Description
Describing how the fraud at satyam happened.
The Satyam Case
The Company
• Was founded in 1987 by Ramalinga Raju and DVS Raju (brothers-in-law) in Hyderabad • Started Satyam Renaissance, Satyam Infoway, Satyam Spark Solutions & Satyam Enterprise Solutions in the 90s • Nipuna, Satyam’s BPO arm was started in 2002 • Has rapidly and consistently grown across industries, geographies, international clients, awards and stature • Is a key player in the IT, consulting, systems integration, and outsourcing solutions space • Has domain expertise in verticals such as Automotive, Banking & Financial Service, Insurance & Healthcare, Manufacturing, Telecom, Infrastructure, Media, Entertainment, and Semiconductors • Is India’s 4th largest software services company • Is part of the SWITCH companies • Is present in 6 continents, 65 countries & 20 industries • Has up to 52000 employees & 690 clients • Won the Golden Peacock award (administered by WCFCG) for excellence in corporate governance in 2008 (now stripped of it) • Pattern of shareholding: promoters ~2%, institutional investors ~60%, general public ~13%
The Raju Brothers
Ramalinga Raju • Ex Chairman, Satyam • Hails from a family of farmers from Vijaywada • Is an MBA from Ohio University • Has 2 sons – Teja Raju (CEO, Maytas Infra) & Rama Raju (Vice Chairman, Maytas Properties) • Started a textile business in 1977 and then a real estate business • Founded Satyam in 1987 with 20 employees • Has won several awards
? ? ? ? ? Ernst & Young Entrepreneur of the Year Services Award 1999 Dataquest IT Man of the Year Award 2000 CNBC's Asian Business Leader - Corporate Citizen of the Year Award, 2002 Lifetime Achievement Award, given by Hyderabad Management Association (HMA), 2005 E&Y Entrepreneur of the Year 2007 ( Revoked after the scam )
B. Rama Raju • Ex MD/CEO, Satyam • Is Ramalinga Raju’s younger brother • Is an MBA from Loredo State University, Texas • Has served as a director with Maytas Infra • Was also on the board of Satyam BPO & Satyam Venture Engineering Services
Timeline of Events
• Dec 16 – Satyam announces that it is buying 51% stake in Maytas Infra & 100% stake in Maytas Properties in a $1.6 billion deal. The decision comes in for severe criticism. • Dec 17 – Under pressure, the deal is called off within 12 hours. Satyam’s stock dips 30% to close at Rs. 158.05. • Dec 23 – The World Bank confirms it has banned Satyam for eight years for bribery • Dec 26 – Independent director, M. Srinivasan resigns • Dec 29 – 3 more independent directors resign
? M. Rammohan Rao, Dean, ISB ? Vinod Dham, VP, Intel & Pentium chip inventor ? Krishna Palepu, Senior Dean, HBS
• Jan 7 – Ramalinga Raju resigns, admits to fraud. He says the company's cash and bank balance sheet has been inflated and fudged to the tune of Rs 5,040 crore.
The Maytas Deal
• Deal involved acquiring 100% stake in Maytas Properties for $1.3 billion & a majority 51% stake in Maytas Infra for $0.3 billion • Raju stated that the deal was struck to diversify the company’s business & make it less vulnerable to global risk; to stave off takeovers; and as a last ditch attempt to close profitability gaps • Decision was approved by the board comprising independent directors but was met with severe investor revolt; criticism was centered around such a huge spending during the slowdown & lack of minority shareholder approval • Listed companies are bound by SEBI's Listing Agreement, which calls for certain proportion of independent directors in the board for keeping a check on the management of companies and work as an oversight mechanism. Apart from value addition they are also entrusted with the task of representing the financial interests of others investors. The contention, rightly so, is that Satyam’s independent directors did not perform their duty. • Why was the deal dubious?
? ? ? ? ? ? Questions about corporate governance, especially the role of independent directors & transparency Deal would have wiped out Satyam’s surplus cash & put it $400 million in debt Related party transaction & benefit to shareholders Unrelated diversification; this diversification would have amounted to a change in the object clause of the company High valuations; Maytas Properties was valued at Rs. 91 lakh/acre while it realistically should have been around Rs. 40 lakh/acre Alternate structures of acquisition such as a merger through a stock swap were not even considered
The World Bank Ban
• Debarred Satyam from applying for contracts for 8 years • Reason cited was Satyam “providing improper benefits to bank staff” for favors & “lack of documentation on invoices” • WB’s VP Mohamed Muhasin had bought Satyam’s preferential shares in 2007. Whether this was done with shareholder approval is not known. Muhasin is no longer with the bank. • 5 year $10 million contract in 2003 ($100 million in 2007) to design, write & maintain information systems has not been renewed • Services included in the contract were ERP implementation, document management & integrated messaging system • WB has banned Wipro until 2011 for the same reason and Megasoft for “participating in a joint venture with bank staff while also conducting business with the bank” • Wipro has however, stated that its actions were in keeping with the then (2000) SECcompliant policy of the bank which has now been modified • TCS has been the beneficiary of a large portion of these contracts • Unconfirmed reports accuse Satyam of data theft from WB, which even the WB has clarified that it has no evidence of • Data theft was done by installing spy software on workstations
The Scandal & the Aftermath
• • • • • • Balance Sheet disclosures ? Inflated cash & bank balances of Rs. 50.4 billion as opposed to Rs. 53.6 billion ? Non existent accrued interest of Rs. 3.76 billion ? Overstated debtors position of Rs. 4.9 billion as opposed to reflected Rs. 26.5 billion Share price on Jan 7 reached a low of Rs. 11.50 Ramalinga Raju, Rama Raju (could be put away for 10 years) & Srinivas Vadlamani (ex-CFO) have been arrested PwC auditors, S. Gopalakrishnan & Srinivas Taluri have been arrested Satyam cut out from the 30-share benchmark index Sensex The new board of members comprises ? Deepak Parekh, Chairman, HDFC ? Kiran Karnik, ex-President, Nasscom ? C. Achutan, SEBI SEBI to investigate insider trading violations, embezzlement & other transgressions Serious Fraud Investigation Office to investigate Satyam, PwC & 325 other companies for violations of corporate law, (diversion of funds, etc.) Registrar of Companies to inspect books of accounts as allowed by Sec 209 A, Companies Act Enforcement Directorate to investigate violations of the Foreign Exchange Management Act (FEMA) and the Prevention of Money Laundering Act (PMLA) Inspector-General of Stamps & Registration to probe into land transactions of Ramalinga Raju IT department to investigate potential tax fraud CBI may coordinate the entire investigation , state CID is currently performing this function AS Murthy appointed CEO
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PricewaterhouseCoopers
• Though Raju claimed full responsibility for the accounting irregularities, commonly held opinion is that auditors of PwC were in the know & that the fraud could not have been possible without their participation • Major clients in India are Maruti Suzuki, United Breweries, United Spirits, GMR Infra, Piramal Healthcare and Marico • Glenmark Pharma has stated that its contract with PwC will now be reviewed • Institute of Chartered Accountants of India (ICAI) has decided to issue a show cause notice to PwC
The Clients
• Satyam claims that over 90% of its clients have promised to remain with it • Satyam has long-term strategic relationships with Unilever, Nestle, DuPont, Cisco, GE, Sony, Applied Materials • Other key clients include ArcelorMittal, Nissan Motors, Qantas Airways, General Motors • IT sourcing contracts of up to $200 million are up for renewal • In the context of the global recession, the scenario looks grim for Satyam as clients are adopting cost-cutting measures • Clients would prefer Satyam’s untainted competitors with clean track records of corporate governance • Applied Materials is likely to restructure the $200 million 5 year contract that it awarded to Satyam in 2008 • PwC, already in the fray, is reportedly planning to review its “continuance” with the company • GE, Cisco, Nestle Coca Cola have all expressed their decision to stay but are also closely monitoring the developments and considering alternative solutions • UK-based mobile and online payments firm Upaid Systems Ltd., which is an old client of Satyam, filed a motion in Texas district court, alleging that Satyam had devised a plan designed to deplete its assets and divert resources out of the company before a judgment is passed on its $1 billion lawsuit against the tech firm after the latter falsely levelled charges of fraud, forgery and breach of contract against its client • Competitors like TCS & Infosys, keeping in line with Nasscom’s guidance, have stated that they will desist from poaching Satyam’s clients and have admitted to having received offers
Those who have left
State Farm Insurance • Fortune 500 company, largest auto insurer in USA • Based in Bloomington, Illinois • The only company so far to have abandoned Satyam, it ended its contract within 10 days of the accounting scandal emerging • Satyam’s reaction has been nonchalant • Had been a client for almost a decade with about 400 Satyam employees at State Farm offices in the US • State Farm was reportedly uncomfortable with the uncertainty of Satyam’s future • Was able to sever its ties quickly since the nature of the outsourced jobs was basic (primarily claims processing). Other outsourcing partners may not be able to defect easily or quickly.
