20th Oct 2021

 by Sushree Surekha Choudhury

What is a block chain technology?

Block chain technology[1], as the name suggests, is a ledger, a database that enables its users to store data in the form of encrypted information stored in blocks. The blocks gets filled one after another and are end to end connected through the database, forming a chain of blocks. This article is an attempt to make its readers aware of this technology and how it can prove to be beneficial in the corporate world.

 

Mechanism that this block chain technology follows:

Steps[2]:

  1. A user who posses the technology, enters a data / set of information into the database.
  2. The data reaches to a network of computers with set of expert individuals, also known as miners.
  3. These miners solve certain complex mathematical equations to give validity to this transaction made by the user. This process is called mining.
  4. When the mining is done, the data is given validation and thus, is saved in the form of blocks. This is called as Proof of work.
  5. Likewise, the new set of information that comes along, continues to go through the same process and get saved in blocks, which are thereby chained together.
  6. The transactions are complete and the data is saved and encrypted, thus ensuring maximum levels of safety.

 

[3]

 

What is Corporate Governance?

There are numerous rules, regulations and legislation governing the corporate world. The Companies Act of 2013[4], is the primary legislation governing all the companies in India. Alongside the Companies Act, 2013; Listed Companies are also governed by numerous SEBI Regulations, SEBI (LODR) Regulations of 2015[5], SEBI (SAST) Regulations of 2011[6], to name a few.

 

Every company, once incorporated, are mandated to follow these prescribed rules and regulations. A board of directors is formed by companies that look into the everyday working of the company, making policies, taking decisions, passing resolutions, conducting board meetings, preparing the business model, run the company and make profits.

 

All these activities come under an umbrella term, known as ‘Corporate Governance’[7]. Good governance practices when practiced by these companies, helps in generation of a considerate amount of revenues, profits and reputation of the company rises.

 

While the traditional business model companies have stuck to the traditional methods of conducting business, the modern tech savvy companies are at a rise which have proven themselves to be earning great name and earn profits.

 

Advantages of incorporating the technology in corporate governance practices[8]:

  1. Ensures safety of data. This can prevent data breaches and save all monetary expenses of security enhancement single-handed.
  2. With the increasing cases of data breaches where even the highly reputed companies are not spared, this ensures increased security levels.
  3. Saves data in high qualities, guarantees authentication.
  4. The process makes the data full proved, checked on authenticity and genuineness and is free from further tampering. This can prevent possible manipulations of data due to corrupted employees and thus mitigates risks and crimes.
  5. Incorporating block chain plays a pivotal role in Enterprise Risk Management and helps reduce the risks.
  6. There is decentralization of data since all the parties to the transaction can have access to the data saved but cannot tamper it, this provides higher levels of transparency, trust and authenticity of information.
  7. The system is easy to use and cuts costs, save time and resources.

 

Disadvantages of incorporating the technology in corporate governance practices[9]:

  1. Since this is an entirely new and budding concept, especially in the Indian Corporate World, it is subject to volatility, lack of trust and stability among companies. For instance, cryptocurrency, which also uses this block chain cryptography[10], have been facing its fair share of ups and downs.
  2. It will still take quite a time to gain recognition and understanding, especially in the decades old existing traditional companies[11].
  3. The use of the technology can be complex for certain reasons and thus, the companies might be reluctant to accept it.
  4. Some companies might see this as an increased expense and some might as well find it as a burden to bear all the expenses in maintaining the ledger.

 

Enterprise Risk Management and Block chain Technology:

As a company running its day-to-day business, it faces several risks. Risks like reputation risk, security risk, operational / management risk, technological risks, internal risks and external litigation risks[12].

 

Many of these risks are usually because by the time a breach is anticipated / known, it becomes too late to mitigate it. Many a times, a company faces internal risks where the company’s own employees causes breaches, frauds, and crimes like insider trading and puts the company into most, if not all, of the aforementioned risks[13].

 

In such a situation, incorporating a block chain technology can prove to be of a great value and mitigate almost all of these risks. Since the technology is highly secure and stores data after giving validation by experts, and also encrypts it, there are zero chances of data breaches and manipulations by any insider or outsider to the organization. This ends the security risks and saves the company’s reputation.

 

Smart contracts can be drafted using the block chain technology and this will be binding to the parties to the contract, there will be no chances of any mistake in implementation and drafting and the adherence will also be governed using technology[14].

 

Many or all of the day-to-day activities of the companies can as well be conducted using this technology, for instance, recording the minutes of the meetings, maintaining the attendance registers, records votes in a meeting while passing any resolution and keeping it anonymous, maintaining the books of records and with no errors, etc. will prove to be highly beneficial to the companies and it will mitigate most of the risks and resolve disputes with ease. Less conflicts will arise than before since there will be no question of questioning anyone’s honesty and credibility for any manually entered data. This will also decrease the criminal offence in corporate world.

 

Some extremely infamous case studies like the Satyam Scam of 2009[15] which shook the nation with its Rs. 7000 crore corporate scandal with manipulation of accounts; the Saga of Ricoh India, which was a replica of the Satyam Scam in terms of accounting frauds, the ICICI Bank Scam where the CEO himself was the fraudster; the infamous Kingfisher Airlines and United Spirits Case[16], where accounts and data worth crores were manipulated and till date, the mastermind behind the scandal, Mr. Vijay Mallya remains unpunished and was recently declared bankrupt by the UK Courts; all these cases involves some or the other kind of data and accounts manipulations from internal management of the companies.

