees of the sitting board. Perverse incentives have pervaded many corporate boards in the
developed world, with board members beholden to the chief executive whose actions they are
intended to oversee. Frequently, members of the boards of directors are CEOs of other
corporations, which some[10] see as a conflict of interest.

The UK has pioneered a flexible model of regulation of corporate governance, known as the
‘comply or explain’ code of governance. This code lists a dozen of recommended practices, such

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as the separation of CEO and chairman of the board, the introduction of a minimum number of
non-executives directors, independent directors, the formation and composition of
remuneration, audit and nomination committees. Publicly listed companies in the UK were
required to either comply with those principles or otherwise, to explain in their annual reports
why they did not do so. The monitoring of those explanations is left to shareholders
themselves. The tenet of the code is that one size does not fit all in matters of corporate
governance and that instead of a statuatory regime like the Sarbanes-Oxley Act in the US, it is
best to leave some flexibility to companies so that they can make choices most suitable to their
circumstances. If they have good reasons to deviate from the sound rule, they should be able to
convincingly explain those to their shareholders. The code has been in place since 1993 and has
had drastic effects on the way firms are governed in the UK.

N ON A NGLO -A MERICAN M ODEL :

In East Asian countries, family-owned companies dominate. According to earlier studies, the
top wealthy families in East Asian countries dominated listed corporate assets. In countries
such as Pakistan, Indonesia and the Philippines, the top families controlled over 50% of publicly-
owned corporations through a system of family cross-holdings, thus dominating the capital
markets. Family-owned companies also dominate the Latin model of corporate governance,
that is companies in Mexico, Italy, Spain, France (to a certain extent), Brazil, Argentina and
other countries in South America.

T RIPARTITE S YSTEM - A CONVENTIONAL MODEL OF GOVERNANCE

"In many nonprofits, the responsibilities for running the organization evolve into a three-part,
interactive system - a tripartite system - comprised of a board of directors, an executive, and
staff. If this system is to function effectively, its parts need to share a sense of mission. A
board’s central function is to keep the organization’s mission in focus, and its primary
responsibility is to ensure that the other parts of the system are working toward accomplishing
that mission."

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S HAREHOLDER AND S TAKEHOLDER MODEL :

In many countries most companies are run mostly for the benefit of the shareholders, the
rightful owners. But there is another model, where companies are run for the benefit of other
significant groupings as well - such as customers, the general public or employees. This is the
stakeholder model.

Choosing a board for each of these models - or something in between - requires people with
different backgrounds and outlooks. The following table compares the shareholder and
stakeholder models:

Shareholders Stakeholders

Maximise shareholder value and look Look after all stakeholder interests,
after shareholder interests especially public

Look for survival, long term growth, and

Seek profitability and efficiency
stability

Less concerned with profit than value for

Hard-nosed and commercial
money

 
Widely Held
Narrow Ownership

Ownership concentrated in a few hands

Ownership scattered with managers given
with strong power over management
a great of freedom but subject to market
sometimes through an executive
forces such as takeovers and proxy fights
chairman

Minority shareholders poorly protected All shareholders need protection with close
and need independent director support attention to management actions

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Another difference arises from the boards' traditional structures: the single tier board going
usually hand-in-hand with the shareholder model and the two tier board more common in
Germany, Eastern Europe, France and a few other European countries.

 Single Tier Board Two tier Board

Continental European model where a

Supervisory Board consists solely of non-
Anglo-Saxon model where executive and
executives and a lower level management
non-executive directors sit together
board consists of full-time managing
directors.

Chairman works closely with CEO, and

Supervisory Board totally independent
there are board committees for audit,
from management board.
remuneration and nomination.

There is no one right model. Despite globalisation, corporate governance patterns continue to
differ, and that is because business but also social practices are not uniform. Differences are
created by: -

 The extent to which laws are enforced

 The treatment of stakeholders such as labour and the community.

 The ways in which executives are compensated

 The frequency and treatment of mergers and takeovers

 Patterns of ownership

 Business customs in the country concerned.

 Significance of the stock market in the country.

 Concentration of ownership. This is still the rule, rather than the exception.

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THE INDIAN CONTEXT
The focus has shifted to CG time and again on account of repeat emergence of financial crises
across the global, as well as frequent instances of financial reporting failures. In competitive
markets, CG is a reflection of market disciplines, and forms the cornerstone for efficient
allocation of resources. CG enables managements to take decisions, while at the same time
being accountable for the decisions taken. Securities & Exchange Board of India (SEBI)
appointed the Committee on Corporate Governance in May, 1999 under the Chairmanship of
Kumar Mangalam Birla, to promote and raise the standards of Corporate Governance, in the
particular context of companies of the Committee included

(i) To suggest measures to improve CG in the listed companies, in areas such as

continuous disclosure of material information, both financial and non
financial, manner and frequency of such disclosures, and the responsibilities
of independent and outside directors;

(ii) To draft a code of corporate best practices; and

(iii) To suggest safeguards to be instituted to deal with insider information and

insider trading.

Based on the recommendations of the Birla Committee, SEBI laid down requirements on CG for
listed entities in February, 2000. However, certain entities including public and private sector
banks, financial institutions, insurance companies and those incorporated under a separate
statute were exempted from the requirements. Subsequently, the requirements of SEBI were
forwarded to Reserve Bank of India (RBI) to consider issuing appropriate guidelines to banks
and financial institutions so as to ensure that all listed companies followed the same standards
of CG. While a number of recommendations already stood implemented, with a view to further
improving the CG standards in banks, additional measures were recommended for
implementations by banks. These measures included constitution of a Committee to look into
the complaints of shareholders and half yearly disclosure of unaudited results. The RBI also
recommended compliance with the requirements of the provisions of clause 49 of the Listing
Agreement in June, 2002. The Standing Committee on International Financial Standards and
Codes, Reserve Bank of India constituted the Advisory Group on Corporate Governance to study
the status of applicability and relevance and compliance of international standards and codes of

35 | P a g e
industrialized and emerging countries and suggest measures/recommendations for achieving
the best practice in India. The Group while submitting its Report in March, 2001, drew
attention to the Organization for Economic Cooperation and Development (OECD) principles,
the models of corporate governance in various countries – U.S., U.K., East Asia and Europe, and
the status in India. The Group covered the mechanism in India with reference to (i) the private
corporate sector, (ii) banks and the development financial institutions, and (iii) Central and
State public sector enterprises set up under the Companies Act, 1956. Comparisons were also
drawn with Bank for International Settlement (BIS) principles. The report submitted that it was
essential to bring reforms quickly so as to make boards of corporate/banks/financial
institutions/public sector enterprises more professional and truly autonomous. The first
important step to improve governance mechanism in public sector units was to transfer the
actual governance functions to the boards from the concerned administrative ministers and
also strengthen the boards by streamlining the appointment process of directors. Further there
was a need for public sector banks to maintain a high degree of transparency in regard to
disclosure of information. The recommendations covered areas of responsibilities of the board
of stakeholders/shareholders, selection procedures for appointment of directors of the board,
size and composition of the board, committees to be appointed by the board for corporate
governance, disclosure and transparency standards, role of shareholders and role of auditors.
In August, 2002, the Department of Company Affairs (DCA) under the Ministry of Finance and
Company Affairs appointed the Naresh Chandra Committee to examine the various CG issues
including appointment of the auditors and his independence; determination of audit fees;
measures to ensure that the managements and companies present “true and fair” financial
statements and certification of the same by the management and the directors; the necessary
to have a transparent system of random scrutiny of the audited accounts; adequacy of
regulations for oversight of statutory functionaries; and the role of independent directors. SEBI
appointed the N.R. Narayana Murthy Committee in February, 2003 to evaluate the adequacy of
existing CG practices and to further improve upon them. The Committee was in line with the
Board’s belief that efforts to improve CG standards in India must continue. The Committee
focused on such issues as audit committees and reports, independent directors, related parties,
risk management, directors and their compensation, code of conduct and financial disclosure.
The Committee’s recommendations were based on such parameters as fairness, accountability,
transparency, ease of implementation, verifiability and enforceability. Prior to these initiatives,
in 1996, the CII had taken the first institutional initiative to develop and promote a code of
conduct for the Indian industry. The initiative was in response to concerns regarding promotion
of investor interest, particularly, small investor’s interest; promotion of transparency within
business and industry; need to move towards international standards in terms of disclosure of

36 | P a g e
information by the corporate sector; and to develop a high level of public confidence in Indian
industry.

C ORPORATE G OVERNANCE IN I NDIA

Most important turning point for corporate governance in India came with the introduction of
economic reforms in 1991 and the need for capital market regulation. Good corporate
governance is the key to efficiency in a competitive environment. Thus, it is not only desirable
but also essential for survival. It is necessary not because it is good for the stakeholders and
other shareholders but because it is in the interest of the company itself in the present
competitive environment.

Corporate governance is steadily becoming a determining factor in the investment decisions

globally. Companies and countries that can provide a stable and transparent investment climate
stand the best chance of attracting investment and ensuring success in the long run.

By practising sound corporate governance companies create safeguards against corruption and
mismanagement and also ensures the ideals consistent with democracy like encouraging
transparency, open management, equal access to information and protection of minority
shareholder’s rights.

Connection between corporate governance and democracy- 4 core values:

 Accountability
 Fairness
 Transparency
 Responsibility

While laws, regulations and corporate codes may provide the ingredients for good corporate
governance, effective governance should rise above mere compliance and be adopted as a self
regulatory mechanism.

The quality of governance ultimately depends on the integrity of the management, ability of the
board, adequacy of the processes, commitment of individual board members, quality of
corporate reporting and participation of stakeholders in the management. Corporate
governance problems in India are very different from that of the US and the UK, where the
issue is essentially that of disciplining the management who has ceased to be effectively
accountable to their owners.

37 | P a g e
The problem of the Indian corporate sector is that of disciplining the dominant shareholder and
protecting the minority shareholders.

CII(The Confederation of Indian Industry) has become quite active on the issues of corporate
governance in the developing countries and works closely with other international agencies like
the World bank, IMF and the OECD on corporate governance

To encourage good governance the Government of India has constituted a “National Award for
Excellence in Corporate Governance”

Nomination criteria are:

 Adequate representation of independent directors on the board

 Existence of prudential checks like audit committee which enable the board to
adequately guide the management
 Adherence to prescribed accounting standards and quality of disclosures relating to
finance and other information provided to shareholders in annual reports
 Frequency and content of communication of financial and operating data to the
shareholders and to the public
 Investor friendly procedures and practices
 Enhancer of shareholder value
 Discharge of social obligations and obligations related to employee welfare
 General concern for the environment
 Ethical code of conduct
 Delegation and empowerment of employees
 Innovative practices to improve quality of life for other stakeholders of the company.

The Tata Iron and Steel Company (TISCO) was selected unanimously for the National Award of
the year 2000.

S TRUCTURE OF C ORPORATE I NDIA

Old industry leaders have been upstaged by more energetic and progressive newcomers who
are first generation entrepreneurs or professionally run companies. Public limited companies
account for 2/3 of the total book value of equity and the Public sector companies for 39% of
paid up capital. Laws that govern Indian corporations:

38 | P a g e
a) Indian companies Act consists of 7 parts including schedules, securities contracts (regulation)
Act 1956 marketable securities

b) Securities and Exchange Board of India (SEBI) Act 1992(Capital Market Regulatory authority)

c) Sick Industrial Companies(special provisions) Act 1985(framework for bankruptcy and

restructuring)

Agency costs: Reasons for bankruptcies and scandals in U.S. business separation of business
separation of ownership and control large spread of ownership. In Asia companies have high
promoter share are highly leveraged and cross handling is a significant feature. However
undesirable features include fixing election of board members, crony director’s neglect of
minority shareholder complaints preferential equity allotment to promoters, private deals at
discounted prices

While Asian firms performed reasonably well financially and gave good returns to their
shareholders their corporate governance was not satisfactory.

Note Agency costs refer to the destruction of shareholder value through managerial inefficiency
and expropriation of minority shareholder rights,

The rights of Debt and Equity : Corporate control in India has greatly improved with a well
defined takeover code the debt side remains unsatisfactory mainly due to ineffective
bankruptcy laws and procedures which are responsible for poor protection of creditors rights.
Fundamental flaws with the SICA- BIFR process include:

a) Late detection resulting in net erosion of equity instead of early detection through debt
default

b) Lengthy and cumbersome procedures (850 days for BIFR to arrive at a decision on
restructuring, cases sanctioned for restructuring 1660 days , cases recommended for
liquidation, 1460 days.

c) Indefinite stay on creditor claims,

d) Debtor in management possession

e) Violation of absolute priority rule (senior creditors to be settled first)

Market for equity driven takeovers was not functioning efficiently till SEBI’s substantial
acquisition of shares and Takeover Code. Major provisions include :

a) Disclosure: any individual or body corporate whose shareholding crosses 5% to publicly

disclose this fact to SEBI and the relevant stock exchanges.

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b) Trigger when a person’s shareholding crosses 10%, he/ they may have to make a public offer
for an extra 20% of the shares (trigger is now 15%)

c) Minimum offer price which should be the average market price over the last 6 months

d) creeping acquisition(existing management is allowed to increase its holding through the

secondary market up to a max of 2% of subscribed and paid up equity per year.

e) Escrow, there has to be an escrow account in which the acquirer has to deposit 25% of the
value of his total bid.

Quality and quantity of disclosures: Financial and non financial disclosures mandated by Law a)
statutorily audited annual accounts. Listed companies have to be submitted to the stock
exchanges where they are listed. Prepare abridged unaudited financial summaries every
quarter. They also have to submit a cash flow statement. A concern is loans from subsidiaries a
source for concern because of the risk of siphoning off of funds. Sundry debtors are also a
source of concern. One suggestion is for the company to implement U.S. GAAP (generally
accepted accounting principles). Credit rating and ownership are 2 areas of concern.

Disclosures about directors: These should be detailed not aggregate and should be done and
made available annually. Comprehensive report on relatives of directors, interest of directors in
any contract or arrangement, details of loans to directors, Insider trading to name a few critical
issues.

Board of Directors: Independent directors number and functioning no. of executive directors,
constitution and membership of audit committees, sitting fees of non executive directors
commission payable to directors attendance record of directors max directorships to be held by
an individual.

State owned enterprises: Constraints on appointment of senior management personnel (only

through Public Enterprise Selection Board(PSEB),n reservations , interference from politicians
bureaucrats, Managers subject to criminal investigation by CVC and CBI. Solution is systematic
and transparent privatization.

Winds of Change- Recent corporate Governance initiatives:

a) CII Code April 1998 focused on listed companies “the objective of good corporate governance
is maximizing share holder value must necessarily maximize corporate prosperity and best
satisfy the claims of creditors, employees, shareholders and the state.

40 | P a g e
C LAUSE 49

Clause 49 of the Listing Agreement to the Indian stock exchange comes into effect from 31
December 2005. It has been formulated for the improvement of corporate governance in all
listed companies.

In corporate hierarchy two types of managements are envisaged:

i) Companies managed by Board of Directors; and

ii) Those by a Managing Director, whole-time director or manager subject to

the control and guidance of the Board of Directors.

 As per Clause 49, for a company with an Executive Chairman,

Chairman, at least 50 per cent of the
board should comprise independent directors. In the case of a company with a non-
executive Chairman, at least one-third of the board should be independent directors.

 It would be necessary for chief executives and chief financial officers to establish and
maintain internal controls and implement remediation and risk mitigation towards
deficiencies in internal controls, among others.

 Clause VI (ii) of Clause 49 requires all companies to submit a quarterly compliance

report to stock exchange in the prescribed form. The clause also requires that there be a
separate section on corporate governance in the annual report with a detailed
compliance report.

 A company is also required to obtain a certificate either from auditors or practicing

company secretaries regarding compliance of conditions as stipulated, and annex the
same to the director's report.

 The clause mandates composition of an audit committee; one of the directors is

required to be "financially literate".

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  It is mandatory for all listed companies to comply with the clause by December 31,
2005.

Corporate Governance may be defined as “A set of systems, processes and principles which
ensure that a company is governed in the best interest of all stakeholders.” It ensures
Commitment to values and ethical conduct of business; Transparency in business transactions;
Statutory and legal compliance; adequate disclosures and Effective decision-making to achieve
corporate objectives. In other words, Corporate Governance is about promoting corporate
fairness, transparency and accountability. Good Corporate Governance is simply Good Business.

Clause 49 of the SEBI guidelines on Corporate Governance as amended on 29 October, 2004 has
made major changes in the definition of independent directors, strengthening the
responsibilities of audit committees, improving quality of financial disclosures, including those
relating to related party transactions and proceeds from public/ rights/ preferential issues,
requiring Boards to adopt formal code of conduct, requiring CEO/
CEO/CFO certification of financial
statements and for improving disclosures to shareholders. Certain non-mandatory clauses like
whistle blower policy and restriction of the term of independent directors have also been
included.

The term ‘Clause 49’ refers to clause number 49 of the Listing Agreement between a company
and the stock exchanges on which it is listed (the Listing Agreement is identical for all Indian
stock exchanges, including the NSE and BSE).
BSE). This clause is a recent addition to the Listing
Agreement and was inserted as late as 2000 consequent to the recommendations of the
Kumarmangalam Birla Committee on Corporate Governance constituted by the Securities
Exchange Board of India (SEBI
(SEBI)) in 1999.

Clause 49, when it was first added, was intended to introduce some basic corporate governance
practices in Indian companies and brought in a number of key changes in governance and
disclosures (many of which we take for granted today). It specified the minimum number of
independent directors required on the board of a company. The setting up of an Audit

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committee, and a Shareholders’ Grievance committee, among others, were made mandatory as
were the Management’s Discussion and Analysis (MD&A) section and the Report on Corporate
Governance in the Annual Report, and disclosures of fees paid to non-executive directors. A
limit was placed on the number of committees that a director could serve on.

In late 2002, SEBI constituted the Narayana Murthy Committee to assess the adequacy of
current corporate governance practices and to suggest improvements. Based on the
recommendations of this committee, SEBI issued a modified Clause 49 on October 29, 2004 (the
‘revised Clause 49’) which came into operation on January 1, 2006.

The revised Clause 49 has suitably pushed forward the original intent of protecting the interests
of investors through enhanced governance practices and disclosures. Five broad themes
predominate. The independence criteria for directors have been clarified. The roles and
responsibilities of the board have been enhanced. The quality and quantity of disclosures have
improved. The roles and responsibilities of the audit committee in all matters relating to
internal controls and financial reporting have been consolidated, and the accountability of top
management—specifically the CEO and CFO—has been enhanced. Within each of these areas,
the revised Clause 49 moves further into the realm of global best practices (and sometimes,
even beyond).

C LAUSE 49 REQUIREMENTS IN A NUTSHELL :

 Remuneration of directors

o Remuneration of non-executive directors to be decided by the board. Details of

remuneration package, stock options, performance incentives of directors to be
disclosed

 Board procedures

o Atleast 4 meetings in a year. Director not to be member of more than 10

committees and chairman of more than 5 committees across all companies

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  Management discussion & analysis report – should include:

o Industry structure & developments

o Opportunities & threats

o Segment wise or product wise performance

 Management discussion & analysis report – to include:

o Outlook

o Risks & concerns

o Internal control systems & its adequacy

o Discussion on financial performance

o Disclosure by directors on material financial and commercial transactions with

the company

 Shareholders information - brief resume of new/re-appointed directors, quarterly

results to be submitted to stock exchanges and to be placed on web-site, presentation
to analysts

 Shareholders’/investors grievance committee under the chairmanship of independent

director. Minimum 2 meetings in a year

 Report on corporate governance and certificate from auditors on compliance of

provisions of corporate governance as per clause 49 in the listing agreement

L OOP HOLES IN CLAUSE 49:

 Allows the promoters to gain/retain control over companies.

o Full freedom to the promoters.

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 o Hardly any threat to incumbent managements of vast majority of companies.

o In most companies institutional investors, have either no presence or are only

marginal players.

 Lack of genuine independent Directors getting elected to corporate boards .

o In many companies the promoter redesignated themselves as the non-executive

Chairmen

o Some companies are designating the promoter’s father in-law, mother’s brother
or wife’s brother as non-executive Chairman as they are not regarded as
relatives under the company law.

C ORPORATE G OVERNANCE IN I NDIA : H AS C LAUSE 49 M ADE A

D IFFERENCE ?

In recent years, more and more Indian companies have been raising capital
overseas by getting themselves listed on international stock exchanges.
These efforts have been accompanied by the Indian government's drive to
attract more foreign direct investment (FDI). Both factors have gone hand in
hand with the realization that if Indian companies want more access to
global capital markets, they will need to make their operations and financial
results more transparent. In other words, they will need to improve their standards of
corporate governance.

The Securities and Exchange Board of India, or SEBI, which regulates India's stock markets, took
a major step in this direction a year ago. It asked Indian firms above a certain size to implement
Clause 49, a regulation that strengthens the role of independent directors serving on corporate
boards. Have these steps made a difference to corporate governance in Indian firms? In the first
of a two-part interview, India Knowledge@Wharton spoke about these issues with
professors 
professors Jitendra Singh 
Singh and 
and Mike Useem 
Useem of Wharton's Management Department who, with

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their colleague 
colleague Harbir Singh,
Singh, are putting together an Executive Education program in Mumbai
on Corporate Governance in India.

V ARIOUS COMMITTEES IN I NDIA :

Shri Kumar Mangalam Committee

o Constituted in may 1999 to promote and raise the standard of corporate

governance in India
 Mandatory Recommendations of Birla Committee:
o APPLIES TO LISTED COMPANIES WITH PAID UP CAPITAL OF rs.3 crore and above
o Composition of board of directors – optimum combination of executive & non-
executive directors
o Audit committee – with 3 independent directors with one having financial and
accounting knowledge.

