INTRODUCTION

Though corporate governance may not be an obvious focus during a

pandemic, it is during these testing periods that leadership and
management structures are tested, exposed for their strengths or flaws,
and remembered by stakeholders in the long-term.1
COVID-19 has created unique and very profound challenges. For the
board of directors, which is charged with overseeing the short-term and
long-term health of the corporation and its business prospects,
navigating the COVID-19 crisis requires careful consideration of a range
of issues under these unprecedented circumstances.2
The COVID-19 crisis is accelerating a shift toward a more integrated
approach to corporate governance that has been gathering force for
some time. The pandemic has put people’s lives, livelihoods and learning
at the centre of the public policy and business response in almost every
country and industry sector. It has dramatically underscored the need for
firms to engage proactively and systematically with diverse stakeholders,
both internally and externally. And, it has highlighted companies as
stakeholders themselves with an intrinsic interest in and shared
responsibility for the resilience and vitality of the economic, social and
environmental systems in which they operate.3
While the Novel Coronavirus is a humanitarian catastrophe its crippling
effect on the world economy has, and will continue to, disrupt the way
business is being conducted globally.
Amongst a host of business re-structuring exercises that we will no doubt
see in the near future, it is critical that corporate leaders come to grips
and re-invent themselves as to how they are going to react, and what
they are going to do, when faced with hard decisions. While choosing
their options, they will need to act with compassion and keep to the
highest levels of governance – for they will be under immense scrutiny
and pressure both during and after the pandemic. There is no doubt that
boards, their conduct, actions and inaction will be analyzed threadbare,
through the lens of hindsight, by various stakeholders, when the dust
settles. Conduct of the board should be able to demonstrate a balancing
act between a number of opposing forces and arrive at a result which is

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good for the company, satisfies regulators, pacifies workmen, presents a
positive image to the society and builds shareholder value. 4
Recently it was noticed that global investors have realized the
significance of corporate governance practices on the financial
performance of companies and also realized that the issue of corporate
governance bears more importance while adopting investment decisions.
It is also true that the investors are ready to pay higher premiums for
companies having sound corporate governance practices. It also leads to
efficient allocation of resources, increases the competitive power and
strengthens the capital market and finally increases the chances of
higher prosperity by preventing and reducing the occurrence of any
financial crisis.

EFFECTS OF CORPORATE GOVERNANCE ON FINANCIALLY

DISTRESSED FIRMS

It is argued that most financial failure is caused by poor corporate

governance, that the main cause of firm’s failure comes from financial
scandals, such as the firm’s mismanagement as the consequence of the
management decision that reflects self-serving behavior. A conflict
between management and stakeholders in times of crisis because
managers prefer a short-term strategy in order not to lose their jobs.
Successful companies are determined by the implementation of good
corporate governance in corporate management. In an era of
increasingly competitive business competition, a company is required to
continuously improve as well as develop all aspects of its business. By
doing so, the company can create value for the owners/shareholders and
other related parties.
When a firm becomes financially distressed, almost every aspect of its
governance is affected in some way. To start, managers and directors of
a corporation owe fiduciary duties to the enterprise, encompassing a
community of interests including creditors, shareholders, and other
parties. For a distressed firm, the interests of creditors, shareholders,
and other parties often conflict.
Manager, Creditor, and Shareholder Interests
Conflicts between debt and equity holders are exacerbated when
leverage becomes high, as it does when firms near financial distress.
Certain actions that may benefit shareholders can impose costs on other
stakeholders. For example, managers have disincentives to raise
additional equity capital if doing so dilutes shareholders interests while it
increases the value of existing debt claims by reducing default risk.

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As management evaluates the strategic options available to the
distressed firm, some possible courses of action can favor the interests of
one group of stakeholders over the recovery prospects of another. In
some cases, managers have engaged in transactions where ownership of
assets is moved within the corporate structure, arguably to the detriment
of creditors, or modified or entered new financing contracts.
Fiduciary Duties of Managers and Directors
Directors have a fiduciary duty to creditors and shareholders, they face
potential liability if they take actions that are not in the interest of
whomever they owe these duties. When a corporation is solvent, the
managers and directors owe fiduciary duties to the corporation and its
shareholders. Creditors are only entitled to protection as provided in the
terms of their original contracts. A series of important case rulings
consider how this relationship changes when the firm becomes insolvent.
Management Turnover
An important aspect of the governance changes that occur as part of a
distressed restructuring, particularly when there is a change in control,
are the changes in the firm's management and board of directors. As
firms become financially distressed, a substantial commitment of time
and attention is required of managers and directors to address the firms
operating problems and develop a restructuring plan. Certain parties,
such as those making investments in the distressed firm or groups
concerned about protecting their interests in the restructuring, may
desire to take board seats.