National Australia Bank • Has suspended all new contracts with Satyam, until the future is clearer
The Future
Potential buyers • Suitors are interested in buying parts of Satyam rather than the whole • iGate was interested in buying Satyam if its liabilities are not in excess of $1.25 billion but is said to have backed out now • Essar has evinced interest in Satyam's BPO business • Both Satyam & Tech Mahindra have shot down reports of a merger • Mindtree has denied its interest in an acquisition • Reports have also proclaimed HP, IBM & HCL’s interest in acquiring Satyam • The Spice Group & the Hinduja Group have both evinced interest in an acquisition • L&T is the keenest party with already 12% stake in the company Takeover code • An offer price under the current regulations would be the higher of the average of the past 6 months or the average of the past 2 weeks • Any group wanting to acquire a minimum 15% stake in a company must make an open offer to all shareholders based on a 26-week average share price • As per the existing SEBI guidelines, a company holding 15% stake in another company is mandated to make an open offer for another 20% stake • The highest quote in any competitive bid could be used as a benchmark for determining the open offer price for the company • The open offer price may be set at two-week average to reflect more genuine value in a shorter and more recent period • SEBI will also discuss how to compensate shareholders retrospectively if large amounts of cash siphoned off by Satyam promoters is recovered by investigators and returned to the company balance sheet at a future date
Industry Opinion
• Ganesh Natarajan, Chairman, Nasscom opined that Satyam is a one-off case: "We believe the entire IT sector will not be impacted much as we consider this as a specific case of a particular firm." • Nandan Nilekani, Co-Chairman, Infosys however felt otherwise: "This incident is a black-eye because we have been promoting Indian entrepreneurs, Indian corporate as the flagship of brand India and when one of the lot really has a deplorable behaviour then obviously it is not a good thing.” • Narayan Murthy, Chief Mentor, Infosys made a controversial statement which was later clarified: "We will not touch such a tainted company.”
Legal Action
• Raju can be prosecuted for violating provisions of mainly, the IPC, SEBI Act & Companies Law • General practice in India is to pick the crime that attracts the longest and harshest sentence and impose that • In the US, sentences are either aggregated or allowed to run consecutively • In rare cases, the US legal approach may be adopted • Kamalanatha vs. State of Tamil Nadu case, 2005 Double life sentence for rape and murder given by the Madras high court was upheld by the Supreme Court
Indian Penal Code
• Raju has been charged under 6 sections of the Indian Penal Code for falsification of accounts, cheating, forgery, fraud and breach of trust • Section 120B – criminal conspiracy • Section 409 – criminal breach of trust • Section 420 – cheating • Section 468 – forgery • Section 471 & 477A – falsification of accounts
• • • • About IPC, 1860 Came into force in 1862 Contains 511 sections in all An exhaustive document that covers crimes of all natures, including new age cyber crime
Section 120B
• Section 120A. Definition of criminal conspiracy When two or more person agree to do, or cause to be done, (1) An illegal act, or (2) An act which is not illegal by illegal means, such an agreement is designated a criminal conspiracy: Provided that no agreement except an agreement to commit an offence shall amount to a criminal conspiracy unless some act besides the agreement is done by one or more parties to such agreement in pursuance thereof. Explanation: - It is immaterial whether the illegal act is the ultimate object of such agreement, or is merely incidental to that object. • Section 120B. Punishment of criminal conspiracy (1) Whoever is a party to a criminal conspiracy to commit an offence punishable with death, [imprisonment for life] or rigorous imprisonment for a term of two years or upwards shall, where no express provision is made in this Code for the punishment of such a conspiracy, be punished in the same abetted such offence. (2) Whoever is a party to a criminal conspiracy other than a criminal conspiracy to commit an offence punishable as aforesaid shall be punished with imprisonment of either description for a term not exceeding six months, or with fine or with both.
Section 409
• Section 409. Criminal breach of trust by public servant, or by banker, merchant or agent
Whoever, being in any manner entrusted with property, or with any dominion over property in his capacity of a public servant or in the way of his business as a banker, merchant, factor, broker, attorney or agent, commits breach of trust in respect of that property, shall be punished with [imprisonment for life], or with imprisonment of either description for a term which may extend to ten years, and shall also be liable to fine.
Section 420
• Section 420. Cheating and dishonestly inducing delivery of property
Whoever cheats and thereby dishonestly induces the person deceived any property to any person, or to make, alter or destroy the whole or any part of a valuable security, or anything which is signed or sealed, and which is capable of being converted into a valuable security, shall be punished with imprisonment of either description for a term which may extend to seven years, and shall also be liable to fine.
Section 468
• Section 468. Forgery for purpose of cheating
Whoever commits forgery, intending that the [document or Electronic Record forged] shall be used for the purpose of cheating, shall be punished with imprisonment of either description for a term which may extend to seven years, and shall also be liable to fine.