Apart from these, the Kumar Mangalam Committee also made some recommendations that are
non mandatory in nature. Some of are:

 The Board should set up a Remuneration Committee to determine the company’s

policy on specific remuneration packages for Executive Directors.

 Half-yearly declaration of financial performance including summary of the significant

events in the last six months should be sent to each shareholder.

 Non-executive chairman should be entitled to maintain a chairman’s office at the

company’s expense. This will enable him to discharge the responsibilities effectively.

It will be interesting to note that Kumar Mangalam Committee while drafting its
recommendations was faced with the dilemma of statutory v/s voluntary compliance. One may
also be aware that the desirable code of Corporate Governance, which was drafted by CII was
voluntary in nature and did not produce the expected improvement in Corporate Governance.
It is in this context that the Kumar Mangalam Committee felt that under the Indian conditions a
statutory rather than a voluntary code would be far more purposive and meaningful. This led
the Committee to decide between mandatory and non-mandatory provisions. The Committee

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felt that some of the recommendations are absolutely essential for the framework of Corporate
Governance and virtually from its code, while others could be considered as desirable. Besides,
some of the recommendations needed change of statute, such as the Companies Act for their
enforcement. Faced with this difficulty, the Committee settled for two classes of
recommendations.

SEBI has given effect to the Kumar Managlam Committee’s recommendations by a direction to
all the Stock Exchanges to amend their listing agreement with various companies in accordance
with the ‘mandatory part of the recommendations.

For ensuring good corporate governance in a banking organization the importance of

overseeing the various aspects of the corporate functioning needs to be properly understood,
appreciated and implemented. There are four important forms of oversight that should be
included in the organizational structure of any bank in order to ensure the appropriate checks
and balances:

(1) oversight by the board of directors or supervisory board;

(2) oversight by individuals not involved in the day-today running of the various
business areas;

(3) direct line supervision of different business areas; and independent risk
management and audit functions. In addition to these, it is important that the key
personnel are fit and proper for their jobs (this criterion also extends to selection of
Directors).

Mandatory recommendations- Birla committee:

 Remuneration committee
 Board procedures – Atleast 4 meetings of the board in a year with maximum gap of
4 months between 2 meetings. To review operational plans, capital budgets,
quarterly results, minutes of committee’s meeting.
 Director shall not be a member of more than 10 committee and shall not act as
chairman of more than 5 committees across all companies
 Management discussion and analysis report covering industry structure,
opportunities, threats, risks, outlook, internal control system
 Information sharing with shareholders

NON-MANDATORY RECOMMENDATIONS OF BIRLA COMMITTEE:

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  Role of chairman
 Remuneration committee of board
 Shareholders’ right for receiving half yearly financial performance
 Postal ballot covering critical matters like alteration in memorandum etc
 Sale of whole or substantial part of the undertaking
 Corporate restructuring
 Further issue of capital
 Venturing into new businesses

IMPLEMENTATION OF RECOMMENDATIONS OF BIRLA COMMITTEE:

 By introduction of clause 49 in the listing agreement with stock exchanges

 Provisions of clause 49
 Composition of board - in case of full time chairman, 50% non-executive directors
and 50% executive directors

 Constitution of audit committee – with 3 independent directors with chairman

having sound financial background. Finance director and internal audit head to be
special invitees and minimum 3 meetings to be convened.

 Responsible for review of financial performance 0n half yearly/annually basis;

appointment/ removal/remuneration of auditors; review of internal control systems
and its adequacy

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C OMPARISON OF THE RECOMMENDATIONS BY VARIOUS COMMITTEES :

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N ARESH C HANDRA HEADED COMMITTEE :

 Committee headed by Shri Naresh Chandra constituted in August 2002 to examine

corporate audit, role of auditors, relationship of company & auditor

 Recommendation of Naresh Chandra committee:

 Recommended a list of disqualifications for audit assignments like direct

relationship with company, any business relationship with client, personal
relationship with director

 Audit firms not to provide services such as accounting, internal audit

assignments etc. To audit clients

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  Auditor to disclose contingent liabilities & highlight significant accounting
policies

 Recommendation of Naresh Chandra committee:

 Audit committee to be first point of reference for appointment of auditors

 CEO & CFO of listed company to certify on fairness, correctness of annual

audited accounts

 Redefinition of independent directors – does not have any material,

pecuniary relationship or transaction with the company

 Composition of board of directors

 Statutory limit on the sitting fee to non-executive directors to be reviewed

 Recommendations have formed part of Companies (amendment) bill, 2003 (yet

to be passed))

 SEBI Constituted A Committee Headed By Shri N. R. Narayana Murthy To Review

Existing Code Of Corporate Governance

 Recommendations:

 Strenghtening The Responsibilities Of Audit Committee

 Improving Quality Of Financial Disclosures

 Utilisation Of Proceeds From Ipo

 To Assess & Disclose Business Risks

 Formal Code Of Conduct For Board

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  Whistle Blower Policy To Be Palce In A Company Providing Freedom To Approach
The Audit Committee

 Subsidiaries To Be Reviewed By Audit Committee Of Holding Company

C ORPORATE GOVERNANCE IN I NDIA – REGULATORY LANDSCAPE

Clause 49 of the listing agreement with stock exchanges provides the code of corporate
governance prescribed by SEBI for listed Indian companies. With the introduction of clause 49,
compliance with its requirements is mandatory for such companies.

India Inc. believes that the spirit and practice of governance regulations and practices need to
be intertwined

We asked respondents whether they see improvement in corporate governance following the
introduction of clause 49. While 19 percent of the respondents feel there has been significant
improvement, 68 percent of the respondents believe that significant scope for improvement
exists.

There is also the question on whether clause 49 can be strengthened and to what extent. This
question evoked a mixed response from respondents. 46 percent noted that clause 49 may
require a few changes and 44 percent noted that clause 49 could benefit from a significant
revamp.

Change in corporate governance levels in India after introduction of clause 49:

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There is also the question on whether clause 49 can be strengthened and to what extent. This
question evoked a mixed response from respondents. 46 percent noted that clause 49 may
require a few changes and 44 percent noted that clause 49 could benefit from a significant
revamp.

Can clause 49 be strengthened to inculcate good governance practices?

In comparison with developed countries that impose stringent penal and criminal
consequences for poor corporate governance, penalty levels in India are considered to be
inadequate to enforce good governance. 71 percent of the respondents considered penalty
levels to discipline poor and unethical governance to be low. 22 percent of the respondents
were either undecided or did not know if the penalty levels are low.

Will the new Companies Act have a positive impact on corporate governance?

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The Ministry of Corporate Affairs has proposed the New Companies Bill 2008 which aims to
improve corporate governance by vesting greater powers in shareholders. These have been
balanced by greater emphasis on self-regulation, minimization of regulatory approvals and
increased and more transparent disclosures.

53 percent of the respondents believe that the new Companies Act might have a limited or
insignificant impact in addressing contemporary corporate governance issues in India.

28 percent of the respondents believe that its impact is likely to be positive. The remaining 19
percent were undecided.

Principle-based approach is required for corporate governance:

Eighty percent of the respondents believe corporate governance should be practiced through a
mix of principle-based standards and moderate regulations.

Should corporate governance standards be enforced through regulations or should they be

principle-based?

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The existing (Clause 49) and ensuing (The Companies Bill, 2008) legislations do cover the
fundamentals of effective corporate governance and India compares favorably with most other
developing and Asian economies as far as the adequacy of corporate governance regulations
are concerned.

Improved corporate governance, however, does not solely rest on control through increased
regulations. What is required is a principle-based approach developed on fundamentals,
preventing moral fragility that is enforced through pragmatic levels of regulations.

“Typically a ‘principle-based approach’ means circulation of a cogent set of principles and

preferred practices which companies are asked to adopt as they see most appropriate to their
particular circumstance.”

C ORPORATE GOVERNANCE CONCERNS :

Various factors pose challenges to effective corporate governance in India:

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Independent directors need significant empowerment.

Clause 49 prescribes that at least a third of Indian boards should comprise independent
directors in cases where the board chair is an independent director.

However, where the board chair is an executive director, clause 49 requires that at least 50
percent of the board should comprise independent directors.

Majority of the respondents feel that independent directors do not adequately challenge the
executive directors and management in the process of discharging their governance
responsibilities.

Many Indian companies operate in a family-owned culture. There has been an implicit
assumption amongst boards that senior managers know their job and have the best interests of
companies they manage at heart. This has sometimes resulted in boards refraining from asking
the difficult questions to senior managers when the company has been performing well or until
there is a crisis. The selection of independent directors who are known to promoter directors
has further compounded the problem. From a governance standpoint, boards should address
the following key areas specifically concerning independent directors:

• Adoption of a formal and transparent process for director appointments. The conflict of
interest involved in managements appointing independent directors should be tackled through

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nomination committees (comprising independent directors) for identification of directorial
candidates

• Alignment of needs of the company to the skills required in the boardroom

• Segregation of the roles of CEO and chairman of the board of directors. The concept of CEO
and board chair separation is well accepted in Europe and is being steadily adopted in the US.
The chairman of the board should be an independent director who plays a key role in setting
the priorities of the board

• Planning for CEO and board succession in different scenarios

• Formal evaluation of the CEO and senior management team’s performance at least annually.

CEO performance evaluation process should be introduced when the company is performing
well. Evaluation of CEO performance sends a clear message that the CEO is accountable to the
board and introduces a healthy balance of power.

• Peer evalution of independent directors should be adopted. This would enable independent
directors to openly discuss amongst their group how they are performing and take tangible
steps to improve their individual and collective functioning.

• Independent directors should take steps to make themselves aware of their rights,
responsibilities and liabilities.

Principle of trusteeship - appropriate protection for minority shareholders:

“Corporate governance is about owners and the managers operating as the trustees on behalf
of every shareholder–large or small.”

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Shareholder activism in India is at a nascent stage and comes to the fore only in instances
where institutional investors holding a significant stake are in a position to question the quality
of corporate governance. As minority shareholders may not have complete understanding of
their rights or the avenues through which these rights could be exercised, increased activism
from institutional shareholders and reinforcing the role of independent directors on the board
is likely to take shape in the near future.

In the context of meeting expectations of stakeholders beyond the minority shareholders (eg.
employees, customers, vendors etc.) a number of initiatives need to be embraced such as:

• Informative Management Discussions and Analysis disclosures that focus on improving level
of detail around operations and key risks

• Openness and transparency in dialogue with shareholders

• Objective and transparent whistle blower policies that are available to key stakeholders
(employees, customers and vendors) and provide adequate safeguards against victimisation of
whistle blowers

• Have minority shareholders’ representatives on boards as independent directors.

I MPROVING AND ENFORCING CORPORATE GOVERNANCE :

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“Corporate Governance is concerned with holding the balance between economic and social
goals and between individual and communal goals. The corporate governance framework is
there to encourage the efficient use of resources and equally to require accountability for the
stewardship of those resources. The aim is to align as nearly as possible the interests of
individuals, corporations and society.”

Sir Adrian Cadbury in 'Global Corporate Governance Forum', World Bank, 2000.

F ACTORS TO IMPROVE CORPORATE GOVERNANCE :

Respondents were asked to rate certain factors that may result in improvement of corporate
governance practices in companies. The importance of all identified factors (refer to table
below) were rated almost equally by the respondents.

In order of importance, improvement in financial and other disclosures and improvement in risk
management and oversight processes received highest votes (24 percent each). These were
followed by enhancing the powers of independent directors (20 percent), separation of the
position of chairman and CEO (17 percent) and strengthening minority shareholders’ rights (15
percent), respectively.

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CORPORATE GOVERNANCE IN
INFOSYS: ONE OF THE LEADING IT IN
INDIA
"A true leader is one who leads by example and sacrifices more than anyone else, in his or her
pursuit of excellence."

- N. R. Narayana Murthy, Chairman, Infosys.

"The US, has discovered India's high-tech industry, and the credit is largely due to shy,
unflappable engineer N.R. Narayana Murthy."

- Business Week, June 14, 1999

Introduction

In February 2001, Infosys Technologies Ltd. (Infosys) was voted as the Best Managed Company
in Asia in the Information Technology sector, in leading financial magazine Euromoney's Fifth
Annual Survey of Best Managed Companies in Asia. Infosys was started in 1981, by seven
professional entrepreneurs led by Narayana Murthy, Chairman and CEO of Infosys with an
equity capital of Rs.10,000. In 2000, Infosys' market capitalization reached Rs.11 billion and by
2001, Infosys was one of the biggest exporters of software from India.

Narayana Murthy had built an organization that was respected across the country, with very

strong systems, high ethical values and a nurturing working atmosphere. With his sound

management skills, Narayana Murthy seemed to have taken Infosys to the pinnacle of success
in two decades. From a turnover of Rs.1.16 million in 1981, Infosys had grown to a Rs.19 billion
company in 2001. There were many firsts to Narayana Murthy's credit.

Infosys was the first company to push for off–shore software development as against body
shopping* that was coming during the 1980s. He championed corporate governance in India.

Infosys was the first Indian company to follow the US Generally Accepted Accounting Principles
(GAAP) disclosure norms before going for a Nasdaq listing in 1999. Narayana Murthy was also
the recipient of many awards. In late 2000, Infosys became a total software services company.

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It had set up a software development centre at Toronto as part its globalization strategy.
Analysts felt that Narayana Murthy had not only managed his company well, he talked about
the company at every opportunity that came his way. In the process, he had built brand equity
for his company.

Background Note

Narayana Murthy obtained his Bachelor's degree in Electrical Engineering from University of
Mysore in 1967 and his Master's degree in Technology from Indian Institute of Technology,
Kanpur in 1969. He started his career as head of the computer centre at IIM, Ahmedabad. In
1972, he went to Paris where he was part of the team that designed a 400-terminal, real-time
operating system for handling air cargo for Charles De Gaulle airport. Narayana Murthy was a
left-wing activist and mingled with French communists during his stay in Paris but his outlook
changed while traveling around Europe. Body shopping is contract labor of skilled workers. It
refers to the practice of recruiting software professionals in India and sending them to work on
projects abroad. He believed that the only way to pull India out of poverty was to create more
jobs, by setting up new companies. In 1975; he returned to India and joined Systems Research
Institute, Pune, (Maharashtra). He then headed Patni Computer Systems Pvt. Ltd., Mumbai,
(Maharashtra) before founding Infosys in 1981, along with six other professionals.

The Strategist

From the beginning, Narayana Murthy focused on the world's most challenging market - the US.
He had two reasons for this. First, there was no market for software in India at the time. He
believed that Indian software companies should export products in which they had a
competitive advantage. In 1987, Infosys entered into a joint venture with Kurt Salmon
Associates (KSA), a leading global management consultancy firm. KSA-Infosys was the first Indo-
American joint venture in the US. In 1988-89, Infosys set up its first office in the US. Reebok of
France was looking for a software system to handle its distribution management at the same
time. Infosys bagged the contract and developed the Distribution Management Application
Package (DMAP) for Reebok's French operations. Infosys decided to use this package to create a
standard application package for similar operations of any company. In 1989, Infosys bagged
another major contract from Digital Equipment. In the early 1990s, with the opening up of the
Indian economy, many export-oriented software companies were set up in India that created
the momentum: Infosys leveraged this very successfully. By mid-1990s, Infosys was competing
not only with Indian software majors like Tata Consultancy Services, and Wipro, but also with
overseas players like Cambridge Technology Partners and Sapinet, which offered software
solutions. Narayana Murthy believed that Indian software professionals had the ability to deal
with complex projects.

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Analysts felt that unlike elsewhere, India's sharpest minds were heading for a career in
software, and the best of these aspired to be at Infosys. Infosys also competed with
consultancies as Anderson Consulting and Ernst & Young, which positioned themselves as
information management specialists. In 1994, the joint venture with KSA was dissolved. In
1995, Narayana Murthy created Yantra Corp. in Acton, Mass. US. Around the same time, Infosys
entered into a joint venture with Satyam Computers and DCM. During 1998-99, Narayana
Murthy planned to position Infosys as a true global company – global clients, global operations,
global staff and a global brand image. In 1998, to support his global ambition, Narayana Murthy
listed the shares of Infosys on Nasdaq through American Depository Receipts (ADR) issue worth
US$75 million.

With this, he took the Indian software industry global. Narayana Murthy's global strategy
comprised three features. The first one was the "global delivery model." The model emphasized
on "producing where it is most cost effective to produce and selling where it is most profitable
to sell."

Cost effective production meant doing as much of the software development work in India and
profitable selling meant focusing almost exclusively on foreign markets, particularly the US.

The second feature of the strategy was "moving up the value chain" – which meant getting
involved in a software development project at the earliest stage of its life cycle.

However, analysts felt that for this, Infosys would have to compete with big companies like
Cambridge Technology Partners or even Andersen Consulting, and that could be tough. Agreed
Narayana Murthy, "Yes, it is not going to be easy. But we don't have to be unduly concerned
about unmitigated success. We may succeed in some and not in others – which is not to say
that we will not succeed as consultants." The third feature of the was the PSPD. According to
Narayana Murthy, there are four fundamental tenets of any well-run business. One:
predictability of revenues; two: sustainability of the predictions; three: profitability of revenues;
and four: a good de-risking model. 'De-risking' meant that Infosys had put limits on its exposure
to businesses of various kinds. For instance, it limited its exposure to Y2K projects to less than
25% of its total revenues because this was a business that could disappear overnight and
Infosys didn't want to take the risk.

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People Management

Analysts felt that one factor which helped Infosys to grow at a faster pace than others was the
low employee turnover. The turnover rate at Infosys was around 11% as opposed to industry
average for software companies' of over 25% during the 1990s. Infosys' retention capability was
a function both of its rigorous selection procedures as well as proactive HRD practices. About
80% of the middle and senior level executives were promoted from within the organization.

Infosys provided many facilities to its employees, which were intended to take care of both the
professional and personal needs such as ticketing, credit cards or house loan applications,
crèche facilities for kids, a gymnasium to work out etc.

Infosys was one of the first companies to adopt an employee stock option plan (ESOP) and
create additional wealth for its employees. Narayana Murthy believed that employees created
wealth and unless Infosys had a mechanism to make them principal shareholders, it was
unlikely to grow. By 1997, 500 employees were awarded stock under the ESOP. By 2001, Infosys
had about 2000 rupee millionaires on its staff and more than 213-dollar millionaires. Analysts
felt that Infosys had one of the best reward systems in the industry. Most employees in Infosys
were paid high salaries by industry average for software companies. Narayana Murthy said,
"My employees seek challenging opportunities, respect, dignity and the opportunities to learn
new things. I keep telling them that my assets are not this building, the business or foreign
contact my assets – all 8000 of them – walk out of the gate every evening and I wait for them to
come back to me the next morning." Employees were encouraged to communicate with each
other and with the higher management about interesting ideas and ways of solving problems
through the electronic bulletin boards.

To improve communication, the managing director sent mails every fortnight. There was also a
concept called the Chairman's List and an annual excellence award. However, groupism was not
encouraged. Narayana Murthy explained, "Everything is judged on merit. Ego doesn't come into
the picture. Our transactions are zero-based so there is no history sheet. Different people
compete, then they have a discussion, one solution is accepted, one person wins, they smile
and go out to lunch. Because the group of people is very smart, there has to be a uniform
distribution of wins. There are no overt or covert prejudices."

Corporate Governance and Infosys

Analysts felt that Infosys became one of the most respected companies in India, through its
corporate governance practices, which were better than those of many other companies in
India.

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Narayana Murthy's move to adhere to the best global practices was driven by his vision to
become a global player. Infosys adopted the stringent US Generally Accepted Accounting
Practices (GAAP) many years before other companies in India did. Infosys' corporate
governance practices conformed to the recommendations of the Confederation of Indian
Industries (CII) committee and the Cadbury committee on corporate governance with a few
exceptions.

To maintain transparency, Infosys provided details on high and low monthly averages of share
prices in all the stock exchanges on which the company's shares were listed. It was one of the
few companies in India to provide segment wise breakup of revenues. Narayana Murthy
believed in commitment to values, and ethical conduct of business. He said, "Investors,
customers, employees and vendors have all become more discerning, and are demanding
greater transparency and fairness in all dealings." He also made a clear distinction between
personal and corporate funds. Founding members took only salaries and dividends and did not
have other benefits from the company. Infosys received was the recipient of awards for its
good governance practices. In 2001, Infosys was rated India's most respected company by
Business World. Infosys was also ranked second in corporate governance among 495 emerging
companies, in a survey conducted by Credit Lyonnais Securities Asia (CLSA) Emerging Markets.
In 2000, Infosys was awarded the "National Award for Excellence in Corporate Governance" by
the Government of India. In 2008-09 Infosys was given award for excellence.

Leaders in the Making In August 2001, Narayana Murthy set up a Leadership Institute in
Mysore, India, to manage the future growth of Infosys.

The institute aimed at preparing Infosys employees to face the complexities of a rapidly
changing marketplace and to bring about a change in work culture by instilling leadership
qualities.

Commenting on the institute, Narayana Murthy said, "It is our vision at Infosys, to create world-
class leaders who will be at the forefront of business and technology in today's competitive
marketplace.

We believe the Leadership Institute will play an instrumental role in equipping Infoscions to be
leaders, contributing to the advancement of the IT industry."

Analysts felt that the two factors responsible for the success of Infosys were Speed and
Imagination. Narayana Murthy agreed, "Without these, we would be wiped out as fast as dew
on a sunny morning. Actually, we have a fetish for excellence."

