{"id":347710,"date":"2025-05-14T09:00:38","date_gmt":"2025-05-14T03:30:38","guid":{"rendered":"https:\/\/www.scconline.com\/blog\/?p=347710"},"modified":"2025-05-14T10:36:04","modified_gmt":"2025-05-14T05:06:04","slug":"importance-of-keeping-the-corporate-house-in-order-and-going-beyond-just-ticking-the-box","status":"publish","type":"post","link":"https:\/\/www.scconline.com\/blog\/post\/2025\/05\/14\/importance-of-keeping-the-corporate-house-in-order-and-going-beyond-just-ticking-the-box\/","title":{"rendered":"Importance of keeping the corporate house in order and going beyond just ticking the box"},"content":{"rendered":"<div style=\"text-align: justify; line-height: 150%;\">\n<p style=\"margin-bottom: 3%;\">The Gensol-BluSmart episode<a id=\"fnref2\" href=\"#fn2\" title=\"2. &#8220;Fund Diversion, Rs 42 Crore Luxury Flat: Why SEBI Cracked Down on Gensol&#8221;, NDTV (ndtv.com, 17-4-2025).\"><sup>2<\/sup><\/a> has re-enforced the pressing importance of running a clean corporateship and that corporate governance is not just a mere &#8220;tick the box&#8221; practice. Since BluSmart was a service regularly used by an extensive user base, suspension of its services has led to conversations about the impact of corporate fraud and importance of corporate governance being carried out amongst a wide audience.<\/p>\n<p style=\"margin-bottom: 3%;\">Often corporate governance policies such as whistleblower, insider trading and related-party transaction policies are formulated by companies to simply comply with regulatory requirements, without ascribing any real value to them and Board governance is also not given much importance. Therefore, when a shake-up like Gensol-BluSmart fraud happens, stakeholders start emphasising the importance of corporate governance as a tool for early detection of fraud.<\/p>\n<p style=\"margin-bottom: 3%;\">While corporate governance cannot address the inherent human trait of greed, it can ensure that robust internal controls are in place to detect fraud and red flags and plug financial leaks at the source and organisational level so that post facto solutions about &#8220;what-ifs&#8221; are mitigated.<\/p>\n<p style=\"margin-bottom: 3%;\">The myth that most closely held, family-owned and run companies operate in an opaque fashion has been somewhat broken by the Gensol-BluSmart fraud since Gensol is a listed entity with a fairly large market capitalisation. Therefore, the issue is not with the structuring of a company but a fundamental understanding of what it means to run a clean corporateship, the responsibilities of the Board of Directors in upholding corporate governance and how corporate policies can be impactful. These practices have to be addressed by the company at an organisational level and by the Board of Directors at a leadership level.<\/p>\n<p style=\"margin-bottom: 3%;\">For a company&#8217;s policies to be actually impactful and not just token documents formulated, it is important for companies to go beyond just &#8220;ticking the box&#8221;. Companies should ensure that corporate policies are integrated with regulatory framework and are effectively relayed to stakeholders and employees of the companies. This can be done through conducting regular training programs and mandatory tests administered to gauge effectiveness of dissemination of the policies and assess performance of each business department and employees based on the answers. Not only does this help companies assess if employees have actually understood the company&#8217;s policies and regulatory requirements along with their duties but also helps to identify department and organisation wide risks and develop strategies to plug these risks.<\/p>\n<p style=\"margin-bottom: 3%;\">Often financial frauds are not committed in isolation and certain stakeholders and senior executives are aware of the impropriety carried out<a id=\"fnref3\" href=\"#fn3\" title=\"3. &#8220;Insider Revelations in BluSmart Scandal: CSR, Media &amp; Co-Founder Silence&#8221;, TICE (tice.news, 18-4-2025).\"><sup>3<\/sup><\/a> and choose to look away. Therefore, at a fundamental level, companies must promote a culture of speaking up, even anonymously, in the face of impropriety. The best way for this is to have a strong and confidential vigil mechanism process and whistleblowing policy so that stakeholders have an outlet to put forth tips of fraud and breach of corporate governance, without fear of retaliation. It is imperative that the process is overseen by an external ombudsman, who works on an arms-length basis from the company and help companies to identify robustness of their control systems, employee issues and other matters of financial propriety. Companies must actively promote and create awareness about the vigil mechanism process, especially regarding its confidentiality and impartiality.<\/p>\n<p style=\"margin-bottom: 3%;\">The role of the Board of Directors in risk management and early detection of fraud is also critical. However, the role of the Board of Directors must only be limited to oversight of corporate governance, compliance and other best practices and not in the management and operations of the company.<\/p>\n<p style=\"margin-bottom: 3%;\">&#8220;Compliance&#8221; as a practice is often viewed by directors as a routine function. However, individual liability, especially for independent directors, is immense and breach can lead not only to corporate frauds but also to civil and criminal penalties being imposed upon directors. Therefore, it is important that the Board of Directors ensures that the company&#8217;s policies are compliant with applicable laws and corporate governance and that the directors&#8217; responsibility statement<a id=\"fnref4\" href=\"#fn4\" title=\"4. Companies Act, 2013, S. 134.