A forensic audit of 200 top companies by the Ministry of Corporate Affairs has detected irregularities to the tune of Rs 1 lakh crore, including diversion of funds. Most of these companies have been referred to insolvency and resolution proceedings under the Insolvency and Bankruptcy Code. Irregularities detected in some top companies point to the collapse of corporate governance structures leading to liquidity stress in these entities. In plain terms, companies’ boards have allowed irregularities to happen knowingly while businesses suffered, investors lost money and bank loans remained unpaid.
Forensic audits aimed of companies’ balance sheets to detect data that confirm fraud and irregularities provide a peek into the dirty world of corporate finance. Irregularities detected by the ministry and the Serious Frauds Investigation Office (SFIO) include unauthorised creation of assets and under-valuation of transactions with related parties where promoters or directors had interests. Also, the ministry seems to have flagged companies holding preferential transactions with a group of creditors and customers. Gold-plating of projects — ways to hide price and cost-sensitive numbers — has been resorted to, to give undue advantage to those in companies’ power structures. Transactions aimed at defrauding creditors have been detected in companies referred by the RBI for insolvency resolution.
Poor corporate governance has been highlighted several times in the past. In June 2017, markets watchdog Securities Exchange Board of India (SEBI) had set up a multi-member body headed by Uday Kotak to look into corporate governance and bring about transparency, particularly in companies listed on stock exchanges. Several of the Kotak panel recommendations were accepted by SEBI and it directed companies to implement them beginning May 2018. Independent directors and auditors have a huge role in improving corporate governance and protecting the interests of small investors. While independent directors have mostly turned into cohorts, auditors have entered into nexus with boards of directors, thereby compromising on professional ethics. SEBI had rightly accepted the Kotak panel recommendations to make disclosure norms more stringent for company boards to bring about transparency. Even for large corporate groups, SEBI had set tight regulations on linkages between listed and unlisted companies. Medium and long-term plans of companies on corporate governance were to be disclosed before SEBI. But then, the problem with companies seems to go much deeper. In view of the detections made by the corporate affairs ministry, a larger cleansing of Indian companies’ financial balance sheets is warranted. SEBI, the finance and corporate affairs ministries and RBI may have to put their heads together to ring in transparency and put in place corporate governance structures that work.