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68 | P a g e
CORPORATE GOVERNANCE AT BANK
OF MAHARASHTRA
Corporate Governance - Model Code of Conduct

 Need and objective of the Code Clause 49 of the Listing Agreement entered into with
the Stock Exchanges, requires, as part of Corporate Governance the listed entities to lay
down a Code of Conduct for Directors on the Board of an entity and its Senior
Management. Senior Management has been defined to include personnel who are
members of its Core Management and functional heads excluding the Board of
Directors.
Accordingly the Board has laid down this Code for its Directors on the Board and its Core
Management
 Bank's belief system
This Code of Conduct attempts to set forth the guiding principles on which the Bank
shall operate and conduct its daily business with its multitudinous stakeholders,
government and regulatory agencies, media and anyone else with whom it is
connected. It recognises that the Bank is a trustee and custodian public money and in
order to fulfill its fiduciary obligations and responsibilities, it has to maintain and
continue to enjoy the trust and confidence of public at large. The Bank acknowledges
the need to uphold the integrity of every transaction it enters
into and believes that honesty and integrity in its internal conduct would be judged by
its external behaviour. The Bank shall be committed in all its actions to the interest of
the countries in which it operates. The Bank is conscious of the reputation it carries
amongst its customers and public at large and shall endeavour to do all it can to sustain

69 | P a g e
 and improve upon the same in its discharge of obligations. The Bank shall continue to
initiate policies, which are customer centric and which promote financial prudence.

 Philosophy of the Code

The Code envisages and expects -
a. adherence to the highest standards of honest and ethical conduct, including proper and
ethical procedures in dealing with actual or apparent conflicts of interest between personal
and professional relationships.
b. full, fair, accurate, sensible, timely and meaningful disclosures in the periodic reports
required to be filed by the Bank with government and regulatory agencies
c. compliance with applicable laws, rules and regulations.
d. to address misuse or misapplication of the Bank's assets and resources
e. the highest level of confidentiality and fair dealing within and outside the Bank

A. General Standards of conduct

The Bank expects all Directors and members of the Core Management to exercise good
judgment to ensure the interests, safety and welfare of customers, employees and other
stakeholders and to maintain a co-operative, efficient, positive, harmonious and productive
work environment and business organization.
The Directors and members of the Core Management must act honestly while discharging
duties of their office and with due diligence. They are expected to act with that amount of
utmost care and prudence which an ordinary person is expected to take in his/her own
business. These standards need to be applied while working in the premises of the Bank at
off-site locations where the business is being conducted whether in India or abroad at Bank
sponsored business and social events or at any other place where they act as
representatives of the Bank.

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B. Conflict of Interest - Related parties

A "conflict of interest" occurs when personal interest of any member of the Board of
Directors and of the Core Management interferes or appears to interfere in any way with
the interests of the Bank. Every member of the Board of Directors and Core Management
has a responsibility to the Bank its stakeholders and to each other. Although this duty does
not prevent them from engaging in personal transactions and investments, it does demand
that they avoid situations where a conflict of interest might occur or appear to occur. They
are expected to perform their duties in a way that they do not conflict with the Bank's
interest such as-
Employment / Outside employment - The members of the Core management are expected
to devote their total attention to the business interests of the Bank. They are prohibited
from engaging in any activity that interferes with their performance or responsibilities to
the Bank or otherwise is in conflict with or prejudicial to the Bank.
Business interests - If any member of the Board of Directors and Core Management
considers investing in securities issued by the Bank's customer, supplier or competitor, they
should ensure that these investments do not compromise their responsibilities to the Bank.
Many factors including the size and nature of investments; their ability to influence Bank's
decisions; their access to confidential information of the Bank or of the other entity and the
nature of relationship between the Bank and the customer, supplier or competitor should
be considered in determining whether a conflict exists. Additionally, they should disclose to
the Bank any interest that they have which may conflict with the business of the Bank.
Related parties - As a general rule, the Directors and members of the Core Management
should avoid conducting Bank's business with a relative or any other person or any firm,
company, association in which the relative or other person is associated in any significant
role. Relatives shall include:

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_ Spouse
_ Father
_ Mother (including step-mother)
_ Son (including step-son)
_ Son's wife
_ Daughter (including step-daughter)
_ Father's father
_ Father's mother
_ Mother's mother
_ Mother's father
_ Son's son
_ Son's son’s wife
_ Son's daughter
_ Son's daughter's husband
_ Daughter's husband
_ Daughter's son
_ Daughter's son's wife
_ Daughter's daughter
_ Daughter's daughter's husband
_ Brother (including step-brother)
_ Brother's wife
_ Sister (including step-sister)
_ Sister's husband
_ If such a related party transactions are unavoidable, they must fully disclose the nature of
the related party transaction to the appropriate authority. Any dealings with a related party
must be concluded in such a way that no preferential treatment is given to that party.
_ In the case of any other transaction or situation giving rise to conflicts of interests, the
appropriate authority should after due deliberations decide on its impact

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C. Applicable Laws

The Directors of the Bank and Core Management must comply with applicable laws,
regulations, rules and regulatory orders. They should report any inadvertent non-
compliance, if detected subsequently, to the concerned authorities.

D. Disclosure Standards

The Bank shall make full, fair, accurate, timely and meaningful disclosures in the periodic
reports required to be filed with Government and Regulatory agencies. The members of the
Core management of the Bank shall initiate all actions deemed necessary for proper
dissemination of relevant information to the Board of Directors, Auditors and other
Statutory Agencies, as may be required by applicable laws, rules and regulations.

E. Use of Bank's Assets and Resources:

Each member of the Board of Directors and Core management has a duty to the Bank to
advance its legitimate interests while dealing with the Bank's assets and resources.
Members of the Board of Directors and Core management are prohibited from:
_ using corporate property, information or position for personal gain;
_ soliciting, demanding, accepting or agreeing to accept anything of value from any person
while dealing with the Bank's assets and resources;
_ acting on behalf of the Bank in any transaction in which they or any of their relative(s)
have a significant direct or indirect interest.

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F. Confidentiality and Fair Dealings

1. Bank's Confidential Information

The Bank's confidential information is a valuable asset. It includes all trade related
information, trade secrets, confidential and privileged information, customer information,
employee related information, strategies, administration, research in connection with the
Bank and commercial, legal, scientific, technical data that are either provided to or made
available to each member of the Board of Directors and the Core management by the Bank
either in paper form or electronic media to facilitate their work or that they are able to
know or obtain access by virtue of their position with the Bank. All confidential information
must be used for Bank's business purposes only.
This responsibility includes the safeguarding, securing and proper disposal of confidential
information in accordance with the Bank's policy on maintaining and managing records. This
obligation extends to confidential information of third parties, which the Bank has rightfully
received under non-disclosure agreements.
To further the Bank's business, confidential information may have to be disclosed to
potential business partners. Such disclosure should be made after considering its potential
benefits and risks. Care should be taken to divulge the most sensitive information, only after
the said potential business partner has signed a confidentiality agreement with the Bank.
Any publication or publicly made statement that might be perceived or construed as
attributable to the Bank, made outside the scope of any appropriate authority in the Bank,
should include a disclaimer that the publication or statement represents the views of the
specific author and not the Bank.

2. Other Confidential Information -

The Bank has many kinds of business relationships with many companies and individuals.
Sometimes, they will volunteer confidential information about their products or business
plans to induce the Bank to enter into a business relationship.

74 | P a g e
At other times, the Bank may request that a third party provide confidential information to
permit the Bank to evaluate a potential business relationship with that party. Therefore,
special care must be taken by the Board of Directors and members of the Core
Management to handle the confidential information of others responsibly. Such confidential
information should be handled in accordance with the agreements with such third parties.
The Bank requires that every Director and member of the Core Management, General
Managers should be fully compliant with the laws, statues, rules and regulations that have
the objective of preventive unlawful gains of any nature whatsoever.
Directors and the members of Core Management shall not accept any offer, payment,
promise to pay, or authorization to pay any money, gift, or anything of value from
customers, suppliers, shareholders / stakeholders, etc. that is perceived as intended,
directly or indirectly, to influence any business decision, any act or failure to act, any
commission of fraud, or opportunity for the commission of any fraud.
IV. Good Corporate Governance practices
Each member of Board of Directors and Core Management of the Bank should adhere to the
following so as to ensure compliance with good Corporate Governance practices.

(a) Dos
_ Attend Board meetings regularly and participate in the deliberations and discussions
effectively.
_ Study the Board papers thoroughly and enquire about follow-up reports on definite time
schedule.
_ Involve actively in the matter of formulation of general policies.
_ be familiar with the broad objectives of the Bank and the policies laid down by the
Government and the various laws and legislations.
_ Ensure confidentiality of the Bank's agenda papers, Notes and Minutes.

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(b) Don'ts
_ do not interfere in the day to day functioning of the Bank.
_ do not reveal any information relating to any constituent of the Bank to anyone.
_ do not display the logo / distinctive design of the Bank on their personal visiting cards /
letter heads.
_ do not sponsor any proposal relating to loans, investments, buildings or sites for Bank's
premises, enlistment or empanelment of contractors, architects, auditors, doctors, lawyers
and other professionals etc.
_ do not do anything, which will interfere with and /or be subversive of maintenance of
discipline, good conduct and integrity of the staff.

V. Waivers
Any waiver of any provision of this Code of Conduct for a member of the Bank's Board of
Directors or a member of the Core Management must be approved in writing by the Board
of Directors of the Bank. The matters covered in this Code of Conduct are of the utmost
importance to the Bank, its stakeholders and its business partners, and are essential to the
Bank's ability to conduct its business in accordance with its value system.

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CASE LAWS:

UOI V/S SATYAM COMPUTER

SERVICES LTD. AND ORS. - APR 16
2009
 C I TA T I O N : 2009 (2) C O M LJ 293

 H O N OU R A B L E J U D GE S : S. B A LA SU B R A MA N I A N , C H A I R M A N

 I SSU E : C O M PA N Y L A W

 C OU N SE L : F O R T H E A P PE L L A N T : S AN JA Y S HO R E Y A N D V I N O D S HA R M A , D E PU T Y
D I R E C T O R S , I N SP E C T I ON AN D F O R TH E R E SP O N D E N T S : P A LLA VI S. S H R O F F A N D R I TU
B HA L L A , A D V .

 D A T E O F J UD G M E N T : A P R 16 2009

 C A SE N O : CP N O . 001 OF 2009 IN CA N O . 179/09

 C A SE S R E F E R R E D : U N I O N O F I N D I A V S A TY A M C O M PU T E R S S E R VI C E S L T D . (2009) 1
C O MP LJ 308 (CLB); U N I O N O F I N D I A V S AT YA M C O MP U T E R S E R VI C E S L T D . AN D
O T H E R S (2009) 2 C O M P LJ 298 (CLB)

Order:

S. Balasubramanian, Chairman (At New Delhi)

1. An apt title to this order could be 'Adoption of Orphan Satyam'. Or 'Orphan Satyam Adopted'.
Apparently a healthy and smiling company, having won various laurels - mostly in relation to
corporate governance, became a weeping orphan, overnight when its promoter - Shri
Ramalinga Raju - abandoned it after making a confessional statement on 7 January 2009 of
fudging the accounts of the company to the tune of over Rs.7, 000 crores. The massive fraud
perpetrated by the promoter caused a huge damage not only to the reputation and credibility
of the company, but also on the employees, customers and all other stakeholders. With the

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view to wipe out its tears and nurture the company which was necessary in the interests of all
stake holders, the Central Government, empowered by the relevant statutory provisions in the
Companies Act, filed this instant petition on 9 January seeking for approval of this Board to
reconstitute the then truncated board of the company with its own nominees. By a detailed
order dated 9 January 2009 [Union of India v Satyam Computers Services Ltd. (2009) 1 Comp LJ
308 (CLB)], recognizing the need for remedial action on a war footing, while suspending the
then existing board, by an ex parte order, I authorized the Central government to appoint, in
the name and on behalf of this Board, not more than 10 eminent persons as directors of the
company. Pursuant to the said order, the Central Government appointed 6 eminent persons as
directors, who, on appointment, acted not only as directors but also like foster fathers to heal
the wounds of the orphaned Satyam. By taking various systematic, purposeful and fruitful
steps, the new board mobilized funds to meet the immediate financial requirements, interacted
with the customers to prevent attrition and also by their commercial wisdom, business and
managerial expertise, ensured that the company continued as a going concern with minimum
disturbance/damage. However, the board formed an opinion that for the long term well being
of the company, there was an urgent need to induct a strategic investor of technical and
financial capability/competence to manage the affairs of the company. Accordingly, the
company sought for approval of this Board to do so. By an order dated 19.2.2009 [Union of
India v Satyam Computer Services Ltd. and others (2009) 2 Comp LJ 298 (CLB)], while according
approval to induct a strategic investor, I also authorized the company to increase its authorized
capital, make a preferential allotment of shares to the selected strategic investor by framing
and following an open and transparent method of selecting the strategic investor by way of a
competitive price bid auction overseen by a retired judge of the Supreme Court or a former
Chief Justice of India. I had also stipulated that before making the preferential allotment, the
approval of this Board should be obtained.

2. The company has filed this instant application CA 179/09 stating that in consonance and in
line with the terms of the order of this Board dated 19.2.2009 [Union of India v Satyam
Computer Services Ltd. and others (2009) 2 Comp LJ 298 (CLB)], the board of directors, through
'Project Prestige', has selected Venturbay Consultants Private Limited, a subsidiary of Tech
Mahindra Limited, as the strategic investor as it has not only satisfied the technical parameters
as prescribed in the bid documents but has also offered the highest price of Rs.58 per share
compared to the offer of Rs 45.90 and Rs 20 offered by two other remaining technically
qualified bidders. Accordingly, the board of directors has recommended that the selection of
Venturbay as the strategic investors be approved and permission be accorded to the company
to make a preferential allotment of 31% shares to Venturbay at Rs.58 per share. It has also
been prayed in the application that on making full payment towards the preferential allotment

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and also on deposit of the full amount required for the 20% public offer, Venturbay be
permitted to appoint four of its nominees on the board of Satyam. It is also further prayed that
since the accounts of the company for over 6 years have to be restated after audit, time for
filing various returns/documents as required by various statutes be extended up to 31
December 2009.

3. Heard Ms Pallavi Shroff, Advocate, for the company and Shri Shorey, Dy Director for the
Central Government. I have also perused all the documents connected with the bid process as
annexed with the application. Shri Justice Bharucha, a former Chief Justice of India who has
overseen the process of selection of the strategic investor, has given in writing, that the process
of selection was fair, transparent and open as required. Shri Shorey has submitted that the
Central Government supports the grant of the prayers sought for in the application.

4. Having convinced myself that the board of directors has selected a technically and financially
competent/qualified strategic investor - Venturbay - to adopt and nurture the ailing Satyam, I
accept the recommendation to induct Venturbay as the strategic investor, with the hope, that,
by adopting the best corporate governance practices, Venturbay would, over the years, make
Satyam to regain its glory in real terms. The allotment of preferential shall be subject to the
following:

1. Venturbay shall deposit as sum of Rs.1, 756 crores as consideration for 31% equity shares, in
escrow, by 21 April 2009.

2. On deposit of the said amount by Venturbay, the board of directors is authorized to issue and
allot 30, 27, 64,327 equity shares of Rs 10 each at a premium of Rs.48 per share to Venturbay.

3. Venturbay shall strictly abide by and follow all the terms and conditions as stipulated in
clause 6 of the RSP dated 13.3.2009, more particularly in relation to:

* Lock in period of 3 years for the shares, allotted on preferential basis and also acquired by
way of public offer, and also the preferential allotment, if made subsequently, from the dates of
allotment/acquisition.

* Non disposal or sale of any material asset of the company and also Satyam as an enterprise
for a period of two years from the date of completion of the public offer without the approval
of the shareholders and of this Board.

* Non-changing of control of Venturbay for a period of 3 years from the date of preferential
allotment/subsequent preferential allotment if any, without the prior approval of this Board.

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* On allotment of 31% shares on preferential basis and funding the escrow account in full in
cash towards 20% public offer by Venturbay, it will have the liberty to appoint, not more than 4
of its nominees as directors on the board of the company. The present 6 directors shall
continue till further orders. The Central Government need not appoint any more directors on
the board.

* Since the company has to restate the accounts for nearly 6 years after complete audit, which
is in progress, I extend the time for filing of returns/documents which are required to be filed
with various statutory authorities under various statues, whether already due or to become
due, upto 31 December 2009. This extension would also apply to publication of quarterly
financial reports as required by the listing agreement, whether overdue or to become due.

* Since the company has suffered huge damages due to the acts of commission and omission by
Rajus, the strategic investor would require sufficient to remedy the situation. Therefore, I
stipulate, that as long as the petition is pending, to ensure that the directors nominated by
Venturbay function without any apprehension of being subjected to civil/criminal or punitive
action, I direct that none of the State or Central Government agencies, in exercise of their
regulatory, enforcement or like such powers initiate any action, civil, criminal, punitive or
coercive actions against these nominees for the acts of commission occurred in the company
prior to 9.1.2009 [Union of India v Satyam Computer Services Ltd. and others (2009) 1 Comp LJ
308 (CLB)], without the prior approval of this Board. However, these nominee directors shall
cooperate with all the agencies which are looking into the past affairs of the company by
furnishing all information/documents as may be sought by these agencies.

HELD:

5. Liberty granted to apply in case of need.

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ANALYSIS:
S CAM :
Ramalinga Raju, the promoter for Satyam computer services limited included fictitious figures in
the balance sheet and the original figures were not evident. The profits were inflated over the
years by filling fictitious assets for real ones.

 Satyam is the fourth largest Indian It company and it has been known as the one of the best
Indian IT companies to work with and it has risen past several companies to bag several
projects.

Its revenues were in the range of 10,000 crores a year and have a roster of about 650 clients all
over the world that used to offshore their work to Satyam. 10000 crores will mean about 2
billion dollars or rather more based on the valuation of the rupee.

This company’s founder is Mr. Ramalinga Raju who in a letter to the Board of Directors said that
he has for the past seven years overstated the accounts and that the total profit margin of the
company is only 3% even though he has been fraudulently showing a profit margin of about
25%.

That means he was showing a cash at hand I mean in the bank accounts to be 5000 crores
about a billion dollars whereas the cash is only 640 crores or even less in the accounts. That
letter caused a stir and the job of about 55000 employees was at stake as well as the whole
future of the company is at stake.

Specifically, Raju acknowledged that Satyam’s balance sheet included Rs. 7,136 crore (nearly
$1.5 billion) in non-existent cash and bank balances, accrued interest and misstatements. It had
also inflated its 2008 second quarter revenues by Rs. 588 crore ($122 million) to Rs. 2,700 crore
($563 million), and actual operating margins were less than a tenth of the stated Rs. 649 crore
($135 million).

The downfall of Raju, a 54-year old software industry veteran, began nearly when Satyam
attempted to acquire two companies controlled by his sons - Maytas (Satyam spelled
backwards) Properties and Maytas Infra - for 1.6 billion dollars in order to compensate for the
holes in his books of account.

The deal was abandoned 12 hours after it was announced when investors objected, claiming it

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was an irresponsible misuse of funds and an instance of nepotism.

The Maytas deals acted as a red flag for international investors, with a host of companies like
Unpaid Systems of Britain accusing Satyam of fraud, forgery and breach of contract.

Shortly thereafter, on Dec. 23, the World Bank barred Satyam from offering its computer
services for eight years citing a potential trail of corruption - data theft and bribery - that led to
Raju.
The last straw perhaps came when an Indian associate of Merrill Lynch terminated an
agreement on grounds of "material accounting irregularities".
Satyam’s worth estimated at seven billion dollars, barely six months ago, is now worth less that
330 million dollars

L OOP HOLES :

Corporate governance is an internal system encompassing policies, processes and people,

which serve the needs of shareholders and other stakeholders, by directing and controlling
management activities with good business objectivity, accountability and integrity.

“In Satyam computer case this is the main problem because here every decision taken by
Mr.Ramalinga Raju was not in the favor of the shareholders and stakeholders. The stakeholders
and the shareholders of the company were cheated as the exact figures were not visible in the
balance sheet of the company i.e. the company was not totally transparent to its stakeholders
and shareholders so, this was a breach of the corporate governance.”

Immediately after Raju’s confession Satyam’s shareholders took a direct hit as the company’s
share price crashed by 77% to Rs 30.

The following are the facts indicating that there were some loopholes in Satyam scandal, which
need to be dealt with new system, rather than traditional way of the machineries: -

 What are the assets and liabilities claimed to belong to or standing in the name
of the Ramalinga Raju and Rama Raju clans - their spouses, their children
(whether sons-in-law or their trusted employees), the numerous companies that
they are alleged to have incorporated, the partnerships they have formed, and
so on? We should have details of all gifts they have made during the last ten
years, the major family or social functions they have performed, the expenditure
they have incurred and so on.

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  The banks have always been the worst conspirators and at the same time, the
most effective whistle-blowers, voluntarily or under compulsion of
circumstances, in all scams of this nature. The scope for making more use of
information in their possession should be examined. The fact so found should be
taken to be evidence of their close connection or of their being among the
group's name lenders. Where the same bearer/durbans/peons/servants carry
cheques/ drafts, cash, etc., to or/and from banks, etc., that fact can also serve as
evidence of the investment business in question belonging to the persons
controlling the group under investigation.

There should be charts revealing how each company is owned /managed by the
group. Satyam should be compelled to furnish details of all its shares which are
charged/hypothecated/pledged for any debt, whether in the names of the
members or in the names of others.

  A panel of suitable accountants/auditors for deployment on deputation 'Foreign

service' to private sector undertakings which need their services should be
maintained by the Comptroller and Auditor general. Audit rotation should not be
confined to any single firm: no firm should be allowed to deal with the same
large company or group of companies for more than three years. There should
be an audit manual setting out what the auditor should check and how the
checking or verification should be done.

C ASE :

Mr. Ramalinga Raju, the promoter of Satyam computers limited fudged the accounts of the
company over the tune of Rs 7000 crore.

The government of India filed a petition against the company and its board of directors to find
out the involvement of various parties in the fraud. Immediately the government changed the
company’s board of directors and the central government appointed six eminent persons as the
directors of the company.

The new board mobilized funds to meet the immediate financial requirements, and ensured
that the company continued as a going concern with minimum disturbance.

