Major Corporate Frauds in the USA & India: Lessons for Businesses & Investors

Col Sunil Sharma | Expert's Blog, Blog | March 24, 2025

Table of Contents

“The invisible hand of the marketplace has to be balanced by emphasizing the visible hand of good governance.”
Amartya Sen, Nobel Prize-Winning Economist

Abstract

Corporate governance is one of the most important legislative domains of a business organisation, which has an impact on its profitability, growth, and even sustainability of business. As business circumstances vary, the investors differ with respect to incentives, risk attitude, and different incentive strategies. The outcome of this process emerges as a kind of corporate governance practice. In order to protect investors from financial irregularities, misleading, and fraudulent activities carried out by the firm, the U.S. Securities and Exchange Commission passed the act called the Sarbanes-Oxley Act (SOX)2, whereas in India, Clause 49 of SEBI is many times termed the Indian version of SOX, but it has also been criticised for not being holistic in nature. Many of the corporate governance regulations are scattered in various clauses of the Indian Companies Act too. In this paper we aim to compare SOX and Indian regulations on corporate governance. We discuss the similarities, differences, and areas of SOX superiority and suggest various improvements that, if incorporated into Indian laws, may lead to the achievement of comprehensive regulation on corporate governance.

Importance of Corporate Governance

In the corporate world, since frauds and scandals were arising, it can be seen that laws and rules came after some of these frauds and scandals had already happened.

How good is that? If we can predict future frauds and scams, we can accordingly make certain laws and rules so that the growing number of frauds could be minimised. From developed to developing countries, it can be seen that corporate frauds are a major problem that is increasing in its frequency as well as in its severity. In the era of globalisation, as new technologies are emerging, the nature of business transactions is also changing. It became a challenging task for the organisations as business transactions became very complex.

Historical Perspective

The term corporate governance was originally developed in 1962, which was a step for ensuring that shareholders who invest their money into the corporation receive a fair return on the investment made by them and also have Utkarsh Goel, Shailendra Kumar, Kuldeep Singh, and Rishi Manrai / Corporate Governance: Indian Perspective with Relation to Sarbanes Oxley Act. A protection against those management activities that are unethical and also create poor use of their invested money.

Over the past two centuries, there have been several decades in which the US system of corporate governance structure has changed constantly. During the 1960s and 1970s, strong corporate managers and weak corporate owners can be seen. The result was seen as giving power to managers, which is called the agency problem. Table 1 and Figure 1 show the list of notable corporate frauds & scams in the US, while Table 2 and Figure 2 show the list of notable corporate scams in India.

Table 1: Notable Frauds & Scams in the USA

Year	Scam	Amount in INR (in billion)
2001	Enron	4788.17billion
2002	World Com	245.88billion
2003	Health South	90.59billion
2004	Adelphia Communications	148.82billion
2005	American Insurance Group	252.35billion
2008	Madoff Investment Scandal	1294.1billion
2012	JP Morgan	388.23billion

Before Enron, many key’ organisations in the US “model” of corporate governance were in place, but the wave of speculation was also running parallel, due to which so many opportunities arose for short-term profit-making through Initial Public Offering (IPO). Around the globe, a wide-ranging examination of corporate governance norms has been raised with the collapse of Enron in the year 2001.

Enron revealed the fact that there were so many reasons due to which the system was not functioning as per the requirement. The weakness of each activity seemed to potentially undermine the other activity. Again in 2002, the WorldCom scandal creates focused substantial criticism on US corporate governance. This led to the emergence of the SOX Act, which was enacted by that time’s Republican Congress and President. Generally, SOX is seen as a piece of “progressive” regulation. From the above Table 1, it can be seen that after the emergence of SOX in the US, the scandal rate was minimised but did not come to an end.

Table 2: Notable Frauds & Scams in India

Year	Scam	Amount in INR (in billion)
1992	Harshad Mehta securities scam	50
2001	Ketan Parekh securities scam	1.37
2002	Stamp Paper scam	200
2008	2G scam	1760
2009	Satyam Scam	71.36
2010	Sahara Scam	250
2012	Indian Coal Allocation Scam	1860
2013	Saradha Group Financial Scandal	400
2016	Kingfisher Scam	50

As Harshad Mehta considered “Sultan of Dalal Street,” investors blindly followed his tricks. Harshad Mehta misused his status to manipulate the stock prices of particular shares on the stock for his personal financial gain. At that time, the Stock Exchange Board of India (SEBI) did not have such authority to regulate the transactions between investors and stockholders. The only authority that has the jurisdiction to look into the matter was the Harshad Mehta Securities Scam, the Central Bureau of Investigation (CBI). But in lieu of this, the Legislature system approves the SEBI Act, 1992. The SEBI Act provided SEBI 3-fold functions.

Protection function—To protect the stock market activities from unscrupulous investors and to provide protection from unfair market practices.
Development function—To develop the stock market actively.
Regulation function—To regulate the transactions between stock brokers and investors.

In 1997, Mehta again tried to re-enter the markets by employing stockbrokers who bought and sold shares at the stock market on his behalf for a commission. But at that time SEBI also had become too smart to catch Harshad Mehta’s tricks. During that period, SEBI had grown immensely and created a way to become the market watchdog. The resulting emergence of Clause 49 came into existence in late 2002. But as per Table 2, it can be seen that the corporate scams were still in continuation as the Ketan Parekh scam revealed in 2001, the 2G scam in 2008, and the coal scam in 2013. It means SEBI was not successful in detecting the scam on its own, although it managed to lash back strongly to ensure such a scam never arises again.