Section 471
• Section 471. Using as genuine a forged document or electronic record
Whoever fraudulently or dishonestly uses as genuine any [document or electronic record] which he knows or has reason to believe to be a forged [document or electronic record], shall be punished in the same manner as if he had forged such [document or electronic record]. • Imprisonment up to seven years and a fine
Section 477A
• Section 477A. Falsification of accounts
Whoever, being a clerk, officer or servant, or employed or acting in the capacity of a clerk, officer or servant, wilfully, and with intent to defraud, destroys, alters, mutilates or falsifies any [book, electronic record, paper, writing], valuable security or account which belongs to or is in the possession of his employer, or has been received by him for or on behalf of his employer, or wilfully, and with intent to defraud, makes or abets the making of any false entry in, or omits or alters or abets the omission or alteration of any material particular of any material particular form or in, any such [book, electronic record, paper, writing], valuable security or account, shall be punished with imprisonment of either description for a term which may extend to seven years, or with fine, or with both. Explanation-It shall be sufficient in any charge under this section to allege a general intent to defraud without naming any particular person intended to be defraud without naming any particular person intended to be defrauded or specifying any particular sum of money intended to be the subject of the fraud, or any particular day on which the offence was committed.
SEBI
• SEBI regulation will apply for violating stock market laws & other statutory violations, which include unfair trade practices, insider trading regulation and takeover code. Relevant regulations could be:
? ? ? ? ? SEBI (Prevention of Fraudulent and Unfair Trade Practices) Regulations, 2003 punishable under Section 24(1) of the SEBI Act, 1992 SEBI (Prohibition of Insider Trading) Regulations, 1992 SEBI (Merchant Bankers) Rules and Regulations, 1992 SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 Securities Contract (Regulations) Act, 1956
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Imprisonment could be up to 10 years and a fine of Rs. 25 crores or both Soon, SEBI will legislate that, in their quarterly statements, companies would be required to disclose the percentage of shares encumbered within the overall promoter holding It will also make it compulsory for promoters to disclose their shareholding if part of it is pledged or hypothecated About the SEBI Act, 1992 The act was modeled on the benchmark FSAP (Financial Services Assessment Programme) introduced by World Bank & IMF Imprisonment and monetary penalty could be awarded "if any person contravenes or attempts to contravene or abets the contravention of the provision of this Act or of any rules or regulations made there under".
Section 24
• Section 24. Offences
(1) Without prejudice to any award of penalty by the adjudicating officer under this Act, if any person contravenes or attempts to contravene or abets the contravention of the provisions of this Act or of any rules or regulations made there under, he shall be punishable with imprisonment for a term which may extend to one year, or with fine, or with both. (2) If any person fails to pay the penalty imposed by the adjudicating officer or fails to comply with any of his directions or orders, he shall be punishable with imprisonment for a term which shall not be less that one month but which may extend to three years or with fine which shall not be less than two thousand rupees but which may extend to ten thousand rupees or with both.
Fraudulent and Unfair Trade Practices Regulations, 2003
• Fraud includes an active concealment of a fact by a person having knowledge or belief of the fact; a promise made without any intention of performing it; a representation made in a reckless and careless manner whether it be true or false; any such act or omission as any other law specifically declares to be fraudulent, and deceptive behaviour by a person depriving another of informed consent or full participation.
Insider Trading – What is it?
• Insider trading is the trading of a corporation's stock or other securities (e.g. bonds or stock options) by individuals with potential access to non-public information about the company. In most countries, trading by corporate insiders such as officers, key employees, directors, and large shareholders may be legal, if this trading is done in a way that does not take advantage of non-public information. The Insider Trading Act is governed by SEBI Regulations,1992 and The Company Act,1956 Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 An “insider” means any person who (is) is or was connected with the company or is deemed to have been connected with the company and who is reasonably expected to have access to unpublished price sensitive information in respect of securities of a company, or (ii) has received or has had access to such unpublished price sensitive information. Under the present SEBI (Prohibition of Insider Trading) Regulations, 1992 the shareholder/director/officer of a listed company is required to disclose to the company information regarding the shareholding or voting rights within 4 working days of receipt of intimation of allotment of shares or the acquisition or sale of shares or voting rights or of becoming the director or officer of the said company, as the case may be.
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Insider Trading at Satyam
• A 12 member team of Serious Frauds Investigation Officers prepared an interim report into the fraud and insider trading was one of the charges against the founders of the company • Ramalinga Raju and his brother through their firm (SRSR Holdings) admitted that their stake in Satyam of around 8.3 percent(around 5.57 crore shares) has been pledged with the lenders • What raised many eyebrows was that between December 23rd 2008 and January 5th 2008, the lenders started to offload the Satyam shares. It was a coordinated action by the lenders, who gave money to Mr Raju, to get rid of shares day before Raju revealed the scam and its share plunged. • After the sale in the open market, SRSR Holdings has around 2.3 percent stake in Satyam(which of course, include the pledges shares) • Also, Mr Raju had floated companies like Bangar Agro Farms, Amaravathi Greenlands, Arjuna Farms etc. which had borrowed huge amount of cash by pledging Satyam shares to the institutional investors • On Jan7th, SEBI ordered an investigation into the affairs of buying and selling or dealing with the Satyam share
Insider Trading at Satyam
• Also, it is believed that Ramalinga Raju pledged his holdings at the time when the stock was quoting at a higher level and hence they would have pocketed around 1230 crores till now, which are worth around 70 crores now.He also sold 92,000 shares on a single transaction which raises suspicion and was a perfect case for insider trading. • Now, Company Law Board(CLB) has prevented Ramalinga Raju and other top functionaries not to sell or mortgage their shares and other assets without prior permission. • SEBI is right now examining whether, in law, pledging of shares amounts to insider trading. The SEBI Committee, as the report importantly adds, will also consider whether the law should be amended whereby pledge of Promoters’ shares would now be required to be disclosed. • Pledge may be for many reasons – for raising of finance for persons or corporate purposes or even further acquisition of shares, etc. In fact, if funds are raised by Promoters for financing further acquisitions of shares, then this may be even indicative of their own confidence in the Company. Of course, in some cases, this disclosure may help initiating investigation of the bona fide nature of the pledge. • If in the heat and pressure of action, to somehow find the Promoters of Satyam guilty of Insider Trading, a stretched interpretation is taken that any pledge of shares should also be deemed to be Insider Trading and it can cause a serious crisis to the whole corporate world generally. Firstly, Promoters of numerous other companies would also be deemed to have committed Insider Trading through pledge. Secondly, this process may bring out the real picture of the status of finances of Promoters in India post stock market meltdown!
Insider Trading – The Details
• Current CEO Mr. AS Murthy sold 40,000 shares of Satyam Computers between December 12 and December 16 2008, days before the Maytas deal was announced. Mr. Murthy very frequently sold his shares from October 2006. He has sold around 3,14,763 ESOPs till now at a regular interval. • Jailed CFO Mr. Srinivasa Vadlamani sold in all 3.65 lakh shares till now during the period from mid 2006 till mid 2008. He is the highest by any Satyam employee.
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Mr Ram Mynampati, interim president, sold around 1.83 lakh shares in Indian market and 56250 of ADS during the same time
• Mr. V Murali , Senior Vice President, sold around 1.71 lakh shares during the same time • Mr. TR Anand, COO, sold around 1.41 lakhs shares • Mr. Manish Mehta, sold around 1.01 lakh shares • Most of these shares were sold between mid-2006 and mid-2008 when the Satyam's scrip ruled high between Rs. 350 and Rs. 480, fetching fat sums. • BSE is working in tandem with SEBI in analysing Satyam Computer’s trading data to find out if there was insider trading.