THE EFFECTS OF COVID-19 ON CORPORATE GOVERNANCE

The Covid-19 pandemic and the economic crisis it has caused will have a
large financial impact on many companies. Boards are struggling to
ensure survival in the short term and to preserve cash, whilst planning
for the long term in a world full of uncertainties.
Many directors are uncertain about their responsibilities and liability
risks in these circumstances. In particular in situations were they are
directors of subsidiaries in other jurisdictions or are qualified by (local)
law as shadow directors of a subsidiary.
In many companies, adequate and swift action will be required from the
board. COVID-19, and the measures taken by governments in response to
the pandemic, may, however, also impact the normal functioning of the
board and shareholders’ meetings. Travel restrictions,social distancing
quarantines, and other measures will often hinder a physical meeting of
the board or shareholders. Not to speak of the fact that some directors or
shareholders might become infected by COVID-19.
Many directors are uncertain about their responsibilities and liability
risks in these circumstances. They are facing questions such as5:
 If the company has limited financial means, is it allowed to pay
critical suppliers and leave other creditors as yet unpaid? Are there
personal liability risks for ‘creditor stretching’?
 Can you enter into new contracts if it is increasingly uncertain that
the company will be able to meet its obligations?
 What is the ‘tipping point’ where the board must let creditor
interest take precedence over creating and preserving shareholder
value?
 Are intragroup receivables subordinated in the face of financial
difficulties?
 At what stage must the board consult its shareholders in case of
financial distress, or even have a duty to file for insolvency
protection?
 Do special laws apply in the face of Covid-19 that suspend, mitigate
or, to the contrary, aggravate directors’ duties and liability risks?

Executive Compensation Dilemma

As the COVID-19 crisis emerged, many companies were either in the
process of, or had just completed the process of, setting performance
targets and metrics for the current performance period (both with
respect to long-term and short-term arrangements, such as performance
equity and annual bonuses).6 In addition, performance relating to awards
granted in prior years can be seriously adversely affected by the ongoing
pandemic and as a general matter, granting equity awards when a
company’s stock price is suppressed (requiring more shares to provide
the same value) could result in depletion of the share reserve under the
company’s equity plan, thus reducing the ability to make future grants.
Therefore, if the process is not yet complete, companies face the problem
of waiting to finalize the targets and metrics until the market and other
business conditions stabilize so that the targets that are set will more
likely reflect the proper incentives and goals for executives in the new
“post-pandemic” business climate. In addition, as a result of the
pandemic, some companies have considered (or implemented) pay
reductions either on a case by case basis or across the executive ranks.
Considerations arise as to the effect of such reductions on various
executive arrangements. For example, certain arrangements, such as
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employment agreements and severance arrangements may have “good
reason” provisions that are triggered by reductions in base pay. This
could provide an executive with the ability to terminate service and
receive a generous severance package. In addition, a salary reduction
could have a negative effect on an executive’s golden parachute tax
calculations in the event of a future change in control, as golden
parachute taxes are based on an average of five years of compensation
such that a salary reduction will reduce the average and increase the
amounts that may be subject to golden parachute taxes.
In India, there is much clamor about the legally questionable
requirements from the Government mandating employees to not reduce
wages and other benefits, not terminate the employment of personnel.
Needless to say, without providing any meaningful economic relief to the
industry, the government is being accused of a lopsided approach as far
as the employers are concerned. On the flip side, it is equally true that in
a highly unequal society such as India, such measures may be required to
mitigate economic ruin of the vast majority of workmen on the bottom
rung of the economic ladder.
In light of this, boards should seriously consider their response in a
holistic manner keeping in mind not only economic necessities and legal
compliance, but also humanitarian and reputational fall outs. We have
seen a number of companies announce pay cuts at the top level while
continuing to pay at the middle and the lowers levels without any
abatement for the time being. This period will test the resolve of the
board and force them to choose priorities. Each such choice will come
with its pros and cons – none perhaps starker than redundancies and
wage cuts.7
Finally, some companies that previously granted stock options or stock
appreciation rights (SARs) are being forced toconsider repricing those
awards in light of market performance. Repricing stock options or SARS
includes either lowering the exercise or base price, substituting the
award with a new award with a lower exercise or base price and/or
cancelling the award for another type of award or cash. Almost all equity
plans of public companies have prohibitions on repricing of stock options
or SARs without stockholder approval.

