19261294 Satyam Fraud Failure of Corporate Governance

8/2/2019 19261294 Satyam Fraud Failure of Corporate Governance

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SATYAM FRAUD; A FAILURE OF CORPORATE GOVERNANCE

OM PRAKASH YADAV

MONOLITH STATUE OF BUDHA AT HYDERABAD, THE HQ OF SATYAM

S


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Satyam fraud is unfolding and so are the inherent weaknesses of Corporate Governance in

India. Ramalinga Raju, once a posture boy of Indias growing software sector who could find

a seat beside Bill Clinton on the dais, has become a villain in the corporate world for valid

reasons.

His emotionally charged four and half page letter of startling revelations shook the entire

corporate world when he admitted of cooking the account and inflating the figure by

Rupees 5040 crores. He committed this fraud and tried to hush up it by an abortive bid to

purchase Maytas infra, a company created by him and run by his son Teja Raju. The move

was opposed by some of the directors and thus last attempt of Raju to cover up the scam

was thwarted. This is the story in brief which all of us know.

This scam is being equated with Enron of USA because here also the scam was orchestrated

by its Auditor, Arthur Anderson, in Satyam, Price Waterhouse cooper.

WHY DID RAJU UNFOLD THE SCAM HIMSELF

There are two sets of serious questions which still desperately require answers. Why did

Raju, the mastermind of the entire fraud, accept the guilt? Why did he choose to surrender

before Police and not run away from India, which he could have easily done? Why was this

fudging done and for what? Secondly, what were regulators and watch dogs like SEBI, ICAI,

and independent directors doing?

The question remained unanswered that whether this fraud shook the conscience of Raju

and he unravelled the truth out of sagacity, or he was simply unable to hush up the matter

which was increasing day by day assuming insurmountable proportions?

No, simply not. It was a well calculated, well strategized blended with legal opinion and well

thought move to unfold the story and surrender before the police.

Mahabharata, the Great War was caused due to Dhritarastras obsession for his son

Duryodhana. The lust of kingdom and its geographical expansion had led many wars across

the world.

Like many fathers, Raju too wanted to create two separate empires for his sons, Teja Raju

andRama Raju junior.He subsequently formed Maytas infra and Maytas info for Teja and

Rama respectively. By the end of the 20th

century, Satyam computers had made a name for

itself on the globe and had emerged as the 4th

largest software in the country. The meteoric

rise of the company can be substantiated by the fact that it was established in 1987 as

private company and got listed by BSE in 1991. In 2001 its share was listed in NYSE and in

2004 it made its place in European stock market. According to companys statement, its

revenue exceeds to 2 bn USD in 2008.


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Similarly Rajus sons companies also were moving with leaps and bound. Maytas infra got

the ambitious Metro projects and bagged many tenders including one of construction of

Technology Park.

It is in this perspective, the question that everyone is willing to ask is that when everything

was fit and fine then why did Raju fudge the account of the company and commit countries

biggest fraud.

The fudging of account had started when the Maytas were formed. Raju started diverting

the cash from Satyam into Maytas and many other companies which he had formed either

in his own name or benami like Godavari bio, Godavari agro etc. In fact such practices are

very common and prevalent in many Indian companies and it would not be a matter of

surprise it similar frauds are unravelled more in future. They do it for simple reasons, to help

establish their kiths and kin. This drain of wealth theory is substantiated by the fact that

the share of Promoters in the company which was 25.6% in 2001, diminished to 3.6% in

January, 2009. Similarly by 2008 Raju had pledged almost all his shares and had thus

siphoned off most of his shares. In fact according to information retrieved from NSE, not

only Raju but CFO V.Srinivas, A.S.Murthy, V. Murli etc has sold shares of 3,6500, 3,14,000,

1,83,000 respectively. Raju inflated the account for increasing the price of shares so that he

and his accomplices get maximum profits, in which he succeeded also. The day this news

broke, the Satyams share was soaring. He wanted to hush up the matter in December,

2008, when he made a desperate but unsuccessful bid to purchase his sons Maytas. It was

vehemently opposed by one of the independent directors Mangalam Srinivas, he

subsequently resigned. Thus the entire game plan of Raju was shattered. He, by now had

come to know that he is not going to succeed in his plan. He therefore, wrote an emotional

letter and confessed him fraud.


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How did he do it?

As per the accounting practise, the Bank accounts are presented before the Auditors of the

company by the CFO after its verification. It seems that the fraud was initially connived by

Raju and CFO Vadalamani Srinivas. Later this nexus might have widened after possible

inclusion of auditors and the Bankers. The continuous inflating and cooking of accounts, that

too on such a big scale was going unnoticed and unchecked by the auditors and the Bankers

sounds absurd, therefore, the possibility of a connivance of bankers and the auditors cannot

be ruled out. CID has claimed that Raju had inflated the numbers of the employees also, if it

goes true, the involvement of Banks would be proved beyond a shadow of doubt.

WHY DID RAJU SURRENDER AND NOT ESCAPE?

