Strengthening Corporate Governance in India to Combat Rising Corporate Frauds

Summary update

The corporate sector in India, which is fundamental to its economic development, has encountered a rise in financial misconduct, as demonstrated by notable incidents such as Gensol Engineering and IndusInd Bank during 2024–2025. These cases, characterized by fund misallocation, accounting irregularities, and governance failures, have diminished investor confidence and exposed inherent vulnerabilities in corporate regulation. According to PwC’s Global Economic Crime Survey 2024, 59% of Indian firms reported experiencing financial fraud in the last two years, exceeding the global average of 41%. As India aspires to become a leading global investment destination, it is crucial to enhance corporate governance to avert fraud, safeguard stakeholders, and promote sustainable growth. This article explores recent fraud incidents, evaluates governance shortcomings, and suggests practical strategies to strengthen India’s corporate governance framework.

Recent Corporate Frauds: A Wake-Up Call

Gensol Engineering

In 2024, the Securities and Exchange Board of India (SEBI) prohibited Gensol Engineering’s promoters, Anmol Singh Jaggi and Puneet Singh Jaggi, from participating in the securities market due to fraudulent activities. SEBI's investigation uncovered that a loan of Rs 975 crore, designated for electric vehicle acquisitions, was misappropriated, with Rs 200 crore funneled through a car dealership to entities linked to the promoters. These funds were utilized for personal purchases, such as a luxury apartment in DLF The Camellias, Gurgaon. SEBI also identified undisclosed loan defaults and forged debt-related documents, leading to an inquiry by the Ministry of Corporate Affairs (MCA) and a credit rating downgrade by ICRA to 'D' (indicating default status). The resignation of independent directors and a 78% decline in the stock price in 2025 highlighted significant governance issues, including insufficient board oversight and poor scrutiny of related-party transactions.

A notable development in the Gensol case is the swift increase in its share price over the past week. Moreover, the fact that it has experienced a upper circuit (UC) for the last three days, despite unresolved issues, raises questions about the reasons behind this surge and the individuals driving it.

IndusInd Bank

In March 2025, IndusInd Bank revealed accounting irregularities within its derivatives portfolio, affecting 2.27% of its net worth, which is approximately Rs 1,979 crore. This issue, which had gone unnoticed for 5 to 7 years, raised alarms regarding the effectiveness of internal controls and audits. Following the revelation, the bank's stock price dropped by 6%, and Moody's downgraded its financial rating due to concerns over insufficient oversight. A forensic audit conducted by Grant Thornton, along with ongoing evaluations by auditors MSKA & Associates and Chokshi & Chokshi, may categorize the situation as fraudulent, necessitating a report to the Ministry of Corporate Affairs if losses surpass Rs 1 crore. Additionally, the Reserve Bank of India's indirect intervention, through public sector banks acquiring Rs 16,000 crore in certificates of deposit, underscored existing liquidity and governance issues. These

incidents are reminiscent of past fraud cases such as Satyam in 2009 and Punjab National Bank in 2018, where poor governance facilitated financial misconduct. They reveal persistent problems, including ineffective boards, inadequate audits, and insufficient regulatory enforcement.

Importance of Corporate Governance & why it matters

Corporate governance sets the framework for internal controls, accountability, and transparency, ensuring a balance among the interests of shareholders, customers, and regulatory bodies. In India, this governance framework is defined by the Companies Act of 2013, the SEBI Listing Obligations and Disclosure Requirements (LODR), and the guidelines established by the RBI for banks. Effective governance plays a crucial role in preventing fraud by: 

• Ensuring precise financial reporting, 

• Reducing conflicts of interest in related-party transactions, 

• Fostering ethical behavior through whistleblower systems, 

• And boosting investor confidence along with market stability. 

Conversely, weak governance opens the door to fraudulent activities, as evidenced by Gensol's fund misappropriation and the undetected discrepancies at IndusInd. With 33% of economic crimes in India attributed to corruption and bribery, strong governance is essential to combat financial misconduct.

Governance Failures Potential Root Causes 

1. Ineffective Board Oversight: Independent directors frequently do not possess the necessary expertise or autonomy to effectively question management decisions. In the case of Gensol, the board did not adequately examine transactions led by promoters, whereas IndusInd’s audit committee neglected to address issues related to derivatives accounting.

2. Weak Audit Mechanisms: In both instances, auditors overlooked warning signs, potentially due to insufficient resources or conflicts of interest. The Satyam scandal also revealed colluding auditors, underscoring fundamental weaknesses in the auditing system.

3. Regulatory Gaps: Despite the strict regulations set by SEBI and RBI, the enforcement of these rules is often inconsistent. Gensol's forged documents remained undetected until a complaint prompted an investigation by SEBI.