Facing Challenges arising from Supply Chain Disruption

With economies affected globally, there is an obvious crunch in the
supply of raw materials8 and components whereas the demand remains
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The Impact of COVID-19 on Global Supply Chains, OXFORD BUSINESS GROUP (April 24,
2020), available at [Link]
supply-chains.
constant, if not inflated by the perceived fear of absolute breakdown of
the economic cycle. The security of the supply has been compromised
due to various reasons like source of supply being a COVID-19 affected
area and apprehension of spread of the fatal virus in transit. This has
impacted the supply chain and more crucially the life cycle of product
manufacturing.9 The disruption at the first rung of supply, say for
instance raw material, has a domino effect – impacting each step - work
in progress, finished goods, further value addition to finished goods, if
any, packing material inventory and lastly the ultimate use of product
whether as a commodity for end use as a component for other OEMs.
The board and management need to respond to the crunch in supply
chain and the dynamic circumstances.
It would not be uncommon for COVID-19 situation to be construed or
claimed as a force majeure event 10 or even leading to impossibility of
performance i.e. frustration of contract, depending on the contractual
terms. However, what would be key for the Board of Directors would be
to find alternatives for sustainability and negotiate support, in case such
events are triggered under the contract. The Board should not assume or
adopt adversarial attitude or strategy to ensure continuity of fair and
long-term relations with operational [Link] hindsight, this
episode will certainly lead to careful crafting of the commercial contracts
reducing the dependency on the boiler plate clauses.

Takeover Defenses and Preparedness

Many public companies are experiencing a dramatic fall in their stock
price in light of the global financial turmoil that has become an
unwelcome byproduct of the COVID-19 crisis. It is prudent for boards of
companies experiencing a significant decline in stock price to consider
the company’s takeover preparedness and whether any steps should be
taken in response to the vulnerability to hostile activity resulting from a
depressed stock price.
If a board typically considers takeover preparedness on an annual basis,
that board should consider whether it makes sense to accelerate that
analysis this year given the changes in circumstances due to COVID-19.
If a board does not consider takeover preparedness on a regular basis,
that board should consider adding this topic to an upcoming agenda.
9
Ruby Arterburn, COVID-19 Impact on Product Life Cycle Management Market Size
and Industry Share, FRESNOOBSERVER: PRESS RELEASE (July 6, 2020), available at
[Link]
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10
See, Ministry of Finance, Office Memorandum No.F.18/4/2020-PPD (India). The fact
that the coronavirus pandemic may be an Act of God may be derived from the verdicts
of the following judgments: Vohra SadikbhaiRajakbhai v. State of Gujarat, (2016) 12
SCC 1 (India), KSRTIC v. Mahadeva Shetty (2003) 7 SCC 197 (India) and Patel
Roadways Ltd. v. Birla Yamaha Ltd (2000) 4 SCC 91 (India).
 Impact on Managers
This pandemic crisis has put an enormous strain on the communications
between managers and BoD. Managers need support, advice and
counselling from the board. BoD should attempt to make themselves
available and be open and communicate with the managers. Effective and
frequent meetings with managers maybe an ideal manner to keep in
touch with the managers and provide reassurances. What sort of support
in terms of technology, physical mental and emotional do the mangers
needs in these unprecedented times?11

Laying off of the workforce

The one thing that the virus and the ensuing lockdown has shown to
employers is– that it may be possible (and indeed better in the medium
term) to operate with a leaner and more agile work force. This is not
applicable in all cases but certainly is the case in the services industry.
Therefore, the more medium-term dilemma is whether to reduce
workforce, scale back investments and become a leaner organization or
whether to go back to the earlier ways of working. This crisis will make
boards and founders re-evaluate their business philosophy and core
operating principles. Whichever option one chooses, it will have costs
(economic, people, reputational and operational).12

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 THE WAY FORWARD

The difficulties arising from the COVID-19 pandemic is not an excuse to

shy away from good corporate governance practices. Rather, the reverse
is true. By following appropriate corporate governance policies, the
companies would see a far more sustainable growth rather than a short
term growth that is doomed to fail after a few years. The pandemic has in
fact shows the need to have a sound corporate governance policy in place
in order to withstand such unforeseeable situations.
The authors, in this section, discuss various practices that must
necessarily be followed strictly, by companies, in the aftermath of the
pandemic.