Legal Violations
• Section 205A: Deals with the case of Unpaid dividend to be transferred to special dividend account • Section 207: Specifies the Penalty for failure to distribute dividends within thirty days • Section 272 : Deals with respect of certain contracts relating to sale, purchase or supply of any goods, materials or services it is obligatory for the concerned company to obtain necessary consent of its board of directors. Also, deals with the penalty for the director who doesn’t hold any shares.
• Section 299: Deals with the Disclosure statements
• Section 372A of the Company Act,1956
eals with inter corporate Loan, Investment, Guarantee and Securities in connection with loan
Companies Act
• Can be charged under Companies Act for large-scale fudging of company’s books • Imprisonment can range between 6 months & 7 years along with a fine under Sections 209, 628 & 629 • Under section 628 of the Companies Act, which deals with misrepresentation of accounts, Raju could be punished for a maximum of 2 years along with penalty. However, the punishment term could be extended to 7 years for producing false affidavits and other documents. • Violations of Sections 370 & 372 have also been made • Section 370 of the Companies Act deals with loans to companies under the same management. Under this Section, a company could not give loans or any form of guarantee to companies under the same management unless it has been approved by a special board resolution. • Section 372 deals with purchase of shares of one company by another • About Companies Act, 1956 • Basic law which governs the creation, continuation, the winding up of companies and also the relationships between the shareholders, the company, the public and the government • Contains 658 sections
Section 209
• Section 209. Books of account to be kept by company • (1) Every company shall keep at its registered office proper books of account with respect to(a) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure take place; (b) all sales and purchases of goods by the company; (c) the assets and liabilities of the company; [and] (d) in the case of a company pertaining to any class of companies engaged in production, processing, manufacturing or mining activities, such particulars relating to utilisation of material or labour or to other items of cost as may be prescribed, if such class of companies is required by the Central Government to include such particulars in the books of account: Provided that all or any of the books of account aforesaid may be kept at such other place in India as the Board of directors may decide and when the Board of directors so decides, the company shall, within seven days of the decision, file with the Registrar a notice in writing giving the full address of that other place.
Section 211
• Section 211. Form and contents of balance sheet and profit and loss account
• (1) Every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of this section • (2) Every profit and loss account of a company shall give a true and fair view of the profit or loss of the company for the financial year • (3A) Every profit and loss account and balance sheet of the company shall comply with the accounting standards • (3B) Where the profit and loss account and the balance sheet of the company do not comply with the accounting standards, such companies shall disclose in its profit and loss account and balance sheet, the following, namely
a) the deviation from the accounting standards; (b) the reasons for such deviation; and (c) the financial effect, if any, arising due to such deviation
Section 372
• Section 372. Purchase by company of shares, etc., of other companies • No company can acquire shares in any other “body corporate” through “subscription purchase or otherwise” for an amount exceeding 60 per cent of the acquiring company’s share capital and free reserves or 100 per cent of its free reserves, whichever is higher, after loans, guarantees and investments • Doing so would require shareholder authorisation through a special resolution passed in a general meeting • Such a resolution has to be passed only through a postal ballot and with advance intimation to the RoC • Violating Section 372A would make the officers-in-default (which include the managing director, company secretary and whole time director) liable for punishment, which includes a fine of Rs 50,000 or imprisonment up to two years
Section 628
• Section 628. Penalty for False Statements
If in any return, report, certificate, balance sheet, prospectus, statement or other document required by or for the purposes of any of the provisions of this Act, any person makes a statement (a) which is false in any material particular, knowing it to be false; or (b) which omits any material fact knowing it to be material; he shall, save as otherwise expressly provided in this Act, be punishable with imprisonment for a term which may extend to two years, and shall also be liable to fine.
Section 629
• Section 629. Penalty for False Evidence If any person intentionally gives false evidence –
(a) upon any examination upon oath or solemn affirmation, authorized under this Act; or (b) in any affidavit, deposition or solemn affirmation, in or about the winding up of any company under this Act, or otherwise in or about any matter arising under this Act;
he shall be punishable with imprisonment for a term which may extend to seven years, and shall also be liable to fine.
Corporate Governance
• Lack of majority shareholder approval & transparency in Maytas deal • Raju was on the executive board of ISB & had been making donations and contributions to the premier business school • PwC’s remuneration rose sharply by nearly 80% in the last 4 years
• About corporate governance • Set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled; also focuses on stakeholders • Principles commonly include shareholder rights, responsibilities of the board, integrity and transparency
Listing Agreement
• 3 violations of Clause 49, Listing Agreement have been made: ? Half of the board size should be non-executive directors and half of the board size should be independent directors. Since the resignation of the four directors, the board size has reduced to five with two independent directors and three executive directors. ? At least three members of the audit committee should be there out of which two-thirds of the members should be independent directors. Previously, the size of the audit committee was four members out of which two members have already resigned. So, there also the minimum requirement of three members on the audit committee has not been complied with. ? There is a time period of 180 days available to the board to fill in the gap of an independent director About Clause 49, Listing Agreement SEBI monitors and regulates corporate governance of listed companies in India through Clause 49 Was amended in 2003 to redefine independent directors, audit committees, financial disclosures, code of conduct, etc; a whistleblower policy was also included On independent directors: "All fees/compensation, if any, paid to non-executive directors, including independent directors, shall be fixed by the board of directors and shall require previous approval of shareholders in general meeting. The shareholders' resolution shall specify the limits for the maximum number of stock options that can be granted to non-executive directors, including independent directors, in any financial year and in aggregate."
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Sarbanes-Oxley Act
• Satyam has come to be called India’s Enron • Satyam is governed by SEC & SOX is applicable to it as it has been listed on NYSE since 2001 • The PCAOB examined the Indian arm of PwC (Satyam’s auditor since 2000) in 2008 • About SOX • Following the accounting scandals of Enron & WorldCom, the Sarbanes-Oxley Act (SOX) was enacted in 2002 • It is also known as Public Company Accounting Reform and Investor Protection Act of 2002 • It has 11 titles • The legislation established new or enhanced standards for all US public company boards, management, and public accounting firms • The Act established a new quasi-public agency, the Public Company Accounting Oversight Board (PCAOB), which is charged with overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies. The Act also covers issues such as auditor independence, corporate governance, internal control assessment, and enhanced financial disclosure.
Company Bill 2008
• Introduced in October 2008 by Ministry of Corporate Affairs • Aims to keep Indian business globally competitive and future- ready • It will replace the Companies Act, 1956
• New Dynamic initiatives include:
• • • • • • • • • MCA 21 E Governance project Introduction of a new Limited Liability Partnership Law Comprehensive Revision of Companies Act, 1956 Indian Institute of Corporate Affairs (IICA) National Foundation for Corporate Governance (NFCG) New Accounting Standards for reforms Reaching out to investors through education and awareness Rebuilding Indian Corporate Law Services Transforming Regulatory framework of effective enforcement
References
• • • • • • • • • • • • • ibnlive.in.com www.time.com www.business-standard.com www.livemint.com www.vakilno1.com/ economictimes.indiatimes.com en.wikipedia.org www.thehindubusinessline.com www.legalserviceindia.com www.satyam.com www.rediff.com/money/satyam.html infotech.indiatimes.com CMIE database
Thank You!
doc_615674241.pptx
Describing how the fraud at satyam happened.