The board also inducted a strategic investor of financial and technical capabilities to manage
the affairs of the company. A preferential allotment of shares was done to the selected

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strategic investor who was selected by following an open and transparent method by way of a
competitive price bid to increase its authorized capital.

Venturbay Consultants Private limited, a subsidiary of Tech Mahindra limited was selected as
the strategic investor and it will be permitted to appoint 4 of its nominees on the board of
Satyam after payment of the preferential allotment.

Since the company has suffered huge damages due to the acts of commission and omission by
Raju’s, the strategic investor would require sufficient to remedy the situation. Therefore, I
stipulate, that as long as the petition is pending, to ensure that the directors nominated by
Venturbay function without any apprehension of being subjected to civil/criminal or punitive
action, I direct that none of the State or Central Government agencies, in exercise of their
regulatory, enforcement or like such powers initiate any action, civil, criminal, punitive or
coercive actions against these nominees for the acts of commission occurred in the company
prior to 9.1.2009 [Union of India v Satyam Computer Services Ltd. and others (2009) 1 Comp LJ
308 (CLB)], without the prior approval of this Board. However, these nominee directors shall
cooperate with all the agencies which are looking into the past affairs of the company by
furnishing all information/documents as may be sought by these agencies.

M EASURES TO BE TAKEN :

I feel regulators need to show to the world that decisive action is taken against the culprits.
Price Waterhouse Coopers were their auditors; they need to be punished more than anyone
else. Satyam was listed in the US too, what US regulators and PWC US were doing. I feel the
Auditors and regulators in the US and India need to be pulled up along with the board and the
independent Directors of Satyam.

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NIULAB EQUIPMENT CO. (P) LTD.
VS. ASHCO INDUSTRIES LTD. - MAR
24 2009
 Citation:

 Honourable Judges: S.J. Vazifdar, J.

 Issue: Companies Act, 1956 - Sections 235 to 351283(1)(h), 290, 295, 297, 391(2); Indian
Companies Act, 1913 - Section 86

 Counsel: For the Appellant: Shyam Mehta with Rajesh Shah i/b. Rajesh Shah and Co. and
For the Respondent: C.J. Joy with Bharati Mahant i/b. S.K. Mohapatra

 Date Of Judgment: Mar 24 2009

 Case No: Company Petition No. 382 of 2008 Connected with Company Application No.
253 of 2008 with Company Petition No. 383 of 2008 Connected with Company
Application No. 254 of 2008

 Cases Referred: St. Mary'' Fsinance Ltd. v. R. G. Jayaprakash and Ors., (2000) 99
Company Cases 359; KEC International v. Kamani Employees Union, (2002) 109
Company Cases 659; Bharat Synthetics Ltd. v. Bank of India and Anr., (1995) 82
Company Cases 437; Hindustan Lever Employees'' Union v. Hindustan Lever Ltd. and
Ors., 1994(4) Bom. C.R., 465; Shiromani Sugar Mills Ltd. v. Debi Prasad, AIR (37) 1950
Allahabad 508

Judgment:

S.J. Vazifdar, J.

1. The Petitioners seek the sanction of this Court to a scheme of amalgamation. The Petitioner
in Company Petition No. 382 of 2008, Niulab Equipment Company Pvt. Ltd., is the transferor
company and the Petitioner in Company Petition No. 383 of 2008, Ashok Industries Ltd., is the
transferee company.

2. The provisions of the scheme as such have not been challenged or even questioned. It is not
necessary therefore to deal with it in any detail. Suffice it to state, that under the scheme, the

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entire undertaking of the transferor company is to stand transferred to and vested in the
transferee company as a going concern, subject to the same being sanctioned by this Court.
Under the scheme, two equity shares of Rs.10/- each credited as fully paid up capital of the
transferee company are to be issued and allotted to all the equity shareholders of the
transferor company for every one equity share of the face value of Rs.1/- each, held by them of
the transferor company.

3. The Petitioners are under the same management. This was so stated in the Company
Application as well as in the Company Petition.

4. Company Application No. 253 of 2008 was taken out by the transferor company and
Company Application No. 254 of 2008 was filed by the transferee company. The Company
Applications were disposed of by orders dated 22.2.2008.

5(A). In Company Application No. 253 of 2008 the learned Judge dispensed with the convening
and holding of the meeting of the equity shareholders of the transferor company in view of the
consent given by all equity shareholders agreeing to the scheme of amalgamation.

By the said order, the convening and holding of the meeting of the only secured creditor of the
transferor company was also dispensed with in view of the averment in paragraph 15 of the
Company Application, that there was only one secured creditor viz. Punjab National Bank of the
value of Rs.4,43,92,831/- who would not in any way be affected by the scheme as the assets of
the transferor company after the proposed amalgamation would be far more than its liabilities
and, as such, sufficient to discharge the liabilities and the undertaking to give notice of the date
of hearing of the petition by RPAD to the Punjab National Bank. The transferor company was
however directed to convene a meeting of the unsecured creditors for the purpose of
considering and, if thought it, approving, with or without modification, the scheme of
amalgamation.

The order directed one Ashok Kotwani, director of the transferor company and, failing him,
Mrs. Kanchan A. Kotwani, also a director of the company, to be the Chairman of the said
meeting, who, in turn, was directed to report the result thereof within 30 days of the meeting.

(B). There is no dispute that the procedure as well as the above order were duly complied with.
The unsecured creditors unanimously approved the scheme.

(C). By an order dated 25.4.2008 the above petition was admitted, fixed for hearing on
27.6.2008 and the usual directions regarding the public notices and notice to the Regional
director, the Official Liquidator and the secured creditor were given. The petition now comes up
for final hearing.

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6(A). In Company Application No. 254 of 2008, the order dated 22.2.2008 directed the
transferee company to convene a meeting of the equity shareholders and the unsecured
creditors for the purpose of considering and, if thought fit, approving with or without
modification, the scheme of amalgamation. The order appointed the said Ashok Kotwani and
failing him, the said Mrs. Kanchan A. Kotwani, to be the Chairman of the meeting.

The meeting of the secured creditors however was dispensed with in view of what was stated in
paragraph 15 of the Company Application viz. that there were four secured creditors of the
value of Rs.1,53,647,678/- who would not be affected by the proposed scheme of
amalgamation, and the undertaking of the transferee company to give individual notices of the
date of hearing of the petition through RPAD to all the secured creditors.

(B). There is no dispute that the procedure as well as the above orders were duly complied
with. The equity shareholders and the unsecured creditors approved the scheme.

(C). By an order dated 25.4.2008 in the above petition, directions were passed in similar terms
as those in respect of the transferor company. This petition therefore comes up for final
hearing.

7. The Official Liquidator has filed an affidavit in Company Petition No. 382 of 2008 stating that
the affairs of the transferor company had been conducted in a proper manner and that the
transferor company may be ordered to be dissolved by this Court. The Official Liquidator has
not opposed the scheme being sanctioned.

8. As noted above, the entire procedure has been followed. Notices have been give to all the
concerned parties. There has been no objection raised by any shareholder or creditor or any
other person to the scheme being sanctioned.

9. The Regional director however has filed a common affidavit in the above Company Petitions
stating that subject to what is stated in paragraphs (viii) and (ix), the scheme appears to be in
order. Paragraphs (viii) and (ix) of the affidavit read as under:-

"(viii) That affidavits vide dated 16/12/2008, Mr. Ashok Kotwani Managing Director of the
Transferee Company admitted that the company and its directors, having regard to the legal
opinion and certificates of Company Secretaries, have violated provisions of section 297 of the
Companies Act 1956 during the last 3 years. Copy of the said affidavits enclosed herewith and
marked as Exhibit E-1' and E-2'. The Transferee Company had also moved an application for
compounding of the said offence. (ix) Deponent further submits that, a further affidavit dated
16/12/2008 was filed by the said Mr. Ashok Kotwani Managing Director of the Transferee
Company, also admitting violation of section 295 of the Companies Act 1956 in respect of the

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issue of a Corporate Guarantee of Rs.765 lacs by the company, on behalf of the Transferor
Company (which is a private limited company of the promoters of the Transferee Company) to
the Punjab National Bank for the credit facilities extended to the Transferor Company without
previous approval of the Central Government. Further it has not charged any commission/quid
pro quo for extending the Corporate guarantee, which action was deemed prejudicial to the
Transferee Company by the Statutory Auditors in their Report vide Annexure to the Auditors
Report dated 30/06/2007. That it may be noted that consequent to the said violation, the office
of director held by the Managing Director and other directors fell vacant as the provisions of
section 283(1)(h) of the Act stood attracted. In view of the above, the Registrar of Companies is
being directed to take necessary penal action for the default under section 295, 297nd section
283 (1)(h) of the Act by the Transferee Company. As the Transferee Company is a listed public
limited company, the above facts, being material having a bearing on the affairs of the company
in the context of corporate governance', are brought to the notice of this Hon'ble High Court.
The letter dated 11/10/2008 and 17/12/2008 of M/s Ashco Industries Limited are annexed
hereto and marked as Exhibit F-1' and F-2'."

10. The Punjab National Bank had granted a loan of Rs.765 crores to the transferor company
which was secured inter-alia by a guarantee issued by the transferee company. It was
contended that the said Ashok Kotwani and Mrs. Kotwani being directors of both the transferor
and the transferee companies, the guarantee was issued contrary to and in violation of Section
295.

11. Section 295 reads as under:- "295. Loan to directors etc.-

(1) Save as otherwise provided in sub-section (2), no company (hereinafter in this section
referred to as "the lending company") [without obtaining the previous approval of the Central
Government in that behalf shall, directly or indirectly,] make any loan to, or give any guarantee
or provide any security in connection with a loan made by any other person to, or to any other
person by,-

(a) Any director of the lending company or of a company which is its holding company or any
partner or relative of any such director;

(b) Any firm in which any such director or relative is a partner;

(c) Any private company of which any such director is a director, or member;

(d) anybody corporate at a general meeting of which not less than twenty-five per cent of the
total voting power may be exercised or controlled by any such director, or by two or more such
directors together; or

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(e) Anybody Corporate, the Board of directors, managing director, or manager whereof is
accustomed to act in accordance with the directions or instructions of the Board, or of any
director or directors, of the lending company.

[(2) Sub-section (1) shall not apply to-

(a) Any loan made, guarantee given or security provided-

(i) By a private company unless it is a subsidiary of public company, or

(ii) By a banking company;

[(b) Any loan made by a holding company to its subsidiary company;]

[(c) Any guarantee given or security provided by a holding company in respect of any loan made
to its subsidiary company.]

12. The guarantee issued by the transferee company in favor of the Punjab National Bank is
therefore contrary to Section 295(1)(c).

13. Mr. Joy submitted that in view of the violation under Section 295, the said Ashok Kotwani
and Mrs. Kotwani had by virtue of the provisions of Section 283(1)(h) vacated office as
directors. He submitted that the resolution of the Board of Directors of the transferee company
proposing the scheme is therefore void having been passed at a meeting without the requisite
quorum. Accordingly, he submitted, all subsequent steps leading to this petition are void. He
further submitted that though a violation under Section 295 would not by itself be a ground for
rejecting the scheme, it ought to be brought to the notice of the shareholders and creditors. In
other words, Mr. Joy, relying upon Section 391(2), submitted that the moment there is a
violation under Section 295 the same must be brought to the notice of the shareholders and
creditors and that if the same is not done, the matter must be again placed before the
shareholders and the creditors disclosing the same to seek their approval afresh.

14. Sections 391(1) and 393(1)(a) read as under: -

391. Power to compromise or make arrangements with creditors and members.

(1) Where a compromise or arrangement is proposed-

(a) Between a company and its creditors or any class of them; or

(b) between a company and its members or any class of them; the [Tribunal] may, on the
application of the company or of any creditor or member of the company, or, in the case of a
company which is being wound up, of the liquidator, order a meeting of the creditors or class of

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creditors, or of the members or class of members, as the case may be, to be called, held and
conducted in such manner as the [Tribunal] directs.

(2) If a majority in number representing three fourths in value of the creditors, or class of
creditors, or members, or class of members, as the case may be, present and voting either in
person or, where proxies are allowed [under the rules made under Section 643], by proxy, at
the meeting, agree to any compromise or arrangement, the compromise or arrangement shall,
if sanctioned by the [Tribunal], be binding on all the creditors, all the creditors of the class, all
the members, or all the members of the class, as the case may be, and also on the company, or,
in the case of a company which is being wound up, on the liquidator and contributories of the
company:

[Provided that no order sanctioning any compromise or arrangement shall be made by the
[Tribunal] unless the [Tribunal] is satisfied that the company or any other person by whom an
application has been made under sub-section (1) has disclosed to the [Tribunal], by affidavit or
otherwise, all material facts relating to the company, such as the latest financial position of the
company, the latest auditor's report on the accounts of the company, the pendency of any
investigation proceedings in relation to the company under Sections 235 to 251, and the like.]"

393. Information as to compromises or arrangements with creditors and members. -(1) Where
a meeting of creditors or any class of creditors, or of members or any class of members, is
called under Section 391:

(a) with every notice calling the meeting which is sent to a creditor or member, there shall be
sent also a statement setting forth the terms of the compromise or arrangement and explaining
its effect; and in particular, stating any material interests of the directors, managing director, or
manager of the company, whether in their capacity as such or as members or creditors of the
company or otherwise, and the effect on those interests, of the compromise or arrangement, if,
and in so far as, it is different from the effect on the like interests of other persons; and

15. The mere fact of a violation of the provisions of Sections 235 to 351 by itself does not
invalidate or warrant the Court refusing to sanction a scheme of arrangement under Sections
391 to 394, including a scheme of amalgamation. It is not every violation of these sections that
disentitles a scheme being proposed or sanctioned. It is only those violations which adversely
reflect upon or affect the scheme that would persuade the Court not to sanction the scheme.
That Section 391(2) only requires the disclosure of all material facts to the Court, establishes
this. If it were otherwise, Section 391, and in particular, sub-section (2) thereof, would have
been worded differently. The purport of Section 391(2) is that all the material facts relating to
the company including the pendency of any investigation proceedings in relation to the

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company under Sections 235 to 351 and the like, ought to be disclosed to the Court in order to
enable the Court to decide whether or not the scheme ought to be sanctioned in view of such
facts. The manner of exercise of discretion would then depend upon the facts of each case.

16. This is fortified by the fact that it is not necessary that a scheme under Sections 391 and 394
is proposed only by the company or its directors or promoters. It may be proposed by others
also, such as the members or creditors of the company. Indeed, a scheme could also be
proposed by the Official Liquidator of a company. If, for instance, there is a violation of the
provisions of Sections 235 to 351 or any one or more of them by a given director, the same
would not bar the company or any member or creditor of the company from proposing a
scheme under Sections 391 and 394. Even if, for instance, a company is adversely affected due
to any acts on the part of its directors, it would not be unusual for an arrangement to be arrived
at between the company and its creditors.

17. In a given case the Court may well order any additional facts not earlier noticed, to be
placed before the members and/or the creditors of the company to enable them to reconsider
their decision to support the scheme. This would depend upon the answer to two questions. Is
the fact a material one, to wit, is it relevant or material to the scheme that is proposed. If the
answer is in the affirmative, the next question is whether there was an adequate disclosure of
the facts to the members, shareholders and other concerned persons. If the answer to either of
the questions is in the negative there does not arise the necessity of placing the material before
the concerned persons.

18. In the present case, the fact of the guarantee issued by the transferee company to the
Punjab National Bank in respect of the loans advanced by the bank to the transferor company
and the details of the Board of Directors of both the companies would constitute material facts
qua both the companies.

19. The question then is whether there was an adequate disclosure of the facts to the
concerned persons. I am of the opinion that there was.

20. Firstly, I do not find the guarantee having been given by the transferee company in respect
of the facilities granted by the Punjab National Bank to the transferor company, by itself, to
warrant a refusal to the scheme being sanctioned. Mr.Joy has not indicated that the same
adversely reflects upon the scheme or that it would adversely affect the members or the
creditors or the companies if the scheme is sanctioned. It is not contended that the directors of
the two companies had any interest in the scheme except as shareholders in general. The
violation of Section 295 does not indicate the same. There is nothing on record which suggests
the same either.

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21. There admittedly is no investigation proceeding pending in relation to the Petitioners, under
Sections 235 to 351 including under Section 295 and 297 and the question therefore of
disclosing the same does not arise.

22. I am satisfied that there was sufficient material before the members and the shareholders in
regard to the guarantee issued by the transferee company to the Punjab National Bank and the
details of the directors of the companies to have enabled them to take an informed decision as
to whether the scheme ought or ought not to have been sanctioned.

(A). The Petitioners in both the Company Applications and both the Company Petitions
expressly stated that they were under the same management.

(B). The Annual Report of the transferee company for the financial year 2006-07 also contains
an important disclosure. Schedule "S" containing the notes to the consolidated accounts refers
to the outstanding bank guarantees under the caption "contingent liabilities". The guarantee by
the transferee company on behalf of the transferor company to the Punjab National Bank for
the credit limit of Rs.765 crores is specifically referred to therein. Schedule "S" also contains
details of "related party disclosures" as under:-

7) Related Party Disclosures:

i) Subsidiary:-

Aschco Niulab Exports Limited

ii) Associate Companies:-

Niulab Equipment Company Private Limited ANKK Media Arts Private Limited

iii) Key Management Personnel and Relatives:-

Mr.Ashok K. Kotwani
Mrs.Kanchan A. Kotwani
Mr.Bhagwan K. Kotwani
Mr. Manohar K. Kotwani
Mr. Ankuish A. Kotwani
Ms. Neha A. Kotwani
M/s. Sayuj Telcom
M/s. Dolly Designs
Mrs.Kavita Godhwani (emphasis supplied)

(C). The annexure to the Auditor's Report for the year ended 31.3.2007 discloses the opinion of
the auditors that the terms and conditions on which the guarantees given by the transferee

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company for the loan taken by others from the bank are, prima-facie, prejudicial to the
company. This was a part of the 21st Annual Report for the year 2006-2007 which was
circulated to all the shareholders. The shareholders therefore had the necessary material
before them regarding the guarantee.

(D). The Annual Report for the financial year 2006-07 of the transferor company in Schedule
"C", which forms part of the balance sheet with details of secured loans, refers to the guarantee
furnished by the transferee company in respect of the facilities granted by the Punjab National
Bank.

(E). The notice of the meeting convened by the Court by the aforesaid order dated 22.2.2008 in
the petition filed by the transferee company, to the shareholders and the unsecured creditors
discloses the names of the said Ashok Kotwani and Mrs. Kanchan Kotwani as directors of the
transferee company as well as the transferor company and also furnishes details of their
shareholdings in both the companies. The said notices state that the directors of the transferee
company as well as of the transferor company have no interest in the scheme except as
shareholders in general.

23. In the circumstances, I see no reason to compel the facts regarding the violation under
Section 295 to be placed before the members or the creditors again.

24(A). Mr. Joy relied upon the judgment of a learned Single Judge of the Kerala High Court in St.
Mary' Fsinance Ltd. v. R. G. Jayaprakash and Ors, (2000) 99 Company Cases, 359. The judgment
is of no relevance to the present case. In that case, the learned Judge found that the scheme
itself was fraudulent, unfair and with a view to benefit another company St. Mary's Properties
Ltd., to which it had advanced a sum of about Rs.7.68 crores. The scheme there proposed a
compromise between the company and its creditors whereby the amount proposed to be paid
to the creditors in installments were far lower than what they were entitled to. Several
creditors opposed the scheme. It was found that the relevant fact about the indebtness of the
other company had not been brought to the notice of the creditors. It was also held that a
director of the company had virtually forced the creditors to issue proxies enabling him to vote
in favour of the scheme on the basis of a letter circulated to the creditors, the contents whereof
were found to be unfair. The advances to the other company were in fact illegal as the
company was admittedly a nidhi company. In the passage at page 370 of the report, relied upon
by Mr.Joy, it is in fact expressly held that because of the compromise there, the real beneficiary
was St. Mary's Properties Ltd., to whom the company had heavily advanced and that the
company had withheld that valid information from the creditors. In the circumstances, it was
held that the meeting, at which the company managed to obtain through "compelled proxies"
had no validity in the eye of law. The learned Judge referred to the observations of the

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judgment of the Gujarat High Court in the case of Sidhpur Mills Co. Ltd. In re, AIR 1962 Gujarat,
305 where it was observed that if the director possesses any interest of whatever kind in the
scheme, then that interest must be stated in the statement accompanying the scheme. In that
case, it was found that the directors in fact possessed an interest in the scheme other than
merely as shareholders of the company and that the same had not been disclosed.

(B). In the present case, as mentioned earlier, there is nothing to indicate that the directors
possessed any interest of any kind in the scheme other than as shareholders of the two
companies. Further, the fact of the guarantees and the extent of the liabilities have been
disclosed to the shareholders and the members as well as to the Official Liquidator, the
Regional director and the Court, which was not the case before the Kerala High Court.

25. Mr. Joy then relied upon the judgment of a learned Single Judge of this Court in KEC
International v. Kamani Employees Union, (2002) 109 Company Cases, 659. He relied upon page
681 of the report which, in turn cited with approval the passage from the judgment of the
Gujarat High Court in Sidhpur Mills Co. Ltd. In re, which was also referred to by the learned
Judge of the Kerala High Court?

It is important to note the last sentence in this passage, which reads thus:-

"In other words, if the director possesses any interest of whatever kind in the scheme, then,
that interest must be stated in the statement accompanying the scheme." (Emphasis supplied)

I have already held that there is nothing to indicate that the directors possess any interest "in
the scheme" except as shareholders of the Petitioners in general.

