foreword - symbiosis law school for publication edition i.pdfculture of thinking, inquiry,...
TRANSCRIPT
FOREWORD
“The governance of the corporation is now as important in the world economy as
the government of countries”
-James D. Wolfensohn, 9th President, World Bank
With globalization and the elimination of barriers to the gratis flow of capital, the
democratic deficit in the governance of corporations has been substituted with a sagacious
consciousness that effective corporate governance as exteriorized by transparency,
accountability, together with just and impartial treatment of shareholders is a qualification
in attracting capital inflows. The recent years have witnessed an exemplar shift in corporate
laws; multiple bills have been tabled aiming to amend Company laws, the Insolvency and
Bankruptcy Code, SEBI’s Listing Agreement and other allied laws. But, a company is an
assemblage of its stakeholders, and corporate governance is the relationship between the
company, its stakeholders and the society at large, broadly envisaging the way a corporation
polices itself. Differences between stakeholders, although unfortunate, have become
commonplace. To ensure that there is no aberration between the owners and executors, the
study of corporate governance emerges, which is predisposed by multiple laws of the land
and renders a pedestal for informed decision-making by stakeholders in relation to capital
distribution, corporate dealings, and financial performance regulation.
This Journal has indubitably hosted an array of articles displaying impeccable innovation in
the field of corporate governance. Whether it be the Millstein Report issued by the OECD
Business Sector Advisory Groupor the Cadbury Report, the Journal has covered the topic
to its profundity. Rendition of modish interpretation of laws has always been of great
interest to me, and the articles contained herein provided ample avenues for exploration of
the concept and approach of corporate governance. It was interesting to note how the
authors have linked transparency to the concept and afforded a new dimension vis-a-vis
Right to Information.
In conclusion, the Journal is quite affluent in terms of interpretive innovation, and I
sincerely congratulate the Editors, C-FACT, faculty, and management of Symbiosis Law
School – Hyderabad on assembling such an anthology.
Ms. Isha Singh Associate
Dhir&Dhir Associates
FROM THE DESK OF THE DIRECTOR
At Symbiosis Law School, Hyderabad our mission is to provide outstanding education and
inspire our students to engage in both academic and enriching extra-curricular programs.
Our students set high expectations for themselves, in an amiable environment to assuage
the community and are constantly rewarded by their achievements.
Symbiosis Law School, Hyderabad has earned its outstanding reputation through its
students’ successes, the rigorous educational program, various co-curricular and
extracurricular activities. The hard work of the students has paid off through this first
edition of the Journal of Corporate Governance and Transparency.
The objective of first edition of the journal is to review the relationship between corporate
governance mechanism, information transparency, interaction of internal and external
governance mechanisms. This Journal develops student learning and understanding, a
culture of thinking, inquiry, reflection, resilience and independence, always focused upon
developing the intellect and skills of a law student to enter into the ambit of corporate
bodies. It culminates with the bridging of the gap between academia and corporate, thus
accentuating and examining the ideas to constellate themselves towards Corporate
Governance.
Beyond this, it is a peer-reviewed journal worked on by the members of Centre for Finance,
Accountability, Corporate Governance and Transparency. This edition wouldn’t have been
possible without the joint efforts of all the members of the Cell who worked congruously
with the Faculty Members to bring out the best portrayals of talent shown by the Authors.
I hope this journal will provide an insight into the many opportunities and challenges that
are offered to the students. We are delighted to bring out the inaugural issue of this journal.
Prof. (Dr.) Sarfaraz Ahmad Khan Director
Symbiosis Law School, Hyderabad.
MESSAGE FROM THE FACULTY-IN-CHARGE
With its inaugural issue of research upon Corporate Governance, the Centre for Finance,
Accountability, Corporate Governance and Transparency (C-FACT) at Symbiosis Law
School, Hyderabad launches its venture aimed at expanding the fields of Corporate
Governance and Transparency. This journal is a peer-reviewed and a broad scope journal
that aims at bridging the gap between academics and corporate world. Original articles
covering research and development topics, which span all areas of Corporate Governance,
are published by this journal.
The journal is designed to advance corporate knowledge and will be unique in that it
encourages authors to submit works addressing fundamental aspects together with
practical/ sui generis issues, works that may otherwise appear in journals whose readership
is rather focused on only one aspect or the other. Our goal is to present innovation.
Practical and developmental issues related to the corporate governance are brought under
one roof and at a very high quality through a careful selection of manuscripts.
I would like to thank the Editorial Board who did an outstanding job in selecting the best
papers out of the huge number of papers that we had received. I would also extend my
sincere gratitude to the faculty reviewers who, despite, their busy schedule, managed to give
their best efforts to the Journal. I congratulate all members of C-FACT, for advancing their
full co-operation hard work towards getting the allied objectives fulfilled for the smooth
functioning of the Cell. I appreciate the Editorial Board for their unwavering help in
bringing out this issue.
Dr. Y. Kishore Kumar Faculty-in-Charge
C-FACT
ADVISORY BOARD
Prof. (Dr.) Sarfaraz Ahmed Khan, Director, Symbiosis Law School, Hyderabad
Dr. AnuradhaBinnuri, Deputy Director, Symbiosis Law School, Hyderabad
Prof. (Dr.) SripathiDwarkanath, Professor
Dr. Prageetha G Raju, Associate Professor
Dr. Y. Kishore Kumar, Assistant Professor
Dr. JayendraKasture, Assistant Professor
Dr. Sanu Rani Paul, Assistant Professor
Dr. D. Ganesh Kumar, Assistant Professor
EDITORIAL BOARD
Editor-In-Chief
Leepakshi Rajpal
Editors
Aritra Deb
Devika Mallik
Hari Naga Abhigna
Sayali Diwadkar
Sonal Gupta
MESSAGE FROM THE ADVISORY BOARD
Enhanced Transparency is one of the main objectives of the many proposed corporate
governance reforms. The uncontroversial nature of this goal, as most observers believe
helped increase transparency to an unambiguously good platform. Everything comes with
its own pros and cons but from an eagle’s eye of the corporate governance perspective,
there are likely to be both costs and increased transparency, leading to an optimum level
beyond which the enhanced transparency lowers profits. The result holds good even in
circumstances where there is no direct cost of increasing transparency and no issue of
revealing or leaking information to regulators or product-market rivals. One can point out
those reforms that seek to increase transparency may reduce a firm’s profits, raise executive
compensation, and inefficiently increase the rate of CEO turnover. There might be every
possibility that executives will take action to distort information. Career growth can be a
reason why these executives could increase transparency that increases penalties for
distorting information which can be profit reducing. This, in my opinion, raises many
questions and for such questions, I head over to the Journal of Corporate Governance and
Transparency.
I am glad and appreciate the initiative taken by C-FACT in bringing out a journal of
Corporate Governance and Transparency which is a peer-reviewed journal. Since the
journal aims to address academicians, students, lawyers, Consumer Forum functionaries,
practising professionals, in-house councils, researchers, other specialists in the field of
corporate law and consumer activists will have an opportunity to forays into the
complicated issues relating to corporate law and the discussions and analytical expositions
will lead to new ideas and new perspectives with regard to transparency in the corporate
world that would go a long way in contributing and shaping a new corporate regime in the
future.
I whole-heartedly congratulate both the management of Symbiosis Law School, Hyderabad
and the professors who have contributed much in bringing out such an excellent journal. I
wish the C-FACT team more success in all their future endeavors.
Prof. (Dr.) SripathiDwarkanath, Professor
Symbiosis Law School, Hyderabad
MESSAGE FROM C-FACT
We, at C-FACT are happy to announce the inaugural issue of the Journal of Corporate
Governance and Transparency: a peer-reviewed academic journal of a nascent joy, which is
an excellent dipaly of hardwork by the Editorial Board. With its broad scope bridging
corporate governance, transparency, and financial aspects of corporate laws, the journal is
dedicated to a challenge rather than to a topic or an intersection of topics. This challenge is
to understand the complexities of the corporate legal parlance. To solve it, we need to
understand the topics at a more complex level. We have received a lot of articles from all
over the country and choosing a few of them took each and every inch of our brain.
There are currently a number of research programs around the world that explicitly or
implicitly address the issue of corporate governance, yet despite impressive successes and
growing interest in corporate governance, wide gaps continue to prevail. Different
professionals may have different opinions and therefore, we invite our readership to send
their articles at any time during the year for the release of the next issue.
The inaugural issue of the Journal includes several seminal vision papers. They determine
the face of the journal and set the stage for subsequent issues that will publish mostly
research papers and theoretical concepts. At the same time, research papers included here
exemplify the kinds of papers that the journal will continue to publish.
Using the journal inauguration as an occasion, we would like to thank many people who
created the opportunity for the journal to be born and who made it happen. The list
includes the Respected Director, Deputy Director, and the Faculty in charge, Editors,
Advisory board, all the members of CFACT and all the students who contributed for the
journal.
Members: Aviral Arun, Arushi Bisht, Sonal Gupta, Leepakshi Rajpal, Aritra Deb, Devika
Mallik, SayaliDiwadkar, Hari Abhigna, Gargi Kulkarni, Sumer Karekar, Sivani Ledalla,
PriyanshiKataria, Vidhi Krishali, Deepika Gupta, Chaitanya Tripathi, Hritik Srivastava,
Naman Tyagi, Abhishek Jena, Namita, Bhaskara Sharma, Budhaditya Purkayastha, Pratiksha
Jain, Snehal Singh, Shikhar Nigam, Megha Jain, Keerthi Chaudhary.
TABLE OF CONTENTS
1. RIGHT TO INFORMATION AND THE OPACITY OF THE CORPORATE SECTOR
Sahana Pratap Simha ................................................................................................................. 1
2. RTI: A GIZMO TO GUARD TRANSPARENCY AND ACCOUNTABILITY
Sreeja Gangishetty ................................................................................................................... 14
3. CORPORATE GOVERNANCE AND TRANSPARENCY
Kunwar Deep Singh, Anandita Singh...................................................................................... 28
4. ROLE OF INSOLVENCY & BANKRUPTCY CODE IN CORPORATE
GOVERNANCE: A LEGAL ANALYSIS
Wajahat Monaf Jilani ............................................................................................................... 49
5. WHITE COLLAR CRIMES: AN ISSUE SELDOM ADDRESSED
Rishika Garg ............................................................................................................................ 62
6. GOOD GOVERNANCE: THE SYNONYM OF CORPORATE GOVERNANCE IN
INDIA
Anuja L. Parulekar, Sahil S. Kadam ........................................................................................ 74
7. CASE ANALYSIS: DARIUS RUTTON KAVASMANECK V. GHARDA
CHEMICALS LTD.
Shalini ...................................................................................................................................... 88
8. EPILOGUE ...................................................................................................................... 96
~ 1 ~
RIGHT TO INFORMATION AND THE OPACITY OFTHE
CORPORATE SECTOR
-SahanaPratapSimha1
Abstract
The Right to Information Act, 2005 (hereinafter referred to as “RTI”) is widely known for
bringing down the opacity of the Government and its instrumentalities in India along with
ensuring that information disclosure does not affect the confidentiality of sensitive information.
Corporate Governance, in regulating the functioning of companies in the private and public
sector, establishes that, with regard to opacity in the corporate sector, principles applicable to
the public sector cannot directly be used in the private sector. Hence there arises a conflict
between the object of the RTI Act and information sought from the private corporate sector.
Section 8(1)(d) of the RTI Act exempts the disclosure of confidential and sensitive information
and thus acts as a competitive constraint by protecting the competitive position of companies in
the market. However, the proviso clause dilutes this immunity. At the satisfaction of the
competent authority, public interest can warrant the disclosure of potentially confidential and
sensitive information from the corporate sector that could harm the competitive position of a
third party.
This article shall seek to examine the extent of the role of the RTI Act in the corporate sector in
enhancing transparency and accountability in the latter with the force of public interest. There
exist various degrees of sensitivity and confidentiality of information arising from the corporate
sector. This article seeks to examine the circumstances surrounding the disclosure of
information including commercial confidence, trade secrets or intellectual property, the
disclosure of which could harm or affect the competitive position of a third party. This article
shall also examine the impact of the dilution of the exception provided for under Section 8(1)(d)
of the RTI Act on the competitive position of the affected companies in the corporate sector.
[Keywords: RTI, Corporate Sector, Opacity, Confidential, Competition, Public Interest.]
13rd Year, B.A. L.L.B, School of Law, Christ (Deemed to be University)
~ 2 ~
INTRODUCTION
Information is perceived as power, particularly by developing countries.2 Right to Information
(hereinafter referred to as “RTI”), very simply put, is a tool that enhances transparency and
therein, accountability of the government and its instrumentalities. The Right to Information is a
right that is statutorily backed by the Right to Information Act of 20053 (hereinafter referred to
as “The Act” or “RTI Act”). This means that information seekers under this act have a right to
receive information and public authorities are duty-bound to disclose the information that is
sought, subject to exceptions provided in the Act. The Act elucidates the right to information
that is held by every citizen to access information that exists under the control of public
authorities. The Act seeks to ensure access to information to citizens who desire to have the
same with the objective of harmonizing conflicting interests. RTI improves public awareness
and in doing so, compels transparency and holds the Government and its instrumentalities
accountable and responsible to the governed. It can be understood from the aforementioned
outstanding features of the Act and the purpose it seeks to fulfill that the Act is largely
applicable to the public sectors and public bodies.
RTI and the Right to Know to precede a very significant aspect of any democracy, i.e., the
Right to Freedom of Speech and Expression which is guaranteed in India under Article 19(1)(a)
of the Constitution of India. Only through access to authentic information can one effectively
exercise his right to free speech and expression. Misinformed individuals will only diminish the
purpose of the right to free speech and expression by spreading false information among the
public. Since the Right to Information and Right to Know to precede the right to freedom of
speech and expression, the latter includes the right to collect and receive information.4
The RTI Act has limited reach over the private sector. Regulated applicability can be
understood mainly from Section 8 of the Act. Section 8 of the RTI Act exempts the disclosure
of information falling under various categories.Section 9 of the RTI Act states that the CPIO or
the SPIO can reject a request for information, the disclosure of which would involve an
infringement of copyright subsisting in a person other than the state. As per Section 24 of the
Act, several organizations contained under the Second Schedule of the Act such as Intelligence
Bureau, Directorate of Revenue Intelligence, Narcotics Control Bureau, etc. are not liable to
disclose information sought under the RTI Act except in circumstances where the information is
2OulacNiranjan; Right to Information and the Road to Heaven; Vol. 40, No. 47 Econ PolitWkly, 4870, 4870 (Nov.
19-25, 2005). 3 The Right to Information Act, No. 22 Acts of Parliament (2005). 4 PCUL v. Union of India, (2003) 4 SCC 399.
~ 3 ~
relating to allegations of corruption or human rights violation. In such instances, these
organizations can be compelled to disclose information that is being sought.
Firms in an economy are governed by rules and regulations that are laid down to ensure good
governance and progress of the firm. Such rules seek to harmonize and balance the interests of
various stakeholders associated with the firm. Corporate governance is a framework that
regulates the functioning of a firm. It guides firms in their path to obtaining their goals and
objectives in a manner that contributes to the value of the firm and is beneficial to all the
stakeholders in the long term.5 Corporate governance not only regulates public firms but also
private firms. This is where the conflict arises between RTI and the private corporate sector.
Section 2(j) of the Act prescribes the disclosure of information that is held by or under the
control of any public authority. Public authority does not always fall within the meaning of the
private corporate sector. As such, private sector firms are not bound to disclose information
under the Act. Under Section 8(1)(d) of the Act, firms are protected from a citizen’s right to
information, where disclosure and misuse of such information could potentially harm the
competitive position of the company. Law recognizes the necessity behind the protection of
trade secrets and other interests exclusive to a company. Such secrets and interests are protected
under Section 8(1)(d) of the Act from disclosure if they have no relation to any form of public
interest.6
Under Section 8(1)(d) of the Act, the information exempted from disclosure can be disclosed if
the competent authority7 is satisfied that larger public interest warrants the disclosure of such
information. However, in certain cases, courts have ordered the disclosure of information upon
finding no reason to keep such information secret.8 Courts are also empowered to decide
whether the information sought falls within the meaning of intellectual property,9 commercial
confidence or trade secrets.
THE EXTENT OF OPACITY AS GRANTED BY SECTION 8(1)(D) OF THE ACT
Section 8 of the Act provides for certain circumstances wherein an exemption from disclosure
of information lies. Section 8(1)(d) of the Act exempts the disclosure of the following:
“information including commercial confidence, trade secrets or intellectual property, the
disclosure of which would harm the competitive position of a third party, unless the
5Lisa Mary Thomson; What is Corporate Governance?;The Economic Times; (Jan 18, 2009, 12.19 AM);
https://economictimes.indiatimes.com/money-you/what-is-corporate-governance/articleshow/3995278.cms. 6PrarveenSayyed; EXEMPTIONS FROM DISCLOSURE OF INFORMATION UNDER RIGHT TO
INFORMATION ACT, 2005: A METHODICAL REVIEW; BLR, 230, 236-248 (Oct-Dec, 2016). 7 The Right to Information Act, No. 22 Acts of Parliament, § 2(e) (2005). 8 State of Jharkhand v. Navin Kumar Sinha, AIR 2008 Jhar 19. 9 Union Public Service Commission v Central Information Commission, 2008 (1) RTI 164 (Delhi).
~ 4 ~
competent authority is satisfied that larger public interest warrants the disclosure of such
information”10
Commercial Confidence refers to information that if disclosed, may damage the commercial
interests of a party. Information of such nature cannot be disclosed without the permission of
the concerned party. Confidentiality Agreements protect such information. A trade secret is any
confidential business strategy or information which gives a firm a competitive edge in the
market. It includes industrial, commercial and manufacturing secrets. Intellectual Property
refers to the ideas, knowledge, invention, innovation, creativity, research, etc., which is the
product of the human mind. Only the proprietor may exclusively use his property at his will and
he has the right to prevent others from using it, without his permission. Copyrights vested with
public authorities are not exempted from disclosure. Access to such information cannot be
denied under the Right to Information Act.11 Public interest means a subject that the public or a
section of the public becomes interested in.12
There is a growing trend wherein access to public records and information is limited in the
name of privacy.13 Along the lines of this trend, there exists the risk of increased opacity in the
corporate sector, leading to firms engaging in corrupt practices which will eventually be
advantageous to the concerned firm but disadvantageous to the public at large. Since the
establishment of the information sector in India with the aim of catering to the needs of
enhancing transparency and accountability in the country, the argument of privacy has been
raised in many cases.14 Details of loan accounts, securities of borrowers, details of property and
valuation reports of immovable assets are all information in the nature of commercial
confidence. Disclosure of such information is exempted under Section 8(1)(d) of the Act as
long as such information has absolutely no relationship with public interest since Banks are
generally required to maintain the secrecy of such information.15
In the case of Shyamal Yadav v. Air India,16 information regarding the details of free travel or
concessions availed by 78 ministers under the scheme of frequent fliers was sought by the
appellant. This information was held to be of the nature of commercial confidence and the
Central Information Commission held that disclosure of such information with regard to any
passenger would only result in misuse for the purpose of harassment and humiliation of the
10 The Right to Information Act, No. 22 Acts of Parliament, § 8(1)(d) (2005). 11 Dr. J. N. Barowalia; Commentary on The Right to Information Act 444 (4th ed., Lexis Nexis Publication, 2016). 12 Dewan; Exhaustive Commentary on The Right to Information Act, 2005 Act No. 22 of 2005 with International
Laws 199 (Indian Law House, 2010). 13Sairam Bhat; Right to Information 208-209 (EBH Publishers, 2012). 14Id. at 209. 15supra note 5. 16 Decision No. 2857/IC(A)/2008.
~ 5 ~
passenger. The Commission stated that airlines provide incentives to passengers regardless of
their official status and commercial entities offer these incentives in the interest of promoting
their business. Thus, the Commission held that denial of this information to the appellant on the
ground of it being within the meaning of Commercial Confidence under Section 8(1)(d) of the
Act is justified.
In the case of N. Anbarasan v National Informatics Centre,17 it was held that information
relating to the development of a website or web-based application is considered as software
which is covered under Intellectual Property Rights. As such, this information is exempt from
disclosure. It is pertinent to note that, the information could not be disclosed in this case
because the appellant was a software developer.
The promotion of business entails strategies that are crucial to the maintenance of the
competitive position of the company. In any firm, there is the utmost freedom to determine the
extent of incentives or concessions that are given to the consumers with the view of promoting
the business. Such freedom is exercised to the convenience of the firm and its functioning. As
such, the disclosure of details of the basis for incentivizing consumers which is critical and
crucial for business promotion of commercial and service organizations is not justified.18
Information relating to monthly entertainment tax collected by cable operators from subscribers
is exempt from disclosure under Section 8(1)(d) of the Act since it would harm the competitive
position of the third parties operating in the said area.19 Seeking information in respect of
details of customers falls under the exempted category under Section 8(1)(d) of the Act.20
Aside from information including commercial confidence, trade secrets, and intellectual
property, the information sought in breach of a confidentiality clause entered into by the
concerned parties is exempt from disclosure.21 Confidentiality clauses inserted into the
document of a commercial business or transaction exempts the disclosure of Memorandum of
Understanding (MOUs). However, if there is no such confidentiality clause incorporated, then
the MOUs shall fall under the public domain.22
Rules in the nature of a subordinate legislation which have the legal force of the Parliament and
forbid the disclosure of information regarding importers/exporters such as their names, etc. in
the daily list, then the exemption from disclosure of such information is justified under Section
17 Appeal No. 24/ICPB/2006, CIC Decision dated 5.6.2006. 18Subhash Chandra Agarwal v Ministry of Petroleum & Natural Gas, HPCL and BPCL, CIC Decision No.
2200/IC(A)/2008. 19 J.S. Kohli v Commissioner of Entertainment Tax, New Delhi, Appeal No. CIC/WB/C/2006/00101, CIC
Decision dated 23.8.2006. 20RajanVerma v. Union of India, Ministry of Finance, Banking Division, New Delhi, 2008 (2) CCC 335 (P&H). 21 Anil Kumar v Indian Telephone Industries, Bangalore, Appeal No. 25/ICPB/2006, CIC Decision dated 5.6.2006. 22 Sh. PramodPagare v Indian Oil Corporation Limited, CIC/MA/A/2006/00427.
~ 6 ~
8(1)(d) of the Act.23 At the discretion of the courts, several elements other than the ones
mentioned in Section 8(1)(d) of the Act have been deemed to be exempt from disclosure for the
reason that disclosure of such information is outside the purview of public interest. Income tax
returns and information that is provided to income tax authorities in the course of assessment
proceedings are exempt from disclosure because considering assessment proceedings as public
proceedings have the propensity to interfere with the former. As such, the disclosure of
information arising during the course of assessment proceedings is not considered to be in the
larger public interest.24
In the case of Rakesh Sanghi v. International Advanced Centre for Powder Metallurgy and
New Materials, Hyderabad,25 the CIC held that no canon of public interest or transparency
justifies the disclosure of vital information or research-data of Research and Technological
Institutions without the latter obtaining tangible or intangible benefit from such disclosure or
exchange. The CIC also held that a citizen’s right to seek information is not absolute. It is
conditioned by the Government’s right to invoke exceptions where such exceptions are
applicable.
THE EXCEPTION TO SECTION 8(1)(D) OF THE RTI ACT, 2005 – COMPELLING
TRANSPARENCY
The exception to Section 8 of the RTI Act provides that if the competent authority is satisfied
that larger public interest warrants the disclosure of information then information including
commercial confidence, trade secrets, and intellectual property must be disclosed. Along with
Chief Executive Officers (CEOs), Chief Financial Officers (CFOs) and Chief Operating
Officers (COOs), corporate entities now also have the accountable positions of Chief
Information Officers (CIOs). CIOs collect, process, verify, validate and then disseminate
corporate information to the various interested information stakeholders. It then becomes the
responsibility of these stakeholders to carry forward the information movement in the corporate
sector. However, government public officials and corporate managers have not openly accepted
or welcomed the pressure from the information movement. Some regard these developments are
invasion or infringement of their personal function space.26
Courts are also empowered to exercise their discretion in holding that certain agreements with
third parties such as agreements for providing driver’s license smart cards, registration book
23 Ramesh Shetty v Central Information Commisison (DZ), CIC/MA/A/2006/00012. 24 Naresh Trehan v Rakesh Kumar Gupta, 216 (2015) DLT 156. 25 CIC/AT/A/2007/01363. 26supra note 1.
~ 7 ~
smart cards, optical smart cards are not exempt from disclosure as it would not lead to the
disclosure of intellectual property or trade secrets. In the view of larger public interest, it would
be desirable to disclose such information to allow public scrutiny of such agreements and
contracts.27 There is simply no merit in contending that the business of a private establishment
is a private matter in which no citizen can have any interest. A citizen is entitled to know if the
law is strictly followed by the licensing authorities in authorizing business activity.28
Suggestions from an individual are not considered as a trade secret. In the case of Shri K.B.
Singh v HMT Limited, Bangalore,29 the Commission ordered the disclosure of documents
regarding the suggestions made by the appellant himself which were being considered by the
Suggestion Committee. The Commission held that there was no trade secret or third-party
involvement in this case and thus ordered the information that was sought by the appellant to be
disclosed.
