Dear Friends,

The given article is the part of my project which I had submitted in NLSIU in investment laws “investor protection a critical analysis with satyam fraud”. It is basically compilation of various views against the fraud and in order to research the cause and suggest the proper action needed.

Here I just want to share that one of my faculty has told commented of satyam fiasco in a philosophical way that “until the greed and thirst for money is there, such kind of frauds will always be there”. Very true, we can not change the human nature but what we can do is to provide enough knowledge to the investors and professional so that such greedy plans to get success in future.

    SATYAM FIASCO : UNCERTAINTIES

                Few months ago, Satyam Computer Services Ltd. ('Satyam') is one of the top four software service providers in India having lakhs of investors and over 50,000 employ ees. It serves 690 clients in 65 countries, including 185 Fortune 500 companies. The company received the 'Golden Peacock Award' for excel lence in corporate governance in 2008 by 'the UK based World Council for Corporate Governance and 'Best Corporate Governance Practice' by Inves tor Relations Global Rankings. But now, Situation is that the Government reconsti tuted the Board to protect the interests of the company and its stakehold ers.' The Ministry of Corporate Affairs ('MCA') appointed the Serious Fraud Investigation Office ('SFIO') to thoroughly investigate the Rs. 7,000 crore fraud and submit its report within three month; Meanwhile, the Company Law Board ('CLB') has restrained the key executives of Satyam from enter ing into any transaction in all assets owned by them, irrespective of in whose name the assets are registered.

                But the real uncertainty is that the “whistle blower” is not a person or body which is expected to be or established for such purpose. Surprisingly, he is the Project consultant of Delhi’s metro rail, E. Sreedharan, who was the first to smell a “political scandal” involving satyam chairman.

                Last year the Andhra Pradesh government awarded 12000 crore HyderabadMetro project to a consortium headed by Maytas Metro Ltd, a sister company of maytas infrastructure. Many say Raju's fall began the day Maytas won the Hyderabad metro rail contract. In a move that everybody found inexplicable, Maytas offered to pay money to win the contract, whereas all the other bidders asked for viability gap funding to make the project feasible. Project consultant E. Sreedharan of Delhi Metro Rail Corporation cried foul. But Raju was least bothered and the chief minister threatened to sue Sreedharan. The Maytas consortium then dropped him from the project. Looks like he was right all the way, as the truth is know to all of them later on. Let us take a look on those who are expected to be “whistle blowers”

 THOSE AUTHORITIES WHO FAILED TO ACT  

How can banks, or at least bankers not be involved?

Is it possible for a company to show its auditors that money exists in bank accounts without bankers giving them at least a fig leaf certificate? If the certificates were genuine my charge that bankers were involved stands proven. If they were forged, banks should find out how their names were misused.

Audit committee - what would its silence imply?

Under the corporate governance, requirements, among other things, the functions of the audit committee include the appointment, reappointment and if required the replacement or removal of the statutory auditor and the fixation of audit fees, Satyam’s auditor fee jumped from Rs 92 lakhs in 2004-05 fiscal to 1.69 crore the next year. But it was the financial year 2006-07 when PWC’s auditing fee shot phenomenally to Rs 4.31 crore.

                The chairman of the audit committee in the relevant years should have interrogated by the police as to what justification did the audit committee have for recommending such hike?

Company secretary - His seeming inertia, pregnant with meaning

The company secretary is the secretary of the audit committee. The role of the company secretary has to play the role of H conscious keeper. He is not just a ministerial official. As a principal officer it was his duty to guide the audit committee. If for any reason company secretary keeps quiet without ringing the warning bell he is only an officer in principle and not a principal officer. He has certainly failed and neglected to use his closer contacts with Board members.

Can the company's Board of directors escape their responsibility for acquiescence in the spree?

After the audit committee makes recommendations, the full Board had the duty to apply their independent mind. But no one seems to have expressed his or her reservation on such unjustified increases.

Shareholders' ignorance and apathy

Although the shareholders have to decide the auditors' remuneration, it is seen that no shareholder raises pertinent questions. Even the large sharehold ers like mutual funds who have equity research staff, do not raise such important issues. It is always said by the experts on capital markets that instead of retail shareholders mutual funds should be preferred since they can reign the managements. In the case of Satyam, such expectation is belied.

