When Corporate Governance Fails: Key Lessons from Major Indian Scandals

Corporate governance is the backbone of trust and accountability in business. When it breaks down, the consequences ripple through the economy, investors, employees, and society. India has witnessed several high-profile corporate scandals that exposed deep flaws in governance systems. These cases reveal how failures in board oversight, auditing, disclosures, and regulatory compliance can lead to massive financial losses and shake investor confidence.

This article examines some of the most significant Indian corporate scandals—Satyam, IL&FS, Yes Bank, DHFL, and the NSE co-location case. It explores the systemic weaknesses that allowed these failures, the roles played by directors, auditors, and regulators, and whether existing laws are sufficient to prevent future crises. Finally, it offers lessons learned and recommendations to strengthen corporate accountability in India.

Corporate office building symbolizing governance and oversight

The Satyam Scandal: A Wake-Up Call for Governance

In 2009, Satyam Computer Services shocked India and the world when its chairman admitted to inflating the company's assets by nearly ₹7,000 crore. This scandal exposed glaring weaknesses in board oversight and auditing.

• Board oversight failure: The board, including independent directors, failed to detect or question the fabricated financial statements for years. This raised questions about the effectiveness and independence of directors.

• Auditor complicity: The external auditor, Price Waterhouse, was accused of negligence and complicity in approving false accounts.

• Disclosure lapses: Satyam’s disclosures were misleading, hiding the true financial health from investors and regulators.

  
  

The scandal led to tighter regulations on auditor rotation and independence under the Companies Act, 2013, but it also highlighted the need for boards to actively engage in governance rather than rubber-stamping management decisions.

IL&FS Crisis: Complex Debt and Governance Breakdown

Infrastructure Leasing & Financial Services (IL&FS) collapsed in 2018 under a mountain of debt exceeding ₹90,000 crore. The crisis revealed systemic governance failures in financial institutions.

• Board complacency: The board failed to monitor the company’s risky lending and complex financial structures.

• Opaque disclosures: IL&FS did not provide clear information about its liabilities and cash flows, misleading investors and creditors.

• Regulatory gaps: Despite warnings, regulators like SEBI and RBI were slow to intervene decisively.

  
  

IL&FS’s failure showed that governance in financial institutions requires constant vigilance, especially when dealing with complex financial products and large-scale debt.

Yes Bank: Risk Management and Regulatory Oversight

Yes Bank’s near-collapse in 2020 was caused by mounting bad loans and poor risk management.

• Board and management failure: The board did not adequately oversee credit risk, allowing non-performing assets to balloon.

• Auditor challenges: Auditors raised concerns, but these were not acted upon promptly.

• Regulatory intervention: The Reserve Bank of India (RBI) stepped in with a reconstruction plan, highlighting the importance of proactive regulatory oversight.

  
  

Yes Bank’s case emphasizes the need for boards to understand risk thoroughly and for regulators to act swiftly to prevent contagion.

DHFL: Governance in Housing Finance

Dewan Housing Finance Corporation Limited (DHFL) defaulted on repayments in 2019, exposing governance weaknesses in the housing finance sector.

• Board oversight gaps: The board failed to question aggressive lending practices and related-party transactions.

• Auditor and disclosure issues: Financial statements did not reflect the true risk profile, misleading stakeholders.

• Regulatory response: The Insolvency and Bankruptcy Code (IBC) process was initiated, showing the role of insolvency laws in addressing governance failures.

  
  

DHFL’s collapse underlines the importance of transparency and strong board vigilance in non-banking financial companies (NBFCs).

NSE Co-location Scam: Market Manipulation and Governance

The National Stock Exchange (NSE) co-location scam involved preferential access to trading data for select brokers, undermining market fairness.

• Board and management failure: The NSE board did not prevent or detect the misuse of co-location facilities.

• Regulatory challenges: SEBI’s investigation led to penalties, but the case exposed gaps in surveillance and compliance.

• Auditor role: Internal audits failed to flag the irregularities in time.

  
  

This scandal highlights the need for governance structures that prioritize market integrity and robust internal controls.

Roles of Directors, Auditors, and Regulators

Directors

Directors must actively oversee management, question assumptions, and ensure transparency. Independent directors should bring unbiased perspectives and challenge conflicts of interest. These scandals show that passive boards enable governance breakdowns.

Auditors

Auditors serve as watchdogs for financial accuracy. Their independence and diligence are critical. Cases like Satyam reveal how auditor complacency or collusion can worsen fraud. Regular rotation and stricter accountability are necessary.

SEBI, RBI, and MCA

Regulators must enforce compliance and intervene early. SEBI oversees securities markets, RBI regulates banks and NBFCs, and the Ministry of Corporate Affairs (MCA) governs company law. Coordination among these bodies is essential to detect and prevent governance failures.

Are Existing Laws Adequate or Reactive?

The Companies Act, 2013, SEBI regulations, and the Insolvency and Bankruptcy Code (IBC) have introduced stronger governance norms, disclosure requirements, and insolvency mechanisms. However, these laws often react after failures rather than prevent them.

• Companies Act, 2013: Introduced mandatory independent directors, audit committees, and stricter disclosure norms. Yet, enforcement remains uneven.

• SEBI regulations: Improved transparency and investor protection but need better surveillance and quicker action.

• IBC: Provides a framework for resolving insolvency but does not address governance lapses proactively.

  
  

Stronger enforcement, real-time monitoring, and cultural change in corporate governance are needed to move from reactive to preventive frameworks.

Lessons Learned and Recommendations

• Active board engagement: Boards must take ownership of governance, understand risks, and challenge management decisions.

• Strengthen auditor independence: Regular rotation, peer reviews, and accountability mechanisms can improve audit quality.

• Enhance regulatory coordination: SEBI, RBI, and MCA should share information and act swiftly on red flags.

• Improve transparency: Companies must provide clear, timely, and accurate disclosures to stakeholders.

• Promote whistleblower protection: Encouraging internal reporting can help detect issues early.

• Focus on culture and ethics: Governance reforms must include building ethical corporate cultures that prioritize accountability.