In the case of State of Jharkhand vs. Navin Kumar Sinha,30 the Supreme Court observed that,
“People have a right to know the basis on which the decision has been taken. If tenders are
invited by the public authority and on the basis of tender documents, the ability of a
tenderer or a bidder is decided, then those tender documents cannot be kept secret, that too,
after the tender is decided and the work order is issued on the ground that it will amount to
disclosure of trade secret or commercial confidence. If the authorities of Government refuse
to disclose the document, the very purpose of the Act will be frustrated. Moreover, the
disclosure of information sought for by the petitioner, cannot and shall not be a trade secret
or commercial confidence rather the disclosure of such information shall be in public
interest, in as much as it will show the transparency in the activities of the Government.”
Information regarding field trials of genetically modified (GM) crops conducted for the purpose
of looking into the feasibility of growing these GM crops and assessing their harmful impact
does not come within the meaning of commercial secrets as understood under Section 8(1)(d) of
the Act. This information concerns the larger public interest of farmers as well as other
communities. As such, the disclosure of this information is not exempted under Section 8(1)(d)
of the Act and has to be disclosed in public interest.31
27Shonkh Technology International Ltd. v. State Information Commission Maharashtra Konkan Region, and
United Telecom Limited v. State Information Commission Maharashtra Konkan Region and Ors.; 2011 (113)
BOMLR 2433. 28 A.S. Lall v Police Headquarters, New Delhi, F.No. CIC/AT/A/2006/00075, CIC Decision dated 2.6.2006. 29 CIC/OK/A/2006/00012. 30 State of Jharkhand v. Navin Kumar Sinha, AIR 2008 Jhar 19. 31DivyaRaghunendan v Dept. Of Biotechnology, CIC/WB/A/2009/000668.
~ 8 ~
A very significant aspect of public interest is the ability of the public to scrutinize information
that is sought. In the case of Sh. N. Anbarasan v Indian Overseas Bank,32 an important
observation was made,
“Transparency in the functioning of public authorities is expected to be ensured through
the exercise of right to know so that a citizen can scrutinize the fairness and objectivity of
every public action. This objective cannot be achieved unless the information that is
created and generated by public bodies is disclosed in the form in which it exists them.
Therefore, an information is to be provided in the form in which it is sought, under Section
7(9) of the Act, if it does not exist in the form in which it is asked for and provided to the
applicant, there is no way that proper scrutiny of public action could be made to
determine any deviations from the established practices or accepted policies.”
In this respect, the information sought in the present case was related to public action with
regard to processes followed for the purchase of computers and accessories. Such public action
falls under the public domain. Thus here, the exemption under Section 8(1)(d) of the Act cannot
be claimed. Only if the information that is sought is provided in the prescribed format as
discussed above, then will the public have a chance to scrutinize whether the public action is
deviant from established practices or accepted policies.33
An instance where larger public interest warranted the disclosure of information was in the case
of Electronics Corporation of Tamil Nadu Limited v Tamil Nadu Information Commission.34
In this case, the Commission ordered the disclosure of information regarding the field
inspection report of water bodies at Thiruporur and other villages in Chengalpattu Taluk for the
purpose of checking the sustainability of those lands in order to set up Information Technology
industries or other industries because larger public interest warranted the disclosure of this
information.
The interest of the public largely lies around the object of checking corruption, misuse of
resources and other unethical practices that public or private bodies may be engaging in. In this
sense, transparency in the public and private sectors seeks to shed light on whether the interests
and resources of the public are being exploited. For instance, in order to check for any possible
misuse of Government Vehicles, the logbooks regarding the movement of official government
vehicles must be put in the public domain to allow public scrutiny. The disclosure of this
information is heavily warranted by public interest.35
32 CIC/MA/A/2006/00453. 33Id. 34 (2010) 5 MLJ 402. 35 M.D.N Panickar v Steel Authority of India, CIC/MA/A/2010/000389.
~ 9 ~
The disclosure of question papers, solutions to questions, model answers as well as instructions
wasgiven to moderators, examiners after examination and evaluations of the answer scripts do
not harm the competitive position of any third party. As such, this information is not exempt
from disclosure under Section 8(1)(d) of the Act.36 Total marks secured in the interview and
written papers are required to be published in Assistant Provident Fund Commissioner
Examination, 2002. The techniques and procedures to establish a cut-off point must also be
disclosed. Further, the composition of the Selection Committee must be disclosed.37 In the case
of Prof. Rajeev Kumar v IIT Kharagpur,38 the CIC ordered IIT Kharagpur to disclose the list
of subjects and marks obtained by candidates excluding their names and personal details to the
appellant for the purpose of facilitating his object of compiling this data into the required
format.
Tender, bid and quotation can be regarded as a trade secret, before the conclusion of a contract.
However, once the contract is concluded, one cannot claim the confidentiality of such
transactions.39 The proviso clause contained in Section 8(1)(d) of the Act plays a great role in
compelling transparency of the corporate private sector. However, aside from public interest
and the discretion of the competent authority, judgments with precedential value also
significantly impact the opacity of the corporate sector.
IMPACT OF DISCLOSURE ON THE COMPETITIVE POSITION OF THE THIRD
PARTY
Generally, public officers who do not wish to disclose certain information but are compelled to
do so state that such disclosure would inhibit the executive from objectively discharging their
functions at any given point in time.40 Competition laws entail that there must exist free and fair
competition between various firms in a market. India is a socialist state, as proclaimed in the
Constitution of India, and seeks to promote and secure the welfare of all players in the market.
One of the primary reasons for securing a competitive market is ensuring that in view of public
interest, there should be no concentration of economic power.41
Licensing is the legal authorization for starting any business. There is no reason to understand
why the grant of licenses or the grounds for providing a license can be deemed to be
36 Institute of Chartered Accountants of India v. Shaunak H. Satya and Ors., (2011) 8 SCC 781. 37Rajnish Singh Chaudhary v Union Public Service Commission, Decision No. 450/IC(A)/2006, Decision dated
15.12.2006. 38 Appeal Nos. CIC/OK/A/2006/000659 AND CIC/OK/A/2007/000168, CIC Decision dated 26.5.2007. 39 Sri Ramesh Chand Sai v National Institute of Science Communication & Information (NISCAIR),
CIC/WB/C/2006/00176. 40Supra note 1. 41 Dr. H. K. Saharay; Textbook on Competition Law 5 (2nd ed., Universal Law Publishing, 2016).
~ 10 ~
“confidential” information. Disclosure of this information in no way affects the competitive
position of the business being licensed or any other businesses since it is an authorization which
merely allows for the establishment of the business and thus enables the citizens to monitor
whether the business is functioning in accordance with the law. However, on the other hand, the
manner of functioning or running the business falls under the category of commercial
confidence or trade secret.42 Disclosing this information can allow a firm’s competitors in the
market to use it to the disadvantage of the firm and weaken its position in the market.
Information relating to sales of promotion schemes are exempt from disclosure under Section
8(1)(d) of the Act since it is confidential and commercially sensitive information that can be
misused affect the competitive position of a third party in an adverse manner.43 Similarly, the
disclosure of commercial information relating to inspection notes, supply orders, etc. of a firm
can have a considerable impact on a firm’s commercial interest and competitive position in the
market. Thus, such information is exempt from disclosure under Section 8(1)(d) of the Act.44
The economic implications of the disclosure of such information can be drastic. The firm could
face a significant reduction in its chain of supply with competitors using the information
regarding their supply orders and its magnitude to divert the supply to themselves. This would
significantly drain the firm of its resources to carry forward its business in a profitable and
sustainable manner.
The intellectual property of a firm allows it to stay competitive in society. Guarding its unique
nature plays a significant role in ensuring that the firm does not get pushed out of the market by
its competitors. Such intellectual property can never be compromised since it would risk the
competitive position of the firm in the market. Furnishing information relating to the IPR of a
firm to the public would lead to unpermitted use of such information by the firm’s competitors
with a view of eliminating competition in the market. Thus, while an appellant is requesting
information from a firm, he has to make a request for specific information rather than general
information. However, the firm would be liable to disclose such information only when it is not
related to the IPR of the company, the disclosure of which could harm the competitive position
of the firm in the society.45
42 Shri PrabhuDayalPunjani v Municipal Corporation of Delhi, CIC/WB/A/2006/00328. 43Amarpal Singh v Registrar of Newspapers for India, CIC/AD/C/2009/000695. 44 Shri K.S. Periyaswamy v Ministry of Defence (DGQA), CIC/AT/A/2006/00201. 45 Shri N. Anbarasan v National Informatics Centre, F. No. PBA/06/028 AND Appeal No. 158/ICPB/2006.
~ 11 ~
In the case of Reliance Industries Limited v Gujarat State Information Commission,46 with
regard to weighing the importance of larger public interest and harm to the competitive position
of a third party, the court held that,
“In considering whether the public interest in disclosure outweighs in importance any
possible harm or injury to the interest of such a third party, the Public Information Officer
will have to consider the following:
(i) The objections raised by the third party by claiming confidentiality in respect of the
information sought for.
(ii) Whether the Information is being sought by the applicant in the larger public interest or
to wreak vendetta against the third party. In deciding that the profile of person seeking
information and his credentials will have to be looked into. If the profile of the person
seeking information, in light of other attending circumstances, leads to the construction that
under the pretext of serving public interest, such person is aiming to settle the personal
score against the third party, it cannot be said that public interest warrants disclosure of
the information solicited.
(iii) The Public Information Officer, while dealing with the information relating to or
supplied by the third party, has to constantly bear in mind that the Act does not become a
tool in the hands of a busy body to settle a personal score.”
The RTI Act cannot be used for furthering personal commercial interest at the expense of
another commercial entity. The main objective of Section 8(1)(d) of the Act is to prevent such
misuse of the Right to Information. Misusing the provisions of this act to reduce competition in
the market can have serious and undesirable economic implications for the firms and the
consumers.
CONCLUSION
Every citizen has the right to know about the activities being carried by the government in the
name of the people. In any civilized society, RTI is a fundamentally important subject.
Transparency of information and an informed citizenry are vital to the functioning of a
democratic society, contain and check corruption and hold the government and its
instrumentalities accountable to the people.47
The economy of every country survives with the operation of competition in the market. Firms
compete with each other by setting competitive prices and attracting consumers to their
46 AIR 2007 Guj 203. 47Barowalia, supra, 9.
~ 12 ~
respective products. The competition allows for a wide range of choices for consumers. The
exemption provided under Section 8(1)(d) of the Act seeks to ensure that companies do not
assume a position of dominance in the market by eliminating competition. Healthy competition
in a market is of fundamental importance. Section 8(1)(d) of the Act allows information officers
and courts to deny the disclosure of information which might have been sought with a mala fide
intention of settling personal scores with competitors. This is not only disadvantageous to firms
in the market but also the consumers as it would restrict consumer choice and they would thus
be locked-in. Further, Section 57 of the Competition Act, 200248 is in consonance with the RTI
Act in stating that information obtained by the Competition Commission of India relating to any
enterprise shall not be disclosed without the prior permission of the enterprise in writing.
When information is not confidential in nature or secret in nature and the disclosure of which
does not harm the competitive position of any third party, then there is no reason that can justify
the withholding of such information by a public authority.49 Thus, if the information being
sought is not covered by the exemption under Section 8 or Section 9 of the Act, then the public
authority is liable to disclose the information that is sought by any citizen.50 However, whether
it is with regard to the public or private corporate sector, public interest can prevail in several
matters even when the information is relating to commercial confidence, trade secrets or
intellectual property rights. Public interest and activity are thus greatly responsible for the
country’s progress through awareness.
Where the government has directly or indirectly financed any firm, or has a shareholding of up
to 26% equity, or any concession by way of aid or grant then that company may be held to be a
public authority.51 As discussed in the introduction to this paper, Section 2(j) of the Act talks
about information which is held by or under the control of any public authority. If a company
does not fall within the category of a public authority as described above, then such a private
company is not bound to disclose any information under the Act. Requiring substantial
disclosure of information by private companies at the will of the citizens would thus require
legislative amendment. In this regard, the parliament would have to construct a mechanism to
balance the interests of both the private corporate bodies as well as the citizens interested in the
information. To a large extent, however, by protecting the information of private firms
including trade secrets, commercial confidence, and intellectual property, a company’s
competitive position in the market is safeguarded.
48 The Competition Act, No. 12 Acts of Parliament, § 57 (2002). 49Shekhar S. Shrivastava v State Information Commissioner, AIR 2016 H.P. 127. 50 Dr. D. P. Verma, Mr. Raj Kumar; Corporate Sector and the Right to Information: A Jurisprudential Analysis;
Vol. 3, Issue 8 IJSER, 1, 6 (August 2012). 51Id.
~ 13 ~
Although RTI’s applicability on the corporate sector is heavily restricted, corporate
transparency and good corporate governance are brought about through other legal instruments
such as the Companies Act, 2013, and other securities regulations such as the Securities and
Exchange Board of India Act, 1992 the Securities Contract (Regulation) Act, 1956, etc. These
legal instruments lay the foundation for a regime of the release of information by firms.
However, there is careful regard given to the sensitivities involved in such corporate
information. This is because sensitive information relating to a corporate firm which is
disclosed can be misused by its competitors and thus harm the competitive position of the firm.
As discussed in the paper, harm caused to the competitive position of any firm can have serious
implications on the growth of the market economy and consumer welfare in that sector. Thus, it
is in the best interest of the firms competing in the market and the consumers that the
sensitivities involved in the information of a private corporate firm should not be disclosed
either through the RTI Act or any other law for the time being in force unless larger public
interest warrants for the disclosure of the same.
In conclusion, the main objective of the RTI Act of ensuring transparency and accountability
should be in consonance with the corporate sector to the extent that, the public has a right to
information where the direct interests of the public are concerned.
~ 14 ~
RTI: A GIZMO TO GUARD TRANSPARENCY AND
ACCOUNTABILITY
-SreejaGangishetty52
Abstract
This article mainly deals with the use of RTI in the banking and financial sectors of government
organizations. These are the most sensitive sectors of the economy, which has a lot of chances of
manipulation and corruption. The paper mainly focuses on changes and developments happened
in the banking and financial sector after the introduction of RTI. The management of
transactions and the credit mechanisms became transparent and this increased the
accountability of the workers and the employees. The changes in the recruitment of the
employees in the financial sector had a huge impact due to the introduction of the transparent
mechanism. There are a lot of accounts that are used for corrupted purposes and all of them
were brought into the limelight through RTI. This is a weapon in the hands of people, to know
the mechanisms of the banks and the rules followed by them. The main aspect of democracy is
the involvement of the people in development. RTI has brought this principle into force and has
improved the inclusiveness of the people in the governmental functions. The goals and the major
usage of the RTI in the banking sector are stated clearly in the article. The application of the
principles and their major utility concepts are explicitly clarified in this paper.
[Keywords:Public sectors, Private sectors, Banking Regulations, Transparency, Accountability,
Relativeness, Corruption, Democracy, Participatory Democracy, Development, Financial
Sector, Exclusiveness, Inclusiveness, Justice, and Illegality.]
522nd Year, B.A. L.L.B, Symbiosis Law School, Hyderabad.
~ 15 ~
INTRODUCTION OF RIGHT TO INFORMATION:
Transparency reduced corruption, but good governance goes beyond that in achieving Openness.
Openness means involving the stakeholders in the decision-making process. Transparency is the
right to information, while openness is the right to participation. Here, in a democratic
governance it is very essential for the government to maintain transparency on the first sense, the
main instinct of the democratic government is to provide transparency in the administration and
to give opportunity to the people for inclusion in the administration53 so right to information is
not the option but, compulsory element in the Democratic society.
“Information is the basic human right and the fundamental foundation for the formation of
the Democratic institution.”
-Nelson Mandela
The right to information was not the act that directly came into existence, it came after a lot of
discussions, Amendments, and developments. In a transparent world, there is the existence of
people participating in the functions of the government. This inclusiveness is the major element
in the democratic world. If there is no transparency in the administration of the government, then
the word Democracy would be useless. With a lot of circumstantial and casual differentiations,
this Right to Information was introduced. In 2002, freedom to information was introduced but
this didn’t last for a long time54. Later this was changed eventually to Right to Information Act,
2005. This not only gave trust to the people of India but also the responsibility to fulfill their
duties as the citizens of India.
ORIGIN OF IDEA OF RIGHT TO INFORMATION:
The people of Rajasthan in 1994 have pioneered the conflict at the right to records whilst
thepoorpeasantsinthe rurallocationfirstmadeastrongdemandfortherighttoinformation.The
initiative for this battle came out of a system by way of the MazdoorKisan Shakti Sanghatan
(MKSS) for the proper livelihood. The slogans of campaigners were for the proper to facts so
one can access their basic requirements. 'Ham Jagenge, Ham Jiyenge' (the right to realize, the
53 M. M. Ansari, Impact of Right to Information on Development: A Perspective on India’s Recent Experiences,
(24/08/2016; 1.35 pm), cic.gov.in/CICIntlEvents/IC-MA-LectureAtUNESCO-15052008.pdf
54 Dr. Abhe Singh Yadav, Right to Information Act, 2005-An Analysis, 5 – 10 (4thedition 2015).
~ 16 ~
right to live) and `Hamara Paisa - HamaraHissab' (our money: our account)55. By setting
theiruniquecallforcopiesoffilesrelatedtoimprovementworksoftheirvillageinthecontext of the
wider demand for the right to facts, those rural campaigners had made the connections
betweenrecords,democracyandissuesintheirsurvivalhadbeenhonestlyclear.Later,forty-day
Dharna in Beawar in 1996 positioned forth an immediate call for a change inside the Panchayat
laws to allow citizens to reap licensed picture copies of any files in neighborhood self- Raj
authority’s workplaces56. However, unique attention turned and located on facts of expenditure
like bills, vouchers on muster rolls. Simultaneously, a demand turned into made for a
comprehensive law for the citizens' right to information in all spheres of governance. This
struggle has had a dramatic and salutary impact on the established modes of brazencorruption.
The MazdoorKisan Shakti Sanghatan of Rajasthan as a pioneer in this field has exposed the
`hyperlink' between the shortages of transparency inside the administration and corruption. The
Right to Know motion started out in Rajasthan had unfolded to other States like Madhya
Pradesh,Maharashtra,UttarPradesh,TamilNadu,and AndhraPradesh.Inreality,theeffectofthe right
to facts has long past throughout India57. The Government of India had appointed a
WorkingGroupheadedunder H.D.Shourieon2ndJanuary1997tohavealookatthe feasibility and
need to introduce a complete-fledged proper to Information Act as a way to meet the desires of
open and responsive government. The Shourie committee submitted its report on 21st May
1997, whilst inter alia contained a Freedom of Information Bill 1997. The
fileturnedintoaddedtotheawarenessoftheChiefMinister'sconference58TheChiefminister’s
conferencelaidthefoundationforthedevelopmentofthefreedomofinformationactandlater reformed
into the Right to Information Act,2005.
IS THIS NECESSARY IN DEMOCRATIC SOCIETY? :
According to Mr. Justice P.N Bhagavat, “Where a society has chosen to accept democracy as its
creedal faith, it is elementary that the citizens ought to know what their government is doing”.
Right to information is now a fundamental right under Article 19 (1) (a) of the Constitution.
But, till 2005, there was no information which is accessible to the common people. Without
55Further discussion on the motion of thanks moved by Shri Madan Lal Khurana on the 16th March, 2000 and
seconded by Dr. NitishSengupta. 56 Dr. N. V. Paranjape, Right to Information Law , 3rd edn. 2016, Hissar , Haryana, LexisNexis, p.5, 6. 57P.Chandra Kumar, RIGHT TO INFORMATION IN STRENGTHENING PARTICIPATORY DEMOCRACY,
Globalised Media Journal - Indian Edition Winter Issue / November 2009. 58 Srivastava, The Right to Information in India: Implementation and Impact, Volume 5, No. 1 Quarter IV, Afro
Asian Journal of legal Sciences, 2011.
~ 17 ~
anyinformation,expectingthepeopletoparticipateinthesocial,politicalandeconomicdebate is not
reasonable59 Information is like an index to measure the level of development of the country.
Supreme Court in many of its cases highlighted the importance of the Right to information in
the development of the democratic society. In S.P Gupta v. Union of India60expressed the view
that “In a democratic setup People have the right to know about the functioning of the
government”. And again, in PrabhuDatt v. Union of India61 held that the right to know the
information of the functioning of the government is included in the right of freedom to press in
the administration of the democratic society62. This states the positivity and supportiveness of
the judiciary in right to information to be part of the society. It shows us the importance of this
right as a part of the life of the human being. Every citizen has a right to know the procedures
and activities going on in the country.
Corruptionisthebeastthatiseatingthe trustofpeopleoverthegovernmentelectedbythem. This is not
only considered as the loophole of the administration but also treated as the major
elementofignoranceinthepeopleregardingtheadministrationanditspolicies.Thisignorance,
inotherwordslacktransparencyisknownasthemajorbacklogforthepeopletofightagainst the odds63.
Right to Information has created a huge scope and paradox for the elimination of
ignorance.Thisemergedasthemajorplatformforthedevelopmentandgrowthofthenational inclusion
in citizens of India. Participatory democracy gave hope for the citizens to express their ideas
and opinions towards the policies and mechanisms. Since they are thebeneficiaries of that
particular scheme, they will know the importance and necessities of this rather thanthe
policymakers. This inclusiveness in the administration gives them a fresh and effective idea for
accurate implementation of the theories.
In Peoples Union for civil liberties v. Union of India64, it was stated that the right to information
was further elevated to the status of a human right, necessary for making governance
transparent and accountable. Here Transparency is the basic word for the interpretation of the
Right to Information, but coming to the accountability, this comes into existence, only when
citizens feel the responsibility on themselves. This responsibility arises only
withinclusiveness.The righttoInformationwillactastheindirecttooltobringfundamentalduties
59 Harsh Mander and Abha Joshi, The Movement for Right to Information in India 60 (1993) 4 SCC 441 61 AIR 1982 SC 6 62 Supra, S.L.Geol 63 Adv. R.K.. Pradeep, The Right To Information – New Law And Challenges, Butter Worth Publications, pp 23 64 2003(001)SCW 2353 SC
~ 18 ~
intoenforcement65.
RTI AS THE TOOL FOR JUSTICE:
Despite multiple issues were raised in the implementation of the principles of RTI, there are a
lot of instances, where there is a proof of justice being delivered to the citizens who approached
through RTI66. Some of them are:
1. In 2008, RTI activists YogacharyaAnandji and Simpreet Singh filed applications that
were instrumental in bringing to light links between politicians and military officials.
The 31-story Adarsh Building in Mumbai, which had permission for only six floors,
was originally meant to house war veterans and widows. But the flats went to
politicians,bureaucrats,andtheirrelativesinstead.Thescamledtothe resignationofAshok
Chavan, former Chief Minister ofMaharashtra.
2. The same year, a Punjab-based NGO filed an application that led to the revelation that
bureaucrats heading local branches of the Indian Red Cross Society were using funds
intended for victims of the Kargil war and natural disasters to buy cars, ACsand
payhotelbillsamongothers.Theofficialsresponsiblewerechargedwithfraudandthe funds
transferred to thePMO.
IMPORTANCE OF RTI IN THE BANKING AND FINANCE SECTOR:
There was always an exception given by the RBI and the financial sector entities
statingthatthedisclosureofinformationofthebankswouldbeagainstthesafetyandsecurity of the
national interest under section 8 of the Right to information act,2005.
Section 8(1)(d) of the RTI Act exempts from disclosure- "information including commercial
confidence, trade secrets or intellectual property, the disclosure of which would harm the
competitive position of a third party unless the competent authority is satisfied that larger public
interest warrants the disclosure of such information;"
This is only applicable when there is any information that is against the social interest. The
establishment or the applicability of the Right to Information Act, 2005 is for bringing
transparency in administration. It has to be open to the public, and they should know the
mechanisms and the loopholes in administration. When people are not aware of the negative
65 NationalStockExchangeofIndiaLimitedv.CIC,WP(C)No.4748of2010decidedon15April2015byHigh Court 66 Dr. RudraraoDeshmukh Urban Co-operative Bank Ltd., Vindya Region v State Information Commissioner
AIR 2011 Bom 96
~ 19 ~
orthelossesofbanksandthefinancialsectors,thenthatwouldbealosson apartofachieving the motto
of Right toInformation67.
The Central Information Commission (CIC), even as allowing an enchantment, directed the
PublicInformationOfficer(PIO)ofReserveBankofIndia(RBI)toofferentirefactsregarding running
of Dindayal NegriSahakari Bank Ltd as well as inspection reviews, report noting of RBI to the
appellant the Right to Information (RTI)Act68.
While giving the judgment on 30 December 2011, Shailesh Gandhi, the then Central
Information Commissioner stated, "If there are irregularities within the functioning of the
Bank,citizenssurelyhavearighttorecognizeapproximatelythesame.Alargerpublicinterest
mightbeservedwiththeaidofdisclosingthisinformation-underSection8(2)oftheRTIAct. The
Nation's interest would be higher served through transparency and publicity of unlawful acts.69"
Here the provisions of the Sections within the RTI act are contradicting with each other, but it
doesn’t mean that the national interest principle will act as the barrier for providing the Right to
Information to the general public in regards to banking and financial sectors70. A large section
of the agricultural sector and illiterate people are not aware of this right to information. They
just believe in the information given by the local officers of the bank, which cannot always be
believed as authentic information.
