Symbiosis Institute of Management Studies, Khadki,
Pune
EVALUATION SHEET
(COVER PAGE)
HOME ASSIGNMENT No: 3&4 (Internal)
[Compulsory Submission for Internal Evaluation]
Subject Code : 8301 Subject: Corporate Governance and Ethics
Prof. Name: Prof. P.K Rajgopal
Course/ Program and Batch: MBA Executive 2018-21 (WEEKDAYS)
Student Name PRN
Kunal Fulewale 18020448037
Dhaval Ved 18020448068
Sandesh Lohiya 18020448092
Mahesh Deshmukh 18020448097
Ashwin Patil 18020448071
Krishna Talnikar 18020448042
Date of submission: 30/10/2019
Submitted to: _SMS Portal: 30/10/2019 Signature of Student________________
Evaluation:
TOTAL
Question 1 2 3 4 5
(Out of 40)
Marks
Allotted
Evaluated by: _______________________ Signature of Faculty ___________________
Date: _______________2019
1. Punjab National Bank (PNB) –
Understanding the Issue
PNB declared in February that they had unearthed a fraud within their system, wherein the fraudsters
were issued Letters of understanding (LOU). LOU essentially is a bank guarantee against which
another lender gives a foreign currency loan issued by PNB without collateral. Therefore, the
fraudsters used the PNB guarantee to acquire goods at the expense of PNB, without the requirement
of any collateral, and run their business unhindered. When the time for repayment of the previous
LOU became due, they would resort to the same strategy and repay that amount. So, the bank was
caught in a vicious cycle of allowing its funds to be used to run the business of the fraudsters. This
raises the question of how could this not have been detected by the auditors. But as the previous
auditors said, they had detected and reported similar incidents in 2006 and no action was taken.
Indeed, after the recent scams it has been reported that the government is planning to introduce
governance to improve the quality of its credit appraisal systems. But it is important to understand
the possible corporate governance lacunae that may have helped perpetrate the present scam. In
fact, this is the aspect that has attracted the least media attention.
Where Corporate Governance lack?
There are three issues to be considered in this case of corporate governance followed in PNB.
First, being a listed entity PNB would have to adhere to Clause 49 (2014) of the Securities and
Exchange Board of India (SEBI) listing agreement. In fact, it is precisely this capability that is enshrined
in clause 49 too. As a responsibility of the Board: ‘Board should provide the strategic guidance to the
company, ensure effective monitoring of the management and should be accountable to the
company and the shareholders. More importantly, the Board is also tasked with ensuring the
integrity of the company’s accounting and financial reporting systems, including independent audit
and putting in place appropriate systems of control – for risk management, financial and operational
control, and compliance with the law and relevant standards.
Second, coming to the rules for composing a Board: Firstly, board shall have an optimum
combination of executive and Non-executive Directors (NED), with not less than 50 percent of the
board of directors comprising of non-executive directors. Secondly, where the Chairman of the Board
is a non-executive director, at least 1/3rd of the Board should comprise independent directors and
in case the company does not have a regular non-executive Chairman, at least half of the Board
should comprise independent directors, and thirdly, independent director means NED, but excludes
nominee director.
Finally, the regulation requires a qualified and independent audit committee. The audit committee
shall have minimum of three directors as members and 2/3rd of the committee members shall be
independent directors. Also, all members of audit committee shall be financially literate (means the
ability to read and understand basic financial statements i.e. balance sheet, profit and loss account,
and statement of cash flows) and at least one member shall have accounting or related financial
management expertise.
https://delhipostnews.com/pnb-scam-corporate-governance-failure/
2. IL&FS –
Understanding the Issue
IL&FS Financial Services fell short of cash and defaulted on several of its obligations. Even as new infrastructure
projects dried up, IL&FS' running construction projects faced cost overruns amid delays in land acquisition and
approvals. It defaulted on repayment of bank loans (including interest), term and short-term deposits and also
failed to meet commercial paper redemption obligations. It reported that it had received notices for delays
and defaults in servicing some of the inter-corporate deposits accepted by it. Following the defaults, rating
agency ICRA downgraded the ratings of its short-term and long-term borrowing programs. The defaults also
jeopardised hundreds of investors, banks and mutual funds associated with IL&FS, and sparked panic among
equity investors, even as several non-banking financial companies faced turmoil amid a default scare.