26(A). Mr. Joy further relied upon a judgment of a learned Single Judge of this Court in Bharat
Synthetics Ltd. v. Bank of India and Anr., (1995) 82 Company Cases, 437. The judgment is of no
relevance. In that case, the banks who were secured creditors contended that if the merger was
allowed, their claims would be jeopardized. The learned Judge accepted this contention. The
Petitioners there had not even placed before the Court the latest financial position. (B). In the
present case there is no opposition to the scheme from anyone. I have already held that the
guarantee per-se does not persuade me to refuse sanctioning the scheme.

27. Mr. Mehta's reliance upon the following judgments on the question of the nature of
disclosure is well founded. They indicate the adequacy of the disclosure in this case.

28. In Hindustan Lever Employees' Union v. Hindustan Lever Ltd. and Ors., 1994(4) Bom. C.R.,
465, the Division Bench affirmed the judgment of the learned Single Judge including the
observations that the disclosure under Section 393(1)(a) is not the same as the disclosure to be
made under Section 173. Under Section 173, all material facts mentioned therein must be

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stated. However, under Section 393(1)(a) the statement must clearly state the compromise and
arrangement, its effect and the manner in which the material interest of specified categories of
persons in any capacity, are likely to be affected by the scheme in case the effect is different
from the effect on the like interest of non-specified categories of persons. The Division Bench
further held that the purpose of such disclosure is to enable the shareholders to make their
objections and that every nondisclosure is not fatal unless it is fraudulent and has prejudicially
affected the decision-making process of the members.

In the present case, there is nothing that suggests any fraud. Nor is there anything that suggests
that the disclosure already made did not enable the creditors and the members to make a
informed decision.

29. The above judgment was affirmed by the Supreme Court in Hindustan Lever Employees'
Union v. Hindustan Lever Ltd. and Ors., 1995 Supp (1) Supreme Court Cases, 499. In paragraph
58, the Supreme Court held as under:-

"58. In the facts of this case, considering the overwhelming manner in which the shareholders,
the creditors, the debenture holders, the financial institutions, who had 41% shares in TOMCO,
have supported the Scheme and have not complained about any lack of notice or lack of
understanding of what the Scheme was about, we are of the view, it will not be right to hold
that the explanatory statement was not proper or was lacking in material particulars."

30. I am satisfied that the disclosures made in the present case enabled the members and the
creditors to make a informed decision which they did while supporting the scheme. There has
been no opposition to the scheme being sanctioned by anyone. Indeed, even the Regional
director does not oppose the scheme as such. I do not find the violation under Section 295 to
have any bearing on the scheme such that I ought to overrule the decision of all those who
desire it to be implemented including the members and creditors of both the companies. It is
not even contended before me that the scheme itself is only to benefit the concerned directors
or any other particular person or persons.

31. Mr. Joy merely submits that the meetings must be convened once again, specifically stating
that there is a violation under Section 295.

32. I do not agree. The members and the creditors already had the relevant information
including about the facts of the guarantee and the names of the directors of both the
companies.

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33. This brings me to Mr. Joy's submission that in view of the violation of Section 295 the
concerned directors viz. Mr. and Mrs. Kotwani had vacated office as directors by virtue of the
provisions of Section 283(1)(h), which reads as under:-

"283. Vacation of office by directors.-(1) [The office of a director shall become vacant if]-

(h) [he (whether by himself or by any person for his benefit or on his account), or any firm in
which] he is a partner or any private company of which he is a director, accepts a loan, or any
guarantee or security for a loan, from the company in contravention of Section 295;"

Mr. Joy submitted that in that event there was no quorum at the meeting of the Board of
Directors on 20.11.2007 whereat the scheme was proposed.

Article 166(a) of the Articles of Association of the transferee company reads as under: -

"166(a). The quorum for a meeting of Directors shall be one-third of the total strength of
Directors (any fraction contained in that one-third being rounded off as one) or two Directors
whichever is higher provided that where at any time the number of interested Directors
exceeds or is two-thirds of the total strength, the number of the remaining Directors that is to
say, the number of Director who are not interested present at the meeting being not less than
two shall be the quorum during such time."

The submission really ought to be that, in that event, there was not a validly constituted Board
of Directors of the transferee company in view of Article 133 of the Articles of Association of
the company which reads as under:-

"133. The number of Directors shall not be less than three or until otherwise determined by a
General Meeting, more than twelve, excluding the debenture director if any.

If the two directors had vacated office there were only two directors of the transferee
company.

34. Mr. Mehta submitted that the directors have not vacated office under Section 283(1)(h). He
further submitted that one of the directors, Mrs. Kanchan Kotwani had in any event been
reappointed as a director after she allegedly vacated office and that thereby there were at least
three directors on the Board of Directors of the transferee company and at the meeting held on
20.11.2007. Lastly, he submitted that even if these two submissions are answered against him
the resolution at the meeting of the Board of Directors is not void in view of Section 290.

35. Mr. Mehta submitted that even assuming that there was a violation of Section 295 on
account of the transferee company having furnished a guarantee in favor of the Punjab
National Bank in respect of the loans advanced to the transferor company, the said directors,

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Mr.Ashok Kotwani and Mrs.Kanchan Kotwani had not vacated their office under Section 283(1)
(h). According to him, Section 283(1)(h) does not apply to such a case.

He submitted that in the facts of the present case the private company viz. the transferor
company of which they are directors, had not accepted a loan from the transferee company nor
a guarantee for a loan from the transferee company. In other words, according to him, while
Section 295 renders several transactions impermissible, Section 283(1)(h) renders the directors
liable to vacate office only in certain cases, covered by Section 295.

36. Mr. Mehta's submission is well founded. There are various transactions under section 295
which are impermissible without the previous approval of the Central Government, only some
of which are specified in section 283(1)(h). Thus, under section 283(1)(h) the office of a director
does not become vacant for any violation of section 295. It becomes vacant only in the limited
category of cases specified therein.

37. A view to the contrary would require re-writing section 283 (1)(h) which is not permissible.
Indeed, if that was the intention of the legislature, section 283(1)(h) would merely have
provided that the office of the director becomes vacant if he contravenes section 295. There is
nothing in section 283 or in section 295 which warrants expanding the scope of section 283(1)
(h).

38. This view is supported by the fact that under section 283(1) (i) the office of a director shall
become vacant if "he acts in contravention of section 299". Section 299 requires a disclosure of
interests by a director. There are different interests specified in section 299. For instance, it
requires a disclosure by a director of his interest not merely of a contract or arrangement but
even in respect of a proposed contract or a proposed arrangement entered into or to be
entered into by or on behalf of the company. Under section 283(1)(i), the office of a director
becomes vacant for any contravention of section 299. The disability under section 283(1)(i)
operates in respect of any contravention of section 299. In contrast, under section 283(1)(h) a
director incurs the disqualification only in respect of certain contraventions under section 295
and not all.

39. Thus, when there is a contravention of section 295 it is necessary to examine whether it
falls within the ambit of section 283 (1)(h) or not. If it does not, the office of the director does
not become vacant merely because there was a contravention of section 295.

40. In the present case, there is indeed a contravention under section 295(1)(c). Under section
295, no company shall give any guarantee in connection with a loan made to any other person
by any private company, of which any such director is a director or member. The expression
"any such director" refers to a director of the lending company. In the present case, the said

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Mr. and Mrs. Kotwani were directors of both the companies. Thus, the transferee company was
prohibited from giving any guarantee in connection with a loan made by any other person viz.
Punjab National Bank to any private company viz. the transferor company, of which they said
Mr. and Mrs. Kotwani were directors and members. However, section 283(1)(h) does not
include within its scope such a contravention of section 295. Neither the said Mr. and Mrs.
Kotwani nor the transferor company accepted any guarantee for a loan from the company.

41. Thus, neither Mr. nor Mrs. Kotwani vacated office as directors of either the transferor
company or the transferee company.

42. Mr. Mehta further submitted that even assuming that Mr. and Mrs. Kotwani had vacated
office as directors of the transferee company, there was a validly constituted Board of Directors
and that there was present the requisite quorum, at the said meeting held on 20.11.2007.

43(A). The transferee company had issued the guarantee on 5.6.2006. On this date, there were
five directors on the Board of the transferee company. Two of them viz. Ashok Kotwani and
Mrs. Kanchan A. Kotwani were also directors of the transferor company. Even assuming that
they vacated the office of directors of the transferee company by virtue of Section 283(1)(h) the
transferee company had three other directors viz. Biswajit Ghosal, Krushnakant Dharia and R.
Rajangam. The said R. Rajangam and Krushnakant Dharia resigned as directors with effect from
30.6.2006 and 30.6.2007 respectively. One Rajesh Nawathe and one Shashin Shah were
appointed as additional directors of the transferee company on 30.6.2007. They were
subsequently appointed as directors of the transferee company at the Annual General Meeting
held on 28.9.2007.

At the Annual General Meeting the said Mrs. Kanchan A. Kotwani was again appointed as a
director of the transferee company. Mr. Mehta submitted therefore that even assuming that
she had vacated office on 5.6.2006, she was re-appointed on 28.9.2007.

(B). On 20.11.2007 the said Mrs. Kanchan A. Kotwani, Rajesh Nawathe and Shashin Shah were
directors of the transferee company and in any event, functioned as such. In the affidavit dated
5.3.2009, apart from stating the above facts, it is expressly stated that these three directors and
the said Ashok Kotwani had attended the meeting held on 20.11.2007. Thus, according to
Mr.Mehta therefore, at least three validly appointed directors were present at the meeting
held on 20.11.2007.

44. Mr. Mehta therefore contended that, in any event, there was a validly constituted Board of
Directors of the transferee company and that the resolution was passed validly on 20.11.2007.

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45. Mr. Joy however contended that if Section 283(1)(h) applies to the said two directors, the
re-appointment of Mrs. Kanchan A. Kotwani is in any event bad as it was sought to be done
under Section 256(3) which was not applicable inasmuch as she could not be deemed to have
retired on that date, having earlier vacated office as a director. In that event, she ought to have
been appointed following the procedure under Section 257.

46. I heard counsel at some length on this question of law raised by Mr. Mehta viz. that even
assuming that the said directors had vacated their office under Section 283(1)(h) there was a
validly appointed and functioning Board of Directors of the transferee company and at the
meeting held on 20.11.2007 there was the requisite quorum as Mrs.Kanchan Kotwani had in
any event been reappointed at the AGM held on 28.9.2007.

47. It is not necessary to decide this question of law in the present case. Even assuming Mr.
Joy's submissions on both the points are correct, it would make no difference to the validity of
the resolution dated 20.11.2007. Mr. Mehta's reliance upon Section 290 of the Companies Act
in this regard is well founded. Section 290 of the Companies Act reads as under:-

"290. Validity of acts of directors.-Acts done by a person as a director shall be valid,

notwithstanding that it may afterwards be discovered that his appointment was invalid by
reason of any defect or disqualification or had terminated by virtue of any provision contained
in this Act or in the articles: Provided that nothing in this section shall be deemed to give
validity to acts done by a Director after his appointment has been shown to the company to be
invalid or to have terminated."

48. The least that must be said in favour of Mr. Mehta's submissions, specially as regards the
applicability of Section 283(1) (h), is that it is more than just an arguable case.

49. The term "terminated" would include a director vacating office by virtue of Section 283. This
is clear from the words of Section 290:-

".........had terminated by virtue of any provision contained in this Act........."

In that event, what is important to note is that, it can hardly be suggested that the said two
directors were cognizant or aware or of the view that their appointment had terminated. They
quite obviously were oblivious of their alleged disqualification. Had they been aware of the
same they would have taken steps to remedy the defect. There was no reason whatever for
them to let the invalidity continue.

I have no reason to believe that it had been shown to the transferee company or its directors
that the appointment of the said directors had terminated. The mere fact that they knew the
facts constituting the disability or invalidity does not lead to an inference in this case that they

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were aware of the consequences of these facts. In that view of the matter, the proviso to
Section 290 would not operate to invalidate the acts of these two directors, done in the
meantime.

50. There is nothing to indicate that at the relevant time i.e. on 20.11.2007 it had been shown
to the company or the said directors that their appointment as directors had terminated. The
Auditor's Report indicates a violation under Section 295. That by itself does not operate the
proviso to Section 290 against the Petitioners. The real question is whether the company/its
directors were cognizant or aware that they had vacated office in view of Section 283(1)(h). I
think not.

51. The question about the said directors vacating the office was raised for the first time only in
the affidavit filed on behalf of the Regional director. Indeed, whether Section 283(1)(h) applies
at all is a moot question. The proviso to Section 290 does not operate in the present case in
view of the fact that there is nothing to indicate that the company or either of the directors
were of the view or had been informed/shown by anyone that their appointment had been
terminated by virtue of the provisions of Section 295 read with Section 283(1)(h).

52. Section 290 is vide in its scope. This is clear from the words:

"Invalid by reason of any defect or disqualification" and the words:

"Had terminated by virtue of any provision contained in this Act or in the articles"

53. Further, the scheme operates not merely qua the directors but all the members and the
creditors of both the companies. 54. Section 290 would also be applicable in cases such as this
where directors act despite there not being the minimum number of directors required by the
Articles of Association as a consequence of one or more of the directors vacating office for any
reason, such as, under Section 283. There is no warrant to curtail the ambit of Section 290 by
excluding such cases.

55. Thus, even assuming that the required number of directors were not present at the meeting
held on 20.11.2007 the same would not invalidate the resolution.

56. In Shiromani Sugar Mills Ltd. v. Debi Prasad, AIR (37) 1950 Allahabad, 508, it was contended
that the directors who voted for the allotment of shares were disqualified to act as such
directors and that the allotment was therefore ultra-vires and of no effect. It was found that the
directors not having acquired the qualification shares had indeed ceased to be directors under
Section 85 of the Indian Companies Act, 1913. Consequently, the resolutions allotting the
shares and making a call for the money were passed in a meeting in which there was no
quorum.

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The Official Liquidator relied upon Article 181 which it was held was couched in the same words
as Section 86 of the Indian Companies Act, 1913. It would be useful at this stage to set out
Article 181 and Section 86 which read as under:-

"Article 181: "All acts done by any committee of Directors or by any person acting as a Director
shall, notwithstanding that it be afterwards discovered that there are some defects in
appointments of any such directors or persons acting as aforesaid or that they or any of them
are disqualified, be as valid as if every such person have been duly appointed and was qualified
to be a Director."

"Section 86 of the 1913 Act:

"The acts of a director shall be valid notwithstanding any defect that may afterwards be
discovered in his appointment or qualification:

Provided that nothing in this section shall be deemed to give validity to acts done by a director
after the appointment of such director has been shown to be invalid." The Division Bench held
as under:-

The Official Liquidator relied upon Art. 181 which is couched in the same words as S. 86,
Companies Act, 1913, by which we are governed in these applications. This Article, widely
worded as it is, supports his contention that in spite of the disqualifications of the Directors the
resolutions passed by them are valid. In Hallows v. Fernie, (1867-3 ch. A 467: 18 L. T. 34C) the
objection to the allotment of shares on the ground that the Directors who made the allotment
did not possess the requisite-share qualification, was overruled on the basis of a provision in
the English Companies Act similar to that contained s.86, Indian Companies Act. In Dawson v.
Afri. can Consolidated Land and Trading Co., (1898) 1 ch. 6:(67 L. J. ch. 47) a call made by
Nielson a Director, was upheld though he had parted with all his shares and thus become
disqualified and was not re-elected as such on acquiring fresh shares before the call was made.
Chitty L. J. emphasised the words "some defect in the appointment" and expressed the view
that the provision is not so framed as to render valid a resolution passed by any persons who
without a shadow of title assume to act as Directors of a company. There was no defect in the
appointment of Nielson as Director; he only became disqualified subsequently on his parting
with his shares. His acting as Director in spite of the disqualification was held to be exactly
within the words of the Article and one of those defects, irregularities or whatever else one
ought to call them which are remedied by Art.114 which is in almost the same words as our Art.
181.

"It is not, therefore, that the facts are not known, but that the knowledge of the defect is not
present to the mind of any person to whom it is material at the time to know it. As it is put in

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Buckley on the Companies Acts, 8th Edn. p. 230, the object of an article like this and S. 67 of the
General Act, is to make the honest acts of de facto Directors as good as the honest acts of de
jure Directors."

In the present case, the Directors certainly knew that they had not paid the allotment and call
moneys, but there is nothing to indicate that the fact that they had thereby disqualified
themselves was present to their minds at the time when they allotted the shares and made the
calls. There was no defect in their appointment as Directors; the only defect is that they
continued to act as Directors even after their disqualification. There is no suggestion that they
acted dishonestly in passing the resolutions of allotment and making the calls. It seems that
they acted bona fide, oblivious of the fact of their disqualification. There is no evidence of the
fact of their disqualification having ever been brought to their minds. The language of Art. 181
fully protects their actions. Had it been a case of only one or to Directors continuing to act as
such despite the disqualification, I would have had no hesitation in forming the conclusion that I
have. Here we have to deal with a large number of Directors acting as such despite the
qualification. But there is no other circumstance from which it can be said that they were
conscious of the fact of their disqualification and yet continued to act as Directors. So I come to
the conclusion, though not without some hesitation that the acts of allotting the shares to the
opposite parties and making the first and second calls were valid."

57. I am in respectful agreement with the judgment of the Division Bench of the Allahabad High
Court. Although Section 86 of the 1913 Act did not deal with the cases where the appointment
of a person as a director is terminated but dealt only with cases where the appointment was
invalid, the ratio of the judgment would apply equally even in the cases where the appointment
has been found to be terminated by virtue of Section 283. The purpose of Section 290 is to
ensure that acts done bona-fide are not annulled as the same would adversely affect the rights
of various third parties as well. In any event, Article 181 which was relied upon by the Division
Bench is similar to Section 290.

58. Mr. Mehta's reliance upon the judgment of the Supreme Court in Seth Mohan Lal and Anr.
v. Grain Chambers Ltd., Muzaffarnagar and Ors., AIR 1968 Supreme Court, 772 = (1968) 2
Supreme Court Reports, 252, is also well founded. The Supreme Court having held that
Regulation 94 of Table A was deemed to be incorporated in the articles of the company held as
under:-

It, therefore follows that Regulation 94 must be deemed to be incorporated in the Articles of
Association of the Company. that Regulation provided:

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"All acts done by any meeting of the directors or of a committee of directors, or by any person
acting as a director shall, notwithstanding that it be afterwards discovered that there was some
defect in the appointment of any such directors or persons acting as aforesaid or that they or
any of them were disqualified, be as valid as if every such person had been duly appointed and
was qualified to be a director."

There is no evidence that the directors were aware of the disqualification which would be
incurred by entering into contracts of sale or purchase or supply of goods with the Company
without the express sanction of the directors. By the subsequent discovery that they had
incurred disqualification, because they had entered into contracts with the Company for sale or
purchase or supply of goods, the resolution passed by them is not rendered invalid. It is in the
view we have taken, unnecessary to decide whether Section 86 of the Indian Companies Act
1913 also grants protection to acts done by directors who are subsequently discovered to be
disqualified."

59. Thus, in any view of the matter the resolution dated 20.11.2007 is saved and cannot be held
to be void.

60. It is however clarified that this order sanctioning the scheme will not in any manner affect
any action that may be taken by any authorities for the contravention of Sections 295 or 297 or
the contentions of such authorities on any application that may be made by the company or the
concerned director for compounding.

61(i). In the circumstances, the Company Petition No. 382 of 2008 is made absolute in terms of
prayers (a) to (j) and Company Petition No. 382 of 2008 is made absolute in terms of prayers (a)
to (i). (ii). The Petitioner companies to pay costs of Rs.7500/- each to the Regional director and
to the Official Liquidator, High Court, Bombay within six weeks from today.

62. The transferee company to lodge a copy of this order and the scheme with the concerned
Superintendent of Stamps for the purpose of adjudication of stamp duty, payable, if any, on the
same within 30 days of obtaining the authenticated and/or certified copy of this order.

HELD:

63. Filing and issuance of the drawn up order is dispensed with.

64. All concerned authorities to act on a copy of this order duly authenticated by the Company
Registrar, High Court, Bombay.

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ANALYSIS
The case is about validity of the acts done by the directors of the company.

As per the section 274 of companies act 1956 a person who has not paid any calls on shares and
the default has continued for 6 months than the person is not eligible for director in the
company.

In the above mentioned case large number of directors of the transferee company did not pay
calls on time. Therefore the question arises that the act done by such directors is valid or not.

In the present case, the Directors certainly knew that they had not paid the allotment and call
moneys, but there is nothing to indicate that the fact that they had thereby disqualified
themselves was present to their minds at the time when they allotted the shares and made the
calls to the public. There was no defect in their appointment as Directors; the only defect is that
they continued to act as Directors even after their disqualification.

So I come to the conclusion, though not without some hesitation that the acts of allotting the
shares to the opposite parties and making the first and second calls were valid" as the directors
were not aware that they were disqualified.

As the Transferee Company is a listed public limited company, the above facts, being material
having a bearing on the affairs of the company in the context of corporate governance', are
brought to the notice of this Hon'ble High Court.

Since in a public limited company corporate governance principles need to be followed so it is

important that all the decisions taken by the company should be taken in consideration of the
shareholders and the company should work transparently.

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KETAN PAREKH VS. SEBI - JUL 14
2006
 Citation:

 Honourable Judges: Justice N.K. Sodhi (Presiding Officer), C. Bhattacharya (Member) R.

N. Bhardwaj (Member)

 Issue: Securities and Exchange Board of India Act, 1992 Section 11 and 11B

 Counsel: N.H.Seervai Sr. Advocate, Prarthana Awasthi Advocate for the Appellant and
Rafique Dada Sr. Advocate, Kumar Desai Advocate, Daya Gupta Advocate, Praveen
Trivedi Dy. Legal Advisor for the Respondent

 Date Of Judgment: Jul 14 2006

 Case No: Appeal No. 2 of 2004

Judgment:

Justice N.K. Sodhi (Presiding Officer)

This order will dispose of a bunch of 9 Appeals nos. 2 to 10 of 2004 in which common questions
of law and fact arise. Since arguments were addressed in Appeal no. 2 of 2004 the facts are
being taken from this case.