The Supremacy given to the Right to information act on all the other contemporary acts is
stated in section 22 of the Right to information act, 2005. In one of the controversies regarding
the application of RTI over the official Secrets Act, 1923 it was stated that,
"Section22oftheRTIActgivessupremacytothesaidActandstipulatesthattheprovisionsof the RTI
Act will override, notwithstanding anything to the contrary contained in the Official Secrets Act
or any other enactment for the time being in force. This non-obstante clause has
tobegivenfulleffectto,incompliancewiththelegislativeintent.Whereverthereisaconflict between
the provisions of the RTI Act and another enactment already in force on the date
whentheRTIActwasenacted,theprovisionsoftheRTIActwillprevail.71"
This describes the importance given to the Right To Information Act,2005 on other acts or the
enactments which were prevailing during that time. Even though there are banking regulations
that are against the principles of RTI and are not permitted to disclose the information, this was
67VaricharyaN.K.,CommentaryontheRighttoInformationAct,DeccanLawHouse,Hyderabad,2007
68SatheS.P.,“RighttoInformation”,9thed.,LexisNexisBetterwords,NewDelhi,2019. 69Ms. Kalpana Vs. PIO, Rohini District Courts, Delhi 70 WareS.L,“RighttoInformationandGoodGovernance”,DeepPublicationsPrivateLimited,NewDelhi,2008 71 DasB.,“HandbookontheRighttoInformationAct,2005”,UniversalPubPvt.Ltd.,Delhi,2008.
~ 20 ~
not permitted and the provisions of RTI were successfully uplifted. Mr. Gandhi stated, a good
way to claim the exemption under Section 8(1)(d) of the RTI Act, the PIO have to establish that
disclosure of the data sought (which may additionally include business or trade secrets and
techniques, intellectual assets or similar facts) would bring about harming the aggressive role of
a 3rd party. This is the clear distinction made in the case by Mr. Gandhi. In this case the
information was not provided to the appellant, because it is in the purview of the fiduciary
relationship between, bank and RBI. Banks trusted the RBI authorities and gave them the
information. If they are providing public with the information, that would be the break of trust
ora fiduciaryrelationship72.
PUBLIC AND PRIVATE AUTHORITIES (SCOPE AND AMBIT):
As per Section 2 (h) of the Right to Information Act, 2005,
“PublicAuthority”meansanyauthorityorbodyorinstitutionofself-governmentestablished-
A) By or under theConstitution
B) By any other law made byparliament
By any other law made by the statelegislature
C) By notification issued or order made by the appropriate Government, and includesany-
1. Body Owned, controlled or substantiallyfinanced,
2. Or Non-government Organization substantiallyfinanced,
Directly or indirectly by funds provided by the appropriate governments.
Thisis themostdebatedandimportanttopicundertheRTIact.Sincethiswouldactas
themostimportantfactorforexpandingthescopeandaltitudeoftheRTIact.According to this, the act
is divided into 2 parts mainly, theyare
The Act thus defines public authorities in two parts:
-Thefirstpartofthedefinition(clauses2(h)(a)to(d))clearlydelineatebodiescreatedby the
Constitution of India (Union and state executives, Election Commission, etc.), by-laws made by
Parliament and state legislatures (Central and state universities, regulators such as RBI, SEBI,
TRAI etc.), and by government orders or notifications (Planning Commission) as
publicauthorities73.
-The second part broadens the scope of the definition of a public authority to include anybody
72Nagraj M. N., “Commentary on Democracy “, New Century Publications, New Delhi, 2009. 73Wadia A.K., op. cit.
~ 21 ~
owned, controlled or substantially financed, and any non-governmentalbody
substantiallyfinancedbytheappropriategovernment.Thissecondpartofthedefinition
hasbeenthesubjectofmuchcontroversylargelybecauseitleavesthequestionofwhat constitutes (a)
ownership, (b) control or/and (c) substantial financing open to interpretation. Unsurprisingly,
therefore, most of the case law related to the question of public authorities is linked to this
aspect of thedefinition74.
This clearly describes that banks are in the ambit of RTI. A common man has all the right to
know,whatishappeninginthebankwhereheissavinghismoney.Thecitizeninademocratic nation is
free to know, the ambit and administration of the banks and the financialinstitutions, which are
governing his financialpowers.
In M.P. Varghese v. Mahatma Gandhi University 75the Hon’ble Kerala High Court at the same
time as elaborating the means of public authority in the RTI Act 2005 states that the
one'scorporationsthatarereceivingthemonetaryusefulresourcefromtheStateareunderneath the
ambit of the general public authority. The phrase State is defined underneath Article 12 of the
Constitution when it comes to the enforcement of fundamental rights via courts, while the RTI
Act is supposed to accomplishing the item of supplying an effective framework for effectuating
the facts acknowledged beneath Article 19 of Constitution ofIndia.
INTERPRETATIONS OF THE PUBLIC AND PRIVATE AUTHORITIES:
Form v. Function, While Section 2(h) seems to emphasize the form of an entity (how it changed
into constituted, who owns, controls and price range it, has vital to determining its repute as
Public Authorities, a few choices of the CIC76and the Delhi High Court 77have used case-law to
nation that an entity’s sports also are critical. This is an interesting broadening of the definition
because the definition within the Act does no longer explicitly nation that the
natureofthefunctionsachievedbywayofaframeoughttobeacriterionindeterminingwhether or not or
now not it may be described as a publicauthority.
Broad v. Narrow interpretation, there have additionally been controversies over
whetherthesecondoneapartofthedefinitionsimplyqualifythefirstapartofthedefinition,
74Wadia A.K , “Global Sourcebook on Right to Information”, 20th edn., Kanishka Publishers and Distributors,
New Delhi, 2016. 75 AIR 2007 Ker 230 76Goel S. L., op. cit. 77 Mishra R.l, “Right to Information and Rural Development in India”, New Century Publications, New Delhi,
2009.
~ 22 ~
orwhetherthetwopartsareunbiasedofeverydifferent.Adoptingtheprimaryapproachwould imply
that the assessments of ownership, manage and large financing would be limited best to bodies
covered in clauses (a) to (d) of Section 2(h). The 2d technique, alternatively, would result in the
inclusion of entities not blanketed within clauses (a) to(d).
The 2nd technique has been upheld by High Courts as the perfect interpretation of the
definition. The Delhi High Court has stated that the second one a part of the definition
is“awesomeinthe alternative,andnownotcumulative”.78TheDelhiHighCourthasabsolutelysaid that
the goal of the 2nd part of the definition is to convey our bodies that won't have been
established with the aid of or below a notification, however, are nonetheless notably financed,
ownedormanagedbyusingthegovernment. TheDelhiHighCourthasadditionallyclarified that
entities falling within the first a part of the definition (from clauses (a) to (d) do no longer have
to additionally be drastically financed, or owned and controlled through thegovernment.79
The support of judiciary in upliftment of the RTI is the most notable thing, the effort made
through the delivery of the previous judgments for betterment of the society, these precedents
acted as the basements for the evolution of RTI. This proved that the judiciary can act as the
pioneer in giving birth to the acts of publicimportance.
WhileRighttoInformationActstatesthatsimplestthoseprivateagencieswhichhave“sizeable”
investmentfromthegovernmentcomeunderthepurviewoftheRTIAct,ininstanceswherein those
entities are in partnership with the government, it's miles feasible to get vital statistics
outofthem.Withmunicipalcompanies,nation,andvitalgovernmentsincreasinglymoreopting for
Public-Private Partnerships (PPP), transparency could take a beating, as private businesses have
been given a possibility to duck under the Right to Information Act. The Act says that best if
personal groups are “considerably” funded then they come below the purviewof public domain.
But the question about the authority which is going to make decisions regarding“great funding”
remains unanswered. Benefitting from this loophole, the personal our bodies take cover and
refuse to offer facts to the man or woman orgroup.
PRACTICAL EXAMPLES OF RTI EXPANSION:
A sterling case is that of the Ideal Road Builders (IRB), a non-public organization that collects
toll charges from maximum of the highways in Maharashtra, together with the Pune- Mumbai
78 Arorap.k,“TheRighttoInformationAct”,ProfessionalPublishers,NewDelhi,2007. 79 Ibid.
~ 23 ~
Expressway80. It is impossible you acquire statistics concerning the data of toll collection.
However, in such cases, for the reason that their partnership is with a central authorityframe,a
citizencangetrightofentrytosuchrecordsfromtheauthoritiescompany. Strangely, the Maharashtra
State Road Development Corporation (MSRDC), the authorities
bodyinthissituationwhichisremittedtodisplaythetollseriesitselfhasnotmonitoredthesales of the
IRB regardless of appointing an unbiased engineering representative, STUP Consultants Pvt.
Ltd. However, residents demanded this fact beneath RTI Act; and thereby the MSRDC changed
into compelled to request the IRB to ship the facts of toll series, year- smart. One of the officers
confessed that they had simplest currently asked the IRB to supply records because of the stress
of RTI queries which were previously untouched.
Similarly, Metros which can be being “compelled” upon residents in several towns and towns
across the United States of America, without the right planning, are in most cases constructed
by means of the Delhi Metro Rail Corporation (DMRC). Here too, the DMRC is a non-public
frame and any question underneath RTI is denied. In the case of the Pune Metro, the DMRC has
disastrously deliberated the metro and submitted a shoddy and superficial Detailed Project
Report (DPR)81. Despite the undertaking record no longer satisfying the Pune Municipal
Corporation’s (PMC) terms of reference and it now not abiding by the valuable government
guidelinesatthesametimeasmakingtheDPR,thePMC’strendyframeandtheadministration has
blindly surpassed the task. It now lies with the national government, which did not allot finance
for it inside the modern-day finances. The scandal of this Rs10, 000-abnormal crores’
infrastructure this is going to feature to the chaos of the already congested roads in Pune and
emergeasaheavytaxburdenforcitizensfordecades,cametomildduetotheRTIinvokedon the PMC.
Thus, in non-public-public partnerships, you could get entry to public documents by putting a
question to the ‘publicaccomplice’.
The key technique and philosophy of the RTI Act appear to be that since the State acts on
behalf of the residents, anyplace the State gives cash, the citizen has a proper to understand
(righttofacts)82.In myopinion,ifthecashgivenforthegoingforwalkschargesisovereither 20% of the
strolling charges of Rs. 1 Crore, the frame must be taken into consideration as receiving ‘great
finance’ and is included within the definition of a ‘publicauthority’.
80 Supra 26 81 Goulash 200., op. cit. 82 People’s Union for Civil Liberties v. Union of India, (2004) 2 SCC 476 : AIR 2004 SC 1442.
~ 24 ~
LIMITATIONS:
1. The unavailability of any preceding has a look at which has been conducted to find out
the position of RTI and its effective functioning in the bankingsector.
2. As on this studies availability of published records from State bank of India isn't to be
had. All facts have been taken from the internet site of widely known authors of famed
newspapers83.
3. Relevancy of records has no longer be supported with the aid of any legal published
data. Insufficient availability of cutting-edge information associated with RTI
applications functions inSBI.
ROLE OF RTI IN MITIGATING CORRUPTION AND ILLEGALITY:
Corruptionisneithertheinbuilttermofthesocietynorourcultureandtradition.Thisisthe concept that
emerged as a result of the development of economic interest. This economical interest is part of
the globalization process. As a part of the development, people should know
theinformationregardingit84.Therearefourmajorreasonsfortheprevalenceofcorruptionin
ourcountry.
1. Lack oftransparency
2. Lack ofAccountability
3. Lack of institutionalmachinery
4. Lack ofinformation
AllthesereasonsaredirectlyorindirectlyrelatedtotheRighttoInformation.Givingpublic access to
the functioning of the government will eliminate most of the reasons behind the prevalence of
corruption. Accountability arises only when there is involvement of the people. If there is no
flow of information then, there is no scope of the passage of the information in thesociety.
WiththeCorruptionbeingconsideredasoneofthemostimportantObstacleswithinthe efficient
shipping of improvement sources to the terrible growing nations. Thesatisfactory
oflifestylesofhumanbeingshasadditionallybeenadverselytormentedbycorruption.The time has
come now in which the obligation of tackling this problem, wishes to be takenby using the
83 V.K DAS, The Right to Information Act 2005, at p. 25 84 T Lunar, "U.S. Foreign Aid to East and South Asia," ed. Congressional Reward Service (2013).
~ 25 ~
people themselves85. Civil society institutions have a key position to play in producing the
much-needed attention, determination, and force, to expose the maladies of corruption and great
music the functioning of public organizations. To snap out of the prevailingsectionandco-
ordinateourethical,tomakeaverylastthrusttointerruptrampant corruption wherein Our people
have been held captive for hundreds of years. Right to Information Act performed that and
given the humans strength to assignment their authorities. This isn't always a small aspect.
Therefore, 62% decline in corruption in Bihar from 2005 to 2008 where Bihar is most corrupted
State. It prevents corrupt public officials from misusing these records to enhance their very own
hobby. Thus, RTI has tremendous electricity to make government accountability and
transparency. We havethepower and obligation of bringing Good Governance by the usage of
and making consciousness about the use of RTI86.
The mainthrustofRTIlawtoexchangethesubcultureofsecrecy,red-tapism,andaloofnessthat
hasplaguedIndia‘smonolithicandopaqueforms.Thiseffortturnedintofirstmadethrough MKSS
(MazdoorKisanShakti Sangathan) to address corruption at grass root stage. TheRTI Actisfull-
sizeemergingasaneffectiveanti-corruptiontool.RTIlegalguidelinesor
sunshinelawsasthey'recommonlyknownas,supplycitizen’scriminalrightstogetentry to
information held by way of their governments, bringing tons needed transparency or opaque
functioning of governments87. Over 80 international locations enacted this law. India‘s RTI Act
is internationally identified as a strong and effective law. Over the last 6
years,RTIhasbeenusedextensivelyviaregularIndianresidentstocallforagreatrangeof facts from
theirauthorities.
In the ultimate 3 years, there had been 3 Million RTI request had been filed and being used to
redress character grievances. India‘s terrible and disadvantaged, the easy act of filing an RTI
software empowers and often ends intangible results.
Ex: 1.Ponds scam--- rural Orissa-- village are underneath the authorities National Wage
Employment Scheme. He acquired records that Ponds have by no means built but money
became allocated and spent.2. Slum-dwellers in Delhi there were grouped into four agencies do
not observe.
Thefirstorganizationsubmittedtheirsoftwareanddonotobserve.The2dgroupconnected an advice
85 CR Kumar, "Corruption and Human Rights: Promoting Transparency in Governance and the Fundamental
Duties to Corruption," Columbia Journal of Asian Law 53 (2008-2009).
86Vital, Corruption of India: The Road words to National privatization, pp 41-49 87 M. K Pandey, Right to Information Awareness and Development, ed : 4, pp 415-456
~ 26 ~
letter from NGOs to their utility. The third group paid the bribe. The group who paid bribe
changed into a success and fourth institution whose RTI request was processed very rapid. Here
to mention ―Access to information seems to empower the bad to the factor where they obtain
nearly the same treatment as middle-elegance –people at the hands of civil servants. This is that
payment of a bribe can‘t do‖. It is a robust weapon to combat corruption arbitrariness and
misuse of electricity. It is a vital device for top governance and this law has been used to tackle
a high profile ofcorruption.
SUGGESTIONS:
Some of the tips concerning the position of RTI in banking zone are cited below:
1. This act needs more rationalization for implementation of unique provisions.As it
requires step by step action elements for every particularprovision.
2. AsIndiaisproperlytechnophileandhavingthe truepowerofknowledgeablehumanbeings
however until now there's a massive requirement of Mass consciousness marketing
campaign at Central and state levels. The important goal in the back of this focus
application is to boom public hobby and know-how approximately their right to
information from any public authority, to encourage citizen involvement; and
additionally to increase transparency in the authority'sgadget.
3. Tocompulsionallpublicauthoritiesandeducationestablishmentsfortheincorporation
andimplementationoftrainingmodulesprimarilybasedonRTIinalltrainingpackages related
to publicawareness88.
4. Todevelopaconsensusonanotunusualsetofregulationsandnormsthatmightenable and
inspire the public to observe for facts from residing in a single state from every other
kingdom, in place of going first of all to examine and understand the policies of every
country and capable authorityseparately.
CONCLUSION:
InConclusion,itisclearlyvisiblethatRTIisthemajortoolforsolvingalotofproblemsthat are
prevailing in the democratic society. All the policies and functioning of the government is for
the development of the people. What is the use of people-centric policies when people
88 R Jenkins and AM Goetz, "Accounts and Accountability: Implications of the Right-to-Information Movement in
India," Third Quarterly 20, no. 3 (1999).
~ 27 ~
arenotawareofthosepolicies?WhatistheuseofKisanYojanasandPradhanMantriyojanas, if people
are not aware of the fruits of those schemes? What is Democracy when people are not given
right to know the functions of the government? What is the use of emergency when there is no
applicability? The answer to all these questions was provided with the introduction of the Right
to Information Act. This is not only considered as the powerful element of the society but also
the trust is given by the government to the people, a tool of true Democracy, a tool of
applicability and a measure of upliftment. It is not only an added advantage but also an element
to promote inclusiveness89. All these are the fruits of Right to Information.
Withregardtotheprivatesector,it'sfaressentialtoholdstabilityamongfactsandalternate
secrets.Tomakeiteasierforeachthefactseekersandtheprivateentities,theexceptionsneed to be
narrowed down so that there may be clarity90. Many times, private our bodies resist providing
data due to the fact it is able to screen some wrongdoing on their component, in an effort to
destroy their popularity, damage their commercial enterprise, and provide an opportunity to its
competition a possibility to overhaul them. One of the criticisms that are leveled against the
extension of the regulation to the non-public quarter is that it’ll increase their running price as
they should create a separate database for amassing and storing the records.
The RTI has advanced as a tool for maintaining transparency within the basic functioning and
governance of the state. While the right to seek records from public information can’t be
wondered, the right to are searching for statistics from personal bodies has been a tough
difficultytothevaguenessofthelaw.Specificrulesneedtobemadealmostaboutthesoftware of RTI to
personal entities. The law should additionally specify which sort of statistics may be demanded
from a personal entity. With rapid globalization and deregulation, non-
publicbodiesalsoplaypublicfeatures.PrivateBanks,personaltelecomcompanies,and
healthcarequartercanbegivenasexamplesofpublicentitieswhoplayapublicfunctioninthe society.
Bringing such non-public entities underneath the regulation is essential to keep a positive level
oftransparency. India is proud to adopt the concept of Right to information, this acted as the
cornerstone for the success of democracy in India. This emerged as the part and parcel of one of
the largest democracy in the world.
89 P Vernon, "Rebuilding Lives," Frontline 2005. 90 DMoyo,AidRecognition:WhyAidIsnotWorkingandThereIsaBetterWayforAfrica(London:publication of the2009).
~ 28 ~
CORPORATE GOVERNANCE AND TRANSPARENCY
-Kunwar Deep Singh, Anandita Singh91
Abstract
Corporate governance has developed outstandingly in the most recent decade. Various nations
have issued corporate administration codes which emblematize that great corporate governance
without a doubt contribute towards multiplied transparency and disclosure. With the
internationalization of cross-frontier portfolios, the method of reasoning is that poor corporate
governance is seen as hazardous and shareholders see great corporate governance (GCG) as an
indication of strength in an enterprise. Corporate governance runs simultaneously with
expanded transparency and disclosure. It is valuable to allude to the OECD (1998a) Principles,
which recognize the key components of good corporate administration. Transparency and
disclosure are the cardinal components of corporate governance structure as they give the base
to educated basic leadership by financial specialists and investors. Nonetheless, the new idea of
transparency puts greater duty on the organization to let reality accessible yet, in addition, let
the financial specialists and investors know reality. Corporate governance in the present
situation has turned out to be progressively dynamic because of expanded examination,
consistency of thorough standards of governance and staying aware of the interest of the
stakeholder and investors. Because of these actualities, new wrongdoings in the organizations,
known as the white-collar crimes, have begun taking off high and regularly past the cutoff-points
and limits. White-collar crimes are peaceful wrongdoings committed by businessmen through
misleading exercises who can get to a large amount of money with the end goal of monetary
benefit. Corporate affairs provide a protocol for the working of corporation under Companies
Act, 2013, under which white-collar and corporate crimes are dealt with. The special provisions
managing white-collar crimes and the arrangement of the Indian Penal Code ought to be wisely
comprehended to control the issue regarding the same.
91 3rd Year, BBA.LLB. (hons), Corporate Law, School of Law, UPES
~ 29 ~
Keywords: Corporate governance, transparency, disclosure, white-collar crimes.
~ 30 ~
INTRODUCTION
Corporate governance has been seen as a fundamental standard of corporate principles aimed at
reducing unethical corporate practices while maintaining a fair business environment. Corporate
governance is the framework by which organizations are governed and superintended92. The
board of Directors is in charge of the administration of their organizations. Corporate governance
has been seen at the front line of setting up measures of corporate ethics aimed at reducing
corrupt corporate practices while protecting a reasonable business condition.
Creditors and financial specialists see good corporate governance (GCG) as an indication of
strength in a corporation rationale are poor corporate governance is seen as hazardous. The
strength of a corporation’s governance systems and the quality of a company's governance
frameworks and the nature of its open revelations are winding up progressively imperative since
stakeholders are giving careful consideration to what is accounted for and how.93 Subsequently,
stakeholders are requesting superior financial revealing and corporate transparency as well as
more GCG practices through their administration so as to cut down their unreliability towards
investment choices. Particularly stakeholders commonly acknowledged, that GCG accomplishes
superior administration and increasingly assets allocation and improves better corporate
execution.
CORPORATE GOVERNANCE FRAMEWORK
Corporate governance is about the exercise of power over corporate elements. The board is the
significantdriving force of governance in a company and primarily determines whether a
company’s administration is sound. The essential goal of GCG is to contribute to enhancing
corporate performance94. In any foundation, GCG starts with proprietors and permeates down
through the board and distinctive administration levels to the representatives. Regardless of what
the proprietorship is, there is a requirement for transparency and responsibility in its relationship
with other stakeholders. In this context, all rules that define the governance obligations,
impetuses and sanctions facing the board, management and employees must be very much
enunciated. Board members must be considered responsible and liable for their decisions and
actions that have sway on the interests of different stakeholders. The basic principles of
92 Disclosures on Corporate Governance, Association of Chartered Certified Accountants (ACCA) Reporting
Trilogy – Research on Reporting Disclosures: Part 2 (2009). 93Tricker, B. Corporate Governance Principles, Policies and Practices- Oxford University Press, (2009). 94 33/3-4,Beeks W. and Brown, P. Do better-governed Australian firms make more informative disclosures? Journal
of Business Finance and Accounting, 422 – 450 (2006).
~ 31 ~
corporate governance are threefold: The significance of transparency has been widely perceived
by both academics and market controllers- Transparency, resulting in numerous rules and
directions being introduced over time to guarantee timely and reliable disclosure of financial
information, creating standards to which companies must follow – Accountability, The
company recognizes the right of all shareholders under the law and cooperate with them for their
own growth and financial stability- Responsibility.95
Corporate governance in present worldwide condition has turned out to be more complex and
dynamic in recent years due to increased regulatory pre-requisites and more noteworthy scrutiny,
creating increased obligations for top managerial staff to comply with expanded governance
standards and furthermore coping with increasing interest for T&D. Significant consideration has
been centered on corporate T&D since the Asian financial emergency. It has generally concurred
that the main failure leading to the financial emergency stemmed directly from the absence of
financial exposure and lack of governance practices such as the supervision and responsibility of
directors.96 Accordingly, there has additionally been an expansion in the number and
complication of accounting principles and other regulatory necessities for exposure around the
world to secure the investing public.
Hence, corporations must provide satisfactory, exact, and timely data to investors and the general
public regarding financial performance, liabilities, possession, and corporate governance affairs.
This is critical if investors are to be able to make informed decisions on the risks and rewards of
any ventures97. It has been seen that companies with better governance also uncover more data.
Companies which are frail in governance lack of financial disclosure and transparency.98
Corporate governance concerns the control of an enterprise, vested in the top managerial staff
who play a critical coordinating role to balance the interests of various stakeholders (both
internal and external) and accomplish economic benefits. In general, corporate governance
features the vital principles of oversight and control over the executive administration's
performance and key directions; and their responsibility to the investors. A code of morals,
which illuminates and stipulates adherence to some of the progressively abstract ideals of trust
95 BDO Corporate Governance Review, 7th Annual Review on HSCI Companies (2012) 96G.N.Bajpai, The Essential Book of Good Corporate Governance (1st ed.,2016). 97. Guidance on Good Practices in Corporate Governance Disclosure. The UNCTAD (United Nations Conference on
Trade and Development) (2006) 98 5/6, Bhasin, M.L. Dharma, Corporate Governance and Transparency: An Overview of the Asian Markets,
International Journal of Business and Management,56 - 73,(2010)
~ 32 ~
and responsibility, is fundamental for GCG.99 The board and management should try to uphold
and sustain responsibility, transparency, reasonableness, and integrity in all aspects of the
company tasks.
Corporate transparency portrays the extent to which a corporation's actions are noticeable by
outsiders. Transparency is one of the key strides to corporate governance and guarantees that
management will not engage in inappropriate or unlawful conduct since their conduct can be and
will be investigated. To accomplish transparency, a company should adopt accurate accounting
strategies, make full and brief disclosure of company data and also make divulgence of
irreconcilable situations of the directors or controlling investors, etc. A key component of ‘good’
governance is ‘transparency’, which uses an arrangement of balanced governance among the
executives, management, auditors and investor. As per the standards of corporate governance of
the Sarbanes Act,100 organizations should elucidate and make publicly known the roles and
duties of board and management to provide stakeholders with a dimension of responsibility.
Accountability ensures that managers utilize the company’s assets in the most proficient and
desirable way as well as for the most suitable objective without inappropriate regard for
individual interests. Cadbury report101 stresses that making the responsibility work is the duty of
both the board and management. Management is responsible to the board, which in turn is
responsible to shareholders. They should also implement procedures to autonomously check and
defend the integrity of the company's financial reporting and provide the quality of information
to all stakeholders of the organization. The revelation of material issues concerning the
organization should be timely adjusted and balanced to ensure that all investors have access to
clear, genuine data.102 With everything taken into account, T&D improves the control and
behavior that helps in effective responsibility for performance results.103 An entity is more likely
to accomplish better outcomes when corporate governance practices of T&D are given
importance inside the association.104 On the other hand, firms with poor corporate governance
methodologies are bound to fail to meet expectations in the long haul.
