In this article, Musaib Khan of KIIT School of law discusses the Satyam scam and role of SEBI (Securities and Exchange Board of India) and SAT (Securities Appellate Tribunal).
Introduction
The infamous Satyam scam
Facts
- It was once known as the rising star of India. Formed in the year 1987 by Mr Ramalinga Raju with just 20 employees.
- The company boomed and developed through the period of 2003-2008 and by the end of March 2008, Satyam’s sales had reached a high of USD$467 an annual growth compound rate of 35% and it had much more achievements.
- Six months after team ‘Satyam’ received the ‘Golden Peacock award’, on 6th January 2009, allegations of fraud were made and it was contended that he had been manipulating with the accounts of the company for years (Rs. 7,316 Crores).
- This scandal is a complete display of one’s carelessness of fiduciary responsibilities, total collapse of ethnic standards; fierce competition and the need to impress stakeholders especially investors, analysts, shareholders, and the stock market; low ethical and moral standards by top management and, greater emphasis on short-term performance. [i]
Issue of law
The charges under which the accused were booked by CBI, Hyderabad were various provisions of the Indian Penal Code- Section 120 B, 406, 420, 467, 471 and 477 A for violating various income tax laws.
Aftermath of the revelation
This led to a complete downfall of the company. The Citibank where Satyam maintained its bank accounts were frozen. Several arrests were made including Mr. Raju and his brother. The BOD was disbanded and the Central Government on its own motion appointed 10 new directors. Satyam was removed from Sensex and Nifty. CBI took over the investigation and filed three charge sheets.
The next concern for the government after happening of such events of great concern was to somehow save this company. This was done through the selling of the company. The successful bidder in doing so was ‘Tech Mahindra’ which overtook ‘Satyam’ and now it is known as ‘Mahindra Satyam’.
Mr. Raju was granted bail on the ground that the limitation period of filing the charge sheet by the CBI had expired. Enforcement Directorate files a criminal complaint against 47 persons and 166 corporate entities headed by Ramalinga Raju. Ramalinga Raju and three others were given six months jail term by SFIO.
The Judge postponed the verdict citing voluminous documents. Ramalinga Raju and nine others, two of their family members, were sentenced to seven years rigorous imprisonment on Thursday in the country’s largest-ever corporate fraud. Mr. Raju along with the other convicted individuals were out on a bail given by a special court in Hyderabad. [ii]
Judgment
The accused were found guilty of bogus inflation of the company’s revenue, the accounts of the company were falsified, income tax return were falsified and the invoices of the transactions were fabricated.
Mr Raju was granted bail on the ground that the limitation period of filing the charge sheet by the CBI had expired. Enforcement Directorate files a criminal complaint against 47 persons and 166 corporate entities headed by Ramalinga Raju. Ramalinga Raju and three others were given six months jail term by SFIO.
The Judge postponed the verdict citing voluminous documents. Ramalinga Raju and nine others, two of their family members, were sentenced to seven years rigorous imprisonment on Thursday in the country’s largest-ever corporate fraud. Mr Raju along with other convicted individuals were out on a bail given by a special court in Hyderabad. [ii]The accused were found guilty of bogus inflation of the company’s revenue, the accounts of the company were falsified, income tax return were falsified and the invoices of the transactions were fabricated.
There were 10 accused in total (Let them be A1- A10) and all were found guilty under Section 120-B and Section 420 of IPC, A1 and A2 were found guilty under 409 of IPC, A3, A4, and A7 were founder guilty under Section 406 of IPC, A4 , A5 and A7 were found guilty under Section 419 of IPC, A1 to A5 and A6 to A9 were found guilty under Section 467, Section 468 of IPC, Section 471 and 477A of IPC.
The ten accused were:- Ramalinga Raju, Rama Raju, Vadlamani Seinivasu, Subramani Gopalakrishnan, Talluri Srinivas, Byrrarju Suryanarayana Raju, G, Ramakrishna, D. Venkapathi Raju, Ch. Srisailam and V. Suryanarayana Prabhakar Gupta.
Now, we shall discuss the important regulatory bodies involved in investigating this case.
SEBI
On 12th April 1992, under the provisions of the SEBI (Securities and Exchange Board of India), SEBI was established. The Preamble of the Securities and Exchange Board of India reads out the core function of the body which is “…to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto”. This single body performs three functions:
- Quasi-legislative: Rules and regulations are drafted,
- Quasi-judicial: It gives orders and passes its rulings.
- Quasi-executive: Investigation is done and enforces the orders.
Although this kind of composition of this body makes it very powerful, its orders are checked by a higher authority, SAT (Securities Appellate Tribunal), the appellate body.[iii]
The Satyam case also changed the perspective of SEBI while discharging its functions and nevertheless this had to be done since this scam is still the biggest scam in India’s corporate sector. Following the Satyam scam, SEBI has turned instrumental and has started taking immediate and much effective actions.
Role of SEBI in the Satyam case
SEBI under Section 17 of the SEBI Act, 1992 took out an extensive investigation into the conduct of Satyam and checked whether the provisions of the SEBI Act, 1992 and Rules, and Regulations framed have been violated. They also inspected the available books of account and pertained to the financial statements of Satyam. They also inspected the documents held by the auditors of Satyam which was ‘Pricewaterhouse Coopers’.
Mr Raju in his declaration letter about his mischievous and fraudulent activities claimed that the reason behind his declaration was because annually he was juggling with the revenue figures because he couldn’t juggle with the expenditure figures so easily, the gap between the ‘book’ profit and ‘actual profit’ kept on increasing every year. He went ahead to buy Maytas Infrastructure and Maytas Properties in order to end the gap and show a real profit of the company or else the company might die. His target was to wipe out the fictitious profits by doing a real deal in which he ultimately failed and subsequently he wrote the letter.[iv]
After this breathtaking revelation which was being termed as the biggest corporate fraud which had shaken everybody, SEBI had kept a target for itself to sell off the company since it was the last resort through which the company could have been saved. SEBI met with the government appointed Board Of Directors, accountants, bankers, government officials and lawyers in order to come up with a plan immediately.
