1 ARTICLES SARBANES-OXLEY: CAN ONE MODEL FIT ALL? SARITA MOHANTY* INTRODUCTION.........................................................................................1 I. CORPORATE GOVERNANCE PRACTICES IN INDIA.........................3 II. IMPERATIVES FOR CHANGE ..............................................................7 III. REGULATORY STRUCTURE: LAWS AND COMMITTEES...........10 IV. SHOULD INDIA ADOPT A SARBANES-OXLEY TYPE OF LEGISLATION? ..............................................................................15 A. SARBANES-OXLEY ACT: AN OVERVIEW..................................16 B. INDIA’S RESPONSE TO THE SARBANES-OXLEY ACT. ..........19 V. SARBANES-OXLEY VIS-À-VIS INDIAN LAW.................................21 A. AUDITING THE AUDIT...................................................................21 B. AUDITORS ROLE AND INDEPENDENCE ....................................24 C. AUDIT COMMITTEES......................................................................26 D. CORPORATE ACCOUNTABILITY AND PENALTIES.................28 CONCLUSION ...........................................................................................30 INTRODUCTION India’s corporate culture is characterized by something that most developing countries face: A mix of traditional and modern corporate structures. The old system of family-run businesses, dominant shareholder settings, corruption, and political influences exist side-by-side with companies with diversified shareholding and good corporate governance practices. Recent stock market scandals and devious acquisition mechanisms adopted by companies demonstrate that corporate governance * L.L.M Student, Vanderbilt University Law School. I would like to thank Professor Randall Thomas and Nancy Calonge for all their help and for graciously sharing their thoughts with me.2 NEW ENG. J. INT’L & COMP. LAW [Vol. 12:2 problems in India have transcended the boundaries of traditional corporate settings, like family-run businesses. While Indian laws governing companies and their “monitors” embody some corporate governance principles, they do not adequately address the current and the potential corporate governance problems in India. Therefore, there have been various efforts to codify corporate governance principles in India by setting up various committees to give their recommendations. However, the implementation of these recommendations has been sparse and the enforcement of the existing principles has been unimpressive. Moreover, the recent scandals in the United States, like the frauds associated with Enron and Arthur Andersen, have had a ripple effect throughout the corporate world, alerting India and other countries of the potential for Enron-type crises. This has increased the urgency for good and codified corporate governance in India, whether its effect is to monitor dominant shareholders or corporate houses with diverse investors. Recent incidents of accounting frauds and corporate governance scandals compelled the United States Congress to pass the Sarbanes-Oxley Act of 2002 [“Sarbanes-Oxley” or the “Act”]. Sarbanes-Oxley was enacted to revise corporate governance and investor protection in matters relating to the preparation of audited financial statements, disclosure, and accounting practices.1 India has generally perceived Sarbanes-Oxley as fair legislation. Indian scholars, accountants, and lawyers believe that India should have a Sarbanes-Oxley type of legislation.2 Some of the provisions that the Act envisages, such as the independence of audit committees and penal provisions for white collar crimes, could also be a welcome addition to Indian corporate governance requirements.3 The current political and economic environment in India needs these types of provisions.4 On the other hand, all the loopholes may not be totally closed, even if this model is adopted. 1. See AICPA, Financial Management Center, How the Sarbanes-Oxley Act of 2002 Impacts the Accounting Profession, http://fmcenter.aicpa.org/Resources/Sarbanes-Oxley+Act/How+the+SarbanesOxley+Act+of+2002+Impacts+the+Accounting+Profession.htm (last visited May 10, 2006); see also AICPA, Financial Management Center, Sarbanes-Oxley Act, http://fmcenter.aicpa.org/Resources/Sarbanes-Oxley +Act/ (last visited May 10, 2006). 2. See Nandini Lakshman & Nikhil Lohade, The Joy of SOX – It Is a Good Act to Follow, DNA Money, Dec. 2, 2005, at http://www.dnaindia.com/report.asp?NewsID =1000256&CatID=4. 3. See S. Shivkumar, Dealing with Accounting Defaults- Lessons from Sarbanes Oxley Act, HINDU BUS. LINE, Jan. 7, 2003, at http://www.thehindubusinessline.com/2003/01 /07/stories/2003010700080900.htm. 4. See Model Clause 49 after Sarbanes Oxley: Experts, FIN. EXPRESS, Aug. 13, 2005.2006] CAN ONE MODEL FIT ALL? 3 This paper explores the current corporate governance structure in India, the possibility of India adopting a Sarbanes-Oxley type of legislation, and whether a Sarbanes-Oxley type of legislation is adequate for corporate India. If Sarbanes-Oxley is not enough, does India need to implement additional laws? Section II of this paper looks into the corporate governance structure and practices in India, and discusses how they are a mix of the traditional family-owned businesses and modern corporations with diversified shareholding. Section III discusses the current and potential corporate governance problems of India and the imperative need for change. Section IV introduces the Indian laws and regulatory structure pertaining to corporate governance. Section V is an overview of Sarbanes-Oxley and also discusses India’s response to the Act. Section VI compares existing Indian laws with Sarbanes-Oxley. This section also focuses on the corporate governance issues addressed by Sarbanes-Oxley, and whether similar issues are addressed by Indian laws or not. This section further argues that India needs to amend and modify many of its laws to correspond with various provisions of Sarbanes-Oxley, including the provisions for increased penalties. The conclusion recognizes the fact that India has its distinct corporate governance issues that cannot be wholly addressed by adopting all the relevant provisions found in the Sarbanes-Oxley Act. In addition, India needs to take further steps. The adoption of Sarbanes-Oxley-like provisions, coupled with other provisions that address India’s idiosyncratic corporate governance problems,