99 Bushman, R., Piotroski, J., and Smith, A. What determines corporate transparency? Journal of Accounting
Research, 42 (2), 207 – 252 (2004). 100Sarbanes-Oxley Act, 2002. 101 Report of the Committee on the Financial Aspects of Corporate Governance (the Cadbury Report). 102 Bennis, W., Goleman, D., and O’Toole, J. Transparency: How leaders create a culture of candor, San Francisco,
Jossey-Bass (2008). 103 Corporate Practices and Conduct, Bosch Committee, 3rd ed. (1995). 104Sanjay Anand, Essentials of Corporate Governance, 77 (2012).
~ 33 ~
OECD PRINCIPLES –
The OECD Principles of Corporate Governance were advocated by OECD Ministers in 1999 and
have since turned into a global yardstick for policy formulators, financial specialists,
organizations and different stakeholders around the world. They have propelled the corporate
administration's motivation and gave explicit direction to authoritative and administrative
activities in both OECD and non-OECD nations. The Financial Stability Forum has assigned the
Principles as one of the 12 key measures for sound financial frameworks. The Principles likewise
give the premise to a broad program of participation among OECD and non-OECD nations and
support the corporate administration segment of World Bank/IMF Reports on the Observance of
Standards and Codes (ROSC). While an assortment of elements influences the administration
and basic leadership procedures of firms, and are essential to their long-haul achievement, the
Principles center on administration issues that outcome from the severance of possession and
control105.
Corporate governance is influenced by the connections among members in the administration
framework. Controlling investors, which might be peoples, family members, coalition
partnership, or different firms acting through a holding firm or cross-shareholdings, can
fundamentally impact corporate conduct. As proprietors of equity, institutional shareholders are
progressively requesting a voice in corporate governance in a few markets. Individual investors
normally don’t try to practice administration rights yet might be very worried about acquiring
reasonable treatment from controlling investors and boards. The job of each of these members
and their interactions differ broadly among OECD nations and among non-OECD nations too.
These connections are subject, partially, to law and direction and to some extent, to willingly
adaptation and, above all, to market forces.
The following Principles of Corporate Governancewere given by OECD:106
1. Ensuring the Basis for an Effective Corporate Governance Framework:
1.1 The corporate governance framework should be developed with a view to its
impact on overall economic performance, market integrity and the incentives it
105 Organization for Economic Co-operation and Development. Corporate Governance: Improving Competitiveness
and Access to Capital in an Era of Global Markets. Report to OECD by the Business Sector Advisory Group on
Corporate Governance (1998) 106Organisation for Economic Cooperation and Development (OECD), OECD Guidelines for Multinational
Enterprises, 27 June 2000, https://www.refworld.org/docid/425bd34c4.html
~ 34 ~
creates for market participants and the promotion of transparent and efficient
markets.
1.2 The legal and regulatory requirements that affect corporate governance practices
in a jurisdiction should be consistent with the rule of law, transparent and
enforceable.
1.3 The division of responsibilities among different authorities in a jurisdiction should
be clearly articulated and ensure that the public interest is served.
1.4 Supervisory, regulatory and enforcement authorities should have the authority,
integrity, and resources to fulfill their duties in a professional and objective
manner. Moreover, their rulings should be timely, transparent and fully explained.
PILLARS OF CORPORATE GOVERNANCE-
Corporate governance stands on four pillars, in particular, disclosures, related party transactions,
accounting, and book-keeping, reporting norms and boardroom practices. Generally, pundits in
the corporate governance area have considered it to be a three-legged stool, in particular,
disclosures, accounting and bookkeeping reporting standards, and boardroom practices.107
However, every corporate governance failure where financial wrongdoings are involved has had
something to do with the RPT’s. Thus, to club, the RPT’s with disclosures are leaving the
regions of wealth management and wealth sharing inadequately observed and a window open for
seeping out resources. The strength of all the pillars can make the corporate edifice safe and
sound, gave these pillars functions in tandem and provide strength to each other. Collectively,
the strength of the four pillars of Corporate Governance ought to be more prominent than the
entirety of the strength of individual pillars.
1) Management inclusive of the chief compliance officer
2) Auditors- Internal and Statutory.
3) Board sub-committees, such as:
a. Audit committee
b. Nomination and remuneration committee
c. Risk management committee
d. Stakeholders’ relationship committee
e. Board of directors.
107 9/1, Bushman, R. and Smith, A. Transparency, Financial Accounting Information, and Corporate Governance,
FRBNY Economic Policy Review, 65 – 87(2003).
~ 35 ~
TRANSPARENCY AND RISK MANAGEMENT–
Transparency and well-built corporate governance are required in both national and worldwide
transactions and at all periods of investment. With the transit of the US Sarbanes Oxley Act of
2002, international organizations must choose the option to push for good, transparent
information accessibility. Quick transparent information is getting to be fundamental to the
foundation of a “pipeline” of vulnerability and risk administration data. Risk administrators need
predictable, available information on108 present and prospective corporate exposures, the expense
of overseeing risks now and before. This sort of data gives risk experts the apparatuses to cost
fluctuating risk management options. There has just been much discourse about improving
governance through the use of better interior financial authority. Risk administrators could
possibly lock onto this as they desire to get more engaged in the organization risk administrator
and the information expected to help that framework.
Energized by proximate inspection of corporate governance risk and the drive to strengthen
investor esteem, information transparency has turned out to be a great instrument against risk
vulnerability.109 The steps towards significant financial transparency, superior governance, and
improved investor esteem can be accomplished. There is additionally an expanding request on
better governance since institutional shareholders accumulate greater and increasingly focused
share segments. Since shareholders’ choices increasingly more rely upon administration metrics,
administration of given firms face constraint to additionally redesign their corporate governance
guidelines and acquire worldwide prescribed procedures of quality governance. Suitably,
organizations should watch out for giving an account of corporate administration in light of the
fact that GCG must be noticeable at first to be a powerful effective driver so as to draw funding
capital. Otherwise, capital markets cannot work productively.
Transparency lies at the crossing point between the people in general’s entitlement to know and
the organization’s right to privacy. People in general’s entitlement to know implicit the investor's
scrutiny for getting organization data about administration and procedure. The shareholders have
a lawful claim to know tremendous aggregate of data about the firm’s activities and expectations.
Then again, the organization’s right to privacy means the firm’s entitlement to control the
accumulation, use and revelation of all data and the executive techniques in connection to the
108Fombrum, C., Gardberg, N. and Barn, M. Opportunity platforms and safety nets: Corporate citizenship and
reputational risk, Business and Society Review, 85-106 (2000). 109Fombrum, C. and Shanley, M. What’s in the Name? Reputation building and corporate strategy, Academy of
Management Review, 233-258 (1990).
~ 36 ~
enterprise. Mistiness, the inverse of transparency, is characterized as the condition of being
difficult to comprehend and not understandable or communicative.110 At the point when data is
not coherent, it is not believed. When data is hidden, it is normal to accept there is genuinely
something to conceal.
TRANSPARENCY IN FINANCIAL REPORTING-
Financial divulging is an elemental data part for investors in their basic decision making. Real
hazard in corporate financial reporting is that financial reports are not reasonably introduced
because of accidental or deliberate misleading. The board may neglect to give certain data to
numerous different clients of fiscal reports, intentionally deceptive them about the company's
activities. Without the required data, it is difficult to completely comprehend a company's money
related condition. 111Transparency in budgetary detailing empowers investors, creditors, and
market members to assess the financial state of an institution. Furthermore, helping financial
specialists settle on better choices, transparency builds trust in the reasonableness of the business
sectors. Consequently, controllers should seek to guarantee that business sectors are reasonable,
effective and transparent and financial specialists are given reasonable access to market, cost or
corporate data.
An intricate and mystifying budgetary report gives no thought regarding the certifiable dangers
included and the genuine fundamentals of the organization.112 Organizations with enigmatic
financials and convoluted business structures are more dangerous and less profitable
investments. There are a few organizations exploiting accounting dictum in various ways that
impede transparency. This may, for instance, darken the organization's dimension of debts. On
the off chance that an organization conceals its obligation, investors can't evaluate their
vulnerability to bankruptcy plausibility. In addition, transparency is imperative to corporate
administration since it empowers the board of governors to assess the executives' viability and to
take early remedial activities, when important, to address disintegration in the financial state of
organizations. Along these lines, it is that every public organization gives a reasonable, thorough
and solid depiction of their financial condition and execution.113 On the assumption that the data
110 International Standards of Accounting and Reporting Guidance on Good Practices in Corporate Governance
Disclosure 111 Hong Kong Stock Exchange Listing, Disclosure of Financial Information Appendix 16, (2012) 112 3 Patel, S., Balic, A. and Bwakira, L. Measuring transparency and disclosure at firm-level in emerging markets,
Emerging Markets Review, 325 - 327(2002). 1131/8, Stiglbauer, M. Transparency and disclosure on corporate governance as a key factor of companies’ success: a
simultaneous equations analysis of Germany, Section 3. General Issues in Management, Problems and Perspectives
~ 37 ~
in financial reports is transparent, investors and different clients of the data are less likely to be
shocked by obscure exchanges or occasions. Investors and creditors anticipate clear, solid,
steady, similar, and transparent announcing of occasions.
Accounting norms give a structure that is expected to display financial data in a way that
encourages educated decisions. For the financial statement to give the data that investors and
other leaders require, significant and reliable accounting principles and equivalent practices are
vital. Great financial disclosure has turned into a corporate administration device of shaping
desires identifying with future organization execution. Today, corporate announcing is not
limited to the financial reports, but, incorporates a wide cluster of extra issues that must likewise
be unveiled so as to give investors the basic data they have to esteem their ventures.
According to a published source, publication of the direction places accentuation on financial
divulgences and scope of non-financial revelations, for example, organization targets;
proprietorship and investors rights; changes in charge and exchanges including critical resources;
and administration structures and arrangements, and so forth.114 Given the huge instability in the
global capital markets, the interest and requirement for ample transparency and reasonable
corporate budgetary detailing are basic. Corporate administration promoters would propose
sound corporate administration systems are vital in keeping up appropriate corporate financial
detailing rehearses, along these lines, helping in alleviating pressures in worldwide markets.
The following Principles of Transparency and Disclosure were given by OECD:115
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.
in Management (2010). 114 Guidance on Good Practices in Corporate Governance Disclosure by the United Nations Conference on Trade
and Development (20060. 115 Ibid
~ 38 ~
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.
CORPORATE GOVERNANCE AND DISCLOSURE-
Corporate administration is turning into an imperative speculation evaluation apparatus since
there are adequate empirical research discoveries showing a positive relationship between
corporate administration and financial proportions, valuations and share price performance.
Progressively, numerous financial specialists examine corporate administration as one of the key
components when they settle on a venture choice. In the event that investors take the view that
poor corporate administration is a hazard, it is essential that organizations enhance their
corporate administration measures so as to draw in investment capital.116 These days, most
nations are reforming their laws and rules to include compliance with GCG and T&D norms and
organizations are willfully having their corporate governance and T&D practices appraised, to
flag their quality and to improve their present practices. There are five mainstays of T&D which
involves: 117
Truthfulness – Information unveiled must give a precise description of conditions.
Completeness – Data disclosed must be adequate to empower shareholders to make informed
choices. Data must include both financial and non-financial matters.
The materiality of Data – Data unveiled must be material to impact investment choices.
Timeliness – Data unveiled must be prompt to empower shareholders to respond as fast as
possible.
116 Pope, P. Discussion of disclosure practices, enforcement of accounting standards and analysts’ forecast accuracy:
An international study, Journal of Accounting Research, 273-283 (2003). 117 Uren, D. (The transparent corporation: Managing demands for disclosure, Crow’s Nest, NSW, Australia, Allen
and Unwin (2003).
~ 39 ~
Accessibility– Data disclosed must be easily accessible and effectively available to shareholders
at little cost.
The revelation of dependable, auspicious data adds to fluid and effective markets by empowering
investors to settle on investment choices dependent on the majority of the accessible data that
would be material to their resolution. Thus, investors are demanding better reporting and more
noteworthy transparency. Corporate administration frameworks are utilized by an organization to
advance probity, complete and exact financial announcing and responsibility.118 T&D are basic
components of a powerful corporate administration structure as they furnish the basis for au fait
decision making by investors, partners, and speculators with respect to capital distribution,
corporate exchanges, and financial execution supervision.119 Thus, T&D serves to investors as
well as helps controllers in keeping upmarket certainty and framework dependability. T&D are
requisite for corporate administration as inflated transparency and better divulgence decrease the
data asymmetry between an organization's administration and financial stakeholders, alleviating
the agency issue in corporate administration.
As per the economic theory, diminishing the data asymmetry by increasingly discretionary
financial divulgences on the stock market expands share liquidity and decreases value cost of
capital. According to the agency perspective, agents are required to act artfully at shareholders
behest and other stakeholders’ profits. Since principal and agent have antithetical interests and
objectives, organization complications may emerge when agent settles on choices that outcome
in the quest for objectives that contrast with those of the principal.120 This brings up the issue of
how the administration can be made responsible and the affair of administering the corporation
further transparent. Organizations recurrently make deliberate divulgences that go past least
disclosure necessities in light of the market request A strong exposure routine that advances
authentic transparency is essential for market-based observing of companies and key to
investors’ ability to practice their possession rights on an informed basis. Empirical involvement
in nations with huge and dynamic equity markets demonstrates that disclosure can be a dominant
asset for impacting the behavior of companies and protecting shareholders. A strong revelation
routine can help draw capital and maintain trust in the capital markets.
On the other hand, feeble exposure and non-transparent practices can add to immoral conduct
and a loss of market trustworthiness at great expense, not just to the company and its investors,
118 G. N. BajpaI, The Essential Book of Corporate Governance (2016) 119 Uren, D. The transparent corporation: Managing demands for disclosure, Crow’s Nest, NSW, Australia, Allen
and Unwin (2003). 120 Robert Ian Tricker, Corporate Governance: Principles, Policies, and Practices (2009).
~ 40 ~
yet in addition to the economy as a whole. Shareholders and potential investors require access to
regular, reliable, and comparable information in sufficient detail for them to assess the
stewardship of management and make informed decisions about the valuation, ownership, and
voting of shares. Insufficient or unclear information may hamper the ability of the markets to
function, increase the cost of capital, and result in poor allocation of resources.
The following Principles of Equitable treatment to shareholders were given by OECD121:
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.
B. Insider trading and abusive self-dealing should be prohibited.122
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
Corporate transparency is essential if there should be an occurrence of worldwide organizations
that work through a system of related backups, subsidiaries, joint endeavors and different
possessions fused in various locales including some clandestine jurisdictions. Without
transparency, a large number of these establishments stay camouflaged from public
contemplation and investigation.123 In this manner, all things considered, the material corporate
property goes unreported and investors don't have an unmistakable and complete image of the
Group's tasks, incomes, benefits and tax collection. Be that as it may, divulgence necessities are
not expected to put preposterous authoritative or cost weights on organizations nor are
organizations expected to uncover data that may imperil their competitive position except if
revelation is important to upgrade the speculation choice and to abstain from misdirecting the
investors. Therefore, to figure out what data ought to be unveiled, numerous nations apply the
121IBID. 122 Brian Tayan, Corporate Governance Matters: A Closer Look at Organizational Choices and Their Consequences
and David F. Larcker (2011). 123 Jill Solomon, Corporate Governance and Accountability (2003)
~ 41 ~
idea of materiality. Material data can be characterized as data whose exclusion or error could
impact the financial choice taken by clients of data.
WHITE-COLLAR CRIMES
In the early 1940s, American sociologist Edwin Sutherland invented the expression "white-collar
crimes," depicting it as “a crime committed by a person of respectability and high social status in
the course of his occupation.”124
There has always been questions revolving around white-collar crimes. Some of the scholars
suggest that there is ambiguity about the nature of white-collar compared to ordinary
crime.125Another scholar probed the question “Who is the white-collar criminal?126:
White-collar crime is traditionally associated with high status and respectable offenders: the
‘crimes of the powerful’ and corporate crime. However, the examination of one group of white-
collar offences reveals that offenders were typically small businesses, employees, and those more
properly described as ‘criminal businesses. While this could be attributed to the ‘immunity’ of
the corporate offender from prosecution, it can be argued that such patterns of offending reflect
not only enforcement policies but also wider structural and market factors. Thus, analyses of
economic and white-collar crime may concentrate overmuch on the corporate offender, and
makeover simplistic distinctions between ‘corporate’ and other varieties of white-collar
offending.127
Managing Business Integrity by Stefan Heissner's expresses that the theoretical media existence
in the light of extortion and corruption-related cases has prompted the improvement of an
extremely sharp feeling of social mindfulness and comprehension for white-collar crimes. This is
because of the degree of harm brought about by white-collar crimes. Sutherland underlined the
inordinate degree of distress brought about by the wrongdoing of the well off in contrast with the
much explored and prominent spotlight on wrongdoing by poor people, and the similarly
unbalanced dimension of social control reactions.128
Sutherland instantiates the corporation as a guilty party on account of war crimes where
organizations benefit profoundly by misemploying the condition of national crisis amid times of
124Sutherland, E. H., White-Collar Criminality, American Sociological Review 1, 7, (1939). 125Nelken. D, White –Collar and corporate Crime, The Oxford Handbook of Criminology. Oxford: Oxford
University Press, (2012). 126Croall. H., Who Is the White-collar Criminal? The British Journal of Criminology 157-162 (1989). 127 Hans N. &Francien L., Prevention of Organised Crimes (2004) 128Gyanendra Kumar Sahu, White Collar Crimes: A legal challenge on Indian corporate system, International
Journal of Current Research, 3 (2015)
~ 42 ~
war. The corporate structure is a benefit boosting element shape war profiteering.129 This is
institutional wrongdoing by potent associations that may perpetuate environmental wrongdoing,
war profiteering, state-corporate wrongdoing, and human rights infringement.130
While Sutherland’s concept of white-collar crime has enlightened sociologists, criminologists,
and management researchers, the concept may have confused attorneys, judges, and lawmakers.
In most jurisdictions, there is no offense labeled white-collar crime. There are offenses such as
corruption, embezzlement, tax evasion, fraud, and insider trading, but no white-collar criminal
offence. Sutherland’s contribution to the challenge of concepts such as law and crime can be
considered one of the strengths of his work as he showed that laws and legal distinctions are
politically and socially produced in very specific ways. For lawmakers, there is nothing intrinsic
to the character of white-collar offenses that makes them somehow different from other types of
offenses.
OFFENCE CHARACTERISTIC-
White-collar crime is a distinctive kind territory of criminology because of its unconventional
relationship with societal impact contrasted with different sorts of criminal offenses. White-
collar crime is characterized in its correspondence to stature, possibility, and access. 131This is
the wrongdoer-based viewpoint. Conversely, offense-based ways to deal with white-collar crime
underline the activities and nature of the unlawful go about as the characterizing operator. In
their examination of the two methodologies, Benson and Simpson132 talk about how guilty party-
based definitions stress societal qualities, for example, high economic wellbeing, capability, and
reputation of the actor. Since status is excluded in the meaning of offense-based methodologies
and status is allowed to differ freely from the definition in most enactments, an offense-based
methodology enables proportions of status to become external expository protean.133
Benson and Simpson's134 approach accentuates the possibility that people with access to deep
pockets to transgress, and those who hold authoritative positions of dominance are bound to
carry out a white-collar crime. They don't restrain their opportunity perspective on undertakings
129E.T.Bureau, 200 suspected e-commerce companies under DIPP radar, The Economic Times (2016) 130 Individual accountability in the spotlight: Global Fraud Survey, News Releases (Jan. 23, 2019, 2:31 P.M),
https://www.ey.com/in/en/newsroom/news-releases/news-ey-individual-accountability-in-the-spotlight-global-fraud-
survey 131 Muhammad A. Khan, Globalization and White Collar Crimes, Pakistan Journal of Criminology 5, 20 (2017) 132Benson, M. L., & Simpson, S. S, Understanding White-Collar Crime: An Opportunity Perspective, New York:
Routledge. (2015). 133 Vol.6, Dr. Sanjay I. Solanki, A Critical Study on White-Collar Crimes in India 54 (2017) 134Ibid.
~ 43 ~
in organizations. Be that as it may, they highlight that opportunities are regularly more prominent
in a hierarchical setting. Convenience Theory, notwithstanding, accepts that wrongdoing
perpetrated in a hierarchical setting be called white-collar crime. This is in cadence with
Sutherland's original work, where he stressed profession and position as key attributes of guilty
parties.
But the more evolved view on the subject advocates that Edwin Sutherland’s initial definition of
white-collar crime as “a crime committed by a person of respectability and high social status in
the course of his occupation”, should not be comprehended along the lines of corporate fraud
alone. The underlying attributes (deception and lack of physical force) remain constant, the ways
of executing the crime have advanced and the people responsible have burgeoned across the
social-economic strata. White-collar crime is a class of regularly expanding the scope, including
high-level corporate offense toward one side of the range and the phishing plans of a regular
citizen acting alone at the opposite end. These unlawful exercises are presently so common as to
influence the overall population on an everyday basis.135
Therefore, a more preferable definition should be “illegal and unethical acts that violate fiduciary
responsibility or public trust for personal or organizational gains.”136 This definition covers the
traditional types of economic wrongdoings as well as the high-tech crimes, as well as crimes
both inside and outside of the institutional setting.
OFFENDER ATTRIBUTES-
The white-collar wrongdoer is an individual of admiration and high economic well-being who
perpetrates financial wrongdoing throughout his or her occupation137.In the wrongdoer-based
point of view, white-collar offenders generally have numerous qualities that are steady with
desires of high reputation in the public arena. White-collar offenders show both accomplished
position and credited position.138 Accomplished position alludes to position that is accumulated
over passage time and with some level of attempt, for example, guidance and salary. Credited
135 Richard A. Posner, Optimal Sentences for White-Collar Criminals, A.L.J 17, 409 (1980) 136 Individual accountability in the spotlight: Global Fraud Survey, News Releases (Jan. 23, 2019, 2:31 P.M),
https://www.ey.com/in/en/newsroom/news-releases/news-ey-individual-accountability-in-the-spotlight-global-fraud-
survey 137Leasure, P., & Zhang, G., “That’s How They Taught Us to Do It”: Learned Deviance and Inadequate Deterrents
in Retail Banking. Deviant Behavior, (2017). 138 Stuart P. Green, The Concept of White Collar Crime in Law and Legal Theory, Buffalo Criminal L.R 1, 22
(2004)
~ 44 ~
position alludes to position that does not require any particular activity or quality, yet rather is
depends on more physically noticeable attributes, such as race, age, and sex.
The primary wrongdoers’ attributes remain benefit and superior rank. Early observation
recommends that the general public feel that white-collar crime isn’t as genuine as different
types of offense.139 Many individuals feel that street lawbreakers ought to get severe penalties. In
this line of reasoning, an individual might be extra worried about theft and physical cruelty that
may hurt them. They might be less worried about white-collar crime that does not influence them
specifically. Possibly the individuals who are financially worried about their very own economic
prosperity will be progressively worried about white-collar crime.140
White-collar culprits have community capability related to various job-related occurrences over
the general public. Capability and control in the hands of people empower white-collar crime,
with power basically getting from the placement people authentically hold.141
GENDER PERSPECTIVES-
Research has proposed a connection between sex and tax agreement, with men being more
distinctly possible to perpetrate tax wrongdoing as compare to women. Analysis of tax avoidance
has both a wrongdoer -based viewpoint and a wrongdoing-based viewpoint. Affluent peoples
have more chances to circumvent tax agreements and to more profit from it. Also, evading tax
agreements can be sorted in an executive setting, where the business organization's control
accounts for the reason of tax avoidance. Status influences the capability of people effectively to
circumvent identification or authorization for non-acceptance, and the chance to perpetuate
variations of tax wrongdoings is ranking based. Tax agreement can be the consequence of
association among Control and belief, where both control and beliefs depend on individual
ranking.142
The unlawful-based way to interpret white-collar crime is also connected when inspecting tax
wrongdoings. The activity of being incompliant utter itself that the wrongdoing is viewed as a
crime. A unique sort of tax wrongdoing is bank deposits in tax harbors. Banks help lawmakers
139 Tony G. Poveda, Rethinking White- Collar Crime 50 (1994) 140Thomas E. Dearden , An Assessment of Adults’ Views on White-Collar Crime, Journal of Financial Crime 309,
318, (2017) 141 Stuart P. Green, The Concept of White Collar Crime in Law and Legal Theory, Buffalo Criminal L.R 1, 22
(2004). 142 Hazel Croall, Understanding White Collar Crime 8 (2001)
~ 45 ~
and others convert petroleum rents and other different resources into concealed prosperity using
bank deposits in tax harbors:
Political upper-class misuse public office to extricate rents. Even the average amount of
government rents may have a socially disagreeable impact, through the unfavorable selection of
political applicants and by misrepresenting political inducement.143 In nations without well
maintained democratic governance, political rents can be significant and the financial and
political consequences acute.
When white-collar wrongdoers are brought to equity, it was established that “significantly a
bigger number of females were given community assistance than males” since “females are
viewed as homemakers for households, and the court frameworks would prefer not to punish a
female in a way that would remove her from her household”.