The Satyam Case
The Company
• Was founded in 1987 by Ramalinga Raju and DVS Raju (brothers-in-law) in Hyderabad • Started Satyam Renaissance, Satyam Infoway, Satyam Spark Solutions & Satyam Enterprise Solutions in the 90s • Nipuna, Satyam’s BPO arm was started in 2002 • Has rapidly and consistently grown across industries, geographies, international clients, awards and stature • Is a key player in the IT, consulting, systems integration, and outsourcing solutions space • Has domain expertise in verticals such as Automotive, Banking & Financial Service, Insurance & Healthcare, Manufacturing, Telecom, Infrastructure, Media, Entertainment, and Semiconductors • Is India’s 4th largest software services company • Is part of the SWITCH companies • Is present in 6 continents, 65 countries & 20 industries • Has up to 52000 employees & 690 clients • Won the Golden Peacock award (administered by WCFCG) for excellence in corporate governance in 2008 (now stripped of it) • Pattern of shareholding: promoters ~2%, institutional investors ~60%, general public ~13%
The Raju Brothers
Ramalinga Raju • Ex Chairman, Satyam • Hails from a family of farmers from Vijaywada • Is an MBA from Ohio University • Has 2 sons – Teja Raju (CEO, Maytas Infra) & Rama Raju (Vice Chairman, Maytas Properties) • Started a textile business in 1977 and then a real estate business • Founded Satyam in 1987 with 20 employees • Has won several awards
? ? ? ? ? Ernst & Young Entrepreneur of the Year Services Award 1999 Dataquest IT Man of the Year Award 2000 CNBC's Asian Business Leader - Corporate Citizen of the Year Award, 2002 Lifetime Achievement Award, given by Hyderabad Management Association (HMA), 2005 E&Y Entrepreneur of the Year 2007 ( Revoked after the scam )
B. Rama Raju • Ex MD/CEO, Satyam • Is Ramalinga Raju’s younger brother • Is an MBA from Loredo State University, Texas • Has served as a director with Maytas Infra • Was also on the board of Satyam BPO & Satyam Venture Engineering Services
Timeline of Events
• Dec 16 – Satyam announces that it is buying 51% stake in Maytas Infra & 100% stake in Maytas Properties in a $1.6 billion deal. The decision comes in for severe criticism. • Dec 17 – Under pressure, the deal is called off within 12 hours. Satyam’s stock dips 30% to close at Rs. 158.05. • Dec 23 – The World Bank confirms it has banned Satyam for eight years for bribery • Dec 26 – Independent director, M. Srinivasan resigns • Dec 29 – 3 more independent directors resign
? M. Rammohan Rao, Dean, ISB ? Vinod Dham, VP, Intel & Pentium chip inventor ? Krishna Palepu, Senior Dean, HBS
• Jan 7 – Ramalinga Raju resigns, admits to fraud. He says the company's cash and bank balance sheet has been inflated and fudged to the tune of Rs 5,040 crore.
The Maytas Deal
• Deal involved acquiring 100% stake in Maytas Properties for $1.3 billion & a majority 51% stake in Maytas Infra for $0.3 billion • Raju stated that the deal was struck to diversify the company’s business & make it less vulnerable to global risk; to stave off takeovers; and as a last ditch attempt to close profitability gaps • Decision was approved by the board comprising independent directors but was met with severe investor revolt; criticism was centered around such a huge spending during the slowdown & lack of minority shareholder approval • Listed companies are bound by SEBI's Listing Agreement, which calls for certain proportion of independent directors in the board for keeping a check on the management of companies and work as an oversight mechanism. Apart from value addition they are also entrusted with the task of representing the financial interests of others investors. The contention, rightly so, is that Satyam’s independent directors did not perform their duty. • Why was the deal dubious?
? ? ? ? ? ? Questions about corporate governance, especially the role of independent directors & transparency Deal would have wiped out Satyam’s surplus cash & put it $400 million in debt Related party transaction & benefit to shareholders Unrelated diversification; this diversification would have amounted to a change in the object clause of the company High valuations; Maytas Properties was valued at Rs. 91 lakh/acre while it realistically should have been around Rs. 40 lakh/acre Alternate structures of acquisition such as a merger through a stock swap were not even considered
The World Bank Ban
• Debarred Satyam from applying for contracts for 8 years • Reason cited was Satyam “providing improper benefits to bank staff” for favors & “lack of documentation on invoices” • WB’s VP Mohamed Muhasin had bought Satyam’s preferential shares in 2007. Whether this was done with shareholder approval is not known. Muhasin is no longer with the bank. • 5 year $10 million contract in 2003 ($100 million in 2007) to design, write & maintain information systems has not been renewed • Services included in the contract were ERP implementation, document management & integrated messaging system • WB has banned Wipro until 2011 for the same reason and Megasoft for “participating in a joint venture with bank staff while also conducting business with the bank” • Wipro has however, stated that its actions were in keeping with the then (2000) SECcompliant policy of the bank which has now been modified • TCS has been the beneficiary of a large portion of these contracts • Unconfirmed reports accuse Satyam of data theft from WB, which even the WB has clarified that it has no evidence of • Data theft was done by installing spy software on workstations
The Scandal & the Aftermath
• • • • • • Balance Sheet disclosures ? Inflated cash & bank balances of Rs. 50.4 billion as opposed to Rs. 53.6 billion ? Non existent accrued interest of Rs. 3.76 billion ? Overstated debtors position of Rs. 4.9 billion as opposed to reflected Rs. 26.5 billion Share price on Jan 7 reached a low of Rs. 11.50 Ramalinga Raju, Rama Raju (could be put away for 10 years) & Srinivas Vadlamani (ex-CFO) have been arrested PwC auditors, S. Gopalakrishnan & Srinivas Taluri have been arrested Satyam cut out from the 30-share benchmark index Sensex The new board of members comprises ? Deepak Parekh, Chairman, HDFC ? Kiran Karnik, ex-President, Nasscom ? C. Achutan, SEBI SEBI to investigate insider trading violations, embezzlement & other transgressions Serious Fraud Investigation Office to investigate Satyam, PwC & 325 other companies for violations of corporate law, (diversion of funds, etc.) Registrar of Companies to inspect books of accounts as allowed by Sec 209 A, Companies Act Enforcement Directorate to investigate violations of the Foreign Exchange Management Act (FEMA) and the Prevention of Money Laundering Act (PMLA) Inspector-General of Stamps & Registration to probe into land transactions of Ramalinga Raju IT department to investigate potential tax fraud CBI may coordinate the entire investigation , state CID is currently performing this function AS Murthy appointed CEO
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PricewaterhouseCoopers
• Though Raju claimed full responsibility for the accounting irregularities, commonly held opinion is that auditors of PwC were in the know & that the fraud could not have been possible without their participation • Major clients in India are Maruti Suzuki, United Breweries, United Spirits, GMR Infra, Piramal Healthcare and Marico • Glenmark Pharma has stated that its contract with PwC will now be reviewed • Institute of Chartered Accountants of India (ICAI) has decided to issue a show cause notice to PwC
The Clients
• Satyam claims that over 90% of its clients have promised to remain with it • Satyam has long-term strategic relationships with Unilever, Nestle, DuPont, Cisco, GE, Sony, Applied Materials • Other key clients include ArcelorMittal, Nissan Motors, Qantas Airways, General Motors • IT sourcing contracts of up to $200 million are up for renewal • In the context of the global recession, the scenario looks grim for Satyam as clients are adopting cost-cutting measures • Clients would prefer Satyam’s untainted competitors with clean track records of corporate governance • Applied Materials is likely to restructure the $200 million 5 year contract that it awarded to Satyam in 2008 • PwC, already in the fray, is reportedly planning to review its “continuance” with the company • GE, Cisco, Nestle Coca Cola have all expressed their decision to stay but are also closely monitoring the developments and considering alternative solutions • UK-based mobile and online payments firm Upaid Systems Ltd., which is an old client of Satyam, filed a motion in Texas district court, alleging that Satyam had devised a plan designed to deplete its assets and divert resources out of the company before a judgment is passed on its $1 billion lawsuit against the tech firm after the latter falsely levelled charges of fraud, forgery and breach of contract against its client • Competitors like TCS & Infosys, keeping in line with Nasscom’s guidance, have stated that they will desist from poaching Satyam’s clients and have admitted to having received offers
Those who have left
State Farm Insurance • Fortune 500 company, largest auto insurer in USA • Based in Bloomington, Illinois • The only company so far to have abandoned Satyam, it ended its contract within 10 days of the accounting scandal emerging • Satyam’s reaction has been nonchalant • Had been a client for almost a decade with about 400 Satyam employees at State Farm offices in the US • State Farm was reportedly uncomfortable with the uncertainty of Satyam’s future • Was able to sever its ties quickly since the nature of the outsourced jobs was basic (primarily claims processing). Other outsourcing partners may not be able to defect easily or quickly.