The IL&FS group operates over a hundred subsidiaries and is sitting on a debt of Rs 94,000 crore.
On April 2, 2019, former vice-chairman of IL&FS, Hari Sankaran, was arrested by SFIO in Mumbai for granting
loans to entities that were not creditworthy and thereby causing loss to the company and its creditors. The
initial SFIO probe also revealed that there were major lapses in Deloitte's audit of the IL&FS. SFIO investigation
found it guilty of painting a rosy picture of IFIN despite being aware of the poor financial health of the
company, triggering the ministry to seek a ban on the auditors.
On August 16, 2019, the Enforcement Directorate (ED) filed its first charge sheet in the so-called IL&FS money
laundering case. The prosecution complaint was filed in a special court of the Prevention of Money Laundering
Act (PMLA), charging former senior management personnel of IL&FS — Ravi Parthasarathy, Ramesh Bawa,
Hari Sankaran, Arun Saha, and Ramchand Karunakaran — along with Aircel founder C Sivasankaran.
The ED also made provisional attachment of bank accounts and immovable property to the tune of Rs 570
crore held by these people. The charge sheet pointed out that the senior management had falsified the
accounts and indulged in circuitous transactions. This was done ostensibly to maintain the credentials of IFIN,
in order to continue receiving high remuneration and to artificially boost the balance sheet of IL&FS group.
However, these activities led to further losses.
https://www.business-standard.com/about/what-is-il-fs-crisis
Where Corporate Governance lack?
It is here that the company’s board comes into sharp focus. It is always the board’s brief to direct policy as
well as to oversee the implementation of agreed policy. It is completely unbelievable that a board packed
supposedly with some of the best and brightest in business (R.C. Bhargava, Michael Pinto, Jaithirth Rao, S.B.
Mathur, Rina Kamath) failed so outrageously in its basic duties. It is always the board’s brief to direct policy as
well as to oversee the implementation of agreed policy.
Apparently, the board whole-heartedly agreed when IL&FS senior management went for a wholesale change
in its business model. It also seems to have believed that the CEO’s personal charms would ensure a work-
around in every tight spot and IL&FS’ image would make sure that a virtual ponzi scheme could be called upon
at any time to deliver more credit lines at the company’s door-step. Indeed, the board was so self-indulgent
that its risk management committee never thought it necessary to meet after July, 2015. So, as IL&FS hurtled
towards disaster, the cosy boys’ club of its directors gave up all pretense at corporate governance.
Most tellingly, the board had nominees of SBI, LIC and CBI as well. It is inconceivable how these institutional
directors – who, incidentally, were expected to keep an eye out for both the shareholders’ and the lenders’
interests – merely looked on as the senior management played ducks and drakes with the public’s money (for,
after all, it was the public’s money that was at play here). A more egregious example of collective failure and
collective venality of a self-important bunch of people is hard to imagine.
https://thewire.in/business/ilfs-downfall-banking-india-economy
3. Axis Bank
Understanding the Issue
The non-state-owned bank, the country’s sixth-largest by market value, has decided to rebrand the entire
$750 million as nonperforming. It’s the second time this year that Axis has had to bump up its bad-loan count
under pressure from the Reserve Bank of India. In May, it reported a previously undisclosed soured asset of
almost $1.5 billion. That time around, it wasn’t the only financial institution to try and hide a bad egg. ICICI
Bank Ltd. and Yes Bank Ltd. made similar disclosures, prompting me to coin a new metric to value Indian banks:
the price-to-truth ratio. If Axis had diligently followed the RBI’s asset classification norms, as much as 24
percent of its $565 million profit for the last full year would have vanished into thin air. (The lender’s shares
plunged as much as 9.4 percent on Wednesday morning.)
Even now all Axis has to say in its defense is that it’s not the only one lying: Most other banks that have
exposure to these nine firms, which include three unidentified power producers and one steelmaker, are also
carrying the advances as standard assets on their balance sheets. What makes this new mea culpa all the more
galling is that just three months ago, CFO Jairam Sridharan was busy telling the world that credit costs, which
had risen from an annualized rate of 1.73 percent during the March quarter to 1.95 percent in June, had only
inched higher because of a seasonal blip. He said things were looking so under control management might
even consider paring its guidance of 1.75 percent to 2.25 percent in full-year credit costs. (Axis’s fiscal year
runs from April to March.)