OCCUPATIONAL AND BUSINESS CRIME-
Segregation in white-collar offenses can be made between vocational crimes and business
crimes. Vocational crime is perpetrated by people in a hierarchical setting for solely personal
gain and to the disadvantage of the institution.144 Business wrongdoing is perpetrated by or in the
name of an institution, for the benefit or intensification. Obviously, in business wrongdoing
institutions cannot commit illicit acts autonomously of human operators/agents.145
Vocational crime is ordinarily committed under states of low dimensions of socialization and
puny responsibility. Employees might be new to hierarchical objectives or essentially overlook
institutional aim, while concomitantly endeavor toward individual goals because of infirm
curtailment by the responsibility system.146 The existence of vocational wrongdoing might be
indicative of colossal debacle in an institution's framework since an institution without
committed and responsible representatives advocate a higher probability of failing at the end.
Vocational wrongdoing will, in general, be perpetrated by affluent people who feel no loyalty
towards the institution, and who do as such only for personal benefit.147
Business wrongdoing, on the other side, is normally committed under states of elevated amounts
of socialization and robust responsibility. Employees relate to the institution as well as its
objectives. The quest for institutional aim over individual goals does not imply the truancy of the
143 Marshall B. Clinard, The Black Market: A Study of White Collar Crime 22 (1969) 144 Gilbert Geis, White Collar and Corporate Crime: A Documentary and Reference Guide 48 (2011) 145 Hazel Croall, Understanding White Collar Crime 14 (2001) 146 Richard A. Posner, Optimal Sentences for White-Collar Criminals, A.L.J 17, 409 (1980) 147 George Robb, White Collar Crimes in Modern England 34,37 (1992)
~ 46 ~
crime. Or maybe, an accomplishment of hierarchical objectives turns out to be important to the
point that on the off chance that it is impossible to fulfill those in lawful ways, therefore, devoted
employees do it in unlawful ways. 148
Both vocational and business wrongdoing is committed inside the institutional setting. Corporate
crime is perpetrated for business ascendancy, for example, cartels, and corruption. Illicit value
fixing and market sharing happen in cartels to empower members in cartels to accomplish more
benefits. Bribes are propounded to potential clients, partners, and open authorities to empower
contracts and licenses. 149
CORPORATE AFFAIRS
Shri Injeti Srinivas, Secretary, Ministry of Corporate Affairs, said, “The challenge before India is
to figure out a way to internalize Corporate Governance. Corporate Governance is in the interests
of companies as it enhances their image, acceptability, and profitability.” Shri Sriniwas vocalized
this at a Cooperation Agreement signing ceremony between the Indian Institute of Corporate
Affairs (IICA) and International Finance Corporation (IFC) at the Ministry of Corporate Affairs,
New Delhi.
Following points were discussed during the ceremony:
1.The Board of Directors needs to exert tactical surveillance over business activities while
specifically estimating and compensating the administration’s accomplishment. At the same time
the Board needs to guarantee compliance with the lawful structure, probity of financial
bookkeeping and reporting approach and validity in the eyes of the investors through appropriate
and punctual divulgence.
2. Board’s obligations inalienably request the undertaking of judgment. Subsequently, the Board
essentially must be vested with a sensible degree of judgment. While corporate governance may
involve both lawful and social standards, no recorded arrangement of rules or laws can ponder
each circumstance that an executive or the board, on the whole, may wind up in. In addition, the
presence of composed standards in itself can’t keep an execute from mishandling his position
while experiencing the motions of acceptable consideration as recommended by composed
standards. Consequently, social standards that incorporate enlightened and reflective decision
148 David Weisburd et al., White Collar Crime and Criminal Career 67 (2001) 149Thomas E. Dearden , An Assessment of Adults’ Views on White-Collar Crime, Journal of Financial Crime 309,
318, (2017)
~ 47 ~
making, division of power, observing of the administration and impartial execution of
obligations owed to the organization just as the investors are similarly vital.
3.Anyway, in a circumstance where organizations have developed in size and have large public
interest potential, it is essential to endorse a proper fundamental structure that needs to be in
accordance with all the organizations without giving up the essential prerequisite of permitting
activity of circumspection and business judgment in the light of a legitimate concern for the
organization and the investors. The obligation of consent must be seen in subject of the
customary-based law system predominant in the nation along with a wide assortment of
possession structures including family-run or controlled or generally firmly held organizations.
The professional domain of any organization today, impacts and incorporates numerous aspects.
There are such huge numbers of individuals who get influenced by the demonstrations of the
organization both straightforwardly and in a roundabout way. The primary parties that get
affected are the customers or partners who are their fundamental recipients and are at paramount
peril. Corporate supervision has been managed by corporate laws forlong.The basic laws make
an organization at risk for the activities of its operators when representatives/specialists act
inside the extent of their work and make a benefit for the partnership with that venture. White-
collar crimes can today effectively be seen making a grave imprint in the working of any society.
They have turned into the vital shades of malice today. The general public can't make do without
them and in the meantime, it is getting to be hard to make do with them. The corporate affairs of
the numerous institutions, which had earlier paved way towards good corporate governance, now
set the footing for the new kinds of white-collar crimes to flourish., most of which are committed
by the employees who are in twin jobs; one job is of being targeted by these crimes and then
again being the main player in committing those crimes.
CONCLUSION
Due to contemporary corporate administrative transgressions, governments have reacted by
espousing various administrative changes. One segment of these progressions has been expanded
disclosure prerequisites. For instance, Sarbanes-Oxley (sox), appropriated in response to Enron,
WorldCom, and further public governance debacles, necessitated comprehensive detailing of off-
balance sheet financing. Furthermore, sox expanded the punishments to officials for
prevaricating.
~ 48 ~
The relatedness among governance and transparency is unambiguous in the public's cognizance;
transparency was expanded to improve administration. However, most pedagogical symposium
about transparency has nothing to do with corporate governance. The most generally examined
merit of transparency is that it decreases uneven data, and consequently brings down the expense
of exchanging the firm's securities and the firm's expense of capital.
In this paper, we give a structure to understanding the job of transparency in corporate
administration. We examine the effect that exposure has on the legally binding and checking
connection between the institution and the public at large. We see the nature of data the firm
reveals as a decision variable that affects the agreements of the firm and its investors, public, etc.
Through its effect on corporate administration, the higher quality revelation gives both benefits
and imposes costs. The benefits reflect the way that progressively exact data about execution
enables institutions to settle on better staff choices and investors and others get a more
comprehensive picture of the institution.
~ 49 ~
ROLE OF INSOLVENCY & BANKRUPTCY CODE IN CORPORATE
GOVERNANCE: A LEGAL ANALYSIS
-WajahatMonafJilani150
Abstract
Even before the Insolvency & Bankruptcy Code (“IBC”) had come into force, it was
projected to have a major impact on the ease of doing business and corporate governance in
India. While there has been much academic and financial focus on the former, the latter has
gone unnoticed. The IBC has ushered a dramatic shift in India’s policy viz-a-viz bankruptcy
resolution, from the debtor-possession to a creditor-in-control system. In other words, it is the
creditors who control the management and affairs of the corporate debtor during insolvency
proceedings. While corporate governance was commonly understood as applying to situations
when a company was solvent, the IBC has emphasized the importance of corporate governance
in situations when the company is rendered insolvent or immediately prior to it. This paper seeks
to study the role of the IBC in maintaining a healthy corporate governance structure of a
company. It will also seek to examine the specific role and scope of independence of the
Resolution Professional (RP) /Interim Resolution Professionals (IRP), who replaces the board of
directors, in control and management of the corporate debtor after the initiation of the
Corporate Insolvency Resolution Process (CIRP). In addition, the role of the Committee of
Creditors, in overseeing the functioning of the RP/IRP and approving a resolution plan, is key to
this analysis. In addition the paper examines the practical working of the IBC and the major
concerns that have arisen.
Keywords: Corporate Governance, Insolvency and Bankruptcy Code, Resolution professional,
Committee of Creditors.
150LLM Candidate, Kings College London, UK, 2019-20.
~ 50 ~
INTRODUCTION
While the term ‘corporate governance’ has been in existence for decades, the tumultuous events
of the past decade have ensured that it is central to any modern corporate practice as well as to
the corporate law paradigm of a country. Consequently, in India’s corporate-legal domain,
legislations and policy decisions are being taken to enhance and inculcate a culture of good
corporate governance.
A prime example of such a legislation is the Insolvency & Bankruptcy Code, 2016 (hereinafter
“IBC” or “Code”), which even before its introduction in the Parliament, was touted by the then
Minister of State for Finance in the Government of India, as a law which will have a big impact
on corporate governance in the country.151 In the past two and a half years since the IBC came
into force, the jurisprudence around various aspects of the code has developed through academic
research as well judicial decisions. However, much of the focus has been on the utility of the
code in ensuring speedy and effective insolvency resolution and creating a business-friendly
environment in India. From a governance point of view, the code has brought about a dramatic
shift in India’s bankruptcy policy from a ‘debtor-in-possession’ framework under the Sick
Industrial Companies Act, 1985 and set of other bankruptcy laws, which provided that during the
continuance of insolvency proceedings the existing management and/or promoters would remain
in control of the corporate debtor, to a ‘creditor-in-control’ regime wherein the existing
management ceases to have an active role in the running of the company, and the creditors
assume control of the company. The statement of objects and reasons of the code states that one
of its objectives is to ‘balance the interest of all stakeholders’. In doing so, the code has
recognized and strengthened the currently weak creditor rights in running of companies in India,
particularly during insolvency resolution. This research focusses on the relationship between the
IBC and corporate governance and studies the rationale of various provisions of the code through
the prism of corporate governance.
RELATIONSHIP BETWEEN IBC AND CORPORATE GOVERNANCE
As far as the challenge of defining the term ‘corporate governance’ is concerned, the most
widely accepted definition is the one provided by The OECD Principles of Corporate
151 K R Srivats, Bankruptcy code will have big impact on corporate governance: Jayant Sinha, The Hindu Business
Line (Feb 09, 2016), https://www.thehindubusinessline.com/economy/bankruptcy-code-will-have-big-impact-on-
corporate-governance-jayant-sinha/article8211994.ece
~ 51 ~
Governance which defines it as “a set of relationships between a company's management, its
board, its shareholders and other stakeholders.”152 According to the principles, good corporate
governance should provide proper incentives for the board and management to pursue objectives
that are in the interest of the company and its shareholders.
Most corporate entities are governed and operated through key managerial executives and a
board of directors. In normal circumstances and healthy financial situation, the board of directors
is responsible for the company’s governance, while the creditors are not usually involved. The
board of directors has a fiduciary obligation to the company and its shareholders. However, when
the company fails to meet its financial obligations or to repay its debt and the IBC is invoked, the
control of the corporate entity also undergoes a change from a debtor-in-possession to a creditor-
in-control regime. This system protects creditors’ interest not only during the corporate
insolvency resolution process (“CIRP”) but also in the time period during which the company is
heading towards insolvency.153
The code permits operational creditors, financial creditors as well as the debtor itself to initiate
the CIRP when the corporate debtor has committed default. Once the application has been
admitted, section 12 prescribes that the CIRP shall be completed within a period of 180 days
from the date of admission of the application to initiate such proceeding, which may be extended
only once for a period of not more than 90 days. Furthermore, the code provides that from the
date of commencement of CIRP, the adjudicating authority shall declare a moratorium which
prohibits the institution or continuance of suits against the corporate debtor, the transferring,
encumbering, alienating or disposing off by the corporate debtor any of its assets or any legal
right or beneficial interest therein as well as any action to foreclose, recover or enforce any
security interest created by the corporate debtor in respect of its property.154 For the governance
of the corporate debtor during the CIRP, Section 16 & 17 of the code are particularly significant.
While Section 16 provides for an ‘Interim resolution professional’ (“IRP”), Section 17 lays down
that the powers of the board of directors of the corporate debtor shall stand suspended and its
powers, as well as the management of the corporate debtor, shall vest in the IRP. To ensure that
the corporate debtor carries on as a going concern, the code mandates that all personnel of the
152 OECD Principles of Corporate Governance, Organisation for Economic Co-operation and Development, 12
(2004), http://www.oecd.org/daf/ca/corporategovernanceprinciples/31557724.pdf 153 Sharad Abhyankar and NirmalMohanty, The Code and Corporate Governance, The Insolvency and Bankruptcy
Code: Implications for Corporate Governance (Apr, 2017),
https://www.nseindia.com/research/content/res_QBApr17.pdf 154 The Insolvency & Bankruptcy Code, 2016, Section 14.
~ 52 ~
debtor including its promoters shall cooperate with the IRP, it also provides for the duties and
powers of the IRP. Chief among the duties of the IRP is the duty to constitute a committee of
creditors (“COC”). This committee of creditors, in turn, is authorized to either confirm the IRP
as the resolution professional (RP) or appoint another person as the RP. Such a resolution
professional shall be responsible for the conduct of the CIRP as well as be duty-bound to
preserve and protect the assets of the corporate debtor. However, the RP is required to obtain the
consent of the COC for key financial and operational decisions concerning the corporate debtor.
Interestingly, although the directors or partners of the corporate debtor may attend the meetings
of the COC, they would not have the right to vote. Any resolution plan, if found eligible by the
resolution professional, be approved by a vote of at least 60% of the COC and approved by the
adjudicating authority shall be binding on the corporate debtor and its employees, members,
creditors, guarantors and other stakeholders involved in the resolution plan.
RATIONALE FOR SHIFT FROM DEBTOR-IN-POSSESSION TO CREDITOR-IN-
CONTROL REGIME
From a corporate governance perspective, the debtor-in-possession regime was not most ideal.
Under this system, the management of the corporate debtor which has been responsible for
leading it into the CIRP would effectively be responsible for not only its day-to-day operations
but also its reorganization efforts or decisions regarding potential liquidation. In such a situation
the ability of the management to uphold its fiduciary obligations towards the company, its
promoters, its shareholders and other stakeholders could be doubtful.
In other words, when a corporate entity becomes insolvent or nears insolvency, the interest of the
various stakeholders in the entity may shift. As a result of the lack of funds, the equity holders or
directors may favor a riskier option, which may suit their interest rather than the long term of the
corporate entity or its creditors. There may also be conflicting interests between secured and
non-secured creditors, which may be in conflict with the objective of ensuring that the entity
continues as a goingconcern. Directors and officers may, therefore, find themselves with
conflicting duties to different groups of creditors and stockholders in guiding the corporation
back to solvency or through reorganization.
In the pre-IBC era, the Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”) was
the law that provided for the rescue and rehabilitation of distressed companies. Under this law,
industrial companies in distress could make a reference to the Board for Industrial and Financial
~ 53 ~
Reconstruction (“BIFR”), which in turn would either sanction a rehabilitation scheme for the
company or refer it to the High Court for winding up. These proceedings under SICA adopted
the ‘debtor-in-possession’ approach which permitted the incumbent management of the
distressed company to remain in control of running the business during the pendency of the
reference to SICA. In addition, SICA provided for a wide and automatic moratorium in favor of
the corporate debtor against enforcement actions by creditors during the pendency of the
proceedings before the BIFR. This debtor-in-possession approach coupled with the wide
moratorium explains the reputation that SICA became a tool for debtors to protect themselves. It
acquired a reputation for delays as delaying the SICA process was in the interest of the managers
of the corporate debtor, was abused by debtors who used the BIFR as ‘safe heaven’ to siphon off
assets from creditors and gave immunity to the corporate debtor from the pressure of legal
enforcement by its creditors.155
The Banking Law Reforms Committee (BLRC), which was instrumental in formulating the IBC,
noted the negative impact of the debtor-in-possession system on the economy of the country in
its report156:
“Speed is of the essence for the working of the bankruptcy code, for two reasons. First, while the
‘calm period’ can help keep an organization afloat, without the full clarity of ownership and
control, significant decisions cannot be made. Without effective leadership, the firm will tend to
atrophy and fail. The longer the delay, the more likely it is that liquidation will be the only
answer. Second, the liquidation value tends to go down with time as many assets suffer from a
high economic rate of depreciation. From the viewpoint of creditors, a good realization can
generally be obtained if the firm is sold as a going concern. Hence, when delays induce
liquidation, there is value destruction. Further, even in liquidation, the realization is lower when
there are delays. Hence, delays cause value destruction. Thus, achieving a high recovery rate is
primarily about identifying and combating the sources of delay.”
Moreover, this model for insolvency resolution was particularly unsuitable for companies with
concentrated ownership such as family-run businesses, which dominate the Indian corporate
landscape.157 In concentrated ownership systems the management of a company is closely
associated with strong shareholders. In other words, the strong shareholders control the
155 Kristin Van Zwieten, Corporate Rescue in India: The Influence of the Courts, Journal of Corporate Law Studies
(1) (2015) 156 Dr. T. K. Viswanathan, The report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design
14. (2015), https://ibbi.gov.in/BLRCReportVol1_04112015.pdf 157 Supra note 4, at 1.
~ 54 ~
appointment of key management personnel and directors to the company’s board. The affiliation
of these executives is not limited to the company but extends to the controlling group of
shareholders. In the context of other such concentrated ownership systems, it has been argued
that “leaving incumbent management to run the corporation while in bankruptcy plays into the
hands of the strong shareholders and exacerbates the risk of loss to the creditors.158 Because the
corporation is insolvent, shareholders will tend to direct the management to engage in overly
risky projects and gamble for yield with the creditors’ money. It follows then, that to neutralize
this risk and better represent the creditors’ interest in bankruptcy and management should be
removed from control of the firm.”159
Even though many of the general corporate governance concepts and their application carry
through to the governance of an insolvent corporation, or even a corporation that has filed for
bankruptcy, those concepts are modified, sometimes dramatically, by bankruptcy law and its
aims. The most significant changes reflect the critical role that creditors and the courts play in
the corporate governance of a debtor.160
As already discussed, as a company approaches insolvency, the incumbent management being in
control of the company is potentially risky from a corporate governance point of view.
Therefore, with an intention to pre-empt and prevent any loss to the company or its creditors, as
well as to strengthen the power of creditors who are faced with a defaulting debtor, the IBC has
heralded India into the creditor-in-control regime. The IBC has based on the premise that the
limited liability company is a contract between equity and debt. As long as debt obligations are
met, equity owners have complete control, and creditors have no say in how the business is run.
When default takes place, control is supposed to transfer to the creditors; equity owners have no
say.161
Most recently, in the landmark Swiss Ribbons Pvt Ltd &Anr. v. Union of India and
Ors.162case, the Supreme Court of India has captured the benefits of the creditor-in-possession
approach:
158 George Triantis, A Theory of the Regulation of Debtor-in-Possession Financing, 46 Vanderbilt Law Review 401
(1993). 159 David Hahn, Concentrated ownership and control of corporate reorganizations, working paper no. 6-03,
Interdisciplinary program for Law, Rationality, Ethics and Social Justice, 1, (2003),
https://biu.ac.il/law/unger/working_papers/6-03.pdf 160 The Bureau of National Affairs, Inc, Corporate Governance of Insolvent and Troubled Entities, 109 CPS I
(2017), https://www.youngconaway.com/content/uploads/2018/05/Portfolio109DA1-1.pdf 161 Supra note 7, at 10. 162 2019 SCC OnLine SC 73.
~ 55 ~
“…the primary focus of the legislation is to ensure revival and
continuation of the corporate debtor by protecting the corporate debtor from its own
management and from a corporate death by liquidation. The Code is thus beneficial legislation
which puts the corporate debtor back on its feet, not being mere recovery legislation
for creditors. The interests of the corporate debtor have, therefore, been bifurcated and
separated from that of its promoters/those who are in management. Thus, the resolution process
is not adversarial to the corporate debtor but, in fact, protective of its interests. The moratorium
imposed by Section 14 is in the interest of the corporate debtor itself, thereby preserving the
assets of the corporate debtor during the resolution process. The timelines within which the
resolution process is to take place again protects the corporate debtor's assets from further
dilution, and also protects all its creditors and workers by seeing that the resolution process
goes through as fast as possible so that another management can, through its entrepreneurial
skills, resuscitate the corporate debtor to achieve all these ends.”
Thus the creditor-in-possession approach, from a governance perspective, ensures that the
interest of the corporate debtor is protected. In line with the approach, while powers of control
are taken away from the management of the corporate debtor, they are placed in the hands of a
specialized professional who is chosen by a committee of creditors, and who is made responsible
for conducting the CIRP within a prescribed timeperiod. In doing so, the code has ensured that
assets of the corporate debtor are preserved. Moreover, faced with nowhere to hide and the
potential of losing control of their companies permanently, the promoters have been encouraged
to resolve their debt situation. These factors have led to a sustained M&A investment and
promoted entrepreneurship in the country. The prospect of acquiring significantly valuable assets
at reasonably attractive prices, and the potential of these assets to generate future returns have
fuelled this momentum from both domestic and international investors.163
ROLE OF RESOLUTION PROFESSIONAL/INTERIM RESOLUTION
PROFESSIONAL IN CORPORATE GOVERNANCE
When insolvency proceedings commence against a corporate debtor under the IBC, as discussed
in the preceding section, the responsibility of the management and operation of the corporate
debtor shifts from the corporate debtor’s promoters/board of directors to an ‘Interim resolution
professional’/ ‘Resolution professional’. To ensure the integrity and independence of the CIRP,
163 PricewaterhouseCoopers Private Limited & Confederation of Indian Industry (CII), Decoding the Code: Survey
on Twenty One Months of IBC in India, 2, (2018).
~ 56 ~
regulations under the code require the resolution professional to be independent of the corporate
debtor.164 According to the regulations, a person shall be considered to be ‘independent of the
corporate debtor’ if he satisfies the following conditions:
a) is eligible to be appointed as an independent director on the board of the corporate debtor
under section 149 of the Companies Act, 2013 (18 of 2013),where the corporate debtor is
a company;
b) is not a related party of the corporate debtor; or
c) is not an employee or proprietor or a partner.
Moreover, a resolution professional is required to make full disclosures at the time of his
appointment and thereafter, in accordance with the code of conduct. This code requires that
resolution professional or his or her relatives do not knowingly acquire any assets of the
corporate debtor unless it is shown that there was no impairment of objectivity, independence or
impartiality. Further, the Code imposes an obligation of continuing disclosure on the RP in
respect of any pecuniary or personal relationship with any stakeholders entitled to distribution in
accordance with section 53 and 178 of the Code. The Code also prohibits RP’s and their relatives
from accepting gifts or hospitality which undermines their independence.165
The code mandates that the adjudicating authority shall appoint an interim resolution
professional within 14 days from the commencement of insolvency proceedings. 166 The IBC has
provided an elaborate mechanism for ensuring that the corporate debtor continues as a going-
concern, provisions for the management of the debtor as well as allocation of responsibility to
resolution professional, institution of a committee of creditors, etc. has been provided for, with
the objective of ensuring maximisation of the debtor’s assets and early resolution.
The responsibility of the management of the affairs of the corporate debtor has been handed to
the Interim resolution professional until the appointment of a resolution professional. Section 17
of the code deals with ‘management of the affairs of the corporate debtor by the Interim
resolution professional’ whereas Section 20 deals with ‘management of operations of the
corporate debtor as going concern’. Section 17 provides that from the date of appointment of the
Interim resolution professional:
164 Insolvency and Bankruptcy Board Of India (Insolvency Resolution Process For Corporate Persons) Regulations,
2016, regulation 3. 165 Insolvency Professional Agency of Institute of Cost Accountants of India, Code Of Conduct For Insolvency
Professionals,1, (2017), http://www.ipaicmai.in/IPA/Upload/Code-Conduct-IPs.pdf 166 The Insolvency & Bankruptcy Code, 2016, Section 16.
~ 57 ~
(a) The management of the affairs of the corporate debtor shall vest in the interim resolution
professional;
(b) the powers of the board of directors or the partners of the corporate debtor, as the case
may be, shall stand suspended and be exercised by the interim resolution professional;
Subsection (2) of Section 17 states that the IRP shall act and execute in the name and on behalf
of the corporate debtor all deeds, receipts, and other documents and shall have the authority to
access the electronic records, books of accounts, records and other relevant records of the
corporate debtor.
In order to ensure a smooth transition and to prevent hurdles in the functioning of the corporate
debtor, Section 19(1) of the code requires the ‘personnel’ of the corporate debtor i.e. the
directors, managers, key managerial personnel, designated partners and employees, if any, of the
corporate debtor167 as well as its promoters or any other person associated with its management
to assist and cooperate with the IRP in the management of the corporate debtor. In the event of
non-cooperation with the IRP, the adjudicating authority has the powers to direct such persons to
cooperate with the IRP.
The IRP is also tasked with the responsibility of making every endeavor to protect and preserve
the value of the property of the corporate debtor and manage the operations of the corporate
debtor as a going concern.168 To do so, the code lists out the actions which the IRP shall have the
authority to carry out, including ‘all such actions as are necessary to keep the corporate debtor as
a going concern.’
One of the most important responsibilities of the IRP, which will be discussed in the next
section, is the responsibility of constituting a committee of creditors (“COC”). This COC shall,
in turn, be responsible for either appointing the Interim resolution professional as a resolution
professional or appoint another resolution professional.169 The code mandates that the entire
CIRP and managing the operations of the corporate debtor shall be undertaken by the resolution
professional.170 The resolution professional shall conduct the meetings of the Committee of
creditors171 and shall prepare an information memorandum for the purpose of preparing a
167 The Insolvency & Bankruptcy Code, 2016, Section 5(23) 168 The Insolvency & Bankruptcy Code, 2016, Section 20. 169 The Insolvency & Bankruptcy Code, 2016, Section 22. 170 The Insolvency & Bankruptcy Code, 2016, Section 23. 171 The Insolvency & Bankruptcy Code, 2016, Section 24.
