DOES INDIA NEED MORE REFORMS ON CORPORATE GOVERNANCE - A CASE STUDY ON YES BANK AND COFFEE DAY ENTERPRISES LIMITED: RIYA BHARDWAJ

 

Introduction

With the Liberalization in 1991 the Indian Corporate landscape has come a long way with foreign companies to set up operations in the country. It has been known that with the passage of time, the laws evolve; and the corporate landscape was governed by different statutes like, the Companies Act, 2013, Reserve Bank of India (RBI) and SEBI Act^[1], hence, the regulatory legal framework of companies has also matured. However, in the last two years, with the fall of corporate that were considered to be unicorns of the corporate space i.e. Café Coffee Day, Jet Airways & Yes Bank, the need to bring changes in the Corporate Governance has been highlighted. Ever since its inception, the prospects of Corporate Governance have been under permanent change which is a result of different corporate mis-happenings in the past.

Problems with the financial position of Yes Bank^[2]:

1. It has undergone a steady decline largely due to inability of the bank to raise capital to address potential loan losses and resultant downgrades.
2. This decline has triggered invocation of bond covenants by investors, and withdrawal of deposits.
3. The bank has also experienced serious governance issues and practices in recent years which have led to its steady decline.
4. The RBI was in constant engagement with the bank’s management to find ways to strengthen its balance sheet and liquidity. The bank management had indicated to the RBI that it was in talks with various investors and they were likely to be successful.
5. Since a bank and market-led revival is a preferred option over a regulatory restructuring, the RBI made all efforts to facilitate such a process and gave adequate opportunity to YES Bank’s management to draw up a credible revival plan, which did not materialize.
6. In the meantime, the bank was facing regular outflow of liquidity. It wasn’t long before the bank collapsed and RBI was forced to apply to the Central Government for imposing a moratorium on YES Bank.

 

 

Fall of Coffee Enterprise Ltd.

1. The Income Tax in September 2017 (I-T) department conducted raids at over 20 locations linked to Siddhartha, the owner. He was reportedly heavily in debt.
2. His Coffee Day Enterprises Ltd had seen net loss widening to INR 67.71 crore in the fiscal year ended March 31, 2018 from INR 22.28 crore loss in the previous year. This despite revenues climbing to 122.32 crores. He disappeared suddenly one evening in 2019.
3. Evidence points to Siddhartha having taken on debt in his private capacity to buy land and invest in long gestation projects, and angry lenders hounding him for quick returns.
4. The company needed funds for both operations and capex. In 2010, Standard Chartered Private Equity (Mauritius) II Ltd, KKR Mauritius PE Investments II Ltd, and Arduino Holdings Ltd (which later transferred the debentures to NLS Mauritius LLC) invested close to $149 million.
5. Compulsorily convertible preference shares held by Standard Chartered Private Equity (Mauritius) II Ltd and the compulsory convertible debenture held by KKR Mauritius PE Investments II Ltd and NLS Mauritius LLC was converted into equity shares at the time of listing.
6. By June 2015, the consolidated debt was a whopping INR 2,700 crore, a knot the board couldn’t wriggle out of.

Reasons of Failure^[3]

1. These entities were The Board of the companies which are predominantly occupied and dominated by a set of promoters bypasses any intervention from the independent directors and further decimates the interest of minority shareholders in the company. Moreover, the promoters adventurism compromises the long term goals of  an organization.
2. The takeover/ acquisition might be perpetuated by someone at the board having a dominant position when the debt to equity ratio of a company does not necessarily permit it.
3. Meddling with book profits to make financials look merrier by showing book profits in the books even when the cash is not received so essentially.
4. When an internal director heads an audit committee, instead of safeguarding the shareholder’s interest in case of a fraudulent financial reporting, the chances of corporate governance principles getting compromised is high.

Conclusion

These failures not only show the miscarriage of the bodies to effectively implement the corporate governance mechanism but also points out the intentional carelessness within the   mechanism. It is a dire need of the hour for the organizations, corporate bodies, individual etc to inculcate corporate governance principles with highest virtues so as to safeguard the interest of the people working in the organization in a nutshell and for the economy of the country in the larger perspective.

 

 

---

^[1] https://www.sebi.gov.in/legal/circulars/feb-2000/corporate-governance_17930.html

^[2] Fernandes, K (2020): Biggest Corporate Governance Failures in India, The CSR Journal, Retrieved from https://thecsrjournal.in/corporate-governance-failures-india/

^[3] https://taxguru.in/company-law/fall-giants-corporate-governance-failures.html