The Indian regulatory framework contains plethora of rules, laws and regulations on the external auditors, so that, they may carry out their role and responsibility objectively and impartially. However, certain inherent deficiency and lacunae subsist in the Indian system (Ganguli, 2001). Auditor independence is concern in India, considering the large and segment market for accounting and and their perceived powerlessness in their face of corporate pressure (Som, 2006). The recent Satyam scandal has surfaced the deficiencies, and raise a question of the auditor's role and their independence (Satyan, 2009).The statutory auditors, as per se, are appointed and remunerated by the dominated shareholders, and so remain accountable towards them. In these settings, auditor at many times is driven to comply with the wishes of his client, in order to minimize the risk of losing fees from audit engagement. The same induces a problem for auditors, and reduces their effectiveness in the Indian corporate governance system external monitors ( Kumar & Singh, 2011). The auditor's independence is unwarranted in the given context, resulting in more opaqueness in financial reporting. This perpetuates more chances of fraud and errors as highlighted by Satyam case ( Kumar & Singh, 2011).
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Several studies and reports have observed the issues related to the external auditors independence and monitoring role. The World Bank Report (2004) points effort is needed to enhance auditor's independence and taking strict disciplinary action against unscrupulous auditors. However, noncompliance with the financial disclosures has been quite common by the companies, as penalty level is low, no prompt action on the part of SEBI and hardly any case of imprisonment as per law (World Bank, 2004; Standard and Poor's, 2009). The auditor's non deterrence in complying with the law is common due low quantum of financial penalties. This is further complemented by judicial delays that is taking away the real bite of auditor's role in corporate governance (World Bank report, 2004; Standard & Poor's, 2009). The report (World Bank, 2004) has commented on length of disciplinary proceedings against the auditors, while citing Naresh Chandra report: "such delays must be avoidedâ€¦.. ( and) that the confidence of investing people, especially small investors cannot be nurtured unless disciplinary cases are dealt with more expeditiously and transparently".
4.6.4 Corporate Governance - Regulatory Arbitrage and Tussle
Companies in India are under the sectoral regulation of multiple regulators like Ministry of Finance (MOF), MCA, SEBI, Registrar of Companies (ROC), Company Law Board (CLB), Reserve Bank of India (RBI) and stock exchanges. These regulators have different (sometimes conflicting and inconsistent) set of rules, powers and functions that govern the operation of companies. Multiple regulators hinder existing corporate governance regulatory framework to be effective. In particular, overlap of authority of SEBI and MCA is of serious concern, giving rise to regulatory arbitrage (World Bank, 2004). All companies registered in India are governed by the Companies Act 1956, which is administered by MCA and CLB. Out of these, companies listed on Indian stock exchanges have to adhere to the pronouncements of both SEBI and MCA. Companies that are not listed remain outside the purview of SEBI measures (Afsharipour, 2009; Indlaw News, 2003).
The regulatory tussle between SEBI and MCA emanates from the fact that multiple regulatory agencies are created by different legislations with substantially overlapping domains of influence (Afsharipour, 2009). Ever since the establishment of SEBI and particularly so in the late 1990s, the MCA and SEBI are engaged in a turf war insofar as to whose domain encompasses the execution of corporate governance reforms and this 'absence of congeniality' in their mutual relationship has never escaped the public eye. With each lead taken by SEBI for the creation of a corporate governance regulation, the MCA has responded with a counter punch, for example, the Chandra Committee in response to the Birla Committee and the Irani Committee sequel to the Murthy Committee (Mishra & Srivats, 2003; Singh & Kumar, 2009).
4.6.5 Corporate Governance Enforcement by Regulator
Several studies (Afsharipour, 2009; Chakrabarti, 2005; Khanna & Palepu, 2006; Singh and Kumar, 2009; Varottil; 2009; World Bank, 2004) have observed that major obstacle to effective corporate governance in India lies of formal enforcement of regulatory structure. Sanctions and enforcement need to be credible deterrents if business practices are to be aligned with the legal and regulatory framework, in particular, regarding related party transactions and insider trading (World Bank, 2004). The Satyam case highlight that perpetrators of the fraud were not undeterred by the enforcement machinery (Singh & Kumar, 2010).
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Clause 49 of the Listing Agreement, the instrument by which SEBI executes corporate governance, is not a stringent mechanism as penalties that are imposed for non-compliance with its provisions are not harsh. The maximum penalty that a stock exchange can impose on a company for not complying with the mandatory provisions of Clause 49 is a suspension of trading in its shares, which hurts the investor community more than the management of the defaulting company. However, to rectify this weakness SEBI has legislated Sec 23E in SCRA, 1956 through Securities Law (Amendment) Act, 2004. The companies act also contains specific provisions for punishments for non-conformity of financial disclosure obligations, but these are inadequate. The maximum penalty is either six months imprisonment, a fine of Rs 2000 or both at most. However, in actual observance, very few defaulters have been prosecuted/convicted (Goswami, 2002).