Economic Social and Governance [“ESG”] Policies

Though some ESG (environmental, social and governance) issues are not
front of mind for steering through this pandemic, the ‘G’ in ESG is a vital
ingredient to coming out the other side strongly.13
Since the beginning of the century, major technological, environmental,
geopolitical and socio-economic changes have been transforming the
expectations and operating context of business, compelling a re-
examination of corporate governance principles and board practices. In
particular, these changes have rendered environmental, social,
governance and data stewardship (ESG&D) considerations substantially
more material to the fundamental purpose of companies – sustainable
value creation. This is eroding the traditional distinction between a
shareholder primacy model of corporate governance focused on financial
and operational risks and opportunities, on the one hand, and a
stakeholder-driven model of corporate responsibility and citizenship
focused on environmental and social risks and opportunities, on the
other.14
The substantial economic contraction triggered by the current global
public health crisis is the latest example of the heightened materiality of
ESG&D factors in our more interconnected and interdependent world. 15
Coming on top of recent protests about inequality, injustice and climate
change, #MeToo scandals, air, water and climate-related production and
financial losses, employee health and safety disasters, trade war-related
supply chain disruptions, cybersecurity breaches and growing concerns

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about personal data privacy and ownership, and skilled-worker shortages
and immigration restrictions that companies have faced in many
countries, this crisis should eliminate any doubt in boardrooms that
ESG&D factors have the potential to destroy substantial value in short
order or even threaten the viability of a business. As such, they need to
be more fully integrated into the governance, strategy and operations of
companies rather than segmented and de facto subordinated as matters
of corporate social responsibility, as they traditionally have been.

Business Continuity and Disaster Recovery

Business continuity management is integral to good corporate
governance. The current scenario should thus act as a stark reminder on
the importance of having adequate strategic management processes
capable of identifying potential threats, advance planning and the
safeguarding of critical business functions in the event of disruption.
Potential disruptions to operations and business relationships need to be
thoroughly and systematically evaluated. This evaluation may include
ensuring that management is appropriately considering16:
 The impact of COVID-19 on key customers, suppliers, financing
sources and service providers and review of key contracts to
identify any potential issues relating to force majeure, triggers for
defaults and termination rights and related contract terms.
 The ability of the company to access any emergency government
funds or other programs initiated in the wake of the COVID-19
crisis.
 The adequacy of the company’s insurance coverage and whether
proper steps are being taken to preserve any potential claims.
A reassessment of long term corporate strategy must be carried
out. Undoubtedly, the COVID-19 pandemic has brought new and unique
challenges to most businesses. Focusing on the critical functions of a
company certainly takes priority for a board. However, once the critical
areas of need are addressed, the board may want to consider the
implications for longer-term corporate strategies in light of the changing
environment caused by COVID-19. These may include cultivating new
alliances, developing more innovation and technology, growing through
acquisitions (or disposing of non-core assets or businesses), exploring
lower cost financing structures, developing new employee benefit plans
and evaluating real estate needs. Some of these issues are discussed in
more detail below.17
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Many businesses nowadays have continuity and contingency plans in
place, the efficacy of which is now being put to the test. Adequate
contingency planning should also provide for remote working, clear
channels of communication and the protection of business
relationships.18 The feasibility of the company’s disaster/contingency
plan must be confirmed. The disaster plan should address matters such
as employee availability, functionality of IT systems, cybersecurity,
communication protocols and legal/regulatory compliance. Due to the
unique nature of COVID-19, the board, as part of its ongoing monitoring
and oversight responsibilities, should continue discussing any
implementation issues with management and evaluating whether any
modifications to the disaster plan are necessary to deal with new issues
as they arise.19By way of example, what if the company’s main suppliers
are unable to supply components which are crucial to the company’s
manufacturing or provision of services?20 As far as possible, these
concerns should be proactively addressed, especially in light of the duty
that directors have to exercise reasonable care, diligence and skill, and
this involves assessing and minimising the risks in similar extreme
situations.
The Board must seek frequent briefing on the company's indebtedness,
the bank financing, lines of credit, liquidity risks in short term and work
with the management to proactively secure the liquidity needs. The
Board must constantly watch out for any early warning signals that may
put their going concern belief to the most stringent test. The Board must
work with the management to prepare and update business forecasts on
a real time basis.21

Liquidity and Capitalization Considerations

One key area of focus during the COVID-19 pandemic is liquidity. Given
the unexpected, and extremely rapid, onset of the crisis, most companies
did not foresee the dramatic slowdown of the global economy. 22
Accordingly, as part of their general oversight duties during the
pandemic, directors should receive periodic updates from management
with respect to the company’s liquidity and capital considerations and
ensure any issues in this regard are being addressed. This includes
understanding the impact of the crisis on the company’s cash flow,
whether there are upcoming maturities of outstanding indebtedness that