\"><sup>4<\/sup><\/a> is an accurate reflection of the affairs on the company and is not just signed nominally.<\/p>\n<p style=\"margin-bottom: 3%;\">The Board of Directors should have cohesive interactions with &#8220;C-suite&#8221; officers and key managerial personnel so as to be aware of the daily operations of the company. The Board should not solely rely on the company to provide information about its affairs but should be aware of practices that may be a red flag such as unaccounted for expenditure in the financial statements.<a id=\"fnref5\" href=\"#fn5\" title=\"5. &#8220;Before the Gensol Fall: Experts List Governance Red Flags Missed During the Firm&#8217;s Meteoric Rise&#8221;, The Economic Times (cfo.economictimes.indiatimes.com, 22-4-2025).\"><sup>5<\/sup><\/a><\/p>\n<p style=\"margin-bottom: 3%;\">The Board&#8217;s review of related-party transactions is critical in detecting fraud as in most instances, corporate fraud is perpetuated through related-party transactions as company funds are often diverted for personal use through related-party transactions.<a id=\"fnref6\" href=\"#fn6\" title=\"6. &#8220;Before the Gensol Fall: Experts List Governance Red Flags Missed During the Firm&#8217;s Meteoric Rise&#8221;, The Economic Times (cfo.economictimes.indiatimes.com, 22-4-2025).\"><sup>6<\/sup><\/a> Approving such transactions cannot be cursory and the Board must independently assess the actual requirement of the company for availing the asset or services of the related party, cogent reasons for such a transaction, must carry out price discovery to ascertain if the price for the transaction is fair and if the transaction is actually at an arms&#8217;-length basis. Only once the Board makes an informed decision approving or disallowing such transactions, can frauds, often effectuated through related-party transactions, be curtailed at an early stage.<\/p>\n<p style=\"margin-bottom: 3%;\">The Board must also ensure that the company is carrying out mandatory regulatory disclosures. While this may seem to be a basic responsibility, the India Disclosure Index 2023 report states that only 9 out of the National Stock Exchange Fifty (NIFTY) 100 companies were &#8220;disclosure champions&#8221;<a id=\"fnref7\" href=\"#fn7\" title=\"7. Press Release, FTI Consulting, FTI Consulting Releases India Disclosure Index 2023 (fticonsulting.com, 12-10-2023).\"><sup>7<\/sup><\/a> based on 18 disclosure parameters. At the least regulatory disclosures should be carried out to detect irregularity in a timely fashion.<\/p>\n<p style=\"margin-bottom: 3%;\">While each time news breaks out of a corporate fraud, the conversation around corporate governance and best practices takes center stage and then slowly simmers down. Hopefully this time around, stakeholders take stock of the situation and put into place active internal controls and corporate governance policies to spot red flags and detect fraud early on so as to avoid shaking the confidence of investors, shareholders and all other stakeholders in the corporate system.<\/p>\n<\/div>\n<hr\/>\n<p style=\"margin-left: 18pt; text-indent: -18pt;\"><a id=\"fn1\" href=\"#fnref1\">1.<\/a> Advocate. Author can be reached at: <a href=\"mailto:prachi.dutta@tari.co.in\">prachi.dutta@tari.co.in<\/a>.<\/p>\n<p style=\"margin-left: 18pt; text-indent: -18pt;\"><a id=\"fn2\" href=\"#fnref2\">2.<\/a> &#8220;Fund Diversion, Rs 42 Crore Luxury Flat: Why SEBI Cracked Down on Gensol&#8221;, NDTV (ndtv.com, 17-4-2025).<\/p>\n<p style=\"margin-left: 18pt; text-indent: -18pt;\"><a id=\"fn3\" href=\"#fnref3\">3.<\/a> &#8220;Insider Revelations in BluSmart Scandal: CSR, Media &amp; Co-Founder Silence&#8221;, TICE (tice.news, 18-4-2025).<\/p>\n<p style=\"margin-left: 18pt; text-indent: -18pt;\"><a id=\"fn4\" href=\"#fnref4\">4.<\/a> <a href=\"http:\/\/www.scconline.com\/DocumentLink\/51e0PO2U\">Companies Act, 2013, S. 134.<\/a><\/p>\n<p style=\"margin-left: 18pt; text-indent: -18pt;\"><a id=\"fn5\" href=\"#fnref5\">5.<\/a> &#8220;Before the Gensol Fall: Experts List Governance Red Flags Missed During the Firm&#8217;s Meteoric Rise&#8221;, <span style=\"font-style: italic;\">The Economic Times<\/span> (cfo.economictimes.indiatimes.com, 22-4-2025).<\/p>\n<p style=\"margin-left: 18pt; text-indent: -18pt;\"><a id=\"fn6\" href=\"#fnref6\">6.<\/a> &#8220;Before the Gensol Fall: Experts List Governance Red Flags Missed During the Firm&#8217;s Meteoric Rise&#8221;, <span style=\"font-style: italic;\">The Economic Times<\/span> (cfo.economictimes.indiatimes.com, 22-4-2025).<\/p>\n<p style=\"margin-left: 18pt; text-indent: -18pt;\"><a id=\"fn7\" href=\"#fnref7\">7.<\/a> Press Release, FTI Consulting, FTI Consulting Releases India Disclosure Index 2023 (fticonsulting.com, 12-10-2023).<\/p>\n","protected":false},"excerpt":{"rendered":"<p>by Prachi Dutta<a id=\"fnref1\" href=\"#fn1\" title=\"1. Advocate. Author can be reached at: prachi.dutta@tari.co.in.\"><sup>1<\/sup><\/a><\/p>\n","protected":false},"author":67011,"featured_media":347743,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[42503,1191],"tags":[34095,82001,82003,82000,82002,82005,82004],"class_list":["post-347710","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-legal-analysis","category-op-ed","tag-board-of-directors","tag-corporate-house","tag-gensol-blusmart","tag-importance-of-keeping","tag-just-ticking-the-box","tag-national-stock-exchange-fifty","tag-tick-the-box"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.4 (Yoast SEO v26.4) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Importance of keeping the corporate house in order and going beyond just ticking the box | SCC Times<\/title>\n<meta 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