4. Cultural Factors: A casual approach and acceptance of unethical practices can facilitate fraud, as highlighted in studies of India's corporate environment.

5. Technological Vulnerabilities: The growth of digital transactions has heightened the risks of cyber fraud, presenting challenges for banks such as IndusInd in safeguarding intricate derivatives portfolios.

Measures to Strengthen Corporate Governance

In order to tackle these challenges, India needs to implement a comprehensive strategy to improve governance and combat fraud. The proposed measures include:

1. How to Empower Independent Directors

Independent directors should serve as proactive stewards rather than passive observers. To enhance their effectiveness: 

• Compulsory Training: Directors should be mandated to complete annual training focused on financial literacy, fraud detection, and regulatory compliance. 

• Increased Accountability: Implement personal liability for negligence in the oversight of related-party transactions, similar to the precedent set in Gensol’s case. 

• Varied Expertise: Boards must include members with specialized knowledge in finance, technology, and risk management to effectively evaluate complex transactions.

2. How to Strengthen Audit Mechanisms

Audits play a vital role in identifying fraud, yet their efficiency needs enhancement: 

• Implement mandatory auditor rotation every five years to avoid overly familiar relationships, in line with the Companies Act recommendations. 

• Leverage AI and data analytics to uncover irregularities in financial reports, as indicated by research on preventing banking fraud. 

• Strengthen the National Financial Reporting Authority (NFRA) by granting it the authority to perform unannounced audits and impose penalties on auditors who fail to comply, furthering its responsibilities established after the Satyam scandal.

3. How to Enhance Regulatory Enforcement

SEBI, RBI, and MCA should take proactive steps: 

• Real-Time Oversight: Deploy AI-driven monitoring systems to detect stock price manipulations and undisclosed defaults, similar to the Gensol case. 

• Enhanced Whistleblower Protections: Fortify SEBI’s whistleblower framework by introducing anonymous reporting options and incentives for reliable information, promoting early fraud identification. 

• Accelerated Investigations: Establish a six-month timeframe for inquiries by SEBI and MCA, as recommended by ICAI, to guarantee prompt responses.

4. Leverage Technology

Leveraging technology can improve governance and mitigate fraud: 

Implement blockchain to ensure transparency in financial transactions, thereby decreasing the likelihood of manipulation in banking and corporate accounts. 

Additionally, the use of continuous auditing tools can facilitate real-time monitoring of financial data, significantly reducing the time taken to identify discrepancies.

Final Remark

The corporate frauds at Gensol Engineering and IndusInd Bank expose deep-rooted governance weaknesses in India’s corporate sector, threatening investor confidence and economic stability. By empowering independent directors, strengthening audits, enhancing regulatory enforcement, promoting ethical culture, leveraging technology, aligning with global standards, and fostering stakeholder collaboration, India can build a robust governance framework to prevent future frauds. These measures, rooted in lessons from recent scandals, will ensure transparency, accountability, and trust, positioning India as a reliable destination for global investment. As the MCA emphasized in 2025, strong corporate governance is not just a regulatory necessity but a moral imperative to protect stakeholders and drive sustainable growth.

GSP a pre Trump Loss which needs to be corrected by the GOI

 

The Generalized System of Preferences (GSP) is a trade initiative that enables developed nations to offer non-reciprocal preferential tariff rates on specific goods imported from developing countries. Its primary aim is to foster economic growth and development in these nations by enhancing their access to global markets.

The GSP program provides numerous advantages to developing countries, such as:

1. Lowering or eliminating tariffs on qualifying products, which boosts their competitiveness in the international market.

2. Increasing export opportunities and generating higher revenue for enterprises.

3. Attracting foreign investments and facilitating local job creation.

India has benefited significantly from the GSP program, especially in the US market. However, in 2019, the US revoked India's GSP status, citing the country's expanding economy and its inability to show adequate reciprocity in trade relations. This decision has had a considerable impact on India's duty-free exports to the US, affecting various industries, including textiles, leather goods, pharmaceuticals, surgical products, plastics, chemicals, imitation jewelry, and machinery.

The following section provides a detailed analysis of the financial losses by sector, based on data from recent reports, while acknowledging that precise figures beyond 2023 are limited due to insufficient updates.

Overall Financial Impact  

Before the termination of GSP benefits, India was the leading beneficiary of the program, with approximately $5.6 billion in exports (across 1,945 products) enjoying duty-free access to the US market during the 2017-18 period. The tariff reductions resulted in annual savings for Indian exporters estimated between $190 million to $241 million, depending on the source.

