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ADVANCING THE CONCEPT OF CORPORATE GOVERNANCE IN THE LIGHT OF PREVENTION OF CORRUPTION (AMENDMENT) ACT 2018

The Prevention of Corruption (Amendment) Act 2018 (hereinafter referred as “Amendment Act”) was brought into effect on 26th July 2018. It was brought to bring India’s anti corruption laws in line with the United Nation Convention against Corruption 2005 (UNCAC) [i] The Prevention of Corruption Act 1988 (hereinafter referred as “Principal Act”) did not dealt with crucial aspect of corruption including corruption by commercial entities. Corruption by and within the corporate entities is on an ascending slope. This is evident by the frequency of corporate frauds that are uncovered in last decades[ii] . these frauds shook India’s economic framework. The alleged corrupt activities undertaken by these enterprises were overlooked because of lack of direct enterprise liability for such conduct. The Amendment Act was brought with an objective to overcome this barrier.
The measures enumerated hereunder are adopted to bring the corporate enterprises and their activities (corporate governance) within the framework of the anti corruption regime. Thus it is imperative to explore the nexus between corporate governance and corruption before we can comment on the implication of the Amendment Act.
Relationship between corporate governance and corruption
Corporate governance[iii] and corruption[iv] are seen as an antithesis to each other[v] meaning thereby that corporate governance should make it more difficult to commit corruption. However corporate governance is seen essentially operating in the private domain while corruption is perceived and defined as public problem. It is presumed that the interaction of private entities with the public domain i.e. with government entities can create the opportunities of corrupt activities.[vi]
Corporate governance and corruption both are seem as am internationalised concept. It is believed that without a good corporate governance structure in place the overall impact of the anti corruption initiatives is reduced and the growth of companies and countries where they operate is undermined.[vii] In this article we will try to establish a cardinal connection between the two and see how effective anti corruption law can be to promote corporate governance.
Corporate governance acts as anti corruption measures essentially at two levels- at decision making level where corporate governance injects transparency and accountability so that it is clear how decisions are made and why, and at moral compass level i.e. business ethics.[viii] For our discussion we will be focusing on these two aspects of corporate Governance and two additional aspects which are introduced by the Amendment Act i.e. Supply side liability and whistle blower’s protection. (Not in particular order)
Supply side is liable
Corruption has a demand side and a supply side. The demand side refers to those in the government sector who can provide undue advantage or rents in exchange for certain payments,[ix] while supply side refers to the private entities who give such undue advantage. Section 8 of the Amendment Act makes a bribing of a public offence punishable under the Act. Any person who gives or promises to give an undue advantage to any other persons with intention to induce a public servant to perform a public duty improperly, or to reward him for such improper performance of public duty is also liable under the Amendment Act.
Section 9 of the Principal Act[x] has been substituted to include offence of offering bribe by commercial organisation and persons associated with it. The Amendment Act has expanded its scope to include not just the body and partnerships incorporated in India and carrying out their business in India but also the body and partnerships incorporated outside India and carrying out their business in India. It provides that if a commercial organisation or any person associated commits any of the offence[xi] mentioned in the Act with the intention to obtain or retain any business, or obtain or retain any advantage in the conduct of its business then such commercial organisation will be punishable under this act.  Additionally Supreme Court has expanded the horizon of ‘public official” definition to included the private bank official as well.[xii]
The conjoint reading of Supreme Court expanded definition of “public servant”, Section 8 and Section 9 makes both bank and corporation liable under Prevention of Corruption act if they indulge in any such act to commit fraud by indulging in the corruption activity.
Making the managements liable
Decision making in a corporation rests with the management of the corporation. Sir Adrian Cadbury[xiii] explains this decision making process as “Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board’s actions are subject to laws, regulations and the shareholders in general meeting.”  The directors of the company are thereby made liable for the management and decision making of the company. However this liability is not superseded by corporate liability as that will violate the principle of corporate veil.
Section 10 of the Act makes the director, manager, secretary or any other officer of the commercial organisation liable for offence committed under Section 9 provided such officer consented to or connived in carrying out such offence. The directors and other management official or any other person who is acting on behalf of the commercial organisation[xiv] can be made liable and their properties can now be attached. [xv] Corporate governance plays its anti corruption role by putting in place an accounting and auditing regulation that will make corruption by such official difficult to disguise
The attachment of property can be seen as a positive step towards streamlining and avoiding multiple enforcement mechanism. The directors who owe liability are now in a way also vicariously liable for the corrupt activities of the company however unlike other vicarious liability the presence of mens rea is an essential component to make an offence under the Act.
Enhancing business ethics