A very pertinent question arises but surprisingly a very few is asking as to if Raju was aware

of the magnitude of his crime as well as quantum of its punishment then why did he notescape and choose to surrender before the police.

Reasons are not far to search. The crime he has committed would attract sections

406,409,420,465,471, etc of IPC and section 628 of Company Act, 1956 and can undergo

imprisonment up to more than 7 years. He was fully aware of it but at the same time he also

knew that he would be sued in USA under provisions of Security and Exchange Commission

Regulation rule 10-5 B. These suits are called Class law suits and the compensation awarded

under this is huge. Raju knew it and thought that his entire earnings and his family would be

taken away and would be left with naught. One the other hand, he fully understood the

loopholes in the Indian Criminal Justice system which hardly punishes white collar criminals.

Ketan Parikh scam still is sub-Judice and is expected to go years and years. It is this scam

which ruined hundreds of Cooperative Banks across Nation and plummeted Unit-64 a

popular mutual fund scheme of the UTI, Indias largest mutual fund company. Harshad

Mehta died without being finally convicted. Global trust Bank scam is still under the

labyrinth of law. Examples are many, results are same. He therefore preferred to surrender

than to face class law suits in USA.

IS CORPORATE GOVERNANCE IN INDIA NOT WORLD CLASS?

Interestingly Satyam has bagged Golden Peacock award for best corporate governance by

World Council for Corporate Governance only a few years ago. The scam has raised many

doubts about the class of corporate governance in India. While speaking at a seminar on

corporate governance organised by CII, Ministry of Company affairs and National foundation

of corporate governance, C.B.Bhave, the chairman of SEBI said on 6th

February, 2009 that

the corporate governance is an ongoing process. There is a retrospection everywhere that

some concrete steps with respect to it should be done.

There are few importance elements of corporate governance namely Auditing, IndependentDirectors, Regulators and Finally the Board including CEO itself. If we examine these


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constituents one by one, it would be crystal clear that all the constituents either failed or did

not act as was required.

The role of Price waterhouse Coopers (PwC), the Auditing firm of Satyam has been dealt.

Institute of Chartered Accountants of India (ICAI) constituted under Charter Accountants

Act, 1949 is the regulatory body of all the accounting and auditing firms across the

countries. According to a report there is acute shortage of qualified chartered accountants

and auditors in India and around the world also. The number of CAs passing every year is

hopelessly small. It is apprehended therefore that the auditing firms out source unqualified

or semi-qualified commerce graduates of Post graduates to do the auditing in the

companies. The prestigious firms get the assignment by virtue of their name and fame

which they recklessly sell in the market by out sourcing the auditors at a very low

remuneration. In case of Satyam, the man who was supposed to do audit was incidentally

executive member in ICAI.

In a startling revelation, the auditors say that they approved the accounts because of Rajustowering presence suggests how ridiculously the auditing was being done.

Thus if Scam occurred, the onus would undoubtedly go on the firm. The kind of attitude

which is adopted here in India in doing auditing is certainly not in congruent with the

standard of world class corporate governance. In fact if we look at the functioning of

institutions like ICAI, we would come to know that they are in a way hijacked by a group of

people. They have the vast statutory powers but without any responsibilities.

Over a period of time so many extra constitutional authorities have come up in India and

have taken up the States role and act as per their own framed regulations. This needs to be

changed. This is the need of hour.

Secondly, the independent directors have also failed to discharge their duties properly.

Section 49 of SEBI Act and section 229 A of Company Act, 1956 provides for appointment of

Independent Directors in the Companies for protecting the rights of public at large in

general and shareholders in particular. In the case of satyam T.R.Prasad, the retired Cabinet

Secretary Govt of India was one of the directors. It speaks a lot about the procedure of

appointment of independent directors. What kinds of people are being appointed in the

company? Moreover, they are appointed by the Companies themselves and pay hefty

salaries and perks for virtually doing nothing. Under this circumstance is it thinkable that

these Independent directors would dare to peep into the affairs of the company against thewishes of the CEOs?

There are only two possibilities in Satyam with respect to Independent directors. Either they

connive with Raju and knew everything that was going on, or they did not know. In both the

cases they failed miserably to discharge their duties. What is the need of such Independent

Directors if they cannot do anything in this matter? One unpalatable justification is given

that the Independent Directors participate in the meeting and are not concerned with

autonomy of the company. It should be bone in mind the Enron scam was exposed by

Sherron Watkins, a women independent director.


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Thirdly, the SEBI and Ministry of Company Affairs too have failed in their assigned jobs. SEBI

is the highest regulator and keeps eagle eye on the activities of the capital markets. When

the profits of this company were registering abnormal growth, thereby the prices of the

shares were soaring, what were these guys doing? There has been a lot of hue and cry with

respect to insider trading; a howl SEBI failed to listen to and it inflicted heavily on Satyam.

Raju had pledged almost all his shares so did many of the promoters. The newly appointed

CEO Murthy is also said to have sold about 3.14 lakhs shares including 40,000 in December

itself belonging to him and his family members. These are the insider trading. Although

insider trading per se is not illegal but it is unethical, moreover when Companys high official

who were on share selling spree must had the idea of what was going in the company. All

such transactions are needed to be probed.