Estimated Annual Loss: The removal of GSP status led to the reintroduction of Most Favored Nation (MFN) tariffs, which increased export costs by an estimated $190 million annually, according to the Indian government, and up to $241 million based on ORF estimates. Some analyses suggest that certain sectors may experience even higher losses due to competitive disadvantages.

Cumulative Loss (2019–2023): Assuming a consistent annual loss of between $190 million and $241 million over the four years from June 2019 to June 2023, the total financial burden on Indian exporters could range from $760 million to $964 million. This estimate does not account for potential market share losses or indirect effects, which could further elevate the total. Looking ahead to 2024 and beyond, if GSP status is not reinstated, losses are anticipated to continue at a similar rate, although precise figures are not yet available. Additionally, the situation has resulted in an estimated loss of around 3 million jobs in India, particularly affecting the small and medium-sized enterprise (SME) sector.

Sectoral Impact

The repercussions varied across different sectors; while some experienced significant losses, others demonstrated resilience. The Generalized System of Preferences (GSP) encompassed labor-intensive and intermediary goods, and the reintroduction of tariffs diminished competitiveness, particularly for Micro, Small, and Medium Enterprises (MSMEs). Below is a summary of key sectors based on the conducted analyses.

Leather Articles: 

Before the GSP withdrawal, leather articles accounted for 50.19% of India's GSP exports, underscoring their significance in the export market. After the withdrawal, 50% of leather products that previously benefited from zero tariffs were subjected to a Most Favored Nation (MFN) tariff rate of 7.73%, the highest among the affected sectors. This adjustment led to increased export costs.

Gems and Jewelry:  

Prior to GSP Withdrawal: This sector significantly benefited from the GSP, contributing to $5.6 billion in duty-free exports.  

The elimination of duty-free access resulted in increased tariffs, typically between 2% and 3% under Most Favored Nation (MFN) rates, raising costs for exporters. Consequently, this industry faced the threat of losing market share to competitors like Vietnam and Bangladesh, which continued to receive GSP benefits.

Chemicals:  

Prior to GSP Withdrawal: This sector included essential raw materials and intermediates vital for GSP.  

The reintroduction of Most Favored Nation (MFN) tariffs, ranging from 2% to 7% depending on the product, reduced cost advantages, particularly affecting small enterprises. The industry struggled to maintain its market share, especially for intermediates sensitive to price changes.

Textiles and Handlooms:  

Before GSP Withdrawal: Textiles were among the 1,900 products eligible for GSP, enjoying duty-free status.  

The withdrawal of GSP resulted in increased tariffs, negatively impacting small producers and micro, small, and medium enterprises (MSMEs). This sector faced the risk of losing market share to countries that continued to benefit from GSP. Potential losses for certain textile products could range from 2% to 10% of their export value, depending on the tariff increases.

Agriculture and Processed Foods:  

Before GSP Withdrawal: This category included vital products such as rice, which heavily depended on GSP benefits.  

Some agricultural exports, particularly certain varieties of rice, suffered losses exceeding 10% of their export value due to the reinstatement of tariffs. This situation weakened the competitiveness of Indian products against those from countries benefiting from GSP.

Engineering Goods and Automobile Parts:  

Prior to the Withdrawal of GSP: In 2018, engineering goods, particularly auto parts, constituted one of the most significant GSP categories in terms of value.  

Notably, some sub-sectors, like electrical machinery, saw an increase in exports following the withdrawal, showcasing resilience fueled by robust demand in the US or other competitive dynamics. In contrast, other engineering goods encountered higher tariffs, leading to overall declines.

Pharmaceuticals:  

Prior to the Withdrawal of GSP: This sector gained advantages from GSP for certain intermediary products.  

As tariffs increased, small and medium-sized exporters faced elevated costs. However, India’s pharmaceutical exports continue to be relatively competitive, and the negative impacts were less severe compared to those experienced in labor-intensive sectors.

The revocation of India’s GSP status in 2019 led to immediate financial setbacks. Industries such as leather, gems and jewelry, textiles, agriculture, and organic chemicals were particularly impacted, with tariff hikes diminishing competitiveness, especially for MSMEs. It is crucial to prioritize the reinstatement of India's GSP status; the Government of India (GOI) should enhance diplomatic ties and engage in trade negotiations. Addressing American concerns about market access, particularly in the dairy, medical devices, and IT sectors, through reciprocal concessions is essential. Collaborating with the US Trade Representative and Congress to highlight mutual benefits, such as job preservation in the US and reducing China's supply chain influence, is critical. A comprehensive trade proposal that includes tariff reductions and reforms in data localization could expedite the restoration process. Furthermore, the GOI should leverage bipartisan support in the US for GSP renewal to strengthen bilateral relations.