Business ethics is based on broad principles of integrity and fairness.[xvi] Business ethics is a form of applied ethics that examines ethical rules and principles within a commercial context. A company is bound to carry out its activity keeping in mind interest of all its stakeholders. The company is obligated to deploy all the tools to ensure the compliance of this interest as departure from such duty will be against the accepted principle of integrity and fairness. Corporate governance represents the moral framework, ethical framework and value framework under which an enterprise takes decision. Companies, under the Amendment Act, need to introduce compliance programmes, manuals and guidance notes to ensure that employees and consultants are adequately educated about obligations under the Act, as done in other developed jurisdictions. The newly inserted section 29A authorised the central government to make necessary rules for carrying out of the provision of this Act. The central government is required to formulate the guidelines which can be put in place by the commercial organisation.[xvii] This is done to establish a standard internal anti corruption framework which should be adopted or complied with by all the corporate bodies.
Commercial organisations are provided with a defence to escape liability under the Act if they can prove that they have in place the adequate procedure in compliance with the guidelines[xviii]. The requirement of setting up of an internal procedure bears close consonance with UK Bribery Act’s “adequate procedure” requirement. Under UK bribery Act this can be established through adherence to six principles: Proportionality, Top-level commitment, Risk assessment, due diligence, Communication, Monitoring and review.  Company’s policies and procedures must be proportionate to the size, nature and complexity of the company; top management should show visible support for the company’s compliance policies and activities; this will foster a culture of integrity in which bribery is unacceptable; perform a periodic and comprehensive risk assessment to identify and weigh internal and external risks and in turn define your priorities.; take a risk-based approach and conduct a heightened-level of scrutiny or due diligence before engaging others to represent your company[xix]; policies and procedures must be communicated to all the stakeholders of a company including the external stakeholders. The communication can be done in the form of e-learning courses, traditional on-site training etc: policies and procedures should be monitored and reviewed continuously to account for changes in risks and the effectiveness of your procedure.
In places where external institutions are weak corporate governance and ethics play much more important role. India’s Listing Agreement clause 49 provides elaborate parameters to strengthen corporate governance yet it is violated by companies with impunity. The legal and regulatory framework as devised by the Central Government under section 29A will set the minimum standard of acceptable conduct in doing business and will reflect what society will hold fair and appropriate behaviour by all types and sizes of firms. These guidelines (not framed yet) should follow the precedence of UK Bribery Act which seeks to establish a code of business ethics rather than code of conduct for commercial organisations.
Whistleblower[xx] protection
The strengthening of corporate governance cannot always be self induced but sometimes it needs application of external factor. Whistleblower protection is important to detect or uncover fraud that occurs violating the requirement of corporate governance. The infamous and high-profiled collapse of Enron corporation was brought in light by the whistleblower Sherron Watkins who in her evidence highlighted that she did not approach her two managers with her concerns on the grounds that this would be ‘‘fruitless’’ and might cost her job.[xxi]
Proviso attached to the section 8(1) exempt certain persons from being punished under the act. A person who is compelled to give an undue advantage reports the matter to the law enforcement authority or investigation authority within a period of seven days from the date of giving such undue influence will not be held liable under section 8. Similarly section 8 sub clause (2) excludes categories of person who assist the law enforcement and investigation agency in an investigation against a 3rd person by giving undue influence to that person. Incorporating of the abovementioned clauses in addition to the Whistle Blower Protection Act 2011 provide the requisite protection to employees/person.
Concluding remarks
The prevention of Corruption (Amendment) Act 2018 though is a step in the right direction it fails to address certain key commitment of UNCAC.[xxii] For instance the bill doesn’t deal with the bribery of foreign official which has become and was one of the reasons behind adoption of UNCAC.[xxiii] Most foreign jurisdiction in their domestic anti-corruption legislation, like US[xxiv] and UK[xxv], deal with this aspect of the corruption by commercial entities. The bill also misses out on opportunity to define the ambiguities that subsist in application of anti corruption law on private enterprises especially when these enterprises are engaged in public-private partnership project[xxvi]. It is also argued that certain provision of the Act compromise the principle of corporate veil or are against the interest of the corporate enterprises[xxvii]. The Act now provides a requirement of obtaining a prior approval of the appropriate government to initiate probe on service or prior public servant. It is argued that this will strengthen the shield available to public officials accused of corruption.[xxviii]
The formulation of guidelines by the government under the Act can eradicate many concerns that are raised. India also needs to reconsider its stand viz.a.viz membership of OECD. A limited acceptance of OECD in the form of its committees but not complete acceptance doesn’t give it a complete authority to take one sided stand. However from our discussion it is accepted that poor corporate governance constitutes the principal source of corrupt behaviour in a corporation,[xxix] and government enactment of Prevention of Corruption (Amendment) Act 2018 is one of its many steps taken to improve India’s ease of doing business ranking. It is too early to comment on the success of the Act but it can be hoped that it goes on to enjoy the same success as enjoyed by Insolvency and Bankruptcy Code 2016.