2. Challenge in this appeal is to the order dated 12.12.2003 passed by the then Chairman of the
Securities and Exchange Board of India (for short the Board) prohibiting Ketan V. Parekh,
Karthik K. Parekh, Classic Credit Ltd., Panther Fincap & Management Services Ltd., Luminant
Investment Ltd., Chitrakut Computers Pvt. Ltd., Saimangal Investrade Ltd. and Classic Infin and
Panther Investrade Ltd. from buying, selling or dealing in securities in any manner directly or
indirectly and also debarring them from associating with the securities market for a period of
14 years. The order is based on two separate show cause notices issued by the Board to ketan
parekh and the other above named entities allegedly associated with him which have been
found to be either connected with or controlled by ketan parekh hereinafter collectively
described as KP entities. Since the Board has recorded separate findings in regard to the two
show cause notices, it will be convenient to deal with them separately i n our order as well.

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3. This show cause notice relates to the alleged price manipulation in the scrip of Lupin
Laboratories Limited (for short ''Lupin''). Persons allegedly involved in the price manipulation
are ketan parekh (appellant herein), Classic Credit Limited, Panther Fincap and Management
Services Limited and Saimangal Investrade Limited (hereinafter referred to as Classic, Panther
and Saimangal respectively). The Board witnessed significant rise in price and volumes in the
scrip of Lupin during the period from September to December, 1999 on the Bombay Stock
Exchange (BSE) and National Stock Exchange (NSE) and, therefore, it ordered investigations into
the buying, selling and dealings in the scrip. Investigations revealed that ketan parekh, Classic,
Panther and Saimangal had together indulged in the price manipulation in the scrip of Lupin.
They were issued a notice dated March 27, 2002 calling upon them to show cause why
necessary directions under Regulation 11 of the Securities and Exchange Board of India
(Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 1995 (for short the
Regulations) and Section 11 and 11B of the Securities and Exchange Board of India Act, 1992
(for short the Act) be not issued to them debarring them from dealing in securities. The
appellant filed his reply on 16.12.2002 to the show cause notice and also filed separate but
identical replies on behalf of the other entities under his signatures. In his reply, the appellant
questioned the very basis on which the Board had compared the price movement in certain
scrips in the pharmaceutical sector during a certain period and stated that any particular scrip
moves according to its own tradeability and the fact that it does not move in line with the
market index does not make persons who trade in that particular scrip guilty of price rigging in
the scrip. He also objected to the period chosen by the Board for comparing the price
movement in the scrip of Lupin with the scrip of other pharmaceutical companies. He stated
that the Board had picked out a certain period in time and construed the findings of the
investigations in such a manner that it would appear as if the movement in the scrip of Lupin
was abnormal. It was pointed out that price movement in any scrip is dictated by various
factors such as growth potential, future earning capability etc. He also pointed out that the
pharmaceutical companies with which the scrip of Lupin had been compared are big and well
established companies which had already achieved a certain degree of critical mass and had
only a limited ability to grow whereas Lupin was a middle size company which had greater
potential to grow and therefore the comparison made by the Board was not fair and that it
compared the unequal’s. As regards the sharp spurt in trading volumes, it was pointed out in
the reply that was a time when there was great optimism in the stock market and the
technology boom was at its zenith and that the euphoria attached to technology stocks had
spread to the pharmaceutical stocks as well. He also pleaded that it was well known that stock
movements are not always rational and are very often irrational and are largely governed by
rumors and hearsay. He stated that in continuation of his reply he would be submitting part II
thereof shortly which he did not file. The Board fixed 14.3.2003 as the date of hearing for the

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first show cause notice and afforded an opportunity to the appellant and other entities to
appear in person. The appellant could not appear in person on this date as he was in judicial
custody in Kolkata. Classic, Panther and Saimangal appeared through their representatives on
the date fixed and sought adjournment on the ground that ketan parekh was in judicial custody
and his personal presence was necessary at the time of the hearing as he alone was in the know
of facts. The case was adjourned to April 30, 2003 on which date a similar request for
adjournment was made because ketan parekh was still in custody and the matter was finally
heard on June 23, 2003. At the conclusion of the hearing, the appellant as also Classic, Panther
and Saimangal filed their written submissions which were taken into consideration by the Board
while passing the final order. The appellant admitted that he was a director on the Board of
Classic, Panther and Saimangal which were all independent investment companies. He also
stated that he had not acquired any shares of Lupin in his name and the transactions were
carried out by the investment companies on whose Board he was a director. He also took the
stand that even though he was on the Board of the aforesaid companies he was not involved in
the day to day decision making. He also denied that there was any artificial price rise in the
scrip during the period under investigation and that placing large orders in the market was not
per illegal. It is pertinent to mention here that identical replies to the show cause notice were
filed on behalf of the three companies signed by ketan parekh and at the conclusion of the
hearing, written submissions were also filed on their behalf which too were signed by him.

4. On a consideration of the submissions made by the appellant, Classic, Panther and Saimangal
at the time of hearing and also the written submissions filed by them, the Board came to the
conclusion that the price of the scrip of Lupin had moved upwards substantially during the
short span of time and this was accompanied with large volumes. The Board compared the
price movement in the scrip of Lupin with other scrips in the pharmaceutical industry like
Ranbaxy, Glaxo, Novartis and Cipla and found that the price rise in the scrip of Lupin was
neither in consonance with the movement of market indices nor was it in tandem with the price
movement of other scrip’s in the pharmaceutical industry. The Board also recorded a finding
that the broking firms through which the scrip was traded had on some occasions placed orders
for purchase of shares of Lupin at a price above the then prevailing market price. The Board
then referred to various instances where Classic, Panther and Saimangal had traded in the
scripts of Lupin. On an analysis of the order log and trade log the Board found that Classic had
on some occasions placed orders for the purchase of shares of Lupin with a view to establish a
higher price. The Board has referred to the transactions of 6.10.1999, 14.10.1999 and
16.10.1999 on BSE to show that Classic -- a KP entity had been placing buy orders for the shares
of Lupin on these dates at a price hi gher than the last traded price and was, therefore,
instrumental in establishing an artificial higher price for the scrip of Lupin. Reference was also

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made to the statements of some of the brokers and others recorded during the course of
investigations and on the basis of these statements a finding is recorded that all the three
entities namely Classic, Panther and Saimangal were controlled and operated by Shri ketan
parekh and orders on their behalf were placed either by ketan parekh or his brother Kartik
Parekh. N.H. Securities had acted as a broker on behalf of Classic and that they both tried to
establish a higher price of the scrip. Several instances have been quoted in support of this
finding. ketan parekh and his entities were found to have transacted in the scrips of Lupin in
large quantities which constituted a significant portion of the total transaction on the two
exchanges namely BSE and NSE. The Board also found that the floating stock of Lupin in the
market was less than 18% because 82.4% was held by its promoters and, therefore, any big
order placed by ketan parekh or any of his entities would lead to the price fluctuation which
was invariably on the higher side. As a result of these findings the Board concluded that the
price rise in the scrip of Lupin was artificial which was accompanied by artificial volumes and
that ketan parekh and his entities were primarily responsible for the same and that they
created higher price for the scrip. Accordingly, ketan parekh, Classic, Panther and Saimangal
were held guilty of violating Regulation 4(a) of the Regulations. Feeling aggrieved by the
findings they are in appeal before us.

5. During the course of hearing Shri N.H. Seervai, learned senior counsel appearing for the
appellants argued that while it was a fact that Shri ketan parekh was on the Board of Classic,
Panther and Saimangal, it could not be said that he was controlling them. He urged that these
three companies were independent entities and that they were being run by their respective
Boards of Directors and being investment companies it was their business to deal in the scrips
of other companies and that they did nothing wrong in trading in the scrip of Lupin. He drew
our attention to some reports by equity research analysts which gave rave reviews about the
future growth and profitability of Lupin to contend that it was generally perceived in the market
that Lupin would do well in the future. He also argued that the Board had selected the period of
September to December 1999 only because during that period the price of Lupin was rising
faster than the stocks of four other companies with which it has been compared. He pointed
out that if we were to compare the share price of those companies with Lupin for the period
from 1.6.1999 to 31.8.1999 the picture would be entirely different. He also argued that the four
companies namely Ranbaxy, Glaxo, Novartis and Cipla with which the price movement of Lupin
has been compared were large size companies and had already reached their zenith having
limited scope for further growth whereas Lupin was a medium capital size company with high
growth potential. He strenuously urged that the Board was in error in comparing the unequals.
He also pointed out that the price movement was compared on the basis of wrong data and he
took us through different charts relied upon by the Board to show that some of the figures

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referred to therein were incorrect. The learned senior counsel also placed before us scripwise
price and volume data of the shares of some other pharmaceutical companies which were
medium size and urged that medium size companies like Lupin and others in the
pharmaceutical industry were expanding faster due to liberalization and globalization of the
economy. The grievance of the appellants is that the Board should have compared the price
movement of Lupin with some other medium size companies which were fast expanding
instead of comparing it with large size companies. The learned senior counsel was emphatic in
his submission that the price rise in the stock of Lupin was not out of tune with the market
sentiment then existing. The learned senior counsel forcefully challenged the finding recorded
by the Board that ketan parekh and his entities had traded in the scrip’s of Lupin only with a
view to establish a higher price. He referred to various charts relied upon by the Board in the
impugned order to show that in most of the cases there was a marginal difference in the buy
orders placed by the appellants than the last traded price of Lupin. He went on to argue that
there is nothing unusual if the buy order placed at the time of the opening of the trading at the
exchange is higher than the previous day’s closing price and that very often buyers do place
orders at a higher price to ensure that the deals go through. The learned senior counsel took us
through the price volume data of shares of some of the companies in the pharmaceutical
industry to prove his point. Having pleaded on the factual aspect, Shri Seervai then submitted
that even assuming though not admitting, that there was any artificial rise in the price of Lupin,
Regulation 4(a) of the Regulations was not attracted in this case and that no action could be
taken against the appellants. The argument is that it is not the case of the Board that artificial
rise in price/volumes in the scrip of Lupin had induced any other person to sell or purchase this
scrip. According to the learned senior counsel it is the requirement of Regulation 4(a) that
artificial rise in price should induce the sale or purchase of securities by any person and since
this has not even been alleged by the Board the requirements of the Regulation were not
satisfied and no action could be taken against the appellants.

6. Shri Rafiq Dada, the learned senior counsel for the Board controverted the submissions made
on behalf of the appellant and contended that it was ketan parekh the main person who was
controlling the three entities which were issued a show cause notice along with him. He
referred to the three letters all dated 12.3.2003 written by Classic, Panther and Saimangal and
urged that the three companies had by these letters informed the Board that the presence of
ketan parekh at the time of personal hearing was necessary as he alone knew the details of the
transactions and therefore they sought adjournment on 14.3.2003 on which date the cases
were fixed for hearing before the Board. He pointed out that the corporate office address as
printed on the letterheads of the three companies was the same and that these companies
were functioning from the same office location and when they informed the Board that ketan

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parekh is the man who knows the details of the transactions and therefore his presence was
necessary, the only inference that could be drawn is that he was controlling the day to day
working of the three companies. He also urged that this was a fit case where the corporate veil
should be lifted and that when we see behind the curtain it is ketan parekh who was placing the
buy and sell orders on behalf of Classic, Panther and Saimangal. Shri Rafiq Dada learned senior
counsel argued that the period of investigation was selected by the Board because it was during
that period that the scrip of Lupin was showing an unusually fast rising trend along with a steep
increase in volumes and therefore no fault could be found for selecting that period. He further
pleaded that the shares of Lupin were compared with Ranbaxy, Glaxo, Novartis and Cipla
because these four companies were market leaders in pharmaceutical industry and their scrips
were quite active on both BSE and NSE. He referred to the instances relied upon by the Board in
paragraph 4.9 of the impugned order to urge that repeated orders at slightly higher price for
substantial quantities were being placed to hike the price and to ensure that the higher price
was established. He pointed out several other instances as well including the two trading
transactions on 14.10.1999 in support of his contention. He further argued that the three
entities had been resorting to matching trades where the sell and purchase orders were placed
at the same time at a price higher than the previous day''s closing price of Lupin. According to
the learned senior counsel the appellants had violated Regulation 4(a) of the Regulations and
he was emphatic in his submission that Regulation 4(a) was attracted to the facts and
circumstances of this case and that when any person trades in the shares of a company with
the intention to artificially raise or depress the price of securities he necessarily induces the sale
or purchase of such securities by many other innocent investors who may be difficult to be
located. In his view the securities market is so wide spread and in a system of screen based
trading various potential investors tracking the scrip through the screen could only see that the
scrip is active / inactive, its trading volumes are large / small, its price is going up / down and
therefore they may decide to invest/disinvest in the scrip. According to Shri Rafiq Dada it is not
possible to locate as to how many such investors were taken in by the price manipulation.
According to him if price manipulation is established then it should be assumed that investors in
the market were induced to buy/sell as a result of that manipulation.

7. Having heard the learned senior counsel for the parties we shall record our findings on the
issues that arise from the first show cause notice. There is no gainsaying the fact that the price
of the scrip of Lupin had been rising steadily during the period from April 1999 to December
1999 and from January 2000 onwards it started falling. Whether the price rise during
September to December 1999 was caused by ketan parekh and his three entities as alleged is
the question which needs to be answered. At the outset it is necessary to first examine whether
Classic, Panther and Saimangal were being controlled by ketan parekh. It is an admitted case of

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the appellants that ketan parekh was a director on the Board of Directors of each of these three
companies. It is true that by merely being a director on the Board of a company, one cannot be
said to be controlling the same nor can an inference be drawn that he is involved in the day to
day decision making process of the company. However, in the case before us, there is sufficient
material on the record to show that ketan parekh was the person who was controlling the three
companies and was taking day to day decisions on their behalf. We have on record the
admission of the three companies as borne out from their letters dated 12.3.2003 addressed to
the Board seeking adjournment on 14.3.2003. The three companies wrote identical letters on
the same date on their letter heads and it would be useful to reproduce the said letter at this
stage.

Sub: Personal hearing scheduled for 14th March 2003 at 2.30 p.m.

This is with reference to your letter providing us an opportunity of personal hearing before the
Chairman, SEBI in relation to the report of the Enquiry Officer dated 30th July 2002. In this
respect, you will appreciate that we have represented before you and before the Enquiry
officer through Mr. Ketan V. Parekh. On prima facie perusal of the Show Cause Notice you will
note that a person with knowledge about the transactions mentioned therein is Mr. ketan
parekh.

Mr. Ketan V. Parekh is currently in judicial custody in Kolkata in relation with the matter being
CC No. 476/2002. In this connection, he has applied for bail before the Hon''ble Supreme Court
which application is scheduled to come up for hearing on the 24th of the March 2003.

We are very keen that we must avail of the opportunity of personal hearing and Mr. Ketan
parekh's presence at such hearing is necessary for a full defence in the matter. On this basis we
request you to kindly reschedule the personal hearing so that the same (i.e. opportunity for
hearing) may be availed of by us, sometime during the first week of April, 2003. You will
appreciate that no prejudice will be caused as a result of such rescheduling of the personal
hearing."

8. A reading of the letter leaves no room for doubt that ketan parekh was the person who was
controlling Classic, Panther and Saimangal and that he was the person having knowledge about
the shares transacted by these companies. Since he was in the judicial lock up in March 2003
the companies sought an adjournment from the Board which was granted. Apart from this
admission made by the three companies, the Board during the course of the investigations had
recorded the statements of some witnesses including one Nimesh Dedhia who was a
representative of one of the brokers (Triumph Securities Ltd.). Dedhiya was specifically asked as
to who was placing the orders and what the instructions in respect of those orders were and he

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replied that the orders had been placed on behalf of Classic and the persons who had placed
the orders were either ketan parekh or his brother Kartik Parekh. The Board has relied upon
this statement to hold that Classic and other two companies were entities of ketan parekh and
he was controlling them. This finding is substantiated by the fact that it was ketan parekh who
filed replies to the show cause notice on behalf of these companies and he also filed the written
submissions on their behalf under his signatures. The statement of Nimesh Dedhia was not
challenged before us though it was contended that a copy of the statement had not been
supplied to the appellants which resulted in the violation of the principles of natural justice. We
shall deal with this contention later. When we look at the letter heads of the three companies
we find that their corporate address is the same though their registered offices are different. It
is, thus, clear that they were functioning from the same office location. In view of the admission
made by the three companies coupled by the statements recorded by the Board and having
regard to the fact that ketan parekh was a director on the Board of Directors of all the three
companies which were functioning from the same office and that he filed replies on their behalf
to the show cause notice and also the written submissions, the only irresistible conclusion we
can draw is that he was the person who was controlling the companies and that all the buy and
sell orders were being placed on their behalf under his instructions. It may be relevant to
mention here that Shri N.H. Seervai, the learned senior counsel during the course of the hearing
had been contending that ketan parekh was a different entity from the three companies on
whose Board he was a director but did not seriously challenge before us the finding recorded by
the Board that he was the force behind the three companies and was controlling them. In the
result, it has to be held that ketan parekh was controlling the three companies and all the buy
and sell orders on their behalf were being placed by him.

9. We shall now deal with the question whether ketan parekh and his three entities namely
Classic, Panther and Saimangal were responsible for the price rise in the scrip of Lupin during
the period under consideration. It may be mentioned at the outset that every trade that takes
place establishes the price of the scrip and the same fluctuates with every buy/sell order which
is executed. Having carefully examined the various transactions relied upon by the Board in the
impugned order we do not think that they conclusively show that the price rise was due to the
transactions undertaken by Shri ketan parekh and his three companies. Admittedly, some buy
orders were placed by the appellants at slightly higher than the last traded price but this by
itself does not lead us to conclude that the increase in the price of Lupin during the period
under consideration was solely, or even largely, due to these orders placed by the appellants.
The comparison of price movement of certain pharmaceutical stocks with the stock of Lupin will
prove the point. It is a normal feature of the stock market that prices of all the stocks pertaining
to a particular industry do not always move in tandem. There are a host of factors which

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influence the pattern of price rise or fall in the share price of a particular company in the stock
market. Merely because the price of the scrips of Ranbaxy, Glaxo, Novartis and Cipla (the four
companies with which the price of Lupin has been compared by the Board) did not move up
that much during the relevant period does not mean that the price rise in the shares of Lupin
was abnormal or that it was artificially ramped up during the said period. The appellants have
produced records to show that there were many other pharmaceutical companies whose share
prices were also rising significantly, some of them even at a faster pace, during the same
period. Our pointed attention was drawn to the scrips of Arbindo Pharma, Ipca Lab, Nicholas
Piramal, Orchid Chemicals and Pharma, Sun Pharma and Torrent Pharma. These are all medium
size companies in the pharmaceutical sector which could be compared with Lupin. The share
price of Arbindo Pharma on 01/09/1999 was around Rs. 560/- and on 30/12/1999 it had risen
to Rs. 1234.55. There was an increase of 121.19% during this relevant period. Similarly share
price of Torrent Pharma on 01/09/1999 was around Rs. 210.75 and on 30/12/1999 it closed at
Rs. 585/- though during the course of the day it had touched Rs. 599.95. There was thus an
increase of about 185% in the price. Similar is the case with the other companies. Shri N.H.
Seervai, learned senior counsel appearing for the appellants was not wrong when he contended
that the Board was in error in comparing the price of Lupin with big size companies and did not
take note of the rising prices of the medium size companies with which Lupin could be better
compared. From the various charts that he produced along with the compilation, the veracity of
which could not be challenged by the respondent because all were computer printouts from
the concerned exchanges, it is clear that the price of the shares of pharmaceutical companies
was on the rise during the relevant period. It cannot therefore be said that the price of Lupin
alone had shot up during the period under consideration. Again, it cannot be said that the price
of Lupin had risen solely because the appellants had traded in this scrip. It is relevant to take
note of another factor which was highlighted by Shri N.H. Seervai. The BSE index (popularly
known as Sensex) had risen from 3060 points on 01/01/1999 to 5005 points on 30/12/1999.
Similarly, price index of NSE (popularly known as Nifty) had risen from 890 points on
01/01/1999 to 1480 points on 30/12/1999. It is thus clear that not only the shares of the
pharmaceutical companies were on the rise but the sentiment of the stock market as a whole
was positive and the price of all the shares generally had an upward trend. The Board, however,
while recording a finding that ketan parekh and his three companies were instrumental in
establishing an artificially higher price in the scrip of Lupin has relied upon the transactions
executed on 06/10/1999, 14/10/1999 and 15/10/1999. It is not necessary for us to examine all
these transactions that took place on these dates and it will suffice if we examine only a few of
them by way of a representative sample. The appellants had placed six buy orders of 10,000/-
shares each of Lupin on 06/10/1999. These orders were placed within a period of less than four
minutes as is shown in the chart below:

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Date Name of the Name of the Time Qty. Order No. Rate LTP (Last Change In
Exchange Broker Traded Price (Rs.)
(Rs.)
Price) (Rs.)

Triumph
6/10/99 BSE Securities 10.14.37 10000 372010160 250 245 5
Ltd.,

Triumph
6/10/99 BSE Securities 10.15.44 10000 372010161 255 250 5
Ltd.,

Triumph
6/10/99 BSE Securities 10.16.47 10000 372010162 260 255 5
Ltd.,

Triumph
6/10/99 BSE Securities 10.17.24 10000 372010166 260.1 260 0.1
Ltd.,

Triumph
6/10/99 BSE Securities 10.17.35 10000 372010167 260.2 260.1 0.1
Ltd.,

Triumph
6/10/99 BSE Securities 10.18.01 10000 372010169 260.25 260.2 0.05
Ltd.,
It is clear from the aforesaid chart that the first three buy orders were at a difference of Rs. 5/-
from the last traded price whereas last three orders were almost at the same rate as the last
traded price. As per the table in para 4.3 of the impugned order the previous day's closing price
of Lupin was Rs. 241/- and when the first order was placed by Classic at 10.14.37 hours the last
traded price had already moved from Rs. 241/- to Rs. 245/-. It is clear that the scrip was already
showing a rising trend due to purchase by others and the rise in the price from Rs. 245/- to Rs.
260/- on that day is not solely due to purchase orders placed by the appellants. The last three
orders placed by the appellants on 06/10/1999 were almost at the last traded price and all this
would indicate the desire of the appellants to purchase the shares but it cannot be said that
they were establishing a higher price.