The enforcement action by SEBI concerning companies' compliance with Clause 49 has been fickle. Firms may get away easily for non-compliance despite being signatories for adoption of such codes of governance because the regulatory mechanisms of the state have weak enforcement (Khanna & Palepu, 2006). SEBI first introduced Clause 49 of Listing Agreement in the year 2000 with gradual implementation and making it mandatory for all companies to comply it from Janurary 1, 2006. Against this backdrop, only 1789 companies had shown compliance out of 4143 companies listed with the BSE and required to meet compliance with Clause 49 as of January 2007 while in March 2008, the number of non-complying companies stood at 1213, approximately 30 % (Afsharipor, 2009; Singh & Kumar, 2009). SEBI initiated its first enforcement action in September 2007, after 71/2 years of introduction of Clause 49, and the total number of prosecutions for non-compliance with Clause 49 as on September 12, 2007 was a mere twenty, including five PSUs (Khanna, 2010; Singh & Kumar, 2009). Therefore, SEBI is may considered as only watchdog without much teeth. Either slow or no enforcement action against non-compliant companies, along with low quantum of penalties easily takes the bite of out of SEBI to effectively enforce the Clause 49 in the companies (Singh & Kumar, 2009).
4.6.6 Corporate Governance Enforcement through Courts
Corporate governance enforcement through the courts is non-viable in the country considering the inefficiency of Indian judicial system. Notwithstanding the presence of an existing regulatory framework of corporate governance for the protection of shareholder rights, India is extremely weak in enforcing the corporate law contracts (Afsharipor, 2009; Chakrabarti et al., 2008). India ranks pathetically low in judicial efficiency, and out of 178 countries its position is 177 (Doing Business 2008, The World Bank Report). The enforceability of corporate governance in India through the judicial system by private action by affected investors is, literally speaking, out of the question with the kind of gestation required for obtaining a Court verdict (Afsharipour, 2009; Afsharipour, 2010; Chakrabarti et al., 2008; Pande & Kaushik, 2011). Adjudication through the courts are time consuming, uncertain with high cost involved due staggering delays involved in getting a final ruling (World Bank, 2004). Several scholars have observed that in India, the staggering delays are involved in resolving a case by trail, which extends up to 20 years (Afsharipor, 2009; Armour & Lele, 2008; Chakrabarti et al., 2008; Singh & Kumar, 2009; World Bank, 2004).
The substantial delay in resolution of cases is on the account of the number of cases pending in the Indian courts. A study by Harzra and Micevvska (2004) report the huge backlog of cases in Indian courts, with number of pending cases amounting to 20 million cases in lower courts and 3.2 million cases in higher courts ( as cited in Chakrabarti et al., 2008). In a latest study done by PRS legislative research, there are about 53 thousand cases pending in the Supreme Court of India, and about 4 million and 27 million respectively in case in various high Courts and lowers courts.
In reference to Satyam case, whereas class action suits filed by US investors  , both against Satyam and its statutory auditor Price Waterhouse Coppers (PWC) have been settled in the US court, trial against convicted Ramalinga Raju and others are still under process in the lower courts. Therefore, considering the time and torture involved in obtaining judicial mandates, means that there exists little scope for coercive enforcement of corporate governance provisions through private action.
4.6.7 Corporate Governance : the Mandatory and Vountary Approach
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The peculiar feature of corporate governance regulation in India is that it is witnessing a see-saw between voluntary and mandatory approach. Corporate governance in Indian companies was first introduced in 1998 through,"The CII Code", which was a voluntary code. Later in 2000, SEBI instigated Clause 49 in Listing Agreement, the first formal statuary corporate governance code for listed companies, was administered through a combination of both hard and soft law. Clause 49 includes both mandatory provisions and non-mandatory recommendations. Companies have to comply with compulsory provisions, with penalty and sanctions for non-compliance with them. Non-mandatory recommendation companies may or may not adopt, without any explanation for non-compliance with them. Voluntary Guidelines (2009) on corporate governance promulgated by MCA , once again is revert to the flexible approach of voluntary adoption, in contrast to the earlier coercive approach adopted in Clause 49 of the Listing Agreement. Going further, if Companies Bill, 2011 gets status the legislative status, it will again enforce corporate governance in companies in an obligatory way (Kumar, 2011).
Corporate governance regulation in India has moved whole 360 degrees, starting from voluntary approach, moving towards mandatory approach, and again coming back the old approach ( Varottil, 2009). All the approaches of regulating corporate governance have its costs and benefits. However, considering the past legal tradition, history of compliance even with mandatory norms and the ineffectiveness of the voluntary approach in jurisdictions of other emerging economies, the success of corporate governance regulation through soft law seem to be distant (Varottil, 2009). It is still to be seen and assessed, which particular approach of regulation will work effectively in India.
This chapter in detail situated and analyzed corporate governance in India, starting from the historical perspective to contemporary state. In the current Indian corporate governance system is part of emerging market corporate governance system, which is still of flux, which may be termed as "hybrid model of governance (Mchold & Vasudevan, 2004; Sarkar & Sarkar, 2000). The Indian governance system has been derived from the business house model in its historical, cultural , economic and and social context. The economic crisis and scandals in the last decade have guided India to adopt legislative Anglo- American based corporate governance regulatory reforms. However, the analysis points that full convergence has not been achieved and even may not be desirable. The complex ownership structure with agency conflict between majority and minority shareholders, makes points to the same. Further, as against the developed capital markets in the US and UK, where external corporate governance is strong and robust, in India all these are weak. The external monitoring mechanism of corporate governance through institutional investors, external auditors, and enforcement through the courts and regulators as observed are weak in India. The Satyam fiasco that has taken place also impounds the corporate governance issues that exist in the country. The Satyam scandal provides an opportunity to think us about the corporate governance model - the board structure, disclosure and accountability mechanism. It highlights that it is necessary to understand the institutional and societal embeddeness of the Indian corporate governance system. Based on this premise, and following analysis drawn from this chapter, I posit that it is necessary to take a holistic view, taking feedback from various stakeholders, and a develop the corporate governance framework for Indian corporation that can address various issues.