Misconduct In Corporate Governance - How This Misconduct Killed the OEM Company - What Was The Gap of The Independent Directors.

 Corporate Governance Practice Audit  

* Birendra K Jha                                                                                                                                                                       Independent Director, IICA ( Ministry of Corporate Affairs ); Corporate Governance  Practice Audit; CSR Social Impact - CSR Planning & Implementation;  Expert Company Law -SEBI Law - Social & Environmental Law   EMail: birendrajha03@yahoo.com

This is a case where the CMD picked two Independent Directors. One was Retired Air Vice Marshall and the other was a Physio-Therapist. Using the innocent face of the Two Independent Directors the Company transferred Rs. 472.11 Crores through  the Related Company. See the case of an Original Equipment Manufacturer given below. The poor Corporate Governance killed this company.  

If  Independent Directors are poor in law and weak in human resource administration, they should not join the  board. This needs high ethical - tough discipline administration experience for maintaining high standard of Corporate Governance. Good Management, who desires to grow business, always looking for strong ethical Corporate Governance. Some pro-measures are needed. This is explained below in the box given below.  

The Independent Directors should must  take following pro-active measures. This is necessary to restore the discipline of the Corporate Governance.

A Listed OEM of NSE and BSE - How Died: 

This listed OEM was formed in 1987. It had three reportable business: a) Consumer Durable ( CD); b) Original equipment Manufacturing (OEM) and c) Heat Exchanger ( HE ) 

One large electrical equipment manufacturing company  purchased the CD business in 2017 at a cost of Rs 1550 Crore. In 2018 SEBI received a "whistleblower" complain that the Directors and senior management  of this OEM company have diverted the funds out of the company received from the electrical company. Meanwhile SEBI also received a letter from the Ministry of Finance on misuse of input tax, while selling the CD business. 

After SEBI investigation a large numbers of Corporate Governance related malpractices landed at the site. All related with Misconduct.  Two Independent Directors, one retired Air Vice Marshal  and another, Independent Director, a Physical Therapist  were found sitting in the Board of Directors. They were also sitting in the Audit Committee also.  Both the Directors submitted that they  had no experience of Law and Corporate Governance. One is expert in warfare and the other in physical therapy. Both the Independent Directors submitted  further that the Chairman and the Managing Director had insisted them to join the Board. Further, they had been convinced by the Chairman & Managing Director of this Company that the  trusted  company secretary is actually controlling the whole finance and compliance relation function of the company so there is nothing to worry. The Independent Directors were trapped in this false promise. The Chairman - Managing Director, whole Time Director  and the Company Secretary were all involved in this misconduct. The Two Independent Directors revealed further that  the Audit Committee meeting were only conducted in paper. Actually it never took place. 

Misconduct of Diverging Funds:  

It was found  that the Company had diverted funds to related parties in following design. This was a case of pure Misconduct.  

Large Scale Corporate Governance Misconduct 

It adopted three routes: 

(a) by advancing funds to related parties and subsequently transferring balances due from them in the company Ledger. The design is produced above in graphical form.  

(b) by transferring the receivable balance from related parties to unrelated vendor accounts; and 

(c) by making fictitious prepaid expenses which were later written off. 

Misconduct  of Corporate Governance:

Prima facie this is proved  that the financial statements of FY 2013-14 to FY 2018-19 were fraudulently manipulated and the figures contained therein were significantly misstated. This led to the publication of manipulated financial results of the Company from FY 2013-14 to FY 2018-19. The  publication of information in the financial statements which are not true and misleading or in a distorted manner was in contravention of the provisions of the SEBI Act, PFUTP Regulations and LODR Regulations.

The Company misused and diverted funds to a tune of Rs. 472.11 Crore.  The diversion mostly took in the shape of Related Party Transaction. For the said RPT, Audit Committee approval was necessary. Based on all the above, it was alleged that the company had made payments to the Related Parties over the years without the approval of the Audit Committee.

Misconduct by the Accountant and the CFO for fictitious entries in the ledger for inflation of profit:

There was a receivable balance from a supplier from Malaysia. This was a Related Party. The receivable balance was written off without any supporting documentation or copy of any internal approval for the said write-off. This was a pure case of fictitious entries in the  ledger to inflate profit. 

Misconduct By The Purchase  and Marketing Staff On Fictitious Purchase and Sale: 

SEBI had received a letter from the Ministry of Finance, where it has been revealed that the GST Input Tax Credit of INR 40.53 Crore has been availed by this company against a fictitious purchase of goods to the tune of INR 225.19 Crore, during the period from July 2017 to March 2018. It was stated in the letter that the Company had reported such fictitious purchase and sale to show an inflated annual turnover in financials. It hiked the suspicion further, when  the closing stock as per financial statements was found Rs. 119.79 Crore higher than the value of inventory as per the stock register of 2017-18. The fictitious practice of purchase and sale were in practice  by the employees. 

Punishment: 

Based on the above alleged transgressions, the Directors, were placed in Judicial Custody. The members of the Audit Committee ( Two Independent Directors ) were issued with heavy fines under the provisions of the SEBI Act, the LODR regulations and PFUTP Regulations. If Independent Directors have taken Pro-Measures this could have been avoided.