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SEBI's Satyam Order: 5 Years Too Late?

Published on Sat, Jul 19,2014 | 15:54, Updated at Sat, Jul 19 at 15:59Source : |   Watch Video :

It changed the way regulators and the government design law & regulations. It has also prompted new rules of the game for auditors and independent directors. I am talking about the over Rs 7000 cr Saytam scam that Ramalinga Raju confessed to in 2009. 5 years later, the CBI is awaiting the trial court's decision, the Enforcement Directorate filed charges against the perpetrators just last year and it’s only this week that market regulator SEBI passed its order against Ramalinga Raju and 4 others. Is SEBI 5 years too late?  Will its evidence pass muster on appeal? And why is SEBI’s order silent on the role of Satyam’s auditors and its Board. Payaswini Upadhyay puts these questions to experts. 
“I would like to bring the following facts to your notice…”

That’s how the over Rs 7000 crore Satyam scam came to light- the then Chairman Ramalinga Raju confessed to inflated cash and bank balances, non-existent accrued interest, understated liabilities, overstated debtors, artificial revenue and operating margins.
After five and a half years of investigation, this week, the market regulator came out with the final order against former Chairman- Ramalinga Raju, Former Managing Director- Rama Raju; former CFO- Vadlamani Srinivas; former VP –Finance G Ramakrishan and former Internal Audit head Prabhakara Gupta.

SEBI sent the first show cause notice in March 2009 and then two supplementary ones in June 2009 and March 2010. And it’s only now that we have the final order. Did the regulator move fast enough?

SEBI’s first show cause notice was met with general denials by Satyam’s former management. In fact Ramalinga Raju’s argument in the CBI trial court is that he never made the confession.

The regulator provided the 5 accused with opportunities for personal hearing but to no avail. Over this five and a half year period, SEBI got the following responses from them
-         a request to keep the proceedings in abeyance till CBI trial court reaches a verdict
-         inability to find time to prepare responses
-         no access to documents to submit replies

On May 12 this year, SEBI gave the former Satyam management a final opportunity of personal hearing. This time, the accused requested permission to cross examine certain persons who provided evidence to SEBI. The regulator concluded that it was a ruse to delay the proceedings and issued its final order this week.

Tushad Cooper
Advocate, Bombay High Court
“In my view, definitely, SEBI could and should have acted more expeditiously. It could be accused on dragging it feet for an inordinately long period of time in order to give the notices sufficient opportunity so that they couldn’t be accused of violating natural justice- I think they overdid it.”
KRCV Seschachalam.
Former Deputy Legal Advisor, SEBI
“Its true that it took some 5 years for SEBI to pass an order but they swung into action immediately. As soon as the letter from Ramalinga Raju reached the Exchanges and SEBI, SEBI immediately started action. And incidentally, the show cause notice, on the basis of which the order has been passed, was given in March 2009- within 2 months means that by March 2009, they completed their investigation to the extent of securities market violations.”

SEBI’s order makes a case of 3 securities law violations against the former Satyam management

-         Violation of FUTP regulations
-         Insider trading
-         And violation of Clause 49 of the Listing Agreement.

Confirmation statements from banks, examination of Satyam’s system tools and information given by key employees led to SEBI’s findings of fraud and insider trading. Will the regulator’s evidence pass muster on appeal?
SEBI concludes violation of its FUTP regulations by pointing out the role of Satyam’s management in misreporting the financial statements, directing recording of bogus bank transfers, keeping forged FDs in their office etc.
KRCV Seschachalam.
Former Deputy Legal Advisor, SEBI
“As far as FUTP regulations are concerned, the Act restricts SEBI’s role to a fraud while dealing in securities. The actions, inactions, the commissions and omissions by these set of individuals, there is nothing done by them while dealing in securities; they have done it within their company. Therefore it is high time and we expecting SEBI to come out with a clear distinction between a corporate fraud and a securities fraud. So long they have done something within the realms of their company, it is a corporate fraud.”

As for insider trading violations – the SEBI order says all 5 accused sold shares knowing that the financials were fudged. A pledge of shares by Ramalinga Raju and Rama Raju was also included in this charge
SEBI also points to violation of Clause 49 by Rama Raju as the CEO and Vadlamani Srinivas as CFO as they provided false certifications on Satyam’s financial statements and transactions and internal financial controls.
Satish Kishanchandani
Co-founding Partner, DSK Legal
“With regards to insider trading- out of the two components- one they will be able to prove easily which is the unlawful gain from transfer of shares but SEBI may not be able to substantiate as strongly in the case of the pledge because if the notices can prove that they did not make any unlawful gain, then how can they be penalized for that.”
Tushad Cooper
Advocate, Bombay High Court
“Look, the argument is that they deal in these securities with an intent to benefit themselves – obviously, if the true state of affairs had been discloses, the price of those shares would have been lower. If the price of the shares would have been lower, they would not have been able to pledge the shares and realize the loan which they did realize. It is not necessarily that they got the benefit by taking the money. The money may have come to the company but they derived a great benefit being in control of the company to have that loan extended on the basis of the pledge of the shares. So, whilst once can legally argue both ways, according to me, it would be tenable to SEBI to indict them even in respect of the pledge of shares.”
Currently there are at least 3 other prosecutions underway- at the CBI trial court, an Enforcement Directorate case against Ramalinga Raju and 212 others under the Prevention of Money Laundering Act, and cases being pursued by the Serious Frauds Office and the Registrar of Companies.

While we’re yet to see the investigations of these various agencies reach fruition, the US securities market regulator SEC and Audit regulator PCAOB imposed largest ever penalties on Satyam’s auditor- PwC. Mahindra Satyam has paid USD 125 million to settle one class action in the US but another one against the independent directors was dismissed by the court. The SEBI order is silent on the liability of both – Satyam’s Board and its auditors.

SEBI itself is said to be investigating the auditors involved and in this week’s order the regulator refers to Board authorizations for Raju and Rama Raju to make any investments and place any fixed deposit from Satyam’s funds without any limit. SEBI notes this allowed the Rajus to control the alleged surplus funds of Satyam. Despite this the order does not seek to punish either the auditors nor the independent directors.

Satish Kishanchandani
Co-founding Partner, DSK Legal
“With regard to the Board, I think SEBI must have conducted an inquiry because they had conducted an investigation before issuing the show cause notice. And then they would have come to the conclusion which of the Directors or employees were involved in the alleged fraud. So I think the show cause notice may have been issued after that. May be after that they decided these are the only 5 noticees who could be held liable.”
Tushad Cooper
Advocate, Bombay High Court
“Perhaps there might be some case made out against the auditors the PwC auditors- who audited the accounts of the company. The question as to whether they were derelict in their duty – that is a matter which the court has also clarified falls within the purview of the Institute of Chartered Accountants. Whether civil liability would fall on those auditors, that again is a different matter. But concerning SEBI jurisdiction to look at it, it would be restricted only to the event that SEBI does find there is actual culpability with mens rea in the acts of those auditors.”
Rs 1850 crores + a 12% interest per annum starting Januray 2009. Roughly that comes to over Rs 3000 cr! The former Satyam management has been ordered to pay this amount within 45 days.  Considering that none of the proceedings against Satyam’s management have even reached fruition- forget the appeal process- it’s doubtful that SEBI would see this money anytime soon.

In Mumbai, Payaswini Upadhyay 


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