10. There is yet another set of transactions to which reference is necessary as much has been
said about those transactions in paragraph 4.9 of the impugned order. The Board has relied,

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amongst others, on the trades executed on 14.10.1999 on BSE and we are extracting those
transactions in the chart below:

Date Name of Name of Time Qty. Order No. Rate LTP (Last Change in
the the Broker (Rs.) Traded Price (Rs.)
Exchange Price) (Rs.)

Buyer and
C. J. Dalai 382.25 Seller both
14/10/99 BSE 10.03.34 25000 85040040 411
(Purchase) (closing) Classic
Credit Ltd.

Buyer and
Price on
Parvin V. Seller both
14/10/99 BSE 10.03.34 25000   411 previous
Shah (sale) Classic
day)
Credit Ltd.

Buyer and Buyer and

C. J. Dalai Seller both Seller both
14/10/99 BSE 15.12.51 30000 85040076 412.80
(Purchase) Classic Classic
Credit Ltd. Credit Ltd.

Buyer and Buyer and

Milan
Seller both Seller both
14/10/99 BSE Mahendra 15.12.52 40000 460120041 412.80
Classic Classic
(Sale)
Credit Ltd. Credit Ltd.,
Classic had placed a buy order of 25000 shares of Lupin through broker C.J. Dalal at 10.03.34
hours at a rate of Rs. 411/- when the previous day's closing price was Rs. 382.25 only.
Simultaneously, a sell order had also been placed with another broker Praveen V. Shah at the
same time and according to the Board this matching transaction by Classic established a higher
price of Rs. 411/- in the scrip of Lupin which was 8% higher than the closing price on the
previous day. Relying on the aforesaid transactions, the Board observed that "The order for
purchase and sale was entered and executed by Classic Credit Ltd., at the opening of trading
session on 14.10.1999 at a rate of Rs. 411/-. With this transaction Classic Credit Ltd.,
established a price of Rs. 411/- in the scrip of Lupin Laboratories Ltd., 8% higher than the
closing price on the previous day which was Rs. 382.25". This finding is based on incomplete
data and on the wrong assumption that the order at Rs. 411/- had been placed at the opening
of the trading session on 14.10.1999 which is not so. We have perused the trade log of
14.10.1999 as produced by the respondent and it is clear that trading on that day started at

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9.55 a.m. Between 9.55 a.m. and 10.03.34 hours more than 100 trades in the scrip of Lupin had
been transacted by others and the price of the scrip had touched Rs. 412/- even though the
previous day's closing was at Rs. 382.25. It was then that Classic placed its order at 10.03.34
hours at Rs. 411/-. Was Classic then establishing a higher price, obviously not? It is also clear
that apart from the appellants, there were others who were dealing in the scrip of Lupin and
this demand could have led to the price rise.

11. As regards the allegation of creation of artificial volumes the impugned order in para 4.14
has referred to a table in which the transactions of Shri ketan parekh and his companies in the
scrip of Lupin have been compared with the total transactions on the NSE. We do not have on
record the total transactions in the scrip of Lupin at NSE and other stock exchanges in the
country. If one were to examine whether volumes were being artificially increased one has to
see the total volume of trade in the scrip in the market and then only can one conclude
whether the appellants had really played any significant role in increasing the volumes
artificially. The complete data in this regard is not forthcoming nor has it been referred to in the
impugned order. The trades of ketan parekh and his three companies cannot be compared with
the total volume only on the NSE as that will not give the true and fair picture. Even going by
the table referred to in para 4.14 of the impugned order, out of the 39 settlement periods
referred to therein the percentage of gross trading volume of the appellants is 50% or more in
relation to the gross traded quantity in only four settlements, it was 25% or more in another 8
settlements and in the remaining 27 settlements the percentage of gross quantity traded by the
appellants was less than 25%. In such a situation we find it difficult to hold that the transactions
undertaken by the appellants had artificially increased the volumes in the scrip of Lupin during
the period under consideration. In the result, we have no hesitation to hold that the appellants
did not establish a higher price for the scrip of Lupin nor did they create artificial volumes and
the findings recorded by the Board in this regard cannot be upheld.

12. We will now deal with the other contentions raised by Shri N.H. Seeravai, learned senior
counsel for the appellants. It was vehemently argued by the learned senior counsel that even if
it were to be assumed that the appellants had artificially raised the price of the scrip of Lupin
and had created artificial volumes in the market, the charge leveled against them under
Regulation 4(a) cannot stand as it is not the case of the Board that such artificial price rise had
induced any person to sell or purchase the scrip of Lupin. In view of our findings recorded
herein above that the appellants neither raised the price of Lupin nor did they create any
artificial volumes in the market the discussion on this issue becomes academic. Since this issue
was debated at length by both sides we think it appropriate to record our findings on the
interpretation of Regulation 4(a) so that it could be properly applied in future in other cases
that may be pending. In order to deal with the argument of the learned senior counsel it is

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necessary to refer to the provisions of Regulation 4(a) under which the charge has been leveled
against the appellants. This regulation reads as under:

4. No person shall --

(a) effect, take part in, or enter into, either directly or indirectly, transactions in securities, with
the intention of artificially raising or depressing the prices of securities and thereby inducing the
sale or purchase of securities by any person;

According to the learned senior counsel clause (a) of Regulation 4 consists of two parts and that
both the parts have to be satisfied before the charge can be said to have been established. The
first part according to him is the act of a person in trading/transacting in the securities directly
or indirectly with the intention to artificially raise or depress the price of the securities.
According to him merely raising or depressing the price of a scrip artificially by itself is not
enough to establish the charge until it induces some other person to buy or sell that scrip. The
argument is that the Board must not only establish that the price of Lupin was artificially
raised / depressed but it must further establish that such manipulation led to inducing some
other person to by or sell those shares. In support of his contention he cited a judgement of this
Tribunal in Nirmal Bang Securities Pvt. Ltd. Vs. SEBI (2003) 6 Comp. L.J. 20 (SAT). Mr. Rafique
Dada learned senior counsel for the respondent, on the other hand strenuously urged that
when a person directly or indirectly transacts in securities with the intention to artificially raise
or depress the price, that act by itself would induce various investors to buy / sell those
securities and that no further material in this regard is necessary to be produced. Having given
our thoughtful consideration to the rival contentions of the parties we are inclined to agree
with Shri Rafique Dada learned senior counsel. One cannot lose sight of the fact that a stock
exchange is a place where persons willing to trade in the securities come to buy and sell and
they are provided with a platform where a buyer buys securities without knowing the seller and
vice-versa. The stock exchange is also a platform for the fair price discovery of a scrip based on
the market forces of demand and supply. Securities market is so wide spread and in a system of
screen based trading various potential investors who track the scrips through the screens of the
exchanges only see whether a particular scrip is active or not, whether it is trading in large
volumes and whether the price is going up or down. Having regard to these factors he makes
up his mind to invest or disinvest in the securities. When a person takes part in or enters into
transactions in securities with the intention to artificially raise or depress the price he there by
automatically induces the innocent investors in the market to buy / sell their stocks. The buyer
or the seller is invariably influenced by the price of the stocks and if that is being manipulated
the person doing so is necessarily influencing the decision of the buyer / seller thereby inducing
him to buy or sell depending upon how the market has been manipulated. We are therefore of

117 | P a g e
the view that inducement to any person to buy or sell securities is the necessary consequence
of manipulation and flows therefrom. In other words, if the factum of manipulation is
established it will necessarily follow that the investors in the market had been induced to buy
or sell and that no further proof in this regard is required. The market, as already observed, is
so wide spread that it may not be humanly possible for the Board to track the persons who
were actually induced to buy or sell securities as a result of manipulation and law can never
impose on the Board a burden which is impossible to be discharged. This, in our view, clearly
flows from the plain language of Regulation 4(a) of the Regulations.

13. Since we have already held that the appellants had neither raised artificially the price of
Lupin nor its trading volumes the charge leveled against them under Regulation 4(a) cannot
stand.

14. At this stage we may also take note of another objection raised by the learned senior
counsel appearing for the appellants. He strenuously urged that the Board had arbitrarily
picked up the period from September, 1999 to December, 1999 for the purpose of investigation
and that if an earlier period or later period had been taken the picture would have been
entirely different. We are unable to accept this contention. The period was taken by the Board
because it was during that time it found that there was unusual spurt in the price and volumes
in the scrip of Lupin. It cannot therefore be said that the Board acted arbitrarily in selecting the
period because as a regulator it was perfectly justified to look into any unusual movement in
the scrip of any company.

15. Lastly, it was urged that the Board violated the principles of natural justice inasmuch as it
did not supply copies of the statements of some of the brokers which were recorded during the
course of investigations to enable the appellants to cross-examine the deponents. We
specifically asked the learned senior counsel whether any request was made on behalf of the
appellants for the supply of the statements and the answer was in the negative. He submitted
that such a request was made verbally at the time of personal hearing. We do not think that
was the proper stage for making such a request. In any case, the respondent seriously disputed
the fact that any such request was made for the supply of the copies of the statements
recorded by the Board. There is no mention of any such request in the impugned order. This
being so, mere ipse dixit of the appellant at the time of hearing before us which is seriously
disputed by the Board cannot be accepted to hold that the principles of natural justice were
violated. For the reasons stated above, the charge levelled against the appellant in the first
show cause notice dated March 27, 2002 must fail.

16. This brings us to the second show cause notice dated July 30, 2002. Due to excessive
volatility in the index movements of stock exchanges during mid February to mid March, 2001

118 | P a g e
and apprehensions of some attempts by certain entities to distort the true price discovery and
manipulate the securities market, the Board ordered investigations into the affairs of two
brokers namely, Credit Suisse First Boston (India) Securities Pvt. Ltd., and Desdner Klienwort
Bensons Securities (I) Limited (hereinafter referred to as CSFB and DKB respectively).
Investigations were carried out for the period from April 1, 2000 to March 31, 2001 and these
revealed that Classic, Luminant Investment Private Limited (Luminant) and Panther had sold the
shares of some companies through these two brokers which were bought either by the same
entity or by other entities connected /controlled by ketan parekh / Kartik Parekh. The other
entities allegedly involved in similar transactions were Saimangal, NH Securities Limited (for
short "NH Securities"), Classic Shares and Stock Brokers Limited (CSSB), Chitrakut Computers
Private Limited (Chitrakut), Classic Infin Limited (Classic Infin) and Panther Investrade Limited
(Panther Investrade). After the conclusion of the investigations the Board issued a show cause
notice to ketan parekh, Kartik Parekh and the aforesaid entities alleging that they were all being
controlled and managed by ketan parekh or Kartik Parekh. It was alleged that KP entities sold
and purchased shares of other companies through CSFB and DKB and that the transactions
were in the nature of circular and fictitious trades which created artificial volumes and artificial
market in the scrips. It was also alleged that KP entities received finance against delivery of
shares without waiting for pay out at the exchange and that the transactions were so
structured as to give the semblance of sale and purchase of shares at the recognised stock
exchanges. It was further alleged that the transactions executed by Classic, Luminant and
Panther through the two brokers were non genuine and involved no change in the beneficial
ownership of the shares since shares were merely rotating from one KP entity to the same
entity or to another KP entity. The show cause notice also alleged that Classic and Panther had
also indulged in similar circular trades thereby creating artificial volumes and artificial market in
certain scrips. In short, the allegations made against KP entities are that they indulged in
manipulative activities such as synchronized trades, financing transactions giving the semblance
of purchase and sale of shares at the exchanges, circular trading and creation of artificial
volumes and bench marking the prices of certain scrips by executing non-genuine transactions.
All this, according to the Board, was detrimental to the integrity of the securities market and
also violative of the Regulations. The appellants (ketan parekh, Kartik Parekh and their entities)
were called upon to show cause why suitable directions under Regulation 11 of the Regulations
read with Section 11B of the Act including a direction to prohibit them from dealing in securities
be not issued against them. None of the appellants responded to the second show cause
notice. They were afforded an opportunity of hearing and were called upon to appear before
the then Chairman of the Board on March 14, 2003. All the KP entities requested for an
adjournment on the ground that Shri ketan parekh was in judicial custody of Kolkatta Police and
that his presence was required during the hearing. They all wrote identical letters of request

119 | P a g e
stating that "you will appreciate that we have represented before you and before the Enquiry
Officer through Mr. Ketan V. Parekh. On prima facie perusal of the show cause notice you note
that a person with knowledge about the transactions mentioned therein is Mr. ketan parekh."
The matter was being adjourned time and again on the request of the appellants because ketan
parekh was not available and was finally heard on June 19, 2003. On a consideration of the
material collected by the Board during the course of investigations and after considering the
written submissions filed by the appellants, it came to the conclusion that ketan parekh and
Kartik Parekh and also their entities which are being controlled by them were guilty of the
charges levelled against them and that by indulging in circular and fictitious trades they created
artificial volumes and artificial market in the scrips in which they traded. The Board also found
that ketan parekh and his entities had raised finance through manipulative transactions and
that they indulged in synchronized trades bench marking the prices of certain scrips. In view of
this finding and also those recorded under the first show cause notice the Board by its order
dated December 12, 2003 exercising its powers under Section 11(4)(b) and 11B of the Act read
with Regulation 11 of the Regulations prohibited ketan parekh, Kartik Parekh and their entities
from buying, selling and dealing in securities in any manner directly or indirectly and also
debarred them from associating with the securities market for a period of 14 years. Hence
these appeals

At the outset we may notice a contention raised by the learned senior counsel appearing for
the appellants that ketan parekh and Kartik Parekh had nothing to do with the other companies
which have been held to be their entities nor were they connected with them. It was urged that
the companies are independent corporate entities governed by their respective Boards of
Directors and therefore the Parekh brothers could not be held responsible for their actions. An
identical contention was raised while challenging the findings recorded under the first show
cause notice. We have dealt with this contention in detail in the earlier part of our order while
dealing with the first show cause notice and for the reasons recorded therein we have no
hesitation in rejecting this contention and uphold the findings of the Board that all the KP
entities were being controlled by ketan parekh / Kartik Parekh and that all the buy and sell
orders on behalf of these entities were being placed under their instructions. We are also of the
view that since serious allegations of market manipulations including circular and synchronized
trades resulting in artificial markets and volumes in different scrips have been levelled against
ketan parekh and his entities, it is a fit case where the corporate veil should be lifted to find out
who are the persons playing behind the curtain. It is true that the company in law is a different
person from those who constitute it and in that sense ketan parekh would be distinguished
from the entities said to be associated with him but this rule has several exceptions which have
now come to be recognised by our Courts, Courts in England and also in the United States.

120 | P a g e
Palmer on Company Law, Volume I, Part II has discussed several situations where the court
would disregard the corporate veil and has pointed out several exceptions to the general rule.
That discussion has been approved by the apex Court in Delhi Development Authority v. Skipper
Construction Company Pvt. Ltd. AIR 1996 SC 2005 wherein their Lordships after discussing the
law on the subject as it prevails in some other jurisdictions have observed as under:

"28. The concept of corporate entity was evolved to encourage and promote trade and
commerce but not to commit illegalities or to defraud people. Where, therefore, the corporate
character is employed for the purpose of committing illegality or for defrauding others, the
court would ignore the corporate character and will look at the reality behind the corporate veil
so as to enable it to pass appropriate orders to do justice between the parties concerned. The
fact that Tejwant Singh and members of his family have created several corporate bodies does
not prevent this Court from treating all of them as one entity belonging to and controlled by
Tejwant Singh and family if it is found that these corporate bodies are merely cloaks behind
which lurks Tejwant Singh and/or members of his family and that the device of incorporation
was really a ploy adopted for committing illegalities and/or to defraud people".

In view of the serious allegations leveled against the appellants we are of the view that it would
be proper to lift the corporate veil of the KP entities and when we do that we find it is ketan
parekh who is lurking behind the corporate curtain.

18. The Board in the impugned order has referred to a large number of trades transacted by
different KP entities to show how they were indulging in circular and fictitious trades creating
artificial volumes and artificial market in those scrips. It will be pertinent to mention that the
appellants do not dispute any of those transactions. While admitting that they executed those
trades they contend that the transactions are legal and perfectly legitimate and that they did
not violate any law. We will take up two types of transactions executed by KP entities by way of
sample to see whether the findings recorded by the Board are justified or not. However, before
we deal with the transactions it is necessary to state as to what are circular trades and
synchronized deals. It will also be relevant to make a mention about the settlement system that
operates in the stock market and what are stock exchanges meant for.

19. A stock exchange is an association of member brokers, whether incorporated or not, for the
purpose of facilitating and regulating the trading in securities. Bulk of the trading takes place in
equity shares of public limited companies which are transferable by endorsement. It provides
the service of getting shares of companies listed for trading purposes. A stock exchange
provides a trading platform to a very large number of buyers and sellers who come and trade
their stocks. A unique feature of the stock exchange is that, unlike other moveable properties,
stocks are generally traded there between the unknowns who never get to meet and the price

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at which they trade is determined by the free market forces of supply and demand. All the
players and intermediaries are expected to play the game according to the rules all of which are
not codified. We also know that not all play the game fairly and some manipulate the market.
There are a variety of methods in which the market could be manipulated all of which cannot
be envisaged as human ingenuity knows no bounds and sometimes even the Board -- the
watchdog of the securities market comes to know only after the event. However, one of the
methods commonly employed by manipulators to create an impression of high trade volumes
and rising prices is circular trading. This is how it works: a manipulator targets a scrip and
acquires as much of the floating stock as is necessary to ensure his profits and creates an
illusion of high trading volumes at the counter. He indulges in what is called circular trading
where a few of them get together and buy and sell large blocks of shares among themselves.
The shares are sold to associates at a price higher than what is prevailing in the market who in
turn sell them to another associate for even a higher price. All transactions usually cancel out
each other and the shares remain within the circle without any genuine trading transaction.
This creates an impression that the stock is an actively traded one and sought after and,
therefore, such transactions attract those outside the circle to buy the stocks. In other words,
the general investing public gets induced to buy such stocks. The manipulators not only
increase artificially the trading volumes but also benchmark the price because every trade
establishes the price of the scrip. Circular trading is among the easiest ways to increase
volumes. Tragically, retail investors and day traders are most vulnerable to such trading as they
follow the herd mentality because they lack market intelligence and experience to diagnose
such cases and they are usually the ones left holding the parcel when the music stops. The
manipulators who had taken large positions in the beginning normally cash out and the
consequences of manipulation are borne by the innocent investors.

20. There are yet another type of transactions which are commonly called synchronized deals.
The word ''synchronize'' according to the Oxford dictionary means "cause to occur at the same
time; be simultaneous". A synchronized trade is one where the buyer and seller enter the
quantity and price of the shares they wish to transact at substantially the same time. This could
be done through the same broker (termed a cross deal) or through two different brokers. Every
buy and sell order has to match before the deal can go through. This matching may take place
through the stock exchange mechanism or off market. When it matches through the stock
exchange, it may or may not be a synchronized deal depending on the time when the buy and
sell orders are placed. There are deals which match off market i.e., the buyer and the seller
agree on the price and quantity and execute the transaction outside the market and then
report the same to the exchange. These are also called negotiated transactions. Block deals
(when shares of a company are traded in bulk) are an instance of trades that match off market.

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Such trades have always been recognized by the market and also by the Board as a regulator. It
has recently issued a circular requiring all bulk deals to be transacted through the exchange
even if the price and quantity are settled outside the market. When such deals go through the
exchange, they are bound to synchronize. It would, therefore, follow that a synchronized trade
or a trade that matches off market is per se not illegal. Merely because a trade was crossed on
the floor of the stock exchange with the buyer and seller entering the price at which they
intended to buy and sell respectively, the transaction does not become illegal. A synchronized
transaction even on the trading screen between genuine parties who intend to transfer
beneficial interest in the trading stock and who undertake the transaction only for that purpose
and not for rigging the market is not illegal and cannot violate the regulations. As already
observed ''synchronization'' or a negotiated deal ipso facto is not illegal. A synchronized
transaction will, however, be illegal or violative of the Regulations if it is executed with a view
to manipulate the market or if it results in circular trading or is dubious in nature and is
executed with a view to avoid regulatory detection or does not involve change of beneficial
ownership or is executed to create false volumes resulting in upsetting the market equilibrium.
Any transaction executed with the intention to defeat the market mechanism whether
negotiated or not would be illegal. Whether a transaction has been executed with the intention
to manipulate the market or defeat its mechanism will depend upon the intention of the parties
which could be inferred from the attending circumstances because direct evidence in such
cases may not be available. The nature of the transaction executed, the frequency with which
such transactions are undertaken, the value of the transactions, whether they involve circular
trading and whether there is real change of beneficial ownership, the conditions then prevailing
in the market are some of the factors which go to show the intention of the parties. This list of
factors, in the very nature of things, cannot be exhaustive. Any one factor may or may not be
decisive and it is from the cumulative effect of these that an inference will have to be drawn.