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need to be considered and the likelihood that financial covenants will be
maintained.
One specific topic for directors to consider in this regard is whether to
suspend the company’s ordinary dividend or pre-existing stock buyback
program to preserve cash. This typically entails weighing a variety of
factors, such as potential downward pressure on the company’s stock
price that may result from suspending the dividend and the benefit to the
company of buying back its shares when the price is relatively low. We do
note that influential proxy advisor firm Institutional Shareholder Services
(ISS) recently issued guidance in advance of the 2020 proxy season
suggesting that boards may open themselves up to “intense criticism and
reputational damage” if they undertake share repurchases under the
current circumstances. ISS was less critical, however, about potential
changes to a company’s approach to dividends saying that boards should
have “broad discretion” in this regard.23
If a decision is made to suspend an ordinary dividend, advice should be
sought from counsel with respect to the timing of the announcement of
that decision relative to the next dividend record date. Moreover, if a
company wants to not pay a dividend that the board has already
declared, further legal considerations are necessary.24

Preparedness to Crises and Systemic Shocks

Systemic crises and shocks are on the rise, ranging from financial crises,
recession and political conflicts to natural disasters, the impact of climate
change and pandemics. Boards play a crucial role in providing oversight
of their company’s ability to respond to and recover from these. To
improve preparedness, they must undertake more regular and
sophisticated scenario analysis and horizon-scanning activities, ‘stress-
test’ the company’s resilience against shocks that may have system-wide
implications, and put crisis response and emergency succession plans in
place for mission critical roles at the executive and operating level. 25
Key areas, where there is additional risk and probabilities for their
occurrence, must be assessed. While the hope is that the COVID-19 crisis
will become more manageable, consideration should be given to
additional steps that might be required if the impact of COVID-19 is
prolonged. The board should also consider the feasibility of implementing
these steps under different scenarios given the possibility of fewer
resources being available, increased health and safety regulations,

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supply chain issues, availability of financing sources and customer
situations.26
In the context of reviewing the company’s takeover defenses and
preparedness, a board should consider whether to enlist the assistance of
outside advisors. For one, an investment bank may be able to provide the
board with useful market intelligence, views on the likelihood that the
company would be a takeover target and particular insight into market
changes happening in real time due to the effects of the COVID-19
pandemic. Similarly, outside counsel could provide a summary of current
structural defenses that are in place and whether adding additional
defenses at this time may be prudent and feasible. One specific takeover
defense that a board may consider under these circumstances is a
shareholders rights plan, also known as a “poison pill.” 27 While many
public companies have a “pill on the shelf” so that they are prepared to
quickly implement a rights plan if the situation warrants, the COVID-19
crisis has resulted in a recent uptick in public companies putting
shareholder rights plans in place both to protect against hostile activity
as well as to, in certain cases, protect tax assets that could be impacted
by shifts in ownership resulting from volatility in the companies’ stock.
As there are various issues for a board to consider in determining
whether to put a shareholder rights plan on place (and if so, the terms of
such plan), a board would typically enlist the assistance of an investment
bank and outside counsel to assist with this analysis. 28
Even if the board does not expect the company to be the target of hostile
activity under the current circumstances, it still may make sense for the
board to take the time to ensure that the board has procedures in place
for responding to a friendly takeover approach. These procedures
typically include having clear instructions in place among the directors in
terms of who communicates with the potential acquirer (typically, but not
always, the CEO), and having outside advisors lined up who are familiar
with the company and can help the board analyze and respond to a
takeover approach very quickly.29
In a crisis management situation, the Board’s role is to support
management in putting people first, especially the health and safety of
employees and other stakeholders, supporting critical functions and
operations for business continuity, and providing oversight of financial
risks and resilience.30 As soon as possible, directors should be engaging
with management to explore recovery options, changes to strategy and
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Adam Hayes, Poison Pill, INVESTOPEDIA (Sept. 20, 2020), available at
[Link]
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business models that might be needed, and opportunities to improve
operational, cultural, financial and technical resilience in future.

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 CASES OF UNETHICAL CORPORATE GOVERNANCE PRACTICES
IN THE FACE OF FINANCIAL GAIN

The following are three cases wherein members of the Board have
engaged in fraudulent activity;Although the companies might not
necessarily have been in financial distress, these fraudulent activities
were done with the motive of getting easy money. In times like the
current economic situation, it is not a giant leap to assume that with
many directors facing a possible future without a job or with a lower
paying job, they might resort to such means in order to secure their
future.
Samsung’s Lee Jae-yong
Samsung chairman’s son Lee Jae-yong was issued bonds-cum-warrants at
a price lower than the market price which enriched him by $116 million
in 1999. Directors of many Samsung group companies approved
purchase of shares in the chairman’s son’s name (four money-losing
companies e-Samsung, e-Samsung International, [Link], [Link]),
to keep them afloat following the dot com meltdown in 2001.