As a matter of fact the tax holidays for the IT-BPO companies also needs to be said goodbye.

Had Raju to pay the Income Tax according to the profits shown in the accounts, he would

not have fudged it to this scale. The ministry of Finance must deliberate upon the entire

gamut of issues related to tax heaven provisions.

INVESTIGATIONS, THE TASK AHEAD

The breaking of news lead to reflexes in all the concerned the SEBI, ROC, state government

and above all MOC.

The Ministry of Company Affairs (MOC) came into action and asked ROC in Hyderabad to

conduct preliminary inquiry. SEBI and state govt all jumped in the fray. The state govt

ordered CB CID inquiry and filed an FIR against Raju and others by themselves as no one

came to file a formal complaint against this fraud.

After receiving the inquiry report from ROC, MOC order inquiry by Serious Fraud

Investigation Office (SFIO). Raju was remanded to judicial custody in Chachalguda Jail and

formal inquiry set in.

INQUIRY BY CID

CID made some commendable headway and arrested CFO and others. They made a startling

revelation by saying that Raju had about 13000 ghost employees and had been drawing

their salaries for years. If it is true, the involvement of Banks in the entire gamut of scam isbeyond any doubt. It has also identified many Bank accounts of Raju as well as CFO and

other accused. Large amount of wealth in terms of Bank account, real estates, false

companies etc have been traced. The investigation is still going on. Well the investigation is

limited to the provisions of IPC only. The CID must also look into the possible nexus of Raju

and politicians and bureaucrats, because the kind of meteoric rise that Maytas made smacks

of existence of such nexus. The bagging of Metro project by Maytas infra must be brought

to the ambit of investigation because this project was awarded to Maytas in spite of

Sreedharans opposition, a man of impeccable reputation and whose knowledge about

Metro is simply unparallel.


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SFIO AND SEBI

SFIO & SEBI both of them have started the probe in their own style. The SFIO has later been

asked to cover as many as 325 public and private sector companies and 25 individuals under

its enquiry by the MOC. SFIO have seized some computers, documents and software of the

company in order to find out the roots of the scam. But due to the widening of its inquiry,

the resultof this, probe is likely to be delayed by few more months. Till date SFIO has not

been able to procure remand from the court to grill Raju.

SEBI on the other hand has come out with a series of new and so called stiffer guidelines for

the listed companies. The promoters will have to inform to it and the share market within 7

days about its pledging of shares. Strict vigil is sought to be kept to check inside trading. But

it seems that still it has not understood the symptom of the disease. Experts in this field

enlist symptoms and prescribe prescriptions. There is, of course, no denying the fact that

prescription in retrospection is easy, but at the same time prevention is better than cure. It

is said that if a company suddenly changes the field and diversify in a completely differentare; it is harbinger of tragedy, as it happened in Satyam. No one could foresee that why a

premiere software company started diversification in real estate (Maytas infra is a real

estate company).

Similarly, when a companys growth is meteoric in terms of profits, it should smell some rat.

This is done in order to increase the value of share and once it is achieved, the inside trading

takes place. SEBI has rightly formulated that peers accounting shall be done, it would

minimise the chances of fudging the accounts. SEBI must concentrate on the modalities of

this scam so that the offenders are brought to book and at the same time corrective

measures are taken.

Many experts suggest that if there is a sudden spurt in insider trading in any company, the

regulator should sound alarm bell. In this case the SEBI failed to discharge this job and could

not trace when it was going in Satyam.

PROBLEMS IN INVESTIGATION AND COVICTION

The inquiry and investigation are being conducted by a number of agencies; it therefore, is

always a possibility of conflicting and intermingling of actions. To avoid this there is need toevolve a mechanism so that a more coordinated and concerted actions are taken and this

investigation reaches to a logical conclusion.

With respect to the preparation and submission of charge sheet against the culprits

including Raju u/s 173 of CrPC, utmost caution is required to be taken. We should not forget

that Raju has amassed huge wealth through this scam and the investigating agencies have

so far been unable to unearth his treasures. He is capable of hiring the best legal brains

available in the world that can tatter the prosecutions case due to a slightest loop holes.


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The simplest theory in the criminal justice system is that the crimes including white collar

crimes are inherent part of the society, but the quantum of punishments and pace of

dispensation of justice are very important and serves as deterrents.

USA enacted SARBANES OXLEY ACT, 2002, one of the toughest penal laws with respect

Corporate and Capital market crimes after Enron scam. Chapter IX and SECTION 901 of this

Act SHORT TITLED,White-Collar Crime Penalty Enhancement Act of 2002provides for the

penalty for such crimes. In fact section 906 of this Act provides for 20 years of

imprisonment, whereas in India, the Companys Act, Section 628 provides for 2 years

imprisonment only. It is perhaps due to this fact that sufficient deterrent is conspicuously

absent in India and fraud after fraud are taking place. The govt will have to come up with a

harsh legislation in this regard so that the culprits are severely punished.

19261294 Satyam Fraud Failure of Corporate Governance

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