National Australia Bank • Has suspended all new contracts with Satyam, until the future is clearer
The Future
Potential buyers • Suitors are interested in buying parts of Satyam rather than the whole • iGate was interested in buying Satyam if its liabilities are not in excess of $1.25 billion but is said to have backed out now • Essar has evinced interest in Satyam's BPO business • Both Satyam & Tech Mahindra have shot down reports of a merger • Mindtree has denied its interest in an acquisition • Reports have also proclaimed HP, IBM & HCL’s interest in acquiring Satyam • The Spice Group & the Hinduja Group have both evinced interest in an acquisition • L&T is the keenest party with already 12% stake in the company Takeover code • An offer price under the current regulations would be the higher of the average of the past 6 months or the average of the past 2 weeks • Any group wanting to acquire a minimum 15% stake in a company must make an open offer to all shareholders based on a 26-week average share price • As per the existing SEBI guidelines, a company holding 15% stake in another company is mandated to make an open offer for another 20% stake • The highest quote in any competitive bid could be used as a benchmark for determining the open offer price for the company • The open offer price may be set at two-week average to reflect more genuine value in a shorter and more recent period • SEBI will also discuss how to compensate shareholders retrospectively if large amounts of cash siphoned off by Satyam promoters is recovered by investigators and returned to the company balance sheet at a future date
Industry Opinion
• Ganesh Natarajan, Chairman, Nasscom opined that Satyam is a one-off case: "We believe the entire IT sector will not be impacted much as we consider this as a specific case of a particular firm." • Nandan Nilekani, Co-Chairman, Infosys however felt otherwise: "This incident is a black-eye because we have been promoting Indian entrepreneurs, Indian corporate as the flagship of brand India and when one of the lot really has a deplorable behaviour then obviously it is not a good thing.” • Narayan Murthy, Chief Mentor, Infosys made a controversial statement which was later clarified: "We will not touch such a tainted company.”
Legal Action
• Raju can be prosecuted for violating provisions of mainly, the IPC, SEBI Act & Companies Law • General practice in India is to pick the crime that attracts the longest and harshest sentence and impose that • In the US, sentences are either aggregated or allowed to run consecutively • In rare cases, the US legal approach may be adopted • Kamalanatha vs. State of Tamil Nadu case, 2005 Double life sentence for rape and murder given by the Madras high court was upheld by the Supreme Court
Indian Penal Code
• Raju has been charged under 6 sections of the Indian Penal Code for falsification of accounts, cheating, forgery, fraud and breach of trust • Section 120B – criminal conspiracy • Section 409 – criminal breach of trust • Section 420 – cheating • Section 468 – forgery • Section 471 & 477A – falsification of accounts
• • • • About IPC, 1860 Came into force in 1862 Contains 511 sections in all An exhaustive document that covers crimes of all natures, including new age cyber crime
Section 120B
• Section 120A. Definition of criminal conspiracy When two or more person agree to do, or cause to be done, (1) An illegal act, or (2) An act which is not illegal by illegal means, such an agreement is designated a criminal conspiracy: Provided that no agreement except an agreement to commit an offence shall amount to a criminal conspiracy unless some act besides the agreement is done by one or more parties to such agreement in pursuance thereof. Explanation: - It is immaterial whether the illegal act is the ultimate object of such agreement, or is merely incidental to that object. • Section 120B. Punishment of criminal conspiracy (1) Whoever is a party to a criminal conspiracy to commit an offence punishable with death, [imprisonment for life] or rigorous imprisonment for a term of two years or upwards shall, where no express provision is made in this Code for the punishment of such a conspiracy, be punished in the same abetted such offence. (2) Whoever is a party to a criminal conspiracy other than a criminal conspiracy to commit an offence punishable as aforesaid shall be punished with imprisonment of either description for a term not exceeding six months, or with fine or with both.
Section 409
• Section 409. Criminal breach of trust by public servant, or by banker, merchant or agent
Whoever, being in any manner entrusted with property, or with any dominion over property in his capacity of a public servant or in the way of his business as a banker, merchant, factor, broker, attorney or agent, commits breach of trust in respect of that property, shall be punished with [imprisonment for life], or with imprisonment of either description for a term which may extend to ten years, and shall also be liable to fine.
Section 420
• Section 420. Cheating and dishonestly inducing delivery of property
Whoever cheats and thereby dishonestly induces the person deceived any property to any person, or to make, alter or destroy the whole or any part of a valuable security, or anything which is signed or sealed, and which is capable of being converted into a valuable security, shall be punished with imprisonment of either description for a term which may extend to seven years, and shall also be liable to fine.
Section 468
• Section 468. Forgery for purpose of cheating
Whoever commits forgery, intending that the [document or Electronic Record forged] shall be used for the purpose of cheating, shall be punished with imprisonment of either description for a term which may extend to seven years, and shall also be liable to fine.
