The importance of corporate governance becomes the talk of the street when a corporate fraud becomes a piece of breaking news. On 29th January 2019, Cobrapost, an investigative journalism company, held a press conference to debut its coverage of a huge banking and financial scam in India. This financial scam was uncovered by closely auditing and examining public records of government authorities as well as information available in the public domain. The scam is reported to involve a sum of more than Rs. 31,000 crore. The suspects of this huge financial fraud are claimed to be the primary promoters of Dewan Housing Finance Corporation Limited (DHFL) and their associated companies. This is an example of a systematic craft to steal public money in broad daylight.

The scam has been pulled off mainly by sanctioning and paying out funds in unsecured and dubious loans. These loans amount to thousands of crores of rupees and were provided to dubious shell companies which were related to DHFL’s own primary stakeholders through their proxies and associates. Added to that, no security or collateral and the proceeds were utilized for private asset creation, neither offshore nor in India. Such large loans were disbursed for new projects to the shell companies, which were newly incorporated, without scrutinizing the feasibility and viability of those projects. A lot of these shell companies are operating from the same email addresses and are run by the same group of initial directors. What raises more concern is the fact that DHFL has hidden the terms of loan and terms of repayment in the financial statements. They also ensured that most of the shell companies have hidden the name of the lender – DHFL. By lending to shell companies without due diligence, DHFL has ensured that the recovery of such dubious loans is impossible since the companies or their directors themselves do not own any assets. This way the private assets acquired by the promoters and their associates by using the funds from these dubious loans are completely ring-fenced from any recovery process. Thus, only public sector banks such as State Bank of India and Bank of Baroda are the primary losers. The loss amounts to a staggering sum of over Rs. 11,000 crore and Rs. 4,000 crore, respectively. Other entities that share the losses are foreign banks and shareholders from among the public or investors of DHFL.

After the press conference, DHFL shares plunged by 11% in the market. While the investors are waiting for further investigation by the authorities, the reputation of the company has already been dented. The credit rating agencies like Brickwork has downgraded various loan facilities by one or two notches. The scam represents a complete and absolute failure of corporate governance, and there is no way to even pretend that corporates are reliable and can commit to the best practices of the industry as required or expected by the law. The investigation brought to light the illegal insider trading, violation of takeover regulations of SEBI, creation of assets offshore for tax evasion, or laundering money illegally. With AAA rating to the company’s credit worthiness, DHFL’s inner working raises the question about the credibility and conduct of all credit rating agencies, which have failed miserably to identify its irregularities, as unearthed in this investigation. Even auditors have failed to address the irregularities in the annual audit reports.The participation of promotors in directing loan amounts to shell company without scrutiny or security shows a complete deviation from the corporate governance policies.

This isn’t the first time when the corporate governance has failed to promote corporate fairness, transparency and accountability. Scandals or scams such as 2G Scam, PNB Scam, Satyam Scam or Sahara Scam etc. all are the result of bad corporate governance. In Satyam Scam, Raju brothers proposed merging with a company known as MAYTAS which is nothing but Satyam spelled backwards. This involved major non-existing cash inflows of funds in the balance sheet, falsely making balance sheet heavy to remain competent. This scam made the need of corporate governance felt very badly along with the importance of good corporate governance and this was the reason that corporate governance became an integral part of the Companies Act, 2013. Not only in India, but companies around the world like Enron in US and Parmalat in Italy fell out because of the corrupt practices followed by the board of directors and the management of the said companies and their financial consulting firms.

The main goal of virtually every publicly-owned company business is to maximize profits for its owners or stakeholders while maintaining corporate social responsibility. Shareholder value gets lost when things are done illegally, when principles of corporate governance are not adhered to, when cohesive action is not taken. Difficulty arises for an analyst when even companies like DHFL, with AAA ratings and strong corporate governance norms, fails to comply with ethical business practices. With such scams coming in the light regularly, it raises a question on the ability of analysts, demanding a stricter monitoring of internal control system within an organization.The most common issues in corporate governance include conflict of interests, oversight issues, accountability issues, transparency, and ethics violations. An analyst should look out for red flags such as accounting anomalies, consistent growth during weak performance of the industry, frequent related party transactions and off balance sheet transactions, etc. to identify any possible irregularities in the financial statement of the organization. The scrutiny of Audit Committee is a vital process to understand the strength of corporate governance norms. An analyst can focus on the audit committee’s powers, functions, responsibilities, and relationships within the framework of corporate governance to gain an insight about the effectiveness of the norms.

With the DHFL scam easily escaping the sight of auditors, credit rating agencies, analysts, authorities and regulators, the investigative journalism acted as a watchdog in the public interest. By indulging in the public records and presented documents of DHFL, they were able to unravel the channel of money laundering of the promoters. Such deep dive analysis consumes months of investigation and scrutiny by dedicated journalists and financial market experts. Work of Cobrapost is commendable for bringing the swindle in the notice of the authorities. The true scale of the scam can be arrived at only after investigative agencies conduct a thorough forensic audit of the money trail.

Sanchita Bhatia

MBA-FA (2018-2020)