Understanding Corporate Governance Failures in India: A Comprehensive Guide for Everyone

by KarNivesh | 03 October, 2025

Corporate Governance Failures in India: Lessons from Major Scandals

Corporate governance is the backbone of any healthy financial system. It ensures that companies operate transparently, ethically, and in the best interest of their stakeholders. When governance collapses, the fallout is devastating not only for the companies involved but also for investors, employees, and the wider economy. India has witnessed several high-profile governance failures that collectively wiped out over ₹3 lakh crores of investor wealth. From the ₹7,136 crore Satyam scandal to the mammoth ₹95,760 crore Punjab National Bank–Nirav Modi scam, these incidents highlight systemic weaknesses in oversight, accountability, and regulation.

Major corporate governance failures in India have caused massive financial losses, with the PNB-Nirav Modi scam and IL&FS crisis being the largest.

What is Corporate Governance and Why Does It Matter?

Corporate governance refers to the framework of rules, practices, and processes through which a company is directed and controlled. At its heart, it ensures that corporate power is not abused and that businesses are accountable to their shareholders, employees, creditors, customers, and society. Good governance prevents financial manipulation, protects minority shareholders, and maintains investor confidence.

When governance fails, the damage is multifold. Investors lose trust, markets become volatile, and ordinary citizens often suffer when banks and institutions collapse under fraud-driven debts. India’s history of scams shows how unchecked concentration of power, weak boards, and lack of regulatory vigilance can trigger massive financial crises.

Anatomy of Governance Failures

Most corporate scandals in India follow a predictable trajectory. They begin with promoter dominance and weak independent oversight, creating room for creative accounting, fund diversion, and unauthorized related-party transactions. External auditors often fail to detect these irregularities sometimes due to incompetence, sometimes due to collusion. Minority shareholders remain unaware of the actual financial condition until defaults occur or whistleblowers come forward. By then, the damage is often irreversible, leading to regulatory crackdowns and sometimes the collapse of the company.

Major Scandals That Shook India

The Satyam Scandal (2009)

Dubbed “India’s Enron,” Satyam’s chairman B. Ramalinga Raju confessed to fabricating accounts worth ₹7,136 crores. Fake invoices, ghost employees, and inflated cash balances fooled investors and regulators alike. At its peak, Satyam claimed salaries for nearly 53,000 employees when the real number was around 40,000. Excess salaries over ₹200 million (₹137 crores) every month were siphoned off by promoters. Despite having reputed auditors and eminent directors, the fraud went undetected for years. The scandal eventually led to reforms under the Companies Act 2013, mandating independent directors and stronger audit committees.

PNB–Nirav Modi Scam (2018)

India’s biggest banking fraud involved fraudulent Letters of Undertaking (LoUs) worth around ₹95,760 crores (approx. $14 billion or ₹9,59,000 crores at today’s conversion). Jewelry tycoon Nirav Modi and associates colluded with PNB officials to secure unauthorized credit from overseas banks without collateral. The fraud exposed glaring loopholes in India’s banking systems, risk management, and regulatory oversight. The Reserve Bank of India subsequently banned LoUs, introduced real-time monitoring, and tightened lending norms. Yet, the episode dented global confidence in Indian banks, particularly public sector lenders.

IL&FS Crisis (2018)

Infrastructure Leasing & Financial Services (IL&FS), once a respected infrastructure financier, collapsed under debt exceeding ₹91,000 crores. The company operated through 348 subsidiaries and special purpose vehicles, creating opacity around its true financial condition. Defaults by its subsidiaries sparked a liquidity crisis in India’s non-banking finance sector. The government was forced to supersede the board and appoint new management under Uday Kotak. This scandal underlined the risks of complex corporate structures, weak risk management, and cozy credit rating practices that failed to warn investors in time.

DHFL Fraud (2019)

Dewan Housing Finance Corporation Limited (DHFL) carried out one of the biggest housing finance frauds worth ₹34,615 crores. A fictitious “Bandra Branch” existed only on paper but was used to funnel funds into shell companies owned by the promoters, the Wadhawan brothers. Investigations revealed circular transactions where loan amounts found their way back to DHFL-affiliated firms. With over 87 shell entities, the scandal highlighted how housing finance companies could be misused without stringent oversight. The case prompted tighter housing finance regulations, enhanced disclosure norms, and stricter audit requirements.

The timeline shows how major corporate scandals in India have consistently triggered significant regulatory reforms to strengthen governance frameworks.

Regulatory Responses and Reforms

The Securities and Exchange Board of India (SEBI), established in 1992 after the Harshad Mehta scam, has led the fight for better corporate governance. Over the years, SEBI has strengthened disclosure norms, independent director responsibilities, and penalties for violations. For instance, in the Satyam case, SEBI levied penalties of ₹1,849 crores and barred guilty directors from markets for 14 years.

Key reforms include:

• Companies Act 2013 – Post-Satyam, introduced mandatory corporate social responsibility (CSR), audit committees, and gender diversity on boards.

• Insolvency and Bankruptcy Code (2016) – Ensured time-bound insolvency resolutions after cases like Kingfisher Airlines.

• Banking Reforms – Post-PNB scam, RBI eliminated LoUs and enhanced monitoring.

• NBFC Oversight – IL&FS led to stricter asset-liability management rules.

• Housing Finance Norms – Strengthened after the DHFL fraud.

Despite these measures, enforcement remains patchy, especially with complex multinational corporate structures.

Economic Impact

Corporate governance failures in India have cost the economy over ₹3 lakh crores in three decades. Beyond the immediate financial losses, they create systemic risks—shaking investor trust, increasing the cost of capital, and discouraging foreign investment. The IL&FS case is a classic example: its collapse triggered a liquidity crisis that cascaded across the NBFC sector. Such events demonstrate how one company’s governance failure can ripple through the entire economy.

Lessons Learned and Way Forward

India’s repeated governance scandals reveal three core lessons:

1. Promoter dominance is dangerous – Boards must empower independent directors to hold management accountable.

2. Complex structures enable fraud – Regulators need stronger tools to monitor subsidiaries and shell companies.

3. Reforms are often reactive – India needs proactive governance frameworks aligned with global best practices.

Emerging trends offer hope. Technology-driven real-time monitoring, ESG-focused investing, and increased shareholder activism are strengthening accountability. However, regulators and investors must remain vigilant as financial instruments grow more complex and cross-border operations increase enforcement challenges.

Protecting Yourself as an Investor

For retail investors, understanding governance risks is key to safeguarding wealth. Red flags to watch out for include:

• Boards dominated by promoters with weak independent directors.

• Overly complex corporate structures with hundreds of subsidiaries.

• Frequent related-party transactions.

• Unusual financial reporting practices.

Diversifying investments, staying updated on SEBI guidelines, and critically reading company annual reports are essential practices. If an investment seems too good to be true, it probably is.

Conclusion

Corporate governance failures in India are not just stories of corporate greed—they are cautionary tales of systemic weaknesses. From Satyam’s ₹7,136 crore fraud to the PNB–Nirav Modi scam of ₹95,760 crores, each scandal has triggered regulatory reforms that have slowly but surely strengthened India’s corporate framework. Yet, the journey toward strong, transparent governance is ongoing.

For investors, policymakers, and regulators, the lesson is clear: vigilance and accountability must remain constant. Only then can India build a corporate culture rooted in transparency, fairness, and ethical practices laying the foundation for sustainable growth and investor confidence in the decades to come.