All of them worked superbly and diligently and brought back the company’s stability and confidence within the 100-day deadline. SEBI has geared up and pulled up its socks after this scam and has enhanced its working. The SEBI chief at the time of this case, Mr C.B. Dave said “Meanwhile, we are looking at some long-term system improvement. There will be quite a few things we will learn from this incident and we will take steps for necessary changes accordingly.[v]”
SEBI relaxed the takeover norms at the request of the government-appointed board of directors of Satyam and the Company Law Board (CLB) permitted selection of the strategic investor fulfilling certain regulatory requirements. SEBI laid down that the interested investor should buy the stake from the newly issued shares amounting to 31 percent of the company’s share capital.
The Securities and Exchange Board of India (SEBI) approved to Satyam Computer Services for choosing a strategic investor to acquire 51 percent of stake in the embattled company through a global competitive bidding process which led to the buying of Satyam Computer services by Tech Mahindra. [vi]
SAT (Securities Appellate Tribunal)
Securities Appellate Tribunal is a statutory body which was established under the provisions of Section 15K of the Securities and Exchange Board of India Act, 1992. Its main function looks after the appeals in reference to the orders by the SEBI or any adjudicating officer under the SEBI Act and to exercise jurisdiction, powers, and authority conferred on the Tribunal by or under this Act or any other law for the time being in force[ix]
PwC (PricewaterhouseCoopers)
PricewaterhouseCoopers is a multinational professional services network headquartered in London, United Kingdom. It is the second largest professional services firm in the world. It deals with the auditing work of huge organizations and is the most reliable option.
In January 2009 PwC was criticised along with the promoters of Satyam, an Indian IT firm listed on the NASDAQ, in a $1.5 billion fraud. [vii]
PwC wrote a letter to the board of directors of Satyam that its audit may be rendered “inaccurate and unreliable” due to the disclosures made by Satyam’s (ex) Chairman and subsequently withdrew its audit opinions.[viii]
Recent developments – Price waterhouse about the SEBI’s order and SAT
In the order given by SEBI on 10th January 2018, SEBI has come hard on PwC with this order. It has imposed a ban on all the firms in the PwC network from auditing listed companies and intermediaries (brokers) [x]for a period of two years held guilty under the Satyam scam. The 108-page SEBI’s order said that they were not complying with the auditing standards and did not report such a wide gap developing in the balance sheets of Satyam and PwC was deceitful along with the main parties involved in the biggest corporate fraud.[xi]The order against PwC was passed as per Section 11 of the SEBI Act and the Prevention of Fraudulent and Unfair Trade Practices(UFTP). Section 11 of the SEBI Act gives authority to SEBI to pass orders in the favor of the investors. [xii]
Current development of the case
Following the ban on PwC, in an email conversation, the spokesperson of the firm said, “We are disappointed with the findings of the Sebi investigations and the adjudication order. The Sebi order relates to a fraud that took place nearly a decade ago in which we played no part and had no knowledge of”. [xiii]
The Bombay High court had ruled in the year 2010 that ‘no direction can be issued against PwC if there is only some omission without proof of connivance and intent to fraud’, SEBI was probing the audit firm’s role in the accounting fraud. PwC was appointed as the auditor of Satyam between 2000-2008. PwC showed a complete negligence and carelessness while performing its practice of auditing. According to SEBI, PwC showed a total disregard of stipulated auditing practice which indicated their complicity in the manipulation.
Following these developments, PwC has decided to challenge the order passed by SEBI in the SAT (Securities Appellate Tribunal). The petition filed is set aside the order and remove the ban on an interim basis until the final order comes.
Conclusion
In wake of the biggest corporate fraud in India where India is the third largest developing economy in entire Asia, its high time that India should take stringent measures to fill in the loopholes so that the economy of our country is saved by masterminds and greedy people. Though after the Satyam scam, the regulatory bodies have advanced their functioning and have taken stringent measures against the wrongdoers. The order against PwC can be seen as one example. It shall be very interesting to see the development of this case when the appeal gets heard at SAT.
[i] Corporate Accounting Fraud: A Case Study of Satyam Computers Limited, Madan Lal Bhasin, SSRN-Id-2676467
[ii] Ibid
[iii] https://www.sebi.gov.in/about-sebi.html
[iv] Corporate Accounting Fraud: A Case Study of Satyam Computers Limited, Madan Lal Bhasin, SSRN-Id-2676467
[v] Off SEBI hook?FRONTLINE, Volume 26-Issue 03, Jan 31- Feb 13, 2009
[vi] SEBI nod for Satyam to choose strategic investor, The Hindu, November 18, 2016
[vii] \”Satyam: A Rs 7,000cr Lie\”. The Times of India. 8 January 2009
[viii] \”PWC says Satyam audit opinions may be unreliable\”. Reuters. 14 January 2009
[ix] http://sat.gov.in/scripts/detailsat.asp?releaseId=E0000US1
[x] Sebi bars Price Waterhouse: What is the firm\’s role in the Satyam scam?Hindustan Times, 11th January 2018
[xi] Satyam case: Price Waterhouse moves SAT against Sebi ban, Live mint, 17th January 2018
[xii] Ibid.
[xiii] Sebi bars Price Waterhouse: What is the firm\’s role in the Satyam scam?Hindustan Times, 11th January 2018