21. We may now briefly refer to the settlement system in a stock exchange. Settlement refers
to the process whereby payment is made by all who have made purchases and shares are
delivered by all who have made sales. The exchange ensures that buyers who have paid for the
shares purchased receive the shares and sellers who have given delivery of shares to the
exchange receive payment for the same. The entire process of settlement of shares and money
is managed by stock exchanges through clearing house which are entities formed specifically to
ensure that the process of settlement takes place smoothly. The period within which the
settlement is made -- the period within which buyers receive their shares and sellers receive
their money -- is called a settlement cycle. It is possible to buy and sell within a settlement cycle
many times which is what traders do. They settle only their net outstanding positions at the end
of the cycle. Therefore, a settlement cycle refers to a calendar according to which all purchase

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and sale transactions executed within the dates of the settlement cycle are settled on a net
basis. There is also a rolling settlement where each trading day is considered as a trading period
and trades during the day are settled based on the net out standings for the day. Presently,
trades in rolling settlement are settled on T+2 basis i.e., on the second working day. T+2 means
that trades are settled two working days after the day the trade takes place. This time schedule
has been prescribed by the Board as the market watchdog with a view to regulate it and
protect the interest of the investors. We are informed that during 2000-01 up to June 30, 2001,
the settlement cycle at the Bombay Stock Exchange (BSE) was from Monday to Friday and at
the National Stock Exchange (NSE) was from Wednesday to Tuesday. In July, 2001 rolling
settlement was introduced in phases across all stock exchanges in India. To begin with, it was
T+5 i.e., trades taking place on a Monday were settled on the following Monday. Thereafter the
cycle was reduced to T+3 and currently it is T+2.

22. Let us now examine some of the transactions executed by ketan parekh and his entities
allegedly with a view to raise funds from the market by rigging its mechanism. It appears that
ketan parekh wanted to raise funds against shares of various companies including Global Trust
Bank (GTB) held by him or his entities. In the normal course he could have gone to a bank or
any financial institution and after pledging the shares he could have raised the money. In that
event he would have lost control over the shares for as long as they remained pledged. Instead
of adopting this method he decided to use the market mechanism in a devious way and
executed transactions giving them the semblance of sale and purchase of shares thereby
achieving the same object of raising money without losing control over the shares. The
following chart will illustrate the manner in which he operated through his entities thereby
manipulating the market.

                                     

It will be seen from the chart that P anther which is one of his entities placed 20 different buy
orders for the purchase of 9,99,750 shares of GTB at Rs. 70/- on October 30, 2000 on the NSE.
The orders are placed within a span of less than 5 minutes ranging from 14:02:41 hours to
14:07:13 hours. CSFB which is essentially a broker sells the shares to Panther from its propriety
account i.e., it acts as a client which is permissible. As a normal transaction the settlement
would have taken place on T+5 basis which was then prevalent. In other words the shares
would have been delivered and the price paid only at the end of the settlement cycle. Within
less than seven minutes of Panther’s buy orders, Classic -- another KP entity, sells 10 lacs GTB
shares through a cross deal to CSFB in its propriety account at Rs. 69/-. This is a cross deal
because CSFB acted as a broker on behalf of Classic and also on its own behalf. This was also a
spot deal where shares were delivered instantly against receipt of money. CSFB in the process

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made a profit of Re. 1/- per share within a few minutes. It is, thus, clear that the shares which
moved apparently from one KP entity to another remained within the control of ketan parekh
and Classic through the spot deal receive d the price of the shares from CSFB to whom they
were sold and that Panther would be paying to CFSB only at the end of the settlement period.
In this way ketan parekh through Classic has raised short term money while retaining control
over the shares which have actually been traded through the exchange mechanism without the
intention of transferring any beneficial ownership therein. It is true that these shares were
actually transferred from the account of Classic to CSFB which held them as a temporary
parking slot and they eventually went to Panther. Since Classic and Panther are both being
controlled by ketan parekh, the latter took a short term loan from CFSB which acted as a
financier for the period of a few days for which it gave the money to Classic without incurring
any risk because it had shares worth that amount by way of security. CSFB was not to retain
those shares nor did it purchase them with the intention of actually buying them. It had
purchased those shares for passing them on to Panther and for the period it retained the shares
it had advanced a short term loan to ketan parekh through Classic. ketan parekh had, thus,
raised a short term loan from CSFB against those shares with a clear understanding between
him and CSFB that Panther would first place a buy order and thereafter Classic would sell those
shares to it. It is interesting to note that CSFB was not in possession of the shares when it
agreed to sell them to Panther. This, in the market terminology is called short selling which is
permissible but nevertheless the broker runs a great risk in going through such a transaction. In
the instant case, CSFB did not run any risk and was doubly sure that the money paid to ketan
parekh through Classic would be recovered from Panther from whom a buy order was already
pending which transaction was to be settled on T+5 basis. If for any reason Panther were to
default in the purchase of the shares (which of course it did not) the exchange guarantee fund
would have taken care of the payment to CSFB. If one were to examine the transaction
between Classic and CSFB or between CSFB and Panther in isolation there would be nothing
wrong with either of them because the shares were sold and transferred. But these
transactions cannot be considered in isolation because they were a part of a chain whereby the
shares were made to rotate from one KP entity to another through CSFB as a broker which
acted as a conduit (financier) to advance a short term loan to ketan parekh. As already
observed, these transactions were not meant to execute a genuine trade in the scrip’s because
the control of those was always with ketan parekh and he had a clear understanding with CSFB
in this regard which acted hand in glove with him in executing these transactions and we are
informed that action has been taken against it as well. The fact that these were financing
transactions is further clear from the statement that was made by the representative of CSFB
during the course of the investigations. He stated that the brokerage which it was charging
from the KP entities varied depending upon the period intervening the date on which the

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money was advanced and the date on which it was received back. In the aforesaid illustrations
the finance was given to ketan parekh through Classic and the money was received back by
CSFB through Panther and the brokerage was proportionate to the number of days that elapsed
between the day on which money was advanced to ketan parekh through Classic and the day
when it was received back through Panther. The major portion of the amount that was charged
as brokerage was in reality the interest for the days for which the amount had been advanced
to ketan parekh through different entities. It is, thus, clear that the transactions were in reality
financing transactions though they were given the semblance of sale and purchase of shares.
Transfer of shares from Classic to Panther through CSFB was not a solitary instance and a very
large number of transactions were executed in a similar fashion not only between Classic and
Panther but also between the other KP entities. As found by the Board, which fact was not
disputed before us at the time of hearing, that during the period from April 1, 2000 to March
31, 2001 shares worth Rs. 5644 crores were traded only by three ketan parekh entities on the
NSE and BSE by raising short term finance from CSFB the broker. Trades by other entities were
in addition. Such large was the trading by ketan parekh and his entities. Having regard to the
frequency of the transactions, their value and volumes and taking note of the fact that they
involved circular trading without change of beneficial ownership and without intending to
trade, we have no hesitation in holding that these transactions were non genuine, fictitious and
circular in nature which were executed to create artificial market in the scrips and that ketan
parekh raised short term finance by distorting the exchange mechanism. As we have already
noticed in the earlier part of the order, a stock exchange is a platform for genuine trading in the
scrips of companies and that they are generally traded among the unknowns at a price which is
determined by the market forces of supply and demand. In the very nature of things, a stock
exchange is not meant for financing transactions. If one needs money, the shares could be sold
in the market which provides liquidity but you can''t raise short term finances through the
circuitous methods as resorted to by ketan parekh. In the case before us matching buy and sell
orders were placed by the KP entities at a predetermined price which did not lead to the true
price discovery of the scrip and thereby the entire market mechanism was polluted in a big
way. One can only marvel at the ingenuity of the manipulators who resorted to this
methodology and the Board appears to have realised after the event that market could be
rigged in this manner as well.

23. In order to show how circular and fictitious trades were being executed by KP entities
through the stock exchange mechanism is further clear from yet another set of transactions
executed among them and in some of the cases the buyer and the seller were the same. The
following chart pertains to the synchronised trades at NSE where KP entities are selling through
DKB as a broker and simultaneously other set of KP entities are buying through other brokers:

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24. A perusal of the chart would show that on 13/12/2000 one KP entity is buying the shares of
DSQ Bio and another entity is selling at the same time and at the same rate and therefore the
trades had to match on the screen of the exchange. In some cases the buyer and the seller is
the same entity. The aforesaid chart clearly illustrates how circular trading was carried on by
the KP entities in a synchronised manner through DKB as a broker. This is only one instance but
not the solitary one. Large number of fictitious trades were executed in this manner in the
scrips of different companies whereby artificial volumes were created by ketan parekh. The
Board has in the impugned order referred to quite a few of the transactions executed by these
entities and we are in agreement with those findings that these were synchronised trades
executed in a circular manner to create artificial volumes. We are not dealing with each and
every transaction executed by the appellants only with a view to avoid making this order bulky.
It is relevant to mention here that the modus operandi adopted by KP entities in dealing with
CSFB and DKB as brokers was similar and circular and fictitious trades were executed to create
artificial volumes and market in the scrip’s. ketan parekh also received finance against delivery
of shares without waiting for pay out at the exchange and the transactions were given the
semblance of sale and purchase of shares. We have, therefore, no hesitation to hold that if
ketan parekh and his entities are allowed to continue with their operations they would pose a
serious threat to the integrity of the securities market and endanger the interests of the
investors.

25. We shall now deal with the remaining two submissions made by the learned senior counsel
on behalf of the appellants. It was strenuously contended by Shri N.H. Seervai that the Board
had violated the principles of natural justice as it did not allow ketan parekh and his entities to
cross-examine the representatives of the brokers whose statements had been recorded during
the course of investigation which statements had been relied upon by the Board in recording its
findings against the appellants. The argument of the learned senior counsel is that ketan parekh
was only a Director on the board of the companies which have been dubbed as his entities and
that he had no concern with their day to day working and that it was necessary to cross-
examine the representatives of the brokers who had stated that it was ketan parekh who was
placing the buy and sell orders on behalf of the companies. Since this right was denied to the
appellants the learned senior counsel contends that the principles of natural justice were
flagrantly violated and that the order deserves to be set aside on this ground alone. We do not
think so. In the two show cause notices issued to Shri ketan parekh and his entities, it was
clearly pointed out to them that Shri ketan parekh was not only associated with the companies
but was also controlling them. At no stage of the proceedings before the Board did ketan
parekh or any of the companies rebutted this allegation. As a matter of fact, when ketan parekh
appeared before the Board during the course of investigations he admitted that he was

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connected with the companies in one way or the other. It is on record that in his reply filed to
the first show cause notice he did not dispute this fact. He and the companies did not file any
reply to the second show cause notice. At the time of final hearing before the Board all the
companies were represented by Shri ketan parekh and that the proceedings were being
adjourned from time to time when ketan parekh was in judicial custody of the Calcutta Police.
We also have on record identical letters from the companies requesting for an adjournment on
account of non-availability of ketan parekh who alone, according to them, was in the know of
facts. The written submissions filed by all the companies had also been signed by Shri ketan
parekh. At no stage of the proceedings did any of the companies or ketan parekh make a
request to the Board that it needed to cross-examine the representatives of the two brokers
and, in our view, rightly, because they knew that it was ketan parekh who was controlling them.
It appears that the plea that the appellants should have been allowed to cross-examine the
representatives of the brokers had been raised for the first time by their counsel at the time of
final hearing before the Board which, in any case, was not the stage to raise such a plea. It was
at that stage that the appellants pleaded for the first time through their counsel that ketan
parekh was only a director on the board of the companies and that he was not looking after
their day to day business and that he was distinct from those entities. In such a situation we are
of the view that the Board was justified in not allowing the representatives of the brokers to be
cross-examined when it was never the case of any of the appellants including ketan parekh
himself that he was not controlling the companies. We have, therefore, no hesitation in
rejecting the contention. In this view of the matter it is not necessary for us to discuss the case
law cited by the learned senior counsel in this regard.

26. Lastly, it was urged that the Board discriminated against the appellants in imposing a high
dose of penalty on them whereas lesser penalty was imposed on the two brokers who had
played an equally dubious role, if not more, in the execution of the transactions which have
been found to be illegal and manipulative in nature. The argument is that CSFB and DKB had
both played an equal role in the execution of the transactions which have been dubbed as
illegal and their certificates of registration had been suspended for a period of 18 months and
two years respectively whereas the appellants have been debarred from accessing the
securities market for a period of 14 years from the date of the order. The learned senior
counsel referred to the orders passed by the Board in the case of CSFB and DKB in support of
his contention. Having heard the learned counsel for the parties on the quantum of penalty we
are of the view that the Board was not justified in letting off the two brokers lightly by imposing
on them a penalty which was clearly disproportionate to the gravity of the charges proved
against them. They should have been given a heavier dose considering the fact that their role in
the execution of the transactions was no less than those of the appellants. The Board had

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committed an error in this regard but that matter is not in appeal before us. This, however, will
not justify the appellants to contend that the Board should have committed a similar mistake in
their case as well and awarded them a lesser punishment. As noticed earlier the appellants
have rigged the market in a big way and the penalty imposed on them in our view is quite
reasonable having regard to the gravity of the charges proved. In this view of the matter we
find no ground to reduce the period of debarment.

HELD:

In view of our findings recorded on the second show cause notice upholding the findings of the
Board we find no merit in the appeals which stand dismissed with no order as to costs.

ANALYSIS:
Ketan Parekh was a Mumbai based share and stock broker. He was from a well to do share-
brokerage based family. He was involved in the shares scam of the year 2000/01.
Modus Operandi
Companies when raising money from the stock market rope in brokers to back them in raising
the share price. Ketan formed a network of brokers from smaller exchanges like the Allahabad

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Stock Exchange and the Calcutta Stock Exchange. Ketan also used benami or share purchase in
the name of poor people living in the shanty towns of Mumbai. Ketan's rise to fame occurred at
the same time as the worldwide dot-com boom (1999-2000) and he relied primarily on the
shares of ten companies for his dealings (now known infamously as the K-10 scrips).
Ketan had large borrowings from Global Trust Bank, whose shares he was ramping up (so that
he could get a good deal at the time of its merger with UTI Bank) – he got Rs 250 crore loan
from Global Trust Bank, though Global Trust’s chairman Ramesh Gelli (who was later asked to
quit) repeatedly said that lending to Ketan was less than Rs 100 crore in keeping with Reserve
Bank of India norms. Ketan and his associates got another Rs 1,000 crore from the Madhavpura
Mercantile Co-operative Bank despite the fact that RBI regulations ruled that the maximum a
broker could have got as a loan was Rs 15 crore.
Thus, Ketan’s modus operandi was clearly to ramp up shares of select firms in collusion with the
promoters – ironically, during the Ketan cleanup, SEBI concluded a 3-year old case where
Harshad Mehta colluded with the managements of BPL, Sterlite and Videocon to ramp up their
shares with money provided by these managements – and to get funding from them to do this.
In the current Ketan case, SEBI has found prima facie evidence of price rigging in the scrip’s of
Global Trust Bank, Zee Telefilms, HFCL, Lupin Laboratories, Aftek Infosys and Padmini Polymer.

Ketan's endgame:

Now with the prices of select shares constantly going up,thanks largely to this rigging,innocent
investors who bought such shares thinking the market as genuine,were at loss. Soon after
discovery of this scam,the prices of these stocks came down to the fraction of the values at
which they were bought.
The scam burst and the rigged shares came down so heavily that quite a few people in India lost
their savings. Some banks including Bank of India lost money heavily.
At this time a group of traders (known as the bear cartel-Shankar Sharma, Anand Rathi, Nirmal
Bang) relied on the global meltdown of stocks to make their profits. Bears sell stocks at high
prices and buyback at low prices. At the time of the year 2000 Financial Budget this cartel
placed sell orders on the K-10 stocks and crushed their inflated prices. All the borrowing of
Ketan’s could not rescue his scrips. The Global Trust Bank and the Madhavpura Cooperative
went bust because the money they had lent to Ketan had sunk with his K-10 stocks.
The information which was furnished by the Reserve Bank of India to the Joint Parliamentary
Committee (JPC),during the investigation of the scam revealed that Financial institutions
Industrial Development Bank of India (IDBI Bank) and Industrial Finance Corporation of India
(IFCI) had extended loans of Rs 1,400-odd crore to companies known to be close to broker

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Ketan Parekh.
Ketan Parekh was later arrested on December-2, 2002 in Kolkata.

CONCLUSIONS:
Though corporate governance practices in India have picked up momentum, there are factors
that inhibit its rapid growth.

1. High concentration of promoter ownership companies.

2. Weak recruitment processes of Directors.

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 3. Shortage of experienced Directors willing to serve.

4. Poor focus of Directors on their responsibilities.

5. Inadequate supply of information for analysis of issues by Directors.

6. Underdeveloped legal regime that permits continuation of existing inadequate systems

of control.

7. Intertwining of business and political circles.

8. Individual performance accountability not encouraged.

9. Conflict of interest situations are too many.

As a result of these deficiencies, corporate performance suffers and the cost of capital
increases. Ownership structures and lack of enforcement capabilities have added to the burden
of poor governance standards. The ownership infrastructure and cultural attitudes of Indian
market are different from those in the developed markets.

The foundation of good corporate governance relies on:

1. Transparency on financial reporting and the details of disclosures.

2. Independence of auditors.

3. Independence and expertise of the “independent directors”

4. Regulatory enforcement and its oversight.

5. Legal systems to resolve disputes early and with a sense of fairness.

CORPORATE BEST PRACTICES:

RECOMMENDATIONS FOR DIRECTORS

For ensuring good corporate governance, the importance of overseeing the various aspects
of the corporate functioning needs to be properly understood, appreciated and
implemented avers Vepa Kamesam (Former Deputy Governor of RBI, Former MD of SBI and
presently MD, institute of Insurance and Risk Management, Hyderabad).

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 Historically attention was paid to the subject following the collapse of Savings and Loan
companies in USA in the mid 1980’s and the SEC of USA taking a tough stand on the same.
It is ironical that once again it was the US which brought in Sarbanes Oxley Act and along
with it very stringent measures of Corporate Governance. In passing, we may add that
there is no corresponding legislation in India. Later, Adrian Cadbury report was an
important milestone, which spelt out 19 best practices called the “Code of Best Practices”,
which the companies listed on the London Stock Exchange, began to comply with. Some of
those guidelines applicable to the Directors, Non-executive Directors, Executive Directors,
an d others responsible for reporting and control are as follows:-

Relating to the Directors the recommendations are:

- The Board should meet regularly, retain full and effective control over the company and
monitor the executive management.

- There should be a clearly accepted division of responsibilities at the head of a company,

which will ensure balance of power and authority, such that no individual has unfettered
powers of decision. In companies where the Chairman is also the Chief Executive, it is
essential that there should be a strong and independent element of the Board, with a
recognized senior member.

- The Board should include nonexecutive Directors of sufficient caliber and number for
their views to carry significant weight in the Board’s decisions.

- The Board should have a formal schedule of matters specifically reserved to it for
decisions to ensure that the direction and control of the company is firmly in its hands.

- There should be an agreed procedure for Directors in the furtherance of their duties to
take independent professional advice if necessary, at the company’s expense.

- All Directors should have access to the advice and services of the Company Secretary,
who is responsible to the Board for ensuring that Board procedures are followed and
that applicable rules and regulations are complied with. Any question of the removal of
Company Secretary should be a matter for the Board as a whole.

Relating to the Non-executive Directors the recommendations are:

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 - Non-executive Directors should bring an independent judgments to bear on issues of
strategy, performance, resources, including key appointments, and standards of
conduct.

- The majority should be independent of the management and free from any business
or other relationship, which could materially interfere with the exercise of their
independent judgment, apart from their fees and shareholding. Their fees should
reflect the time, which they commit to the company.

- Non-executive Directors should be appointed for specified terms and reappointment

should not be automatic.

- Non-executive Directors should be selected through a formal process and both, this
process and their appointment, should be a matter for the Board as a whole.

Finally, the four aspects of oversight that should be included in the organizational structure
of any financial institution to ensure appropriate check and balances are:

(i) Oversight by the board of directors or supervisory board;

(ii) Oversight by individuals not involved in the day-to-day running of the

various business areas;

(iii) Direct line supervision of different business areas; and

(iv) Independent risk management and audit functions.

EPILOGUE
 The focus of corporate governance in India should primarily be of Controlling,
considering the fact that most businesses in India are family run. SEBI should keep
this in mind when moving towards implementing international standards.
 Transparency, objectivity and rigour in the processes to select independent
directors. Current limits on independent directors are unrealistic and it is likely that
many independent directors may fail to do justice to their commitments. 

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  The conduct of board meetings needs introspection in terms of frequency and
duration, information needs, balance between presentation and discussion,
interaction outside the boardroom and consultation when in doubt. 
 The CEO and board chair roles should be segregated. Board chairs should actively
monitor how individual directors are pro-actively identifying and fulfilling their
knowledge and competency needs. 
 Code of conduct norms should be communicated to the wider stakeholder group. All
whistle blowing should be linked directly to the Audit Committees. 
 Auditors should be asked to prove their understanding and evaluation of risks. 
 Regulatory bodies must carry out periodic checks to ensure that regulations are
actually being practiced.
 The twin objectives of corporate governance should be to take decisions in the best
interests of a wide group of stakeholders together with seeking to achieve
consistency in exemplary corporate behaviour that does justice to the substance
behind the rules. Corporate boards and specifically the independent directors on the
board have a major role to play in achieving these objectives through the principles
they adopt and the practices they follow.

Remember that most financial and money managers - and the investors they represent - would
prescribe the following as an essential part of good governance; -

 Observation of shareholder rights

 Maximize shareholder value

 Transparent and frequent reporting

 A watch on management

 A regular honesty check and reliable and transparent audits.

BIBLIOGRAPHY:
A Better India A Better World: by N R Narayana Murty

Corporate Governance by Devi Singh and Subhash Garg

Chartered Accountant module of ICAI

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Corporate laws and secretarial practice by Munish Bhandari

Company secretary module of ICSI

http://www.primedirectors.com/

www.wikipedia.org
www.legalpundits.com
www.slideshare.net
www.sebi.gov.in
www.primedirectors.com
www.in.kpmg.com
www.scribd.com
www.outlookexpress.com

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