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REFERENCES

[i]. The UNCAC was adopted by the General Assembly of the United Nations on 31 October 2003. It is the only legally binding universal anti-corruption instrument. See https://www.unodc.org/unodc/en/treaties/CAC/

India ratified the Convention in 2011 and thereafter this bill was introduced in 2013 but was pending ever since

[ii] Satyam fraud:; NSEL (National spot Exchange Ltdscandal or NSEL fraud ; Firestar-Gitanjali fraud:

[iii] For our discussion corporate governance specifies “the distribution of rights and responsibilities among different participants in the corporation such as the board, managers, shareholders, and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs.” OECD (2004), OECD principles of Corporate Governance, available at http://www.oecd.org/,

[iv] For our discussion corruption means “use of one’s official position for personal and group gain and that includes unethical actions like bribery,…..” AAPAM (1991). “Ethics and Accountability in African Public Services” Report of the Lilith round Table of the African Association for Public Administration and Management (AAPAM) held at Mababane, Swaziland, December 2-6._

[v] Prabhakar Krishnamurthy, Impact of Corruption on Corporate Governance – An Overview Under the

Context of Policy Framework Against Corporate Corruption, SSRN Electronic Journal, January 2011.

[vi] See Andrew W. Goudie and David Stasavage, Corruption: The Issues, OECD Development Center Technical Paper No. 12, present a Typology of Public Sector Corrupt Practices:

[vii] X. Wu, Corporate Governance and Corruption: A Cross-Country Analysis, International Journal of Policy, Administration and Institutions, 18(2), pp. 151-170.

[viii]  John D. Sullivan,  Andrew Wilson & Anna Nadgrodkiewicz, The role of corporate governance in fighting corruption,  Deloitte, available at- https://www2.deloitte.com/content/dam/Deloitte/ru/Documents/finance/role_corporate_governance_sullivan_eng.pdf

[ix] id

[x] Section 9 of the Prevention of corruption Act 1988 (PCA 1988) dealt with the offence of taking gratification for exercise of influence with public servant.

[xi] Section 9 specifically deals with the offence of bribing a public servant i.e. giving undue advantage to public servant. Section 8 of the Act specified when an act can be said to be a bribing a public servant and also exceptions when the act will not amount to bribing.

[xii]  The Inspector of Police, Central Bureau of Investigation v. Ramesh Gelli 2016 (3) SCC 788 (India)

[xiii] Sir Adrian Cadbury, 1992 Report on Financial Aspects of Corporate Governance, available at- https://ecgi.global/sites/default/files/codes/documents/cadbury.pdf

[xiv] See section 9(3) (c) of the PCA and explanations appended to it.

[xv] Amendment Act extends the application of Prevention of Money Laundering Act 2002 and Criminal Law Amendment Ordinance 1944 (Section 18A) to PCA. It is based on the 254th Recommendation Report of Law Commission of India.

[xvi] Dr. Ramakrishnan, Inter-Relationship between Business Ethics and Corporate Governance Among Indian Companies, International Seminar At The Institute of Management, NIRMA University, Ahmadabad, January 5-7, 2007 available at – https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1751657

[xvii] Section 9(5) and 29A of PCA

[xviii] Proviso to section 9(1) of PCA

[xix] See explanation 1 appended to clause (c) of sub clause (3) of section 9 which talks about the liability of agents and subsidiaries which are considered as third party.

[xx] International Labour organisation defines whistle blower as ‘The reporting by employees or former employees of illegal, irregular, dangerous or unethical practices by employers”: ILO Thesaurus. (2005). International labour organization webpage, available at- www.ilo.org.

[xxi] Drew, K. (2010). ENRON. The foreign corrupt practices act & The OECD convention. This paper is produced as part of the work of UNICORN: a global trade unions anti-corruption project.

[xxii] Section 29A(2)(a) of PCA 2018

[xxiii] India is not a member of the OECD hence not a signatory to OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions unlike many other developed and major developing countries.

[xxiv] Foreign Corrupt Practices Act, 1977.

[xxv] Section 6, UK Bribery Act 2010

[xxvi] See Atikant Kaur, Payel Chatterjee, M.S. Ananth, Vyapak Desai & Pratibha Jain, Parliament tightens the noose on corruption!, Nishth Desai Associates, 31st July, 2018, available at- http://www.nishithdesai.com/information/news-storage/news-details/article/parliament-tightens-the-noose-on-corruption.html

[xxvii] Id

[xxviii] Anshul Prakash , Abhimanyu Pal  and Kruthi N Murthy, Prevention Of Corruption (Amendment) Act 2018 – Booster For The Honest Or The Corrupt?, Mondaq, 2nd August 2018, available at – http://www.mondaq.com/india/x/724856/White+Collar+Crime+Fraud/Prevention+Of+Corruption+Amendment+Act+2018+Booster+For+The+Honest+Or+The+Corrupt

[xxix] Easa Hamdhan Rasheed & Rashad Yazdanifard, Corporate governance as a solution for corruption in the private sector, G.J.C.M.P.,Vol.2(6):116-119

ABOUT THE AUTHOR

Shashank Pandey is a 4th yr law student at Dr Ram Manohar Lohiya National Law University.

In Content Picture Credit: Thestreet

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