For mitigation, these conflicts in corporate governance structure evolve. Corporate governance has received much attention in the corporate world after the high-profile scandals such as Adelphia, Enron, and WorldCom were revealed in the Indian market. This led to the most sweeping corporate governance regulation in the US, named the Sarbanes-Oxley Act (SOX) 2002, and in India it came in the form of Clause 49 of the Listing Agreement of the Indian Stock Exchange, which came into effect in 2005.

The purpose was to ensure the reduction of corporate frauds and irregularities. It recommended independent auditors and the financial heads to take the undertaking of the financial statements. Proponents of the rules argue that such rules are necessary because the corporate scandals indicate that existing monitoring mechanisms in the public corporations should be improved.

Corporate governance is looked upon as a distinctive brand and benchmark in the profile of corporate excellence. This is evident from the continuous updating of guidelines, rules, and regulations by the SEBI for ensuring transparency and accountability. In the process, SEBI had constituted a Committee on Corporate Governance under the chairmanship of Shri Kumar Mangalam Birla. The committee, in its report, observed that

“ The strong Corporate Governance is indispensable to resilient and vibrant capital markets and is an important instrument of investors protection. It is the blood that fills the veins of transparent corporate disclosure and high-quality accounting practices. It is the muscle that moves a viable an accessible financial reporting structure.”

Based on the recommendations of the committee, the SEBI had specified principles of corporate governance and introduced a new clause 49 in the listing agreement of the stock exchanges in the year 2000. These principles of corporate governance were made applicable in a phased manner. SEBI, as part of its endeavour to further improve the standards of corporate governance in line with the needs of a dynamic market, constituted another Committee on Corporate Governance under the chairmanship of Shri N.R. Narayana Murthy to review the performance of corporate governance and to determine the role of companies in responding to rumours and other price-sensitive information circulating in the market in order to enhance the transparency and integrity of the market.

The Committee in its Report observed that “the effectiveness of a system of Corporate Governance be static. In a dynamic environment, the system of corporate governance needs to be continually evolved.”

With a view to promoting and raising the standards of corporate governance, SEBI, on the basis of recommendations of the committee and public comments received on the report and in exercise of powers conferred by Section 11 (1) of the SEBI Act, 1992 read with Section 10 of the Securities Contracts (Regulation) Act, 1956, revised the existing Clause 49 of the listing agreement.

10 Key Lessons for Businesses & Investors from Major Corporate Frauds in the USA & India

High-profile corporate scandals like Enron in the USA and Satyam in India expose systemic flaws in governance, oversight, and regulatory agility. These cases underscore that reactive measures are insufficient—businesses and investors must proactively adopt ethical frameworks, robust compliance, and adaptive strategies to mitigate risks.

Drawing from historical failures and evolving regulations, the lessons below offer actionable insights to safeguard stakeholders and foster sustainable growth in a complex global economy.

Prioritize Robust Corporate Governance: Strong governance frameworks are non-negotiable for investor trust, operational transparency, and long-term business sustainability.
Proactive Regulation Over Reactive Fixes: Learn from past frauds (e.g., Enron, Satyam) to anticipate risks and implement preventive regulations before crises strike.
Holistic Regulatory Frameworks Matter: Fragmented laws (e.g., India’s Clause 49) leave gaps; comprehensive systems like SOX are more effective in deterring fraud.
Enforce Independent Oversight: Ensure rigorous audits and accountability for executives to mitigate conflicts of interest and agency problems.
Empower Adaptive Regulators: Support dynamic institutions like SEBI that evolve with market complexities and technological advancements.
Address Tech-Driven Complexity: Modernize governance to counter sophisticated frauds enabled by digital transactions and globalized operations.
Continuous Governance Improvement: Treat compliance as an ongoing process, not a checkbox exercise, to stay ahead of emerging risks.
Educate Investors: Informed investors (e.g., avoiding Harshad Mehta-style traps) are less vulnerable to manipulation and market rumors.
Align with Global Standards: Multinational businesses and investors must navigate diverse regulations (e.g., SOX vs. Indian laws) to ensure cross-border compliance.
Ethics Complement Markets: Balance profit motives with ethical governance, as Amartya Sen noted, to build resilient, trustworthy institutions.

These lessons underscore that corporate governance is not static—it demands vigilance, adaptability, and a commitment to transparency to protect stakeholders and sustain growth.

Final Thoughts

The history of corporate frauds in the USA and India serves as a stark reminder that no economy—no matter how advanced or emerging—is immune to governance failures. From Enron’s accounting manipulations to Satyam’s fabricated ledgers, these scandals reveal systemic vulnerabilities that demand proactive vigilance from businesses and investors alike. While regulations like SOX and Clause 49 have strengthened transparency, their true power lies in consistent enforcement, cultural shifts toward ethical leadership, and investor education.

As markets grow more interconnected and complex, the lessons of the past must guide future strategies: prioritize accountability, embrace adaptive governance frameworks, and never underestimate the cost of complacency. By balancing profit motives with ethical imperatives, stakeholders can build resilient institutions that thrive not just financially, but in trust and integrity—the bedrock of sustainable growth.

Better to be Safe Than Late!

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