Section 471
• Section 471. Using as genuine a forged document or electronic record
Whoever fraudulently or dishonestly uses as genuine any [document or electronic record] which he knows or has reason to believe to be a forged [document or electronic record], shall be punished in the same manner as if he had forged such [document or electronic record]. • Imprisonment up to seven years and a fine
Section 477A
• Section 477A. Falsification of accounts
Whoever, being a clerk, officer or servant, or employed or acting in the capacity of a clerk, officer or servant, wilfully, and with intent to defraud, destroys, alters, mutilates or falsifies any [book, electronic record, paper, writing], valuable security or account which belongs to or is in the possession of his employer, or has been received by him for or on behalf of his employer, or wilfully, and with intent to defraud, makes or abets the making of any false entry in, or omits or alters or abets the omission or alteration of any material particular of any material particular form or in, any such [book, electronic record, paper, writing], valuable security or account, shall be punished with imprisonment of either description for a term which may extend to seven years, or with fine, or with both. Explanation-It shall be sufficient in any charge under this section to allege a general intent to defraud without naming any particular person intended to be defraud without naming any particular person intended to be defrauded or specifying any particular sum of money intended to be the subject of the fraud, or any particular day on which the offence was committed.
SEBI
• SEBI regulation will apply for violating stock market laws & other statutory violations, which include unfair trade practices, insider trading regulation and takeover code. Relevant regulations could be:
? ? ? ? ? SEBI (Prevention of Fraudulent and Unfair Trade Practices) Regulations, 2003 punishable under Section 24(1) of the SEBI Act, 1992 SEBI (Prohibition of Insider Trading) Regulations, 1992 SEBI (Merchant Bankers) Rules and Regulations, 1992 SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 Securities Contract (Regulations) Act, 1956
• • • • • •
Imprisonment could be up to 10 years and a fine of Rs. 25 crores or both Soon, SEBI will legislate that, in their quarterly statements, companies would be required to disclose the percentage of shares encumbered within the overall promoter holding It will also make it compulsory for promoters to disclose their shareholding if part of it is pledged or hypothecated About the SEBI Act, 1992 The act was modeled on the benchmark FSAP (Financial Services Assessment Programme) introduced by World Bank & IMF Imprisonment and monetary penalty could be awarded "if any person contravenes or attempts to contravene or abets the contravention of the provision of this Act or of any rules or regulations made there under".
Section 24
• Section 24. Offences
(1) Without prejudice to any award of penalty by the adjudicating officer under this Act, if any person contravenes or attempts to contravene or abets the contravention of the provisions of this Act or of any rules or regulations made there under, he shall be punishable with imprisonment for a term which may extend to one year, or with fine, or with both. (2) If any person fails to pay the penalty imposed by the adjudicating officer or fails to comply with any of his directions or orders, he shall be punishable with imprisonment for a term which shall not be less that one month but which may extend to three years or with fine which shall not be less than two thousand rupees but which may extend to ten thousand rupees or with both.
Fraudulent and Unfair Trade Practices Regulations, 2003
• Fraud includes an active concealment of a fact by a person having knowledge or belief of the fact; a promise made without any intention of performing it; a representation made in a reckless and careless manner whether it be true or false; any such act or omission as any other law specifically declares to be fraudulent, and deceptive behaviour by a person depriving another of informed consent or full participation.
Insider Trading – What is it?
• Insider trading is the trading of a corporation's stock or other securities (e.g. bonds or stock options) by individuals with potential access to non-public information about the company. In most countries, trading by corporate insiders such as officers, key employees, directors, and large shareholders may be legal, if this trading is done in a way that does not take advantage of non-public information. The Insider Trading Act is governed by SEBI Regulations,1992 and The Company Act,1956 Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 An “insider” means any person who (is) is or was connected with the company or is deemed to have been connected with the company and who is reasonably expected to have access to unpublished price sensitive information in respect of securities of a company, or (ii) has received or has had access to such unpublished price sensitive information. Under the present SEBI (Prohibition of Insider Trading) Regulations, 1992 the shareholder/director/officer of a listed company is required to disclose to the company information regarding the shareholding or voting rights within 4 working days of receipt of intimation of allotment of shares or the acquisition or sale of shares or voting rights or of becoming the director or officer of the said company, as the case may be.
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Insider Trading at Satyam
• A 12 member team of Serious Frauds Investigation Officers prepared an interim report into the fraud and insider trading was one of the charges against the founders of the company • Ramalinga Raju and his brother through their firm (SRSR Holdings) admitted that their stake in Satyam of around 8.3 percent(around 5.57 crore shares) has been pledged with the lenders • What raised many eyebrows was that between December 23rd 2008 and January 5th 2008, the lenders started to offload the Satyam shares. It was a coordinated action by the lenders, who gave money to Mr Raju, to get rid of shares day before Raju revealed the scam and its share plunged. • After the sale in the open market, SRSR Holdings has around 2.3 percent stake in Satyam(which of course, include the pledges shares) • Also, Mr Raju had floated companies like Bangar Agro Farms, Amaravathi Greenlands, Arjuna Farms etc. which had borrowed huge amount of cash by pledging Satyam shares to the institutional investors • On Jan7th, SEBI ordered an investigation into the affairs of buying and selling or dealing with the Satyam share
Insider Trading at Satyam
• Also, it is believed that Ramalinga Raju pledged his holdings at the time when the stock was quoting at a higher level and hence they would have pocketed around 1230 crores till now, which are worth around 70 crores now.He also sold 92,000 shares on a single transaction which raises suspicion and was a perfect case for insider trading. • Now, Company Law Board(CLB) has prevented Ramalinga Raju and other top functionaries not to sell or mortgage their shares and other assets without prior permission. • SEBI is right now examining whether, in law, pledging of shares amounts to insider trading. The SEBI Committee, as the report importantly adds, will also consider whether the law should be amended whereby pledge of Promoters’ shares would now be required to be disclosed. • Pledge may be for many reasons – for raising of finance for persons or corporate purposes or even further acquisition of shares, etc. In fact, if funds are raised by Promoters for financing further acquisitions of shares, then this may be even indicative of their own confidence in the Company. Of course, in some cases, this disclosure may help initiating investigation of the bona fide nature of the pledge. • If in the heat and pressure of action, to somehow find the Promoters of Satyam guilty of Insider Trading, a stretched interpretation is taken that any pledge of shares should also be deemed to be Insider Trading and it can cause a serious crisis to the whole corporate world generally. Firstly, Promoters of numerous other companies would also be deemed to have committed Insider Trading through pledge. Secondly, this process may bring out the real picture of the status of finances of Promoters in India post stock market meltdown!
Insider Trading – The Details
• Current CEO Mr. AS Murthy sold 40,000 shares of Satyam Computers between December 12 and December 16 2008, days before the Maytas deal was announced. Mr. Murthy very frequently sold his shares from October 2006. He has sold around 3,14,763 ESOPs till now at a regular interval. • Jailed CFO Mr. Srinivasa Vadlamani sold in all 3.65 lakh shares till now during the period from mid 2006 till mid 2008. He is the highest by any Satyam employee.
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Mr Ram Mynampati, interim president, sold around 1.83 lakh shares in Indian market and 56250 of ADS during the same time
• Mr. V Murali , Senior Vice President, sold around 1.71 lakh shares during the same time • Mr. TR Anand, COO, sold around 1.41 lakhs shares • Mr. Manish Mehta, sold around 1.01 lakh shares • Most of these shares were sold between mid-2006 and mid-2008 when the Satyam's scrip ruled high between Rs. 350 and Rs. 480, fetching fat sums. • BSE is working in tandem with SEBI in analysing Satyam Computer’s trading data to find out if there was insider trading.
