Corporate Governance in India: Lessons from Gensol’s Governance Failure
Background
The recent corporate governance collapse at Gensol has prompted an urgent reassessment of India’s regulatory framework. Legal experts are particularly concerned about the challenges posed by misconduct from promoters and are calling for more robust governance solutions.
The Call for Enhanced Ethics Training
In light of these failures, legal scholars are advocating for comprehensive ethics training for key management personnel and corporate promoters. Jayesh H, Co-founder of Juris Corp Advocates & Solicitors, emphasizes that such training should be mandatory rather than optional. He argues for a structured program that includes training videos, assessments, and evaluations to ensure understanding among corporate leaders about ethical boundaries and fund management.
“We need to mandate ethics training for promoters—something structured and monitored,” said Jayesh. He highlighted a common misconception: the belief that everyone inherently understands ethical limits. “Often, people don’t know any better, and it is presumed that everyone knows what not to do!”
Regulatory Landscape and Its Shortcomings
Despite significant efforts by the Securities Exchange Board of India (SEBI) to enhance transparency and accountability, such as the Companies Act of 2013 and the LODR Regulations of 2015, Gensol’s governance failures reveal critical weaknesses in enforcement and compliance.
The company’s actions demonstrate a severe breakdown in internal controls, with funds misappropriated to related parties and unrelated expenses, essentially treating corporate assets as personal resources. “The promoters were running a listed public company as if it were a proprietary firm,” noted SEBI in their findings. This failure underscores the urgent need for stricter accountability measures.
Evaluating SEBI’s Regulatory Measures
SEBI has introduced various amendments to related party transaction (RPT) regulations, aiming to tighten disclosure requirements. However, experts point out that simply increasing regulatory burden may not yield the desired improvements. Natasha Treasurywala, a partner at Desai & Diwanji, mentions the importance of conducting regular audits for related party transactions to reinforce accountability at the board level.
“While many companies do follow good practices, institutionalizing these through regulatory frameworks can mitigate future governance failures,” she states, further highlighting the role of vigilant internal and external auditors.
Concerns Over Over-Regulation
Nevertheless, experts caution against the insatiable urge for more regulations, suggesting that this could inadvertently complicate operations for compliant businesses, resulting in increased costs and inefficiencies. Jayesh asserts, “Mere tightening of the norms will mostly make it difficult for businesses at large without much resultant benefit.”
Moreover, the overall governance environment—including political, administrative, and judicial factors—affects corporate behavior, presenting unique challenges for companies striving for ethical practices.
A Dual Governance Strategy
The solution may lie not solely in regulation but in a combined approach that integrates enhanced regulatory frameworks with proactive ethical training. Experts propose fostering a strong culture of compliance as a strategic investment for long-term sustainability.
As global trends shift toward Environmental, Social, and Governance (ESG) criteria and stakeholder capitalism, Indian companies that prioritize a solid internal compliance culture will likely gain a competitive advantage. Cultivating ethics and governance as integral components of corporate strategy is vital for enduring growth.