~ 58 ~
resolution plan.172 In order to protect the assets of the corporate debtor, the resolution
professional is tasked with ‘preserving and protecting the assets of the corporate debtor.’173
ROLE OF THE SUSPENDED BOARD OF DIRECTORS
As pointed out earlier, Section 17 of the Code says that once the IRP is appointed ‘powers of the
board of directors or the partners of the corporate debtor, as the case may be, shall stand
suspended and be exercised by the interim resolution professional’. However, confusion has
arisen because of the phrasing of section 24(3) which requires a resolution professional to give
notice of the meeting of the committee of creditors to the members of the “suspended board of
directors or partners of the corporate debtor”. The confusion centers on the moot question i.e.
whether the board of directors is suspended or only their powers? In other words, do the directors
of the corporate debtor continue to remain directors in their individual roles while not having the
collective powers as ‘the board of directors’ or do they cease to be directors as well?
A careful reading of section 17(1) reveals that the section speaks about suspending the ‘powers’
of the board of directors, not the board of directors. The word “suspended” qualifies “powers of
the board”, and not “board of directors” itself.174 The board of directors continues to exist but is
only rendered powerless with respect to the acts for which the law empowers it. Nevertheless,
the individual directors continue to be directors of the corporate debtor in the register of the
registrar of companies (“ROC”). Section 19 of the code, in fact, requires the personnel, which
includes directors to render assistance to corporate debtors. In addition, these directors are also
invited to attend the meetings of the committee of creditors.
Moreover, in Steel Konnect (India) (P) Ltd. v. Hero Fincorp Ltd175 the appeal before NCLAT
was filed by the Directors of the debtor company against which the insolvency proceedings
under Section 7 stood admitted by the adjudicating authority. The respondent creditor challenged
the locus of the debtor Directors on the ground that an interim resolution professional has been
appointed who has already taken over the management of the corporate debtor and the
powers of the Board of Directors, since then has stood suspended in terms of Sections 17(1) (a)
and (b) of the IB Code. NCLAT dismissing the contention of the respondent creditor reasoned
that though the functions of the Board of Directors or partners of corporate debtor
172 The Insolvency & Bankruptcy Code, 2016, Section 29(1) 173 The Insolvency & Bankruptcy Code, 2016, Section 25. 174Shikha Bansal Resolution Professional vis-à-vis Board of Directors: Governance of InsolventCompanies, 1,
(2018), http://vinodkothari.com/2018/03/resolution-professional-vis-a-vis-board-of-directors/ 175 2017 SCC OnLine NCLAT 390.
~ 59 ~
are suspended and their power can be exercised by the interim resolution professional, such
exercise of power is limited to the extent of the purposes mentioned under Section 17(2) of the
IB Code. The Directors do not cease to be Director(s) or member(s), since they are
not suspended but only their function as Board of Director(s) is suspended and therefore,
the Directors have locus to file an appeal under Section 61 of the IB Code and need not appeal
through the interim resolution professional.
Recently, with regard to whether members of the suspended directors should be given copies of
the resolution plans and other confidential documents that the COC considers during the
meetings, The Supreme Court in Vijay Kumar Jain v. Standard Chartered Bank &Ors.176held that
the scheme of the Code makes it clear that the directors, though not members of the COC, have a
right to participate in every meeting of the COC. In addition, for discussion on resolution plans,
they also have the right to receive copies of the resolution plans which are presented to the COC.
Although this decision does give rise to a number of questions, it makes the conduct of the COC
meetings more transparent.
ROLE OF THE COMMITTEE OF CREDITORS
One of the most important aspects of the insolvency and bankruptcy code’s ecosystem is the
Committee of Creditors (“COC”). The IRP has the responsibility of constituting the COC after
duly collating all the claims received against the corporate debtor and due determination of its
financial position.177 This committee consists of mainly all the financial creditors of the
corporate debtor who shall have voting rights. Nevertheless, the code prescribes that the notice of
its meetings shall also be given to the suspended board of directors, partners and operational
creditors if the amount of their aggregate dues is not less than ten percent of the debt, although
they shall not have the right to vote. The proviso to Section 21(2) clarifies that a director who is
also a financial creditor who is a related party of the corporate debtor shall not have any right of
representation, participation, or voting in a meeting of the committee of creditors.
For protecting the interest of the corporate debtor as well as its creditors, the code mandates that
the RP shall not take important decisions concerning the corporate debtor’s finances, its
operations or its management as are provided under section 28(1) without the prior approval of
the committee of creditors. In fact, any decision shall be approved by a vote of not less than 60%
of the voting shares for it to be valid. The Committee of creditors also has the responsibility of
176Writ Petition (Civil) No.1266 Of 2018. 177 The Insolvency & Bankruptcy Code, 2016, Section 21.
~ 60 ~
examining the resolution plan submitted by the resolution applicant and confirming that it meets
the requirements laid down under section 30(2).
A resolution plan, in order to be successful, has to be approved by a vote of 60% of the voting
share of the financial creditors, after the COC has satisfied itself about the feasibility and
viability of the resolution plan. Therefore not only does the Committee of creditors have a key
role in the governance of a corporate debtor while it is in the midst of the insolvency
proceedings, but it is also pivotal in the resolution of the insolvency and maximization of the
assets of the corporate debtor.
MORATORIUM AND STRICT-TIME LIMIT FOR THE CIRP
Given the past experience of the assets of the corporate debtor being siphoned off or losing its
value, the code makes express provisions to prevent the same. Section 14 of the Code provides
that from the insolvency commencement date, the adjudicating authority shall declare a
moratorium which prohibits certain actions being undertaken during the pendency of the
insolvency proceedings, such as:
a) The institution of suits or continuation of pending suits or proceedings against the
corporate debtor including executions of any judgment, decree or order;
b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its
assets or any legal right or beneficial interest therein;
c) any action to foreclose, recover or enforce any security interest created by the corporate
debtor in respect of its property;
d) the recovery of any property by an owner or lessor where such property is occupied by or
in the possession of the corporate debtor.178
The prohibition from taking the above-mentioned action ensures that the assets of the corporate
debtor are not harmed in any manner, that the management or the promoters of the company
cannot extract any undue benefit from the corporate debtor and that the insolvency resolution
process remains unaffected.
In addition, another lacunae of the debtor-in-possession regime under the erstwhile SICA was the
inordinate delays which often worked to the advantage of the promoters/management of the
corporate debtor. Under the IBC regime, the code mandates that the CIRP shall be completed
178 The Insolvency & Bankruptcy Code, 2016, Section 14.
~ 61 ~
within a period of 180 days, extendable once up to 90 days and no more.179 Although it is an
ambitious challenge and delays continue to take place, it is nevertheless a welcome initiative
from a governance perspective.
CONCLUSION
A recent survey by the PricewaterhouseCoopers (PwC) found that more than two-thirds of the
lenders preferred insolvency resolution through the IBC for the recovery of their dues because it
not only enhances the chances of recovery but also ensures a quicker turnaround time.180 This is
in sharp contrast to the inordinate delays and the diminishing value of the assets of the corporate
debtor in the pre-IBC era.
With the particular characteristics of the Indian economy in mind and decades of inactive legal
machinery, the IBC has definitely brought a new wave of optimism in India’s corporate-legal
setup. While it has certainly propelled India’s status in the ‘ease of doing business’ rankings, at
the same time it is quietly going about optimizing the governance mechanism of the corporate
entity during the insolvency or pre-insolvency phase. Moreover, the shift to the creditor-in-
control regime and its implementation through the IBC will certainly strengthen the low power
of the creditors who for decades have faced immense challenges in recovering their dues.
179 The Insolvency & Bankruptcy Code, 2016, Section 12. 180 Supra note 14, at 15.
~ 62 ~
WHITE COLLAR CRIMES: AN ISSUE SELDOM ADDRESSED
-Rishika Garg181
Abstract
The technological advancements that we see today are worth praising to the skies. However,
every good thing comes with a cost which here is the birth of a whole new category of crime
namely, ‘White Collar Crimes’. The definition of the same is debatable hence; a definition of
general acceptance is yet to be formed. White Collar Crimes are an outcome of the unethical
trade practices that result from the economic instability in the country. These include different
financial frauds, money laundering, tax evasion, etc. that invokes serious concern pertaining to
the Corporate Affairs of the economy. The term ‘White Collar Crime’ is often confused with the
term ‘Economic Crime’ and the two are generally considered synonymous to each other,
wherein fact, both the terms fall under separate umbrellas of crime. White Collar Crimes are
breeding at the drop of a hat in every corner of the Indian society; however, India is not home to
a score as high as the other nations around the globe. This perhaps does not negate the fact that
the resultant loss from such crimes is humongous that also contains in itself the inevitable and
irreversible damage to the public morality. Lack of awareness, however, keeps the common man
from acquainting himself with the nature and existence of such category of crimes and the
categorical complexities make the issue nothing but difficult to identify. The principal root of the
problem is trade competition where winning over the opponent requires shortcuts such as
forgery, corruption, manipulation, etc. Hence, the following research work aims at reading the
trends and shifts in the occurrence of White-Collar Crimes in India, what chain of reaction
causes the ill-effects of the nation’s economy and how exactly the issue needs immediate
attention of the country’s legislature.
Keywords: White Collar Crime, Legislation.
181B.Com. LL.B. (Hons.) Student, Institute of Law, Nirma University, Ahmedabad, Gujrat.
~ 63 ~
BIRTH OF A DEBATE
The technological advancements that we see today are worth praising to the skies. However,
every good thing comes with a cost which here is the birth of a whole new category of crime
namely, ‘White Collar Crimes’. The newer form of criminality pertains to the upper and middle-
class people and is executed by them in the course of their occupation.182 Criminal law has been
one of the most engaging bifurcations of jurisprudence.183 Not every criminal is a devil in
disguise and not every crime glorifies violence. As the name puts forth, White Collar Crime is an
unlawful act frequently committed in enormous and complex organization.184 White-collar crime
is commonly referred and covered under the ambit of socio-economic crime185 because of the
direct effects which it embosses on our society and economy. These offenes are perpetrated by
the adept in the areas of management, finance, medicine, and so on. White-collar crime hold
within it, the following offences like corruption, embezzlement, tax evasion, fraud, money
laundering, insider trading, misrepresentation of financial statements that are committed mainly
by corporations, their owners, executives or employees as well as by government or municipal
officials and members of the professions.186
Brief history
Edwin Sutherland was the first to make an attempt to define the phrase “White Collar Crime” as
a crime performed by a person who has high esteem during the span of his occupation.187The
crimes arising out of acts of corporations and other legal entities were also inculcated under his
definition. Sutherland, also manifested that crimes were not perpetrated by lower-class offenders
exclusively.188 His study of white-collar crime was persuaded by the view that criminology had
erroneously concentrated social and economic determinants of crime.189 He put forth that the
ignorance of lawbreaking by the elite class was fundamentally due to the fact that there was no
exhibition of crimes committed by the upper class in the official criminal records.190 He went on
to explain the reason behind the same and said that people of the elite socio-economic class are
182
Judith M Collins & Frank L Schmidt, Personality, Integrity and White Collar Crime: A Construct Validity Study
Personnel Psychology, 46 SAGE PUBLICATIONS, 295 (1993).
183SnigdhaKuriyal&AnjumParvez, Depletion of our economy: a study on white collar crimes in India, 4 IJLDAI
327,326-338 (2018).
184Dr. Sanjay I. Solanki, A Critical Study on White-Collar Crimes in India, 6 IJBMI, 52, 52-58, (2017). 185
JupiGogoi, Socio-Economic Offences, Annual Survey of Indian Law, 49 INDIAN LAW INSTITUTE 1001, 1001-
1024, (2013).
186HartmutBerghoff& Uwe Spiekermann, Shady business: On the history of white-collar crime., 60 BUSINESS
HISTORY 289, 289-304, (2018).
187Edwin H. Sutherland, White Collar Crime, 59 Yale L. J. 581, 581-585, (1950).
188 Id. 189
G. Nagarajan& Dr. J. Khaja sheriff, White Collar Crimes in India, 1 IRJC 157, 157-164, (2012).
190ArjanReurink, From Elite Lawbreaking to Financial Crime: The Evolution of the Concept of White-Collar
Crime, MPlf Discussion Paper 16/10, 3 (2016).
~ 64 ~
more powerful, both politically and financially and as a consequence, they escape arrest and
conviction to a substantial extent than the persons who do not possess such power.191 By coming
up with the concept of white-collar crime, Sutherland has made us realize that upper-class people
perpetuate their own forms of crime.192
Attributes
The white-collar crimes are separate from other crime because of their remarkable
attributes193which include a crime that is committed by a person of high esteem and social status,
during the course of his profession, resulting in the violation of trust. Ordinarily, the illegal act is
intentional and the modus operandi of such act is motivated by fraudulence and not by force. The
motive behind committing such acts is extreme greed of material White collar crime, particularly
violent crime, is our nation’s one-track mind.194 White-collar crime holds sway over the media,
public, the legislature, the judiciary and we look at it in a slightly different way than any other
crime. On one side of the coin, it perplexes us as to why the well-paid professionals commit it,
while on flipping the coin, the complicated financial course of action bothers us because they are
often cumbersome to understand. The agony caused by white-collar crimes is mostly self-
evident. For example, insider trading results in loss to investors, tax evasion results in reduction
of revenue, so on and so forth. These crimes cause revenue and foreign exchange loss and create
inequalities in the economy. White Collar Crimes consists of complexity and uncertainty, which
is prima facie not identifiable. As a bonus to this, recognizing the victims is tough as they are
themselves unaware of their victimization. The plethora of crimes come under the ambit of
White Collar Crime, yet all of them are committed with the same intention of having financial
gain through deceit. These include different financial frauds, money laundering, and tax evasion
and so on, that invokes serious concern pertaining to the Corporate Affairs of the economy. The
competitiveness in the market is essentially responsible for the commission of White Collar
Crime. The crooks in various professions tend to become unprincipled because of their
carelessness during their earlier stages of life when people gained training for building their
character.195
Historically, white-collar crime was not classified as a kind of wrong-doing under the umbrella
of crime. This is because people committing white-collar crimes were not perceived as ‘typical
191
ArjanReurink, “White Collar Crime” The Concept and its potential for the analysis of financial crime, 57(3) European Journal of Sociology,387, 385-415, (2016) doi:10.1017/S0003975616000163 192
Supra note 9 at 3. 193VijayanandPandeya, Social and Economic Offences in India, Resource Material Series No. 15, UNAFEI, Japan,
204, (1976). 194JM Olejarz, Understanding White Collar Crime, HARVARD BUSINESS REVIEW, 110, 110-111, (2016)
https://hbr.org/2016/11/understanding-white-collar-crime 195
Supra note 2.
~ 65 ~
criminals’ who were engrossed in theft, or murder.196 These crimes have proved to have an
adverse impact on the social as well as economic framework of the state and have become a
stumbling block for future development.
PRINCIPAL ISSUES ASSOCIATED
Corporate criminals are not perceived as criminal identities, and are not really subjected to
criticism.197 A white collar criminal is a person of elite socio-economic class in the society,
whose acts in an illegal manner for financial gain. The criminal commits the illegal acts during
the course of his occupation in a professional setting, where these criminal activities are often
concealed. Further, the person committing white collar crime does not consider his action as
crime and has no feeling of guilt. In case the criminal is recognized, he hires a top white-collar
attorney. The punishment awarded to white collar criminals is mostly milder than that of street
criminals.198
The dynamic socio-economic scenario of the society along with expansion of wealth has given
open window for commission of these crimes. Keeping in mind, the growing instances of white
collar crimes, the Law Commission in its 29th
Report observed that technological advancements
and monopolistic behaviour in business world have led to situation of increased white collar
crimes.199 The principal root of the problem is competition in business community where
winning over the opponent requires shortcuts such as forgery, corruption, manipulation etc. In cases of White Collar Crime, one of the issues raised is, whether or not the accused actually
knew that he acted in an illegal way. This essentially means that the facts alone are just drop in
the ocean. In reality, it is the perception of the accused which needs attention for ascertaining his
or her intention.200 The accused tend to defend them by contending that they were uninformed
about violation of a law, in view of their actions.201 Determining the intention in a definite
manner becomes more ticklish when a person relies upon on the advice of an expert to make
decisions. For instance, if an accountant tells you that it is legal to show inflated profits to attract
more and more investors, when in reality this is illegal, so, should you now be sent behind the
bar for the same? The answer to this question remains ambiguous. This in turn provides room for
196
Supra note 2. 197Supra note 2 198
Petter Gottschalk, Investigating Fraud and Corruption: Characteristics of White-Collar Criminals, 1 J
FORENSIC SCI CRI INVES. 1, 2-7 (2016).
199Supra note 2
200Supra note 2
201Id.
~ 66 ~
the promotion of White Collar Crime, as the experts with eyes wide open take the shelter of their
uninformed clients to commit it.
Our country is in a developing stage, and there exists various unwelcomed issues like illiteracy,
starvation, poverty and ignorance which exert influence on the life of the people. In such a
scenario, white collar crimes are obligated to grow by leaps and bounds. Curbing these crimes
has become a critical issue for the criminal justice system of our country. White Collar Crimes
are an outcome of the unethical trade practices that result from the economic instability in the
country.202 The quantum of loss to life caused by corporate adversity such as testing of
pharmaceuticals in an inadequate way, go above and beyond those caused as a result of murder.
Despite being of non-violent in nature, the white collar crimes affect a number of people and the
monetary damage significantly. Any individual person can become a victim of white collar
crime. The principal root of the problem is trade competition where winning over the opponent
requires shortcut such as forgery, corruption, manipulation and so on.24There is an increase in the
number of white collar crimes due to economic upswing and technological advancement. Law
enforcement is sometimes hesitant to follow these cases because they are difficult to keep an eye
on and investigate.
SOME OTHER CAUSES
One of the paramount reasons for white collar crime, recognized at present, is criminal
opportunities. Without opportunity, there can be no crime.203 Opportunities are one of the
important causes of white-collar crime, where the opportunity structures may be different from
those of other kinds of crime. These differences create special difficulties for control, but they
also provide new openings for control.204
Globalization and liberalization remain yet other far-reaching reasons that are to be blamed for
white collar crime.205 The dynamic socio-economic fabric of the society combined with
increased wealth and prosperity has bestowed opportunities for such crimes. Out of the
abundance of the factors responsible for white collar crimes, the economic and industrial growth
has been the most potential cause for it. The Law Commission in its 29th
Report made the
following observation that technological advancements and monopolistic trends in business
202
Aashish Ahuja, “Analysis Of White Collar Crimes In India”, i Pleaders https://blog.ipleaders.in/analysis-white-
collar-crimes-india.
203Marcus Felson, Ronald V. Clarke, Opportunity Makes the Thief, Paper 98, Policy Research Paper Series
https://pdfs.semanticscholar.org/09db/dbce90b22357d58671c41a50c8c2f5dc1cf0.pdf 204
Benson Ml & Simpson Ss, White-Collar Crime: An Opportunity Perspective (2009).
205Supra note 2.
~ 67 ~
world have provided a route to immense increase in white collar crimes.206 From every now and
then, these crimes are committed solely to hold on to the competitive business. For instance,
educational institutions, receiving public-aid or grants, present false account merely in view of
retaining their existence. Similarly, in order to claim tax exemption, the members of corporations
who enjoy high status in the society tend to conceal their actual gains and losses by producing
fabricated financial statements.The high socio-economic status of white-collar criminals is one of
the reasons responsible for the abundance of white-collar crime. These criminals are powerful
enough to handle their occupation in a judicious way. As a result, a person affected by it, hardly
knows that they are being victimized. Furthermore, the common man is also somewhat
indifferent towards such crimes, thus teething problems in prosecution and punishment of white-
collar criminals.
It is often alleged that Judges become supportive to the white collar criminal because they belong
to the upper class of the societal setup. But there is no available evidence to support the same.
But, if this allegation derives its basis form the large number of acquittals, it may be emphasized
that it is not because of distinction that exists between criminality and immorality pertaining to
white collar crimes.207
CONCERN
White collar crimes are responsible for abusing the position of trust and power. Officers in
corporation fix prices to wash out the competitors out of the business. White collar crime is often
difficult to detect, in comparison to other crimes. This is because loss caused to victim may not
be evident immediately after the illegal act is done, and further, the crime may have sophisticated
schemes and cover ups. The failure to characterize the correspondent offences into categories in
terms of its mode of operating, characteristics, impact on victims, has been proved to be one of
the major drawback of studies of white collar crime.208Even after having legislations for curbing
this serious problem of white collar crime, the white collar criminals go unpunished. Due to their
privileged position, the white collar criminals, the prosecution becomes difficult. This is because,
first of all, they can afford to hire the best lawyers to represent them and have a political
advantage, enabling them to influence legislative process in their favour.
White collar crimes cannot be recognized easily because the adverse impacts that follow are
stretched to a large number of people. For instance, bribery can lead to over imposing of
206
29th, Law Commission of India (1966).
207Supra note 2. 208Herbert A. Bloch, Gilbert Geis, "White-Collar Crime" in Man, Crime and Society: The Forms of Criminal
Behavior, New York Random House, 394-404 (1962)
~ 68 ~
payment for public projects which would, then result in higher taxes for all citizens of a country.
Such white collar crimes seem to be ones in which there is no injured party at first place, because
the facts of the crime are very often hidden. However in reality, a substantial harm is caused, yet
victimization is scattered.
A lot of people get away with white collar crimes. This is because; most of the crimes like
these are dependent on trust. People are often vested with certain roles and responsibilities,
but they take these responsibilities as advantageous in their favour and abuse the good-faith.
The case related to white collar crimes are not easy to understand. They are often complex
and complicated to be understood in one go. Over and above this, if a defendant does not
cooperate in some manner, a lot of time would be consumed to know about the extent of the
crime. It might take months or year to unravel. The law enforcement agencies and the
prosecutor’s office do not have enough people who have substantial backgrounds in
forensic accounting. Most law enforcement is geared towards prosecuting violent crimes,
like sex crimes, crimes related to bodily injury, so on and so forth. Another reason
responsible for getting away with white collar crime is hiring good attorneys. If one can
afford an exceptional legal counsel, the prosecution is likely to cut a deal with you rather
than risk losing So long as the defendant receives some punishment and pays some
restitution, it’s often deemed better than nothing happen at all.
Because of the complex nature of these crimes, it becomes difficult to determine their
nature, i.e., whether they are if criminal nature or of civil nature. In cases, when there is
doubt as to the nature of the white collar crime, it is often declared to be one of civil nature.
Police plays a major role in determining the nature of these crimes. The limited knowledge
related to business affairs which might be insufficient to assess the correct nature, may lead
to wrong judgment by the police. The confusion regarding the civil and criminal nature of
crime may allow the offender to flee the investigation, resulting in no action against him.
PERCEIVED HARM
Commentators have noticed the enormous consequences of white collar crime on the economy
and have concluded that white collar crime result in greater total harm than other crime.209 The
recognized harm from white collar crime is subject to two conditions. The debate whether the
criminal activities result in any harm continues, in light of criminal enforcement of some
209J. Kelly Strader, The Judicial Politics of White Collar Crime, 50 HASTING L. J. 1266, 1199-1273 (1999).
~ 69 ~
economic regulations. For instance, it has been long debated that whether the securities market
and the investors are harmed, or benefitted by the insider trading.210 Second, it is difficult to
identify a particular victim, especially when it is generally agreed that the act of few other white
collar crime is toxic.211 For example, violating the provision of law relating to currency, causes
little harm, i.e., only one party, the Government is affected in a minor way. Similarly, in case of
the offence of bribery, the defendant violates large public trust, and hence the victims are
included in this manner.212
Assessment of the overall economic impact of white collar crimes supersedes the complicated
problem to define and to draw its connection to moral categories. Undoubtedly, it is the people
belonging to weaker strata of society, who have to suffer massive damage.213 Social Conflict
theory envisages that the one with power and wealth of society determine what is right and what
is wrong, i.e., the rich can behave like financial magnate, just because they make laws.214 So,
there arises a question as to why would the people in power punish their own elite members?
The severity of the punishment for the offence is highly dependent on the superiority of the
offender. However, it remains unclear whether or not the superior offenders be punishes more or
less severely.215 In general, the superiors set example for their juniors, therefore, considering this
fact, the senior executives who commit any sort of white collar crimes should receive harsher
penalties than juniors. This sets an example and the company sends a powerful message to other
employees regarding the compliances, restraining the employees from committing wrong doing
in the future.
Every coin has two sides, and both the sides cannot be favourable. Applying this analogy, it is
seen that, though the company, by severely punishing the senior executives, set an example for
future, but at the same time it can cause loss to the company. This is because, litigation risks and
media coverage of senior offenders are likely to become severe, thus hurting the company’s
reputation among its stakeholders. In addition to this, the executives at the company may decide
not to disclose, crucial information related to the crime, because of the fear of losing its client
coverage and over all reputation in the market. Further, it is costlier to recruit a senior executive
in replacement, than a junior, thus adding to the company’s cost. As a result, the company
210
Richard W. Painter, Don’t Ask, Just Tell: Insider Trading After United States v. Oo’Hagan, 84 VIRGINIA L.
REV. 153,168 (1998).
211Supra note 17.
212Leo Katz, Criminal Law In A Companion To Philosophy Of Law And Legal Theory 90-93 (1996). 213
Supra note 5.
214Id. 215
Paul Healy, George Serafeim, “Who Pays for White Collar Crime?Working Paper 16-148 HARVARD
BUSINESS SCHOOL, 11, 1-48 (2016).
~ 70 ~
wouldpunish the high-performing senior offenders less severely, even when they have
committed a wrong.