Just as he was making that cheery prognosis, shareholders came to know Axis had reappointed CEO Shikha
Sharma for another inning, giving her a clear runway until 2021. The board announced its decision with almost
a year to go in Sharma’s current term because there was speculation, she might leave for the Tata Group.
Would that have been such a bad thing? Sharma, who came to the bank as CEO in 2009, has overseen
shareholder returns of 252 percent, less than the country’s Bankex index at 270 percent. On her watch, $250
million of bad loans has swelled to more than $4 billion, even as total assets merely tripled. Now, after the
September quarter, annualized credit costs have ballooned to 3.16 percent. That includes a 1.42 percentage
point bump due to the $250 million provision management had to make after the central bank caught its lie.
As for that full-year credit-cost guidance, which the CFO was planning to lower in July, it’s now been raised to
between 2.2 percent and 2.6 percent.
Where Corporate Governance lack?
Whichever way you look at it, the failure of governance at Axis is now absolute. That other banks will also be
admitting to having similarly lied about their nonperforming loans can’t be an excuse. If the non-executive
directors of Axis, including the former bureaucrat who chairs it, feel even a modicum of responsibility toward
shareholders, they should quit, and leave it to a new board to deal with management and its fibs.
https://www.financialexpress.com/industry/banking-finance/failure-of-governance-at-axis-bank-is-now-
absolute-indias-sixth-largest-bank-has-been-caught-lying-again/898691/
4. DHFL
Understanding the Issue
DHFL is a non-banking financial company, also known as a shadow bank. This means it doesn’t have a banking
licence or access to central bank liquidity, but is nevertheless involved in financial services – in this case,
primarily giving loans to home buyers in India’s tier 2 and tier 3 cities.
In 2018, another major NBFC, IL&FS, went bust, causing alarm bells to ring throughout the industry. Banks
became much more careful about lending money to NBFCs. But this led to a liquidity crunch, since there was
limited access to credit. Many NBFCs rely on short-term borrowing to finance long-term lending, which puts
them in a difficult spot when there is a liquidity crunch.
In September 2018, after the IL&FS crisis emerged, DHFL’s stock also took a hammering, by as much as 60%.
Then, in January, Cobrapost claimed that the company’s promoters were involved in a Rs 31,000 crore scam
to siphon off money. The company denied these claims and later said that an independent chartered
accountant’s inquiry found them to be untrue.
The company insists that this is only a temporary problem and has said that it will pay back the amount within
the seven-day grace period. If it is able to do so, this will allay some fears about this being an “insolvency issue”
– whether the company itself can survive. Instead, it will become just a “liquidity issue”, suggesting the
company just needs more time to mobilise money.
DHFL has insisted that the underlying assets that it holds, a big chunk of which are house loans, are valuable
and have a very low non-performing asset percentage. But those underlying assets are worth about Rs 1 lakh
crore. As a consequence, if this is indeed a solvency issue, if the company’s survival itself is uncertain, it could
be a huge blow to India’s financial markets. This will lead to further panic – and tighter liquidity – across the
system.
If the company fails, that will affect all of those that have extended credit to the company. That includes about
Rs 50,000 crore from banks, another Rs 30,000 crore from the Life Insurance Corporation, pension funds and
more. In other words, this isn’t about just one company failing: it is a danger to the already-beleaguered
banking system.
Where Corporate Governance Lack?
Rating Agencies must be regulated to reflect the as is status and not the twisted status. With such scams
coming in the light regularly, it raises a question on the ability of analysts, demanding a stricter monitoring of
internal control system within an organization. The most common issues in corporate governance include
conflict of interests, oversight issues, accountability issues, transparency, and ethics violations. An analyst
should look out for red flags such as accounting anomalies, consistent growth during weak performance of the
industry, frequent related party transactions and off balance sheet transactions, etc. to identify any possible
irregularities in the financial statement of the organization. The scrutiny of Audit Committee is a vital process
to understand the strength of corporate governance norms. An analyst can focus on the audit committee’s
powers, functions, responsibilities, and relationships within the framework of corporate governance to gain
an insight about the effectiveness of the norms.