Pioneer Industries
The Pioneer Industries scandal in Hong Kong where the directors
approved the sale of its key assets and prime US real estate to an
offshore company controlled by its two controlling families for a less than
a third of their market value of about $220 million. The directors were,
not surprisingly, paid a 200 per cent performance bonus in the same year
despite the company posting a net loss in 1999!

Bangkok Bank of Commerce

Two senior managers of Thailand’s Bangkok Bank of Commerce lent out
about a third of the bank’s total portfolio to themselves and senior
politicians, and fabricated the accounts. The Thai central bank spent $3
billion of public funds and bailed it out. Many cases like these are abound
including Hyundai, SK Telecom, Philippine National Bank, Renong-UEM
where the promoters continue to thrive and prosper in full public gaze
even a decade after these incidents took place.

In India, there have been some significant corporate governance scandals

done with the motive of financial gain. As mentioned previously, it is
important to discuss these as the temptation to commit similar scams in
the current weak economic scenario may be quite high. With that in mind
it would be ideal to discuss the Satyam and Kingfisher cases.

The Satyam Scam

The then founders of Satyam were found guilty of committing fraud
worth 7000 crores. They fooled the government, markets and customers
by cooking up numbers in their financial statements. The Satyam scam
shed light upon various errors that sustained in the Indian legal system.
Satyam computer services ltd was started in 1987 at Hyderabad by the
Raju brothers, Rama Raju and Ramalinga Raju. The company was quite
successful. Hence, they went forward to get it listed. The company got
listed in the Bombay stock exchange in 1991. At that time the shares of
Satyam ltd were oversubscribed by 17 times. Ramalinga Raju became the
chairman in 2006. Soon their annual revenue touched 1 billion and by the
end of 2008, it crossed 2 billion. The company spread its wings to 20+
countries and the business bloomed day by day.
Tensions started when the brothers decided to merge with the company
called Matyas. Matyas was held and managed by Raju's family. The
merger of the two companies gave rise to various legal issues leaving
Raju brothers in trouble. Suddenly Raju resigned his position as a
chairman and released a confession letter of 5 pages. In it, he admitted
committing a fraud of 7000 crores.
The Raju brothers conspired such a huge scam to increase their revenue
fictitiously. An increase in revenue projected a tremendous increase in
profits. This attracted a lot of investors which in turn made the share
price reach new heights. The Satyam brothers, who were the founders
and promoters of Satyam companies used this opportunity and sold their
holdings at a much higher price. They took a profit of 1200 crores
through the sale.
The brothers did this by adjusting and modifying the books and bank
statements to act in their favor. Most companies make use of ERP system
for accounting. But the Raju brothers used their strength and developed
their ERP system for accounting purposes. This system, unlike its
counterparts, had numerous loopholes. Hence, the insertion of fictitious
invoices and fictitious bank statements became a child’s play for the
brothers. The projected fake bank statements held more money than the
actual one. They simply converted this money into a fixed deposit
account. The value of such fixed deposits was roughly around 5000
crores.
The PWC who were the auditors of the Satyam companies failed in their
job terribly. They did not verify the invoices or bank statements. Physical
verification wasn’t conducted as well. Nearly 7,561 fake bills were
created and the auditors couldn’t spot it for about 7-8 years.