LIMITED MEDIA COVERAGE
Corporate criminals do not receive the title of criminal identities. In comparison to the number of
its incidents, arrest for white collar crimes is rarely made. Socio-economic crimes, today, have
become as a crime of strict and absolute liability. Thus, if not completely, but as such relevance
of mens rea or guilty mind has been decreased to a large extent, in relation to white collar
crimes.216 It is mostly encountered that the white collar criminals do away with the punishment
primarily because of the faulty investigation and prolonged prosecution and trial. Therefore, it is
need of the hour to ponder upon the investigation and trial procedure of white collar crimes. It is
true that certain efforts have been undertaken to address on this aspect of the concern. Creation
of special courts or tribunals for the trial and punishment of white collar crimes is quite often
suggested. It is not the creation of such institutions which matter more, but the men who run
these institutions. Once the special courts or tribunals are created, it does not mean that the white
collar crimes would be handled with more efficacies or that these crimes would be wiped out.
Criminal law is part and parcel of society and not only the enforcement agency is responsible for
its success or failure but also the investigating and prosecution agencies. While remaining self-
reliant from the influence of any criminal law and its agencies, the acts of these agencies need a
combined coordinated effort.217
The Law Commission of India quotes the Santhanam Committee’s Report as under which talks
about the advent and progress of white collar criminality in India218 “The advance of
technological and scientific development is contributing to the emergence of 'Mass Society' with
a large rank and file and a small controlling 'Elite' encouraging the growth of monopolies, the
rise of a managerial class and intricate institutional mechanisms. Strict adherence to a high
standard of ethical behaviour is necessary for the honest functioning of the new social, political
and economic processes. The inability of all sections of society to appreciate in full this need
results in the emergence and growth of white-collar and economic crimes” and the consumers
should be provided with enough information in order to make a ration purchasing, keeping in
mind the complexities in today’s market.
THE AFTERMATH (SOLUTIONS)
216
Dr. Sanjay I. Solanki, A Critical Study on White-Collar Crimes in India, 6 IJBMI, 54, 52-58, (2017).
217Id. 218
Supra note 28.
~ 71 ~
The white collar criminality erodes the moral and ethical values. It is through education that we
can combat and control these crimes and this would be possible only by undertaking certain
measures, as a result of which, the welfare of the future generation can be secured. The higher
section of the society and the public services is in much more need for reinforcement of the
morals, as compared to the weaker sections. Further, to achieve national welfare, it is necessary
for us to develop group norms and ethics which will derive their basis from national honesty and
integrity. This is possible only when the character of the person is built at grass-root level with
the intention of feeling of genuine concern for the nation among the youth, in order to make them
ready to lead an honest and ethical life. The common man is generally not familiar with the
complexities of white collar crime, and hence fails to understand them. The media plays a major
role in spreading awareness about any issue prevailing in the society. Hence, public awareness
should be created against the white collar crimes through various modes of media, including
audio-visuals, press clippings, etc. Awareness camps should be organized and the people should
be imparted with legal literacy. However, it is often noticed that, the media also refrains from
showing the real side of white collar crime, as they are themselves involved in it. The whole
story comes and revolves around the same discussion, i.e., the powerful sections of the society
have charge over everything, and thus they become successful in hiding their deeds by bribing,
committing yet another crime.
Our criminal justice system does not have umbrella legislation for white collar crimes. It is well
accepted fact that, a completely new legislation would definitely take huge time and effort to
come into force, but a change is needed at this hour. This will ensure that those who are
prosecuted for white collar crimes do not flee from the punishment because of their high status.
Tribunals that shall only deal with cases of white collar crimes should be created and authority of
final decision shall also be given to them. This will not only reduce litigation burden on the
courts, but, it will also ensure that fair justice is imparted, because the head of such tribunals will
have expertise in business affairs. Some stringent regulatory laws and rigid punishment for white
collar crimes may also help in reducing the number of such crimes, as it will set an example for
the future. Another way out could be, constitution of a White Collar Crime Commission
nationwide, which would look after the crimes and all its facets. This would ensure that the
crimes do not go unreported and that they are properly investigated.Criminal deterrence uses
severe penalties which includes prison sentences for a long period of time and heavy fines to
deter white collar crimes. However, it is unclear as to how effective this is at reducing white
collar crime. One of the problems associated with criminal deterrence is that it is responsive
~ 72 ~
instead of proactive. In simple words, the damage has been done and it cannot be undone. Thus,
there is a need to change this dynamic. These changes include training those included in the
financial activity to help in preventing white collar crime.
Business ethics training is another way in which the white collar crime can be combated. In this,
the business professionals are provided education on different dimensions of business activities.
Its major aim is to enable the employees to identify and tackle the ethical problems and develop
their moral feeling, which are implied in day to day actions and choices. Most of the businesses
provide training and workshops to their employees. Many of these are comprehensive and cover
a wide variety of situations that includes white collar crime. A number of companies are
instituting more concentrated training in the area of white collar crime. This education helps in
the identification of white collar criminal activity by training key personnel to spot activities
generally associated with white collar crimes. Many of these training sessions are given by ex-
cons who were once business professionals themselves but lost everything by getting caught and
convicted of white collar crime.
CONCLUSION
White collar crimes might have been ignored earlier, but they have continued to exist in the
society from a long time. It is clear from the above discussion that the technological
advancements that we see today have led to the birth of a whole new category of crime namely,
‘White Collar Crimes’ The Indian penal code was enacted in 1860, and the word White Collar
Crime is not mentioned anywhere in the code. However, the aspect of white collar crimes are
very wide and there are certain white collar crimes such as corruption, bribery, counterfeiting of
coins and government stamps, offences relating weight and measures, adulteration of foods and
drugs, misappropriation of property, criminal breach of trust, cheating and dishonestly inducing
delivery of property, forgery etc that are closely related to offences defined under Indian penal
code. But, the extent of the white collar crimes has gone so far, that there is an urgent need to
create umbrella legislation to address the problem of the same. The effects of white collar
crimes, which look victimless at first place, have made the victims all over India. They need to
be looked at immediately in order to address these not so visible crimes. The common man is
unaware about the complexities of the white collar crimes and hence cannot assess whether or
not, they are one of its victim. In order to solve this problem, the media can play a major role by
educating the masses and influencing their opinion on white collar crime. However, it is believed
~ 73 ~
that media is controlled by the elites which lead to lesser reporting of white collar crimes on
media, but in reality it is the invisible nature of the crime itself, which is responsible for the
same. After analysing the problem of white collar crime thoroughly, it has been noticed that this
type of crime takes birth from within the organization by those who are in powerful positions and
the ones who have been entrusted with some authority. Such people take advantage of their
positions and act in an illegal manner for their own financial gain. Our country is in a developing
stage, and there exists various unwelcomed issues like illiteracy, starvation, poverty. In such a
scenario, white collar crimes are obligated to grow by leaps and bounds. Curbing these crimes
has become a critical issue for the criminal justice system of our country. Therefore, the
constitution of Tribunals and a Commission, as suggested in the above discussion would solve
the problem to a great extent. Every big change takes huge time and efforts, but the change has to
come sometime, and this should not be delayed anymore, otherwise, this problem will continue
to grow and would cause greater harm.
~ 74 ~
GOOD GOVERNANCE: THE SYNONYM OF CORPORATE
GOVERNANCE IN INDIA
-Anuja L. Parulekar, Sahil S. Kadam219
'As an alcoholic, you will violate your standards quicker than you can lower them'.
-Robin Williams
Abstract
In the context of corporate governance, when the above quote is made applicable to the money-
minded, intemperate possessors are the alcoholics who tend to violate corporate ethics to attain
their avarice. The concept of governance is as old as human civilization. Corporate governance
refers to the way a corporation is governed. It is the system of rules, practices, and processes by
which a firm is directed and controlled. Good governance is inherent to the very being of the
company. Corporate governance is about corporate decency, lucidity, and responsibility.
According to Adrian Cadbury, Corporate governance is concerned with holding the balance
between economic and social goals and between individual and communal goals. The
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. The need for good corporate governance
has stemmed as a result of the growing concern about the non-compliance of standards of
reporting and otherwise by board of directors and management imposing heavy losses to the
investors. Needless to say, the country at large is also affected by this degree of mismanagement.
This paper tries to summarize the importance of Good Corporate Governance along with
situations that deliberate the role of Good Corporate Governance. It also highlights the role of
government in good corporate governance, accountability of corporate decisions, significance of
corporate behavior, corporate governance and corporate social responsibility amongst others.
As the concept of good corporate governance revolves around the age-old saying 'A stitch in
time saves nine'.
Key Words- Accountability, Good corporate governance, Mismanagement
INTRODUCTION
219 Students, 5th Year B.B.A- LL.B (Hons) School of law, University of Mumbai.
~ 75 ~
"The real mechanism for corporate governance is the active involvement of the owners".
-Lou Gerstner
Corporate Governance is a comprehensive revelation of information and an account of an
organization's pecuniary position, performance, ownership, and governance, relationship with
shareholders and adherence to business ethics and values. The term governance is a wholesome
term meaning the act of managing a corporate entity. Efficiency, as well as globalization, are
significant factors urging corporate governance.Corporate Governance is the soul of the
organization and must be clinged onto while getting into any business activity. A Corporation is
produced to address objectives that are much more than generating products and services, it has
to serve the larger purpose of satisfying multi-level needs of the society. Healthy Corporate
Governance practices are no longer the need of the law but have become pivotal for the very
survival of the organizations; the current economic calamity has proven that beyond doubt.
Good Corporate Governance is the skill of administering and controlling the organization by
balancing the needs of various stakeholders. Stakeholders would include everyone ranging from
the Board of directors, Management, Shareholders to Customers, Employees and Society. One of
the aspects of Corporate Governance is that the notion of economic efficiency must be followed
when directing, managing and controlling organizations. For instance, it is truism that
corporations exist to make profits and hence the profitability and proceed generation ought to be
the aim for which the corporate must aspire for. Good Corporate Governance means that the
processes of disclosure and transparency are followed so as to provide regulators and
shareholders as well as the general public with precise and accurate information about the
financial, operational and other aspects of the company.220 Corporate Governance is a term that
means many things and the bottom line for good corporate governance is a dual aim of pursuing
profits and doing so in a transparent and accountable manner. Corporate Governance provides
guidelines to a company as to how it can be directed or controlled such that it can fulfill its goals
and objectives in a manner that adds value to the company and is beneficial for the stakeholders
in the long term. Corporate governance is a multidisciplinary field of study which covers a wide
range of disciplines – accounting, consulting, economics, ethics, finance, law, and
management221The main function of corporate governance is to make agreements that describe
the privileges and tasks of shareholders and the organization. In case of disagreements because
220
https://www.managementstudyguide.com/what-is-good-corporate-governance.htm 221
S. Li and A. Nair, “Asian corporate governance or corporate governance in Asia?” Corporate Governance: An
International Review, vol. 17, no. 4, pp. 407-410, 2009.
~ 76 ~
of conflict of interest, it is the responsibility of corporate governance to bring everyone together.
It also has the function of setting standards against which corporations work can be managed and
administered222.Corporate governance has played a very important role in the present economic
condition of India. India successfully started its move towards an open and welcoming economy
in
1991. From then onwards it has seen an amazing upward trend in the size of its stock market,
that is, the number of listed firms was increasing proportionately.223
NEED AND IMPORTANCE OF GOOD CORPORATE GOVERNANCE:
The last decade has witnessed Corporate Fraud and governance failure frequently which is why
we require good corporate governance in the country. Our country provides proper norms and
laws which meet the international standards to govern a corporation. The need for good
corporate governance can be analyzed from the given points:
1. Corporate has a lot of shareholders with different perspectives towards corporate affairs,
corporate governance shields the shareholder's democracy by executing it through its
code of conduct.
2. Large corporate lenders are becoming a challenge to the management of companies as
they influence the decision making the power of the companies. Corporate governance
proves to be a code in such situations.
3. Past years have seen a number of frauds when it comes to corporate, corporate
governance helps to revive that confidence in the investors again which was shaken due
to such frauds.
4. Corporates give ray of hope and increase expectations of the general public and the
society in which they operate. Sensitivity towards the environment, pollution, quality,
and quantity of goods and services are some of them. Takeovers and Acquisitions also
have a big role to play in affecting the trust of stakeholders. Corporate Governance is
needed to manage these circumstances.
222
R. V. Aguilera and G. Jackson, “Comparative and international corporate governance,” Academy of Management
Annals, vol. 4, no. 1, pp. 485-556, 2010. 223
L. Som, “Corporate Governance Codes in India,” Economic and Political Weekly, vol. 41, no. 39, pp. 4153-
4160, 2006.
~ 77 ~
5. Globalization has made Indian market a home to many international investors which has
also resulted in Indian companies being listed on international stock exchanges and thus
making a proper code of conduct mandatory for a smooth-running economy.
Basically, there is often a level of confidence that is analogous to a company that is known to
have Good Corporate Governance. The existence of an active group of independent directors on
the board accords a great deal towards ensuring confidence in the market. Corporate governance
is one of the criteria that foreign institutional investors are progressively dependent on when
deciding on which companies to invest in. It also has a positive influence on the share price.
Some points to summaries its importance are given below:
1. Risk mitigation and compliance:
There is a direct relationship between compliance, governance and risk mitigation. If a company
is ruled on the basis of good principles, it will naturally work efficiently, and shelter compliance
with every statutory law and guideline. Being in consonance with the policies and law states that
the company is prepared for uncertainty and thus has risk mitigation mechanisms in place. Better
the governance strategies; less is the risk of disruption arising out of uncertain events.
2. Magnify Shareholder's worth:
There is no definite relation between corporate governance and market value of a company but
its role in enhancing shareholder's satisfaction cannot be understated. In India, corporate
governance plays an important role in safeguarding the value of the company as the ultimate goal
of any company is to maximize its stakeholder's value. All the value and reputation which a
company builds over years can be wiped off in a single unfortunate incident and hence good
control system is a must.If India wants to attract more countries for foreign direct investments,
Indian companies have to be more focused on transparency and "Shareholders value
maximization"224
3. The benefit of Goodwill during corporate breakdowns :
Many stories relating to banking fraud and financial malpractices have done news in the recent
past. It is natural for the masses to believe that all corporate are involves in such frauds which are
224
R. Ramakrishnan. (2007). Inter-relationship between business ethics and corporate governance among Indian
companies. [Online].Available: http://ssrn.com/abstract=1751657
~ 78 ~
not always true. Only when organizations ensure people about their core and transparent
governance practices will they actually believe them. Trustworthy nature which has been
established over the years plays a vital role in upholding the company's image during tough
situations.
4. Enhanced Organizational Efficiency:
Corporate Governance is a key determinant of industrial competitiveness. Many questions are
raised on how a company is governed. Good governance assures enhanced corporate
performance and boosts economic results.
5. Key Factor during Mergers and Acquisition:
A critical role is played by corporate governance while restructuring events such as mergers and
acquisitions. Corporate governance not only helps a company to differentiate between good deals
from bad ones but also Mergers and Acquisitions activity by a company with good corporate
governance is better received by stakeholders in the market. Mergers and Acquisitions have the
power to improve the quality of Corporate Governance in an organization.
6. Crucial for shareholder's wealth:
In order to protect investors and shareholders of a corporate company needs protection for their
interest due to inefficient standards financial reporting and accountability. Companies in India
raise their capital from the market at a high valuation of their shares by projecting the wrong
picture of the company's performance and profitability. “Bad governance was also exemplified
by allotment of promoters’ share at preferential prices disproportionate to market value affecting
minority holders interest”.225 Indians are becoming increasingly aware and conscious of
investing in companies having good corporate governance practices.
7. Means to pay heed to Investor's grievances:
All investors are entitled to full and complete disclosure by companies in which they invest their
hard-earned money. Committees like Kumar Manglam Birla Committee reported that companies
225
Article on "Corporate Governance in India: Need, Importance and Conclusion" by SubhoMukher available at
http://www.economicsdiscussion.net/business-environment/corporate-governance/corporate-governance-in-india-
need-importance-and-conclusion/10145
~ 79 ~
were not paying adequate attention to timely dissemination of information to the investors.
Regulators like SEBI and RBI are enforcing measures to ensure transparency in activities this is
not enough. Much more regulations are required and what can be achieved with a good corporate
governance system.
8. Global Perspective:
The basic principles of good corporate governance have now become an important factor in
attracting foreign investment. In this era of globalization quantitative limitations have been
removed and trade barriers are dismantled, the relationship between corporate governance and
flows of foreign investment has become increasingly important.
9. Indispensable for healthy vibrant stock markets:
A striking feature of good corporate governance is that it is imperative for a vibrant stock
market. Companies take undue advantage at the expense of investors in general through insider
trading. Insider trading is a kind of fraud committed by the officials of the company by using the
Unpublished Price Sensitive Information. It is a way used by companies to signal the market that
proper regulations are under check and that the stakeholders are secured with their investments.
PRINCIPLES AND FRAMEWORK OF CORPORATE GOVERNANCE IN INDIA:
Corporate Governance describes the processes, practices, and structures through which a
company manages its business and affairs and works to meet its financial, operational and
strategic objectives and achieve long term stability. Corporate Governance is a matter of law
based on corporate legislation, securities laws and policies, and decisions of the courts and
security regulators. Directors have a fiduciary relationship with the company they work for and
owe loyalty towards their company in its best interest.
Corporate Governance has developed three key parameters to be its guidelines as given:
1. Transparency:
Disclosing the relevant information in time is an important task corporate are expected to
complete. It facilitates the stakeholders' knowledge of their wealth and returns.
2. Accountability:
~ 80 ~
A person's liability is dependent on how he takes decisions for the interest of others. Hence
people like managers, chairman, directors, and other officers are to be held accountable for the
stakeholders' benefit.
3. Independence:
The independent functioning of top managerial personnel is crucial for the smooth functioning of
the corporate. No interference of any person in their functions helps the company take neutral
and unbiased decisions. Independence is a quality that can be possessed by individuals and is an
essential component of professionalism and professional behavior. It refers to the avoidance of
being unduly influenced by a vested interest and to be free from any constraints that would
prevent a correct course of action being taken. It is an ability to ‘stand apart’ from inappropriate
influences and to be free of managerial capture, to be able to make the correct and
uncontaminated decision on a given issue226
In order to ensure that the entire above are attained it is of primary importance that corporate
develop strong and independent code of conduct which forms the base and pillar or good
corporate governance practice. A corporate governance framework needs to be developed by
providing a broad overview of recent corporate governance research. All aspects of corporate
governance are important from board structure to ownership structure.227The Indian framework
on Corporate Governance has been enormously in consonance with international standards.
Broadly, it can be given as:
1. The Companies Acts 2013 has provisions concerning Independent Directors, Board
Constitution, General meetings, Board meetings, Board processes, Related Party
Transactions, Audit Committees, etc.
2. SEBI (Securities and Exchange Board of India) Guidelines ensure the protection of
investors and have mandated the companies to adhere to the best practices mentioned in
the guidelines.
3. Accounting Standards issued by the ICAI (Institute of Chartered Accountants of India)
wherein the ICAI is an autonomous body and issues accounting standards. The disclosure
226 Article on Indepedence of Corporate Governance available at https://www.accaglobal.com/content/dam/acca
global/pdf/sa_sept11_independence.pdf 227
S. L. Gillan, “Recent developments in corporate governance: An overview,” Journal of Corporate Finance, vol.
12, pp. 381-402, 2006.
~ 81 ~
of financial statements is also made mandatory by the ICAI backed by the Companies
Act 2013, Sec. 129.
4. Standard Listing Agreement of Stock Exchanges applies to the companies whose shares
are listed on various stock exchanges.
5. Secretarial Standards issued by the ICSI (Institute of Company Secretaries of India)
issues standards on ‘Meetings of the board of Directors’, General Meetings’, etc.. The
companies Act 2013 empowers this autonomous body to provide standards which each
and every company is required to adhere to so that they are not punished under the
Companies Act itself.228
DEMAND FOR GOOD CORPORATE GOVERNANCE AT ALL LEVELS
Our past has seen some major scandals relating to corporate governance. From the IT giant,
Infosys to popular startup Unicorn (essentially who has high value in market) and the ever-so-
famous TATA group amongst the other. Corporate Governance has become a bone of contention
with the leaders of these organizations and stakeholders. There is a quite noticeable cultural
incompatibility which leads us to question Corporate Governance. If for reference Infosys is
considered then, the owners gave up control to the new Executive Board and delivered the
company to an outsider, have been in conflict with the later over the issues connected to
executive compensation and severance pay. This indicates the importance of Corporate
governance policies at all levels since they create a uniform base for all the employees to follow
which leads to minimum disputes and maximum profits.
The most popular personal cab service UBER went from being one of the least known to now as
the most convenient and accessible mode of travel for the commuters. This Corporate found
itself in the soup when the founder was accused of gross ethical violation as well as serious
charges of sexual misconduct and the unprofessional way in which UBER dealt with outbreak
regarding ethical and gender-related partisanship. So here is a firm who took pride in claiming
itself to be the force shaking the world of personal cab services finding itself in hot water
primarily because it is now discerned to be rot at all levels of organizational hierarchy thus
giving another example regarding the impact of bad governance and shaken rules of conduct.229
228 Article on 'Corporate Governance in India' by Pratiksha Ravi available at https://blog.ipleaders.in/corporate-
governance-india 229
Article on Uber's 'Uber breach: A Stunning Failure in Corporate Governance and Culture' by Heidi Shey
available at https://www.forbes.com/sites/forrester/2017/12/05/ubers-uber-breach-a-stunning-failure-in-corporate-
governance-and-culture/#5da7db5459fc
~ 82 ~
Firms like Fidelity and TATA have been accused of breaching corporate governance norms
predominantly because the top management does not let their vision reach the lower classes in an
amicable way. This creates a drift between the levels of organization which in turn affects
it'sworking. The main problem in these firms is that they are dispersed across the world and
being large organizations, the employees down the hierarchy and have an inclination to
misinterpret and misjudge the rules.
What has to be learned from this desperate and different organization is that corporate
governance is something that has to be hatched at the top, and permeate at all levels and infuses
in the corporate DNA.
It is of utmost importance that all the levels are on the same page and it is evident that the
executive management has to come up with strong vision and mission policies and they have to
ensure that it is percolated down the chart wherein all the employees agree to the same rules as
far as mutual agreements and code of conduct is concerned. One of the most effective techniques
of Corporate Governance is to 'walk the talk' which means the top management is expected to
practice what they preach. This will make sure the employees below in the hierarchy follow the
same path and have good role models in place.
Thus, another lesson that one can learn is that a rational approach to corporate governance will
do wonders instead of one single star attempting to mold the organization in their own way. That
being said, it has to be noted that a practical approach to corporate governance does not mean a
“Wink and Nod” attitude towards ethical and normative rules of conduct. Rather, what is needed
is an approach that combines the soaring vision with that of pragmatic realities and on the ground
requirements so that corporate governance is practiced at all levels of the organizational
hierarchy.
Business advisory firm PricewaterhouseCoopers (PwC) calls corporate governance “a
performance issue,” because it provides a framework for how the company operates. According
to PwC, corporate governance should encompass the following:
• The company’s performance and the performance of the board
• The relationship between the board and executive management
• The appointment and assessment of the board’s directors
• Board membership and responsibilities
• The “ethical tone” of the company, and how the company conducts itself
~ 83 ~
• Risk management, corporate compliance, and internal controls
• Communication between the board and the C-suite
• Communication with the shareholders
• Financial reporting
This list provides a bird’s-eye view of corporate governance in action and conveys the extent to
which it can influence business. To help organizations navigate corporate governance, Deloitte
offers a Governance Framework that outlines the board’s objectives and responsibilities, and
how they relate to the corporate governance infrastructure.230
There is not one particular approach to corporate governance, and the way in which it is
preached differs from organization to organization and is dependent as much on the leaders as it
is on the middle and lower levels.
CORPORATE GOVERNANCE AND CORPORATE SOCIAL RESPONSIBILITY:
All of us live and operate in a society and we owe certain responsibilities back to the society in
which we function. Corporate Social Responsibility (CSR) is an important and basic principle of
good corporate governance. At the crossroads of corporate self-regulation and meta-regulation,
scholars have recently pointed to an evolving interplay between corporate governance
And CSR.231CSR essentially means that the corporations have to consider the society and the
environment to cater to their needs in place of just usurping profits at the cost of everything else.
Including CSR we can hope that the corporate would govern themselves and be accountable for
their social and environmental costs. Disclosing the CSR policy and expenditure is considered to
be a good corporate governance practice.
Indian laws are in favor of this concept. Companies Act, 2013 under section 135 describes and
provides for CSR. The CSR Rules appear to widen the ambit for compliance obligations to
include the holding and subsidiary companies as well as foreign companies whose branches or
project offices in India fulfill the specified criteria. There is a need for clarity with respect to the
compliance obligations of a company as well as its holding and subsidiary companies. The
activities that can be undertaken by a company to fulfill its CSR obligations include eradicating
230 Article on 'Importance of Corporate Governance in an organization' by Nichloas J. Prince available on
https://diligent.com/blog/importance-corporate-governance-organization 231
Lawrence E. Mitchell, The Board as a Path Toward Corporate Social Responsibility,
inNEW CORPORATE ACCOUNTABILITY, supra note 4, at 279. See also Ruth V. Aguilera, Cynthia
A. Williams, John M. Conley, & Deborah E. Rupp, Corporate Governance and Social Responsibility:
A Comparative Analysis of the UK and the US, 14 CORP. GOVERNANCE: AN INT'L REV. 147
(2006).