 

There can be seen a hike in online frauds, data breaches, users’ data manipulations by hackers and millions of users’ data being compromised even from the highly reputed companies’ systems like Facebook, LinkedIn, Zomato India, etc. are instances of data manipulations from external attacks to the companies[17].

 

The lists goes on and all these instances calls for none but one thing, i.e. Higher levels of security, which is possible only by the incorporation of these strong and complex systems of encrypted databases which provides high levels of security and saves the companies’ and users’ valuable information. Needless to say how important this is.

 

Pandemic and Technology:

The COVID19 global pandemic brought in changes and scenarios into the picture that were never thought of before. As a surge in virus was seen, so were the implemented lockdown all over the globe putting an indefinite pause to everyday activities in the market. The corporate world largely faced the consequences of this unanticipated changes. The force majore clause in the contracts gained overnight fame and importance and companies started taking shelter under these exceptions to mitigate losses. Today, its been more than a year to this pandemic and most of the companies, courts, universities and every other office have adopted the virtual mode of conducting businesses[18]. This was a phase of technological development in all sectors, without an exception. Today we witness a work from home culture being normalized, courts conducting virtual hearings, universities imparting education virtually, etc. While these turn of events have been witnessed, the companies which implemented and utilized the boons of technology have flourished and mitigated the losses which would have otherwise been there.

 

Conclusion, Analysis and Suggestions:

Throughout the article, we came across various scenarios, situations and places where implementation of modern technology have saved the day. We saw how the big scandals have taken place and analyzed those case studies, only to realize that a technological upgrade could have possibly saved them mishaps from happening in the first place.

 

We can safely make this statement that, ‘Technology is the future’. It is inevitable and for the greater good in the long run alongside immediate benefits. As the cyber risks have been increasing with every passing day, it has become a necessity to prevent these breaches and provide security. Cyber crime is an unlawful act, where the computer is either used as a tool / target / both. Theft, forgery, fraud, defamation, cyber terrorism, etc are some traditionally committed cyber crimes along with numerous additions. The ambit is very large. Government departments take measures on everyday basis to curb these crimes. Cyber crime has been a big treat to our national security and financial health. The hackers have been tremendously technologically advanced. In order to deal with them and win over, the security systems needs to increase their levels of cyber security as well. Inclusion of cryptography by incorporating block chain technology will mitigate most of these problems and help the companies flourish in multiple grounds[19].

[1] https://www.investopedia.com/terms/b/blockchain.asp

[2] What is Blockchain, EuroMoney (April 27, 2021, 14:28pm), https://www.euromoney.com/learning/Blockchain-Explained/What-is-blockchain

[3] Image source: Investopedia, https://www.investopedia.com/terms/b/blockchain.asp

[4] The Companies Act, 2013

[5] SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

[6] SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011

[7] James Chen, Corporate Governance, Investopedia (April 27, 2021, 14:23pm), https://www.investopedia.com/terms/c/corporategovernance.asp

[8] redbytes (April 27, 2021, 14:40pm), https://www.redbytes.in/advantages-and-disadvantages-of-blockchain-technology/

[9] redbytes (April 27, 2021, 14:40pm), https://www.redbytes.in/advantages-and-disadvantages-of-blockchain-technology/

[10] The Economic Times (April 27, 2021, 14:08pm), https://economictimes.indiatimes.com/definition/cryptography

[11] YourStory (April 27, 2021, 14:50pm), https://yourstory.com/2020/01/blockchain-technology-cryptocurrency-indian-market

[12]https://www.icsi.edu/media/webmodules/GOVERNANCE_RISK_MANAGEMENT_COMPLIANCES_AND_ETHICS.pdf

[13] Nicholas J Price, Relationship Between Risk Management and Corporate Governance, Diligent Insights (2018), https://insights.diligent.com/risk-oversight/relationship-between-risk-management-and-corporate-governance (last visited Apr 21, 2021)

[14] De Filippi P., Wright A., Blockchain and the Law: The Rule of Code, Harvard University Press, Cambridge Massachusetts, 2018, p. 76

[15] M/S. Satyam Computer Services vs Directorate Of Enforcement,on 31 December, 2018

[16] Kingfisher Airlines Ltd vs Union Of India And 4 Ors on 15 July, 2015

[17] Harry Pettit, Personal Facebook, Instagram and LinkedIn data of 200MILLION users ‘exposed online by leakers’, The Sun (April 27, 2021, 14:06pm),

https://www.the-sun.com/lifestyle/tech/2137962/facebook-instagram-linkedin-data-exposed-hackers/

[18] https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-covid-19-has-pushed-companies-over-the-technology-tipping-point-and-transformed-business-forever#

[19] https://www.ibm.com/in-en/topics/blockchain-security

 

*The views in this article are author’s point of view. BSK Legal may or may not subscribe to the views of the author. This article is not intended to substitute legal advice. Any portion or part of this article can be reproduced, copied or used, in whole or in part, after giving due credit to the publisher. The Copyright of the article is with the author.