Kingfisher Airlines
There was a time when Kingfisher airlines was one of the best rated
airline in India and got success in gaining customer satisfaction, but it
failed to sustain that for a long time. With the economic slowdown in
2008 and the increasing fuel prices as well as the KFA’s mandatory
requirement to provide services on non-profitable routes, the path ahead
was full of difficulties. The cash strapped Kingfisher airlines was caught
in a precarious web and burdened under huge debt, which it owed for
airport fees, fuel, and salaries to employees, repayment of loans to
different banks and service tax.
Kingfisher also made a major business decision error in deciding to
merge with Air Deccan. When Vijay Mallya first bought Air Deccan he
allowed both to function as separate companies. But over time it became
clear that Kingfisher was the golden child in between the two. If there
were clashes between the schedules of the two, Kingfisher was always
favored. The problem arose when passengers not only left Air Deccan
due to this but decided to choose competitors other than Kingfisher. If we
take a look at the picture offered by Kingfisher to the travelers at
inception it would be safe to say that Kingfisher would be luxurious
domestic travel. But over time this picture began to change. Kingfisher
went ahead and purchased Air Deccan. Air Deccan did not fully suit the
image that had been created by Vijay Mallya in consumers’ eyes. Air
Deccan was set up as a low-cost airline. By purchasing it Kingfisher
gained a few consumers particularly those looking for cheap fares but in
the process lost its distinctive sheen. This is just one of the examples of
Kingfisher changing its business models. A regularly changing business
model gave travelers the impression that Kingfisher wasn’t consistent
and would only keep getting worse.
Post the closure of Kingfisher the Serious Fraud Investigation Office
(SFIO) found that serious corporate ethics were violated during the
merger. Kingfisher had created three new departments in the airline to
avoid paying capital gains tax.
In September 2011, in order to get along with the cash crunch, kingfisher
airlines decided to exit Kingfisher Red, which was its low cost segment,
but the survival mantra was very late for the ailing airlines. According to
the Kingfisher Airline’s annual report for the year 2011, reasonable
doubts over the company's existence were raised and it was pointed out
that the government money had not been deposited by the airlines, which
it deducted as TDS and provident fund contribution, highlighting scruffy
financial sustenance of the company. With the passage of time the
situation of the company got worse, leading to termination of
international flights and cancellation of domestic flights, which is still
continuing unabated. On 25th April, 2012 its languishing shares hit an
all-time low of 13. During the year 2012, losses of over Rs. 7,000 crores
were accumulated by the company, with about half of its aircrafts
grounded and many members of its staff going on strike. As all its
operation suspended, the airline came to a halt. In view of these
predicaments, Vijay Mallya appealed the government for a bailout, but
was refused the same. DGCA suspended its flying license on
20thDecember 2012, and the airline had to shut down its operations.
There has also been controversy when it comes to the means used and
collateral placed to acquire these loans. BOI had given a loan of 300
crores to Vijay Mallya on items like office stationery, boarding pass
printers, and folding chairs as collateral. The banks’ willingness to
provide loans based on Current assets as capital created suspicion on the
bank officials.
The loans given by SBI were on the trademarks and Goodwill of
Kingfisher airlines kept as collateral. These trademarks which were
worth over Rs. 4000 crores in 2009 have now plummeted to not more
than Rs. 6 crores. IOB too faces similar issues where the 2 helicopters
placed as collateral are not in a flying condition and hence cannot be sold
to recover Rs. 100 crores of debt.
Over the course of time, the loans associated with Kingfisher were
monumental. But the question arises if the loans that were taken by UB
Group were actually implemented for its actual purpose. There have been
allegations that the loans taken by Vijay Mallya were only to further his
personal agenda. These allegations claim that the loans taken by Vijay
Mallya were laundered overseas to various tax havens. This was done
with the help of shell companies. Mallya would have the loan received
from banks transferred to these shell companies where dummy directors
were placed for this purpose. These companies were not active and did
not even have an independent source of income. The directors placed
here would act as per the directions received from the UB group at the
command of Mallya. These companies were located in seven countries
including the United Kingdom, the USA, Ireland, and France.
Furthermore, it is also alleged that Vijay Mallya also diverted these loans
in order to fund his IPL cricket team The Royal Challengers Bangalore
and his F1 racing team Force India. This was all in the midst of a period
when the employees of Kingfisher were not paid their salaries. As of
October 2013, the salaries had not been paid for a period of 15 months.
 STEPS TAKEN BY THE INDIAN GOVERNMENT

Steps taken by Ministry of Corporate Affairs (MCA):

 The Ministry of Corporate Affairs (MCA) (vide Circular No.14/ 2020
dated 8 April 2020) has encouraged the companies to take all
decisions of urgent nature which requires the approval of
members, other than items of ordinary business or business where
any person has a right to be heard, through the mechanism of
postal ballot or e-voting without holding a general meeting, which
requires physical presence of members at a common venue.

 In case holding of an extra ordinary general meeting (EGM) is

unavoidable, MCA has permitted listed companies (along-with
other companies which are required to provide e-voting facility) to
hold the same through video-conferencing (VC) or other audio
visual means (OAVM) complemented with e-Voting
facility/simplified voting through registered emails, without
requiring the shareholders to physically assemble at a common
venue.

 The above Circular along-with MCA Circular dated 13 April 2020

also provides the procedure for conducting EGMs through VC or
OAVM facility such as requirement of clear disclosure with respect
to accessing and participating in the meeting, providing two way
teleconferencing or webex, among others. It also specifies that the
VC or OAVM facility should allow at least 1000 members to
participate on a first-come-first-served basis, with no such
restriction on the participation of large shareholders (holding 2%
or more shareholding), promoters, institutional investors,
chairpersons of committees, directors, KMPs, auditors etc.