~ 84 ~
hunger, poverty and malnutrition, promoting preventive healthcare, promoting education and
promoting gender equality, setting up homes for women, orphans and the senior citizens,
measures for reducing inequalities faced by socially and economically backward groups,
ensuring environmental sustainability and ecological balance, animal welfare, protection of
national heritage and art and culture, measures for the benefit of armed forces veterans, war
widows and their dependents, training to promote rural, nationally recognized, Paralympics or
Olympic sports, contribution to the prime minister's national relief fund or any other fund set up
by the Central Government for socio-economic development and relief and welfare of SC, ST,
OBCs, minorities and women, contributions or funds provided to technology incubators located
within academic institutions approved by the Central Government and rural development
projects.232
Some considerations need to be made in the provisions of the Act. For instance, the act
composites CSR activities to be undertaken only in the area in which the company operates. But
in reality, there can be such cases where the surroundings of the company would not need help
and upliftment as the other parts would need. So corporates must be at liberty to exercise their
responsibility in any area they feel needs that help and care. Companies can consider
collaborating with their fellow competitors in such a way as to each company is able to report it
individually as well. CSR capabilities can be built by a company by implementing through
agencies that have established track record of at least 3 years. Provided the expenditures for such
activities does not exceed 5% of the total CSR expenditure of the company in a single financial
year. Proper reasons must be given in case of failure to comply. CSR activities are based on the
'Comply or Explain' principle.
India has many examples of responsible corporate doing their duty right to inspire others. Some
of them are:
• TATA group is known to have the best CSR projects implemented all over India. They
have tied up with and implemented projects in the Government of India, Udaan India
Foundation, Tata Medical Centre, National Confederation of Dalit and Adivasi, Cancer
Institutes and more. Their thematic areas include Eradication of hunger, malnutrition,
poverty, preventive healthcare, water, and sanitation.
232
Article by EktaBahl on 'An Overview of CSR rules under Companies Act, 2013' available at
https://www.business-standard.com/article/companies/an-overview-of-csr-rules-under-companies-act-2013-
114031000385_1.html
~ 85 ~
• HDFC also has numerous projects in line. They have implemented projects with and in
Magic Bus Foundation, Shri Aurobindo Society, Aroh Foundation and more.
• Infosys has implemented projects with and in Indraprastha Institute of Technology, IIT
Dharwad, IIT Bangalore, ShishuShikshaSamiti and the Infosys Foundation and more.
• ITC is one of the corporate giants of India and they have implemented projects with and in
Welcome group Graduate School of Hotel Administration (WGSHA), ITC Rural
Development Trust, ITC Sangeet Research Academy (ITC SRA) and more.
• WIPRO has implemented projects with and in the National Centre for Promotion of
Employment for Disabled People ( NCPEDP), ASHA Foundation, Rural Literacy and
Health Programme (RLHP), BITS PILANI Goa Campus and more.
Corporate governance and corporate social responsibility have become difficult to distinguish in
the global economic landscape. Their conjunction in the face of regulatory, business, and social
changes in transnational markets has given rise to debates and controversies over both the
advantages and disadvantages of corporate accountability mechanisms. Scholars and
practitioners have looked beyond their traditional perceptions to explore how amalgamating
governance and responsibility would affect existing practices in business and social advocacy.
ISSUES:
Every coin has two sides. With the advantages of Corporate Governance, there also comes
certain issues it has to face. They can be broadly stated as under:
• Board Performance:
The Board requires a healthy mix of executive and non-executive directors and appointment of at
least one woman director. A capable, diverse and active board would, to a large extent,
improvise the standards of a company. Companies in India tend to comply only on paper; board
appointments are considered only as "word of mouth" or recommendations made by fellow
board members. Because evaluation is not performed on a timely basis, transparency is lost
somewhere. The performance is not always result-oriented and so some requirements are not
always met with.
• Performance evaluation of Independent Directors:
Independent directors are chosen for a definite reason which seems blur in the current scenario.
In January 2017, SEBI published guidance notes for evaluating the directors which included
different aspects of performance evaluation. Evaluation is however very subjective and may
~ 86 ~
catch itself in the trap of counter-arguments. But to have strong corporate governance in place,
this is a must.
• Accountability to Stakeholders:
Responsibility to be realized has to be accompanied by certain mandatory disclosures. These
disclosures may not only be to the corporation but like what the Company law states are towards
the stakeholders as well. It is considered a good idea to make directors directly accountable to
the stakeholders so there are transparency and accountability both in one go. The directors are
expected not only to bear in mind their own interests but also to the interest of the community.
• Executive Compensation:
The Contentious issue faced by the company is subject to shareholder accountability is executive
compensation. In order to search talent, companies have to offer competitive compensation. The
policy is framed by a company under the Indian Law for the remuneration of key employees (a
committee of board comprising of a majority of independent Directors).
• Founder's Control and Succession Planning:
The capacity of the founders to have a controlling hand over their corporation is the matter
derailing corporate governance from its track. The identity of the founder is often merged with
that of the corporate whereby without regards to their legal positions they continue to enjoy a
dominant influence in their organization. In some cases, if this is not controlled, it may have a
negative impact on the functioning of the company which might not be in adherence to the
corporate governance principles.
• Risk Management:
Efficient and pragmatic risk assessment policies are the need of the hour. The world is only
becoming a difficult place to survive without having a Plan B. Risk assessment does not only
mean analyzing the risk or identifying it but on the contrary, also includes the ways to overcome
unfortunate situations.
CONCLUSION
Corporate governance is integral to the existence of the company. Corporate Governance is
needed to create a corporate culture of transparency, accountability, and disclosure. Good
governance practices must be effectively implemented and enforced preferably by self-
regulation and voluntary adoption of an ethical code of business conduct. Indian companies still
have the scope to paint a bright future for them. They have to acknowledge and continue the
~ 87 ~
corporate governance reforms and bear in mind that this bright future will have its own set of
challenges. The future of corporate governance is becoming apparent now, as in the future the
investors would be promoted to behave like owners rather than just traders. Independent
directors will have more defined roles and responsibilities. And the incentives said to be given
out to others will be distributed to the shareholders.
In the long run, a market-oriented and shareholder-centered system will develop into a new
emerged system as stakeholder-oriented system making finance itself accountable to the public
interest.233 We can very well conclude that, "As legal rules are, to a significant degree,
endogenous to the political economy context of the systems in which they operate and so are the
corporate governance practices."234Kautilya’sArthashastra gave four-fold duties of a king which
included Raksha, Vridhi, Palana, and Yogakshema which is protection, growth, maintenance,
and social security respectively. It is amusing how these principles are so relevant to date and a
must for good corporate governance to prevail. Corporate Governance extends beyond corporate
law, its fundamental objective is not mere fulfillment of the requirements of law but in ensuring
commitment of the board in managing the company in a transparent manner maximizing the
value for shareholders. The real onus of achieving desired levels of corporate governance lies
with corporates themselves and not the external measures.
We are living through times that are very demanding for all as the convergence of several waves
of change and the resistance to such change are all bouncing into each other and hence, it is
indeed the case that corporate governance must change with the times to ensure that it does not
fall into the trap of short-termism and at the same time, does not shy away from being aggressive
in the marketplace.
To conclude, as we grapple with change and continuity, risk and passivity, corporate governance
must reflect the contemporary realities and at the same time, not lose sight of its history.235
233 Article on 'Corporate Governance- Indian Perspective' by RuchiKulkani and BalasundramManiam 234
R. V. Aguilera and G. Jackson, “Comparative and international corporate governance,” Academy of Management
Annals, vol. 4, no. 1,
pp. 485-556, 2010. 235 Article by Management study guide available on https://www.managementstudyguide.com/
~ 88 ~
CASE ANALYSIS: DARIUS RUTTON KAVASMANECK V. GHARDA
CHEMICALS LTD.
-Shalini236
Abstract
History speaks of combatant between individual liberty and institutional wielding power.
Corporate entities disseminate opportunities for individuals to exhibit their talent, however, it’s
not charity on part of them and the society along with individuals has to pay a cost for it. The
question of worry is to mitigate the costs and to strive individual development with societal
welfare. Corporate governance has come into play as a key to unlock this paradoxical scenario.
Related party transactions, overseeing practices of management personnel’s, disclosures and
accounting standards are quadrant of corporate governance. The thread of human ingenuity
weaves around these four corners. Developing countries like India have not yet touched the
cornerstone of corporate governance. The derivative actions are one such half-baked arena of
corporate governance in India. Derivative suits provide a sword to individual against director of
the company provided such action must be for the beneficial interest of the company. The Indian
legal framework does not recognize the principles of derivative actions and often the judiciary
has negated its application in its verdicts. However, it is well recognized principle in common
law. The author rubbernecking the emerging pitfalls that are popping due to non-applicability of
the derivation suits dissects the case of Darius RuttonKavasmaneck v. Gharda Chemicals Ltd.
The author attempts to critically analyse the judgment as the court failed in pioneering to begin
a new era of corporate governance by planting derivative suits as part of Indian legal system.
The court overlooked the necessity of derivative actions in coeval time and in the present
pronouncement reiterated the archaic view.
Keywords: Corporate Governance, Derivative Suits, Indian legal system and common
law.
2365th Year Student, Symbiosis Law School, Hyderabad.
~ 89 ~
INTRODUCTION
History speaks of combatant between individual liberty and institutional wielding power.
Corporate entities disseminate opportunities for individuals to exhibit their talent, however, it’s
not charity on part of them and the society along with individuals has to pay a cost for it. The
question of worry is to mitigate the costs and to strive individual development with societal
welfare. Corporate governance has come into play as a key to unlock this paradoxical scenario.
Related party transactions, overseeing practices of management personnel’s, disclosures and
accounting standards are quadrant of corporate governance.237 The thread of human ingenuity
weaves around these four corners. Developing countries like India have not yet touched the
cornerstone of corporate governance. The derivative actions are one such half-baked arena of
corporate governance in India. Derivative suits provide a sword to individual against director of
the company provided such action must be for the beneficial interest of the company. The Indian
legal framework does not recognize the principles of derivative actions and often the judiciary
has negated its application in its verdicts. However, it is well recognized principle in common
law. The question of worry is whether the court in absence of legislature guidelines should take
the step to elaborate the derivative actions in Indian jurisprudence.
When a corporation fails to defend the rights of its shareholder, in such unfavorable
circumstances the shareholder himself can bring action to protect his rights. A suit can be file,
known as Stockholder’s Derivative Suit, in order to seek redressal. However, the jurisprudence
of derivative action is yet to be recognized by the policymakers in India. In absence of any such
legislation it is the judiciary which has taken up the sword to guard the minority interests against
deprivation of their rights by majority shareholders of the company.DariusRuttonKavasmaneck
v. Gharda Chemicals Ltd238 marks an elevation point in corporate governance. In this case the
Bombay High Court has taken an affirmative step towards developing the derivative suits in
India. The substance of the present case is intersection of two issues of law; patent law and
company law. Although, the court had not accepted the claims of the plaintiff regarding
derivative actions, it has elaborated the grounds and conditions when such claims can be
admitted in the court of law in India.
In the present paper, the author rubbernecking the emerging pitfalls that are popping due to non-
applicability of the derivation suits dissects the case of Darius RuttonKavasmaneck v. Gharda
237India CSR Network, Getting a measure of corporate governance, Indiacsr (August 14, 2017)
http://indiacsr.in/getting-a-measure-of-corporate-governance/ (Nov. 12, 2017). 238Darius RuttonKavasmaneck v. Gharda Chemicals Ltd, (2015) 191 Comp Cas 52.
~ 90 ~
Chemicals Ltd. The author attempts to critically analyse the judgment as the court failed in
pioneering to begin a new era of corporate governance by planting derivative suits as part of
Indian legal system. The court overlooked the necessity of derivative actions in coeval time and
in the present pronouncement reiterated the archaic view.For the purpose of comparative
understanding of the corporate principle the author elucidates the applicability of the principle in
other nations. Also, the author highlights the limitation of the application of the principle in
Indian context.
POSITION OF DERIVATIVE SUITS IN OTHER COUNTRIES
The derivative action, also known as the derivative suit (in the United States), Aktionärsklage
(Germany), kabunushidaihyōsoshō (Japan), action socialeutsinguli (France) and paishengsusong
(PRC) (among others), is a global phenomenon.239 Although often derided in some countries as
being methods of extorting money from corporations by disgruntled shareholders or
entrepreneurial attorneys, they are lauded in others as being important weapons of accountability
and corporate governance that may serve other important social goals as well.240 The principle of
Derivative actions can be traced from common law as an exception to Foss v. Harbottle241 which
established that it is the company which has to bring suit, not the shareholders. If the majority
rule principle (the majority members of the company runs the company) along with derivative
actions can holistically protect the interest of the company. The courts have taken the initiative
and had affirmed exceptions that in instances of fraud on minority and wrong against company,
the minority shareholders should be entitled to bring action in the form of Derivative Actions. In
2006 this right was given a statutory status as it was enumerated in the Companies act 2006. This
statute also provided the procedure to bring such claim and mandated that it is the court which
will allow for it. The permission was required from court to prevent frivolous litigations.242
In the United States, due to variation in the laws with states the position of derivatives suits also
differs, however, some states like New York, California, Nevada, etc. are major centres where
companies are incorporated and these states provide certain barricades to derivatives actions. It is
239 Harald Baum and Dan W. Puchniak,The derivative action: an economic, historical and practice-oriented
approach, at 1, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2695599 (Nov. 11, 2017). 240Vikramaditya Khanna &UmakanthVarottil, THE RARITY OF DERIVATIVE ACTIONS IN INDIA: REASONS
AND CONSEQUENCES, file:///C:/Users/user/Downloads/SSRN-id2695599.pdf (Nov. 11, 2017). 241Foss v. Harbottle, (1843) 67 ER 189. 242 Gareth Baker and Samantha Hacking, UK: Statutory Derivative Claim Regime: Ten Years On,
http://www.mondaq.com/uk/x/610366/Shareholders/Statutory+Derivative+Claim+Regime+Ten+Years+On (Dec.
15, 2017)
~ 91 ~
the American Bar Association which provides the guidelines pertaining to derivative actions. It
states that the shareholders seeking the suit have to file the demand to the board. It will be
discretionary power of the board to either accept or reject the same. On rejection, after a certain
period of time the shareholder can institute the suit, however, on acceptance of the demand the
corporation itself will file the suit. The board also assist by appointing a special litigation
committee. The landmark case of Shaffer v. Heitner243 heard by Supreme Court of US is an
example of derivative suit.
In continental Europe, a different scenario of derivative suit can be witnessed as the statutes does
not allow small shareholder to bring suit in the court. There is a threshold of shares set by the
legislature to institute a derivative suit by the shareholder. New Zealand has given statutory
recognition to the derivative suits subject to permission of the court. They are ramified sets of
permutation and combinations in various countries for derivative suits and the changing saw may
influence India to bring this right within the purview of the legislation.
FACTS AND ALLEGATIONS RAISED
In the present case the plaintiff is a minority shareholder holding 12% of the share of the M/s.
Gharda Chemicals Industries (hereinafter ‘the company’). There are five defendants but the
major dissension is between the Plaintiff and Defendant No. 2. Defendant No. 1 is the company
whose chairman and managing director is Defendant No. 2. The case was brought up after the
plaintiffs received a notice informing them about an agreement that has been entered between the
company and ‘A’ under which the company acknowledges that the A owns and shall continue to
own any invention that he has invented /conceptualized during his tenure as the Managing
Director of the company and the company shall not claim any ownership over such
inventions.244Plaintiff tried to establish that he is not the beneficiary to the suit and has filed the
case on behalf of Defendant No. 1 who is unable to bring any action. Defendant No. 2 is having
60% of the shares and is estranged uncle of plaintiff and other defendants are the directors of the
company. The plaintiff has filed number of suits against the defendants and the present suit is
one among them. Defendant No. 2 is holding some patents in his own name and is registered
owner of the same. He also enjoys free royalties. However, plaintiff claims that patents should be
in the name of Defendant No. 1 and the conduct of the Defendant No. 2 is resulting in breach of
243Shaffer v. Heitner, 433 U.S. 186 (1977). 244 Nikhil Issar &AkshayGoel, A Critique of Indian Patent Assignments Regime: Pre- Invention Assignments and
Employees’s Inventions, 18 J INTELLEC PROP RIGHTS 83, 87 (2017).
~ 92 ~
fiduciary relationship of him with the company. Plaintiff sought injunction against the utilisation
of patent by the Defendant.
PLAINTIFF’S ARGUMENTS
• Defendant No. 2 ought to obtain a patent in the name of Defendant No. 1 as he has
utilised the R&D facilities, team, and aid by the company.
• The defendant is the promoter, director, majority shareholder and the Research Head of
the company and therefore is in fiduciary relationship with the company and the patent
ought to be in the name of company.
• The defendant is required to comply with Section 88 of Indian Trust Actwhich provides
that a person in fiduciary relationship with a company if acquiring any pecuniary benefit
adverse to the company has to be held for such unjust benefit incurred.
• Arguendo, Defendant is under an obligation as an employee to work for the prerequisite
of the company.
• Defendant’s conduct should not be competing with the company’s interest or divert the
assets of it.
DEFENDANT’S ARGUMENTS
• Defendants argued that plaintiff does not have locus standi in the present matter because
similar suits have been filed and courts have decided against the plaintiff.
• Under the garb of derivative action, defendant has filed the suit which is not bonafide and
similar issues have been earlier raised between the same parties.
• The patent in question is developed by the defendant in his individual capacity and not in
trust of the company. So it is not required to register the patents in the name of the
company, consequently, there is no breach of fiduciary duty.
• The defendant is the managing director of the company and has no duty to invent patents
for the company. In addition, there is no such law which states that employees developed
patents should belong to their employer.
• The competitors of the defendant if apply for revocation of the patent under Section
64(1)(b) of the Patents Act, it would be adverse to the interest of the company.
DETERMINATION BY THE COURT
~ 93 ~
The Bombay High Court in the present suit dismissed the notice of motion of the Plaintiff. The
court rejected the plaintiff’s argument that a prima facie case is required to be shown and
categorize the suit as full-fledged trial substantiating that injunction sought by the plaintiff is in
form of final relief. In determining the conditions whether plaintiff can avail the benefit of
derivative action suit, the court emphasized mainly on three factors: Whether the intent of the
plaintiff was bonfire, Whether it is in best interest of the company and What are the views of
independent members. For the determination of first question it is required that plaintiff has
come to the court with clean hands. For this purpose they relied on Nurcombe v. Nurcombe245
which stated that the person bringing the suit should be proper and the benefit should be of
company. The court rejecting the claim of plaintiff observed that he instituted the suit out of
hatred and he had personal interest in bringing this suit. Further, the plaintiff has ulterior motive
and it is found that he had sold his shares to the competing business company. Also, other
independent directors of the company who are minority shareholders did not support the said
action of the plaintiff. The court placed its reliance on Smith v. Croft246, the court held that
independent directors bringing derivative action which is not in the benefit of the company such
action would be dismissed. Furthermore, the court observed that acceptance of plaintiff
contentions would not benefit the company. Therefore, the court disallowed the derivative action
of the plaintiff. The court concluded with certain remarks which exhibited the disappointing
position of derivative actions in India. The court made the following remark: “The Courts should
be alert in dealing with such speculative suits and shoot down such bogus litigation at an early
stage.”247
CRITIQUE
In common law derivative actions has to pass through the dual test. Existence of prima facie case
is the first requirement for establishing a derivative action. However, this test is not stringently
applied as it would result in a trial before trial. The present case has ignored the above-
mentioned principle established in Prudential Assurance Co. Ltd. v. Newman Industries
Ltd248and stated the prima facie case as requisite for bringing any such action. The court further
applied the doctrine of clean hands. But for actions which are brought on behalf of the company
by plaintiff in interest of company, the plaintiff’s previous conducts should not be of much
245Nurcombe v. Nurcombe, (1985) 1 All ER 65. 246Smith v. Croft, [1998] Ch. 114. 247Darius RuttonKavasmaneck v. Gharda Chemicals Ltd, (2015) 191 Comp Cas 52, at para 63. 248Prudential Assurance Co. Ltd. v. Newman Industries Ltd., (1982) 2 WLR 31 : (1982) 1 All ER 354.
~ 94 ~
relevance in deciding the suit of this nature. Additionally, in United Kingdom the doctrine of
clean hands is superseded by doctrine of good faith. Nevertheless, the good faith principle is not
substantive but it would have assisted in growth of new principles of law in India. The court took
consideration of the fact that if the patent denied to Defendant No. 2 it would not be in interest of
the company. If the ownership of patent is denied to the Defendant No. 2 the company would be
in loss and on this premise the court denied the claim of plaintiff that patent ought to be
registered in the name of Defendant No. 2 who is the rightful owner of the patent. This reason
does not seem to deny the plaintiff’s claim if the court is satisfied on one hand that patents
belong to the company. In fact, dismissal of the action by the court in the present case is
grounded on a pre-trial which was done by the court before a full-trial. Generally, in dealing with
such claims courts make application of Order 1 Rule 8 of the Civil Procedure Code, 1908. While
in present case no reference is made of this provision.
LIMITATIONS OF DERIVATIVE ACTIONS IN THE INDIAN LEGAL SYSTEM
In spite of the positive implications of the application of the principal, India is susceptive to
adopt the principle in toto. Through derivative actions a shareholding even having one share in
the company can bring a suit in court of law against the misconduct of the management of the
company. The principle of proper plaintiff laid in Foss v. Harbottle249 is defeated. Now, any
person can bring derivative action in company’s interest in court and this has led to filing of
vexatious litigations. Pendency of cases is a serious problem faced by Indian judiciary and this
provision will foster more filing of bogus cases and burden the legal system. Nations where such
actions are prevalent, it is seen that “many such suits are "misguided because they produce small
awards to their plaintiffs, and are, at worst, frivolous claims designed to extort an award of
attorneys' fees”.250Institutions of these actions are mostly inefficient. Even small investors can
coerce the company to pay heavy costs of litigation and this money is paid out of the profit of
company which in turn will affect the shareholder’s interest. It was conclusively found that (1)
there was little evidence of specific deterrence, with only increased top management turnover in
sued firms; (2) general deterrence is probably weak; and (3) there was mixed evidence of indirect
benefits, in particular advantages for block-shareholders.251 Lastly, there are no guidelines and
provisions laid by the legislature for prevention of vexatious cases and to regulate the effect of
249Foss v. Harbottle, (1843) 2 Hare 461. 250 Dr. Gyanendra Kumar Sahu, Investors protection: The derivative action, 3 International Journal of Law 101, 103
(2017). 251Id.
~ 95 ~
derivative actions, therefore, the courts should not step forward to lay down by their own set of
guidelines in this regard.
CONCLUSION
Derivative actions are intermittent in India and only a few numbers of cases are instituted on this
premise. Among them very few are accepted by the courts on speculations. Courts do not have
any legislation and primarily resides on English precedents for adjudicating such matters. Lack
of legislative policies on the subject has rendered discretionary powers to the judiciary to decide
the fate of minority shareholders rights in India. Also, courts while applying common law
principles pretermit recent developments of laws in United Kingdom. Even the recent legislation
on company’s law in India i.e., Companies Act, 2013 is inarticulate on providing laws on the
subject of derivative actions. Although, class action suits are new development in India it does
not expressly incorporate derivative actions. Insufficient local laws have left minority
shareholder’s rights in India directionless and transient. However, we find that, at present, the
use of derivative actions in India is extremely limited and the current legal, judicial, economic
and cultural landscapes in India make it highly unlikely that derivative actions would be
commenced.252 Until there are statutory provisions, courts in India would continue to decide the
derivative claims with speculations and trepid in allowing derivative claims. Corporate
governance principles in India are in developing stage and statutory recognition of derivative
actions could form a major development in the field of company laws. The present case would
have formed a salutary precedent if all corners of principles and provisions of common laws
would have considered by the court.
252Vikramaditya Khanna &UmakanthVarottil, THE RARITY OF DERIVATIVE ACTIONS IN INDIA: REASONS
AND CONSEQUENCES, file:///C:/Users/user/Downloads/SSRN-id2695599.pdf (Nov. 11, 2017).
~ 96 ~
EPILOGUE
Last but not least…..
“Every End is the Beginning of Something New” and this one is surely the commencement
of new thoughts that provoke critics, appreciation, and passion towards the corporate world.
The plethora of opportunities we aim to achieve through this journal can be fulfilled only
through the support of all the contributors including students, teachers, academicians,
practitioners and the Advisory expertise of the journal.
Research has always been the key to every practical aspect but the problem arises when the
difference between effective research and plagiarism is not understood. The Journal of
Corporate Governance and Transparency aims at achieving a unique thought-provoking end
to the subject matter with possible solutions to it. We aim to be enhancing quality and
quantity with every issue and provide our readers with the maximum food for thought.
“What you seek, is seeking you” is the most basic principle of the law of attraction and we
abide by it and thereby are extremely delighted to launch the first issue of this journal.
Learning is not what rather what’s in the courts and case laws is in the books or library. True
knowledge lies in experience and therefore the practical exposure of Corporate Governance
and Transparency that is not available to students in their libraries is brought to the search
terms of the students. With this edition of the Journal, we aim to curtail the gap between the
legal education sector by bringing in handy the application of the corporate law in articles
and notes.
We strive to excel in the subject chosen and wish to invite and include guest lectures and
their opinions in the next issue onwards. We wish that all our thoughts come to life in black
and white on the pages of this journal with the help, support, and encouragement from the
audience along with the Editorial and Advisory Board Members.
Till then, we wish you a period of effective research and growth in your professional careers!
Editorial Board,
C-FACT, 2018-19