5. Yes Bank
Understanding the Issue
Yes Bank’s problems started two years ago, when the regulator forced it to disclose that nonperforming loans
were $630 million more than the $113 million reported in the company’s audited accounts for the year ended
in March 2016. The divergence widened to almost $1 billion a year later. The RBI pulled the plug, and refused
to approve a further three-year term as chief executive for co-founder Rana Kapoor. Deutsche Bank AG’s
former India CEO Ravneet Gill, who recently replaced Kapoor, has decided to make kitchen-sinking of problem
loans his first priority. Yes reported it’s first-ever loss during the March quarter after the new CEO took a $300
million hit to cover for loans that could go bad in the future.
Where Corporate Governance Lack?
Yes Bank is, after all, a private bank and it happens to be the only bank which was offered a banking license
without any prior experience. Although the promoters did spend considerable time working in big banks, at
the time of its inception Yes Bank was literally a startup. Now as a startup, we can vouch for one thing. Funding
is hard to come by and if you are a private sector bank trying to build a financial institution of the kind Yes
Bank was trying to build, the problem is further compounded. It would so happen that the promoters of Yes
Bank, each had with them enough money to pool in about 150 Crores to begin operations and within the next
year the company had raised an additional 300 Crores through an IPO.
7. Laxmi Vilas Bank
Understanding the issue
The Reserve Bank of India has picked holes in the business practices and corporate governance standards at
Lakshmi Vilas BankNSE 4.63 %. The private sector lender says it is plugging the gaps pointed out by the
regulator.
The RBI has said the staff had been negligent in monitoring accounts and that the promoter group had been
raising stake in contrast to its direction to lower the holding, an inspection report shows. Lakshmi Vilas, the
Karur, Tamil Nadu-based lender, had conducted transactions with the promoter that was not among best
corporate governance practices, it said.
"Data integrity is an issue and the lack of reliable MIS (management information system) was also a cause of
concern," says the RBI report. "Compliance function, as an independent unit, was not well established. Many
deviations in adherence to KYC and AML were observed. In such a scenario, bank runs high operational risk
and, therefore, focused attention of the top management towards all the above issues was required on
priority." But the bank, which had in the past faced problems of high bad loans and outdated technology , says
it is putting its house in order. "Regulatory queries or clarifications are dealt with in the normal course and the
bank can confidently report that no operational matters remain unresolved beyond the agreed time frame,"
said PR Somasundaram, MD & CEO, Lakshmi Vilas Bank, without elaborating on the issues and timeframe. The
bank has made significant strides in process improvement and in upgrading IT capabilities and has even
received awards from reputed institutions for several initiatives." LVB, an old-generation private sector bank,
has been without a chairman since January 2011 as the regulator clashed with the proposal sent by
shareholders.
The RBI central bank had declined to approve the name of KR Pradeep, who owns about 5% of the bank, to
chair the bank and had sought two more names for consideration . But the shareholders are yet to do so.
Shareholding of LVB's promoter group rose to 11.47% in September 2011, despite RBI’s direction to bring it
down to 10% by December 2011. Bank officials said that after recent dialogues , the RBI has given the
promoters time till December to lower the stake to 10%. RBI said the bank does not have a systembased
identification in its core banking solution and thus requires manual intervention. It found that in 171 accounts,
with an outstanding of Rs 1.12 crore, the last credit was more than three years ago, but they were still not
classified as NPA.
As many as 1,814 accounts, were classified as sub-standard as on March 31, 2011. RBI said the bank's treasury
breached counter-party limits on 44 occasions and some breaches continued for as long as two months.
Reported frauds increased from 12 involving a sum of Rs 5.17 crore in 2009-10 to 24 involving a sum of Rs
219.7 crore in 2010-11 , in which staffrelated frauds increased to Rs 26.72 crore from Rs 5.14 crore.
Where Corporate Governance Lack?
Some of the governance issues include the bank leasing premises from one of its directors without verifying
comparable rent and without assessing the need, said the report. The transaction with the director was not
made public either in the annual report, which is the norm.