 All companies using the option of VC or OAVM facility are required

to maintain a recorded transcript of the entire proceedings in safe
custody, and public companies are also required to host this
transcript on their website for greater transparency. Various other
safeguards have also been included in the above Circulars to
ensure transparency, accountability and protection of interests of
investors.

 MCA, vide Circular dated May 05, 2020, also extended the above
provisions on conducting meetings through VC or OAVM facility to
Annual General Meetings (AGMs) of companies conducted during
the calendar year 2020; the circular has also dispensed with the
printing and dispatch of physical annual reports to shareholders –
 now soft copies of the same can be sent to shareholders’ email
addresses only in electronic mode.
Steps taken by SEBI:
 As per the SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015 (“LODR”), the top 100 listed entities by market
capitalisation have to hold their Annual General Meetings (AGM)
within 5 months from date of closing of the financial year. In view
of the COVID-19 pandemic, SEBI has permitted these entities to
delay their AGM by one month. Moreover, listed entities whose
financial year ended on December 31, 2019 are permitted to
conduct their AGMs till September 30, 2020.

 SEBI has relaxed the timelines for submission for quarterly and
annual financial results (for quarter / year ended 31 March 2020)
by giving additional time of 45 days and 30 days, respectively.
Further, since banking / insurance companies follow different
accounting standards, companies having such entities as part of
the group may face challenges in preparing consolidated financial
results. In view of the same, SEBI has permitted listed entities
which are banking and / or insurance companies or having
subsidiaries which are banking and / or insurance companies to
submit consolidated financial results for the quarter ending 30 June
2020 on a voluntary basis. However, such entities shall continue to
submit the standalone financial results

 SEBI has granted various relaxations, for listed entities on a

temporary basis, from the regulatory provisions relating to
corporate governance specified under the LODR, with regard to:

- Extensions in the timelines for making various filings under

LODR such as financial results, statement of investor
complaints, shareholding pattern disclosure etc.

- Exemption from observing the maximum stipulated time gap

between two meetings (of 120 days) the board of a listed entity
and its audit committee

- Extension of time for conducting meetings of various

committees of the listed entity

- Exemption from publication of advertisements in newspapers for

certain items such as notice of the meeting of board of directors,
financial results, etc.
- Relaxation of timelines relating to prior intimation by listed
entities to stock exchanges on: meetings of the board of listed
entities where financial results are to be considered, intimation
regarding loss of share certificates and issue of duplicate
certificate

- Relaxation in the implementation of a revised SEBI Circular on

Standard Operating Procedure (SOP) on imposition of fines and
other enforcement actions for non-compliances by listed entities
with the provisions of the LODR. With regard to the functioning
of stock exchanges, despite significant movements in the
market, there has not been any disruption in the settlement
cycles of the Stock Exchanges / Clearing Corporations. Towards
ensuring orderly trading and settlement, effective risk
management, price discovery and maintenance of market
integrity, measures such as revision in market wide position
limit and position limits in equity index derivatives, increase in
margin for stocks meeting certain criteria etc. have been taken
on a temporary basis till May 28, 2020. SEBI and Market
Infrastructure Institutions viz. Stock Exchanges Clearing
Corporations and Depositories are continuously monitoring the
market developments and will take any further suitable actions
as may be required
 CONCLUSION

In the short term, poor governance structures are likely to be exposed

during such periods of crisis, while well-governed companies will act
more decisively to contain its impacts and provide much-needed
transparency and consistency to their stakeholders.
In the long-term, the capacity for a company to effectively and
appropriately manage and navigate its way through this pandemic will be
remembered by its investors and clients. Crises been and gone have been
the ‘make or break’ moment of many companies throughout the course of
history.31
The pandemic and resulting shutdowns have made the complexity and
interconnectedness of the global economy more obvious and tangible
than ever before. For example, prior to the pandemic, roughly half of the
world’s supply of N95 facial masks – life-saving equipment required by
every health care worker fighting the virus – was being produced in
China, which came to a halt as the country had to shut down factories to
help slow the spread of the virus. The resulting shortage prompted
companies in industries as varied as automotive and pet suppliers to
begin producing masks. In our interviews, directors reflected on how this
experience has demonstrated that there are no truly “local businesses”
anymore; every enterprise, regardless of size, has been impacted
profoundly by this global event.32
An effective corporate governance framework needs to be flexible to
respond to changing market dynamics, yet it must be unwavering as
regards its values and ethics. While designing and implementing the
governance processes, there is a need to insure an effective mechanism
of checks and balances with transparency and accountability as the
hallmark.

31
[Link]
of-covid-19-for-corporate-governance
32
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