Legal Violations
• Section 205A: Deals with the case of Unpaid dividend to be transferred to special dividend account • Section 207: Specifies the Penalty for failure to distribute dividends within thirty days • Section 272 : Deals with respect of certain contracts relating to sale, purchase or supply of any goods, materials or services it is obligatory for the concerned company to obtain necessary consent of its board of directors. Also, deals with the penalty for the director who doesn’t hold any shares.
• Section 299: Deals with the Disclosure statements
• Section 372A of the Company Act,1956
eals with inter corporate Loan, Investment, Guarantee and Securities in connection with loanCompanies Act
• Can be charged under Companies Act for large-scale fudging of company’s books • Imprisonment can range between 6 months & 7 years along with a fine under Sections 209, 628 & 629 • Under section 628 of the Companies Act, which deals with misrepresentation of accounts, Raju could be punished for a maximum of 2 years along with penalty. However, the punishment term could be extended to 7 years for producing false affidavits and other documents. • Violations of Sections 370 & 372 have also been made • Section 370 of the Companies Act deals with loans to companies under the same management. Under this Section, a company could not give loans or any form of guarantee to companies under the same management unless it has been approved by a special board resolution. • Section 372 deals with purchase of shares of one company by another • About Companies Act, 1956 • Basic law which governs the creation, continuation, the winding up of companies and also the relationships between the shareholders, the company, the public and the government • Contains 658 sections
Section 209
• Section 209. Books of account to be kept by company • (1) Every company shall keep at its registered office proper books of account with respect to(a) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure take place; (b) all sales and purchases of goods by the company; (c) the assets and liabilities of the company; [and] (d) in the case of a company pertaining to any class of companies engaged in production, processing, manufacturing or mining activities, such particulars relating to utilisation of material or labour or to other items of cost as may be prescribed, if such class of companies is required by the Central Government to include such particulars in the books of account: Provided that all or any of the books of account aforesaid may be kept at such other place in India as the Board of directors may decide and when the Board of directors so decides, the company shall, within seven days of the decision, file with the Registrar a notice in writing giving the full address of that other place.
Section 211
• Section 211. Form and contents of balance sheet and profit and loss account
• (1) Every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of this section • (2) Every profit and loss account of a company shall give a true and fair view of the profit or loss of the company for the financial year • (3A) Every profit and loss account and balance sheet of the company shall comply with the accounting standards • (3B) Where the profit and loss account and the balance sheet of the company do not comply with the accounting standards, such companies shall disclose in its profit and loss account and balance sheet, the following, namely
a) the deviation from the accounting standards; (b) the reasons for such deviation; and (c) the financial effect, if any, arising due to such deviationSection 372
• Section 372. Purchase by company of shares, etc., of other companies • No company can acquire shares in any other “body corporate” through “subscription purchase or otherwise” for an amount exceeding 60 per cent of the acquiring company’s share capital and free reserves or 100 per cent of its free reserves, whichever is higher, after loans, guarantees and investments • Doing so would require shareholder authorisation through a special resolution passed in a general meeting • Such a resolution has to be passed only through a postal ballot and with advance intimation to the RoC • Violating Section 372A would make the officers-in-default (which include the managing director, company secretary and whole time director) liable for punishment, which includes a fine of Rs 50,000 or imprisonment up to two years
Section 628
• Section 628. Penalty for False Statements
If in any return, report, certificate, balance sheet, prospectus, statement or other document required by or for the purposes of any of the provisions of this Act, any person makes a statement (a) which is false in any material particular, knowing it to be false; or (b) which omits any material fact knowing it to be material; he shall, save as otherwise expressly provided in this Act, be punishable with imprisonment for a term which may extend to two years, and shall also be liable to fine.
Section 629
• Section 629. Penalty for False Evidence If any person intentionally gives false evidence –
(a) upon any examination upon oath or solemn affirmation, authorized under this Act; or (b) in any affidavit, deposition or solemn affirmation, in or about the winding up of any company under this Act, or otherwise in or about any matter arising under this Act;
he shall be punishable with imprisonment for a term which may extend to seven years, and shall also be liable to fine.
Corporate Governance
• Lack of majority shareholder approval & transparency in Maytas deal • Raju was on the executive board of ISB & had been making donations and contributions to the premier business school • PwC’s remuneration rose sharply by nearly 80% in the last 4 years
• About corporate governance • Set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled; also focuses on stakeholders • Principles commonly include shareholder rights, responsibilities of the board, integrity and transparency
Listing Agreement
• 3 violations of Clause 49, Listing Agreement have been made: ? Half of the board size should be non-executive directors and half of the board size should be independent directors. Since the resignation of the four directors, the board size has reduced to five with two independent directors and three executive directors. ? At least three members of the audit committee should be there out of which two-thirds of the members should be independent directors. Previously, the size of the audit committee was four members out of which two members have already resigned. So, there also the minimum requirement of three members on the audit committee has not been complied with. ? There is a time period of 180 days available to the board to fill in the gap of an independent director About Clause 49, Listing Agreement SEBI monitors and regulates corporate governance of listed companies in India through Clause 49 Was amended in 2003 to redefine independent directors, audit committees, financial disclosures, code of conduct, etc; a whistleblower policy was also included On independent directors: "All fees/compensation, if any, paid to non-executive directors, including independent directors, shall be fixed by the board of directors and shall require previous approval of shareholders in general meeting. The shareholders' resolution shall specify the limits for the maximum number of stock options that can be granted to non-executive directors, including independent directors, in any financial year and in aggregate."
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Sarbanes-Oxley Act
• Satyam has come to be called India’s Enron • Satyam is governed by SEC & SOX is applicable to it as it has been listed on NYSE since 2001 • The PCAOB examined the Indian arm of PwC (Satyam’s auditor since 2000) in 2008 • About SOX • Following the accounting scandals of Enron & WorldCom, the Sarbanes-Oxley Act (SOX) was enacted in 2002 • It is also known as Public Company Accounting Reform and Investor Protection Act of 2002 • It has 11 titles • The legislation established new or enhanced standards for all US public company boards, management, and public accounting firms • The Act established a new quasi-public agency, the Public Company Accounting Oversight Board (PCAOB), which is charged with overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies. The Act also covers issues such as auditor independence, corporate governance, internal control assessment, and enhanced financial disclosure.
Company Bill 2008
• Introduced in October 2008 by Ministry of Corporate Affairs • Aims to keep Indian business globally competitive and future- ready • It will replace the Companies Act, 1956
• New Dynamic initiatives include:
• • • • • • • • • MCA 21 E Governance project Introduction of a new Limited Liability Partnership Law Comprehensive Revision of Companies Act, 1956 Indian Institute of Corporate Affairs (IICA) National Foundation for Corporate Governance (NFCG) New Accounting Standards for reforms Reaching out to investors through education and awareness Rebuilding Indian Corporate Law Services Transforming Regulatory framework of effective enforcement
References
• • • • • • • • • • • • • ibnlive.in.com www.time.com www.business-standard.com www.livemint.com www.vakilno1.com/ economictimes.indiatimes.com en.wikipedia.org www.thehindubusinessline.com www.legalserviceindia.com www.satyam.com www.rediff.com/money/satyam.html infotech.indiatimes.com CMIE database
Thank You!
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