 Registrar of Companies: failure.

Under the companies Act, the Registrar of Companies is not just a registering authority, when annual reports are filed. He can ask for expla nations from the company management. He can also inspect company's books under section209A. Such, Alert actions may prevent frauds. He cannot decline to see, bear or speak.

Fraud office gets mandate, but not people.

The Serious Fraud Investigation Office (SFIO) has received the official mandate to begin work into the financial fraud committed by B Ramalinga Raju, former chairman & CEO of Satyam Computer Services. But the office, under the ministry of corporate affairs, is handicapped by a shortage of staff. A third of the posts, 32 of the 100-staff body, are lying vacant. The posts are in critical divisions like capital markets and financial transactions.

                All these facts thus indicate that in spite of all the rules and regulations, systems and machineries the “game” was played and none all the above discussed have not taken any initiative to smell it while performing the legal or moral duties.

                Let us further discuss those facts showing the loopholes in the present system : -

 SATYAM SCAM : LOOPHOLES

The following are the facts are indicating that there are some loopholes in satyam scandal, which need to be dealt with new system, rather than traditional way of the machineries: -

•    What are the assets and liabilities claimed to belong to or standing in the name of the Ramalinga Raju and Rama Raju clans - their spouses, their children (whether sons-in-law or their trusted employees), the numerous companies that they are alleged to have incorporated, the partnerships they have formed, and so on? We should have details of all gifts they have made during the last ten years, the major family or social functions they have performed, the expenditure they have incurred and so on.
•      The banks have always been the worst conspirators and at the same time, the most effective whistle-blowers, voluntarily or under compulsion of circumstances, in all scams of this nature. The scope for making more use of information in their possession should be examined. The fact so found should be taken to be evidence of their close connection or of their being among the group's name lenders. Where the same bearer/durbans/peons/servants carry cheques/ drafts, cash, etc., to or/and from banks, etc., that fact can also serve as evidence of the investment business in question belonging to the persons controlling the group under investigation.
•     There should be charts revealing how each company is owned /managed by the group. Satyam should be compelled to furnish details of all its shares which are charged/hypothecated/pledged for any debt, whether in the names of the members or in the names of others.
•     A panel of suitable accountants/auditors for deployment on deputation 'Foreign service' to private sector undertakings which need their services should be maintained by the Comptroller and Auditor general. Audit· rotation should not be confined to any single firm: no firm should be allowed to deal with the same large company or group of companies for more than three years. There should be an audit manual setting out what the auditor should check and how the checking or verification should be done.
•     If a case or group of cases involved in a scam is entrusted for investiga tion by a commission or a group of officers, it will always be desirable for it to have a chairman from outside the State, in view of the political of developments during the last decade, preferably a retired judge of the Supreme Court or a retired chief justice of the High Court who will have no axe to grind in the State to which the person under enquiry belongs or in which he has 'his head office.

                All the questions of law which have a bearing on the case, particularly those issues which point to the need for new legislation or an amendment of the existing law should be spelt out for the recommendations on, the commission/group, Where criminal or civil action is called for the recommendation should not merely be re quired to be specific with reference to the contraventions noticed under the different laws but also to be accompanied/supported by draft amend ments of the law or draft for the fresh legislation where one is found to be essential.

The three important issues for consideration in the Sat yam cases include the following:

1.        What is the role/responsibility of independent directors? Are they rubber stamps to affirm the decisions already reached by the promoters or to examine the proposal before approval?

2.         Have the auditors exercised due diligence in performing audit?

3.        How do we check and prevent corporate frauds in future?

Continued …..

Latita iyer, Abhinav Singh, “Deccan deceit: the Asatyam saga”, the week, January 18^th, 2009. 17.

Jagannathan R, “Promoter,banker,crook”, DNA news line, January 15th, 2009 at p 9 .

Prof. Suresh Thakurdesai, “satyam episode - auditors’ remuneration is not fee for turning blind eye to management fraud”  88/3, Corporate law advisor, 186, February (1), 2009.

Ibid at page 188

Prof. Suresh Thakurdesai, “satyam episode - auditors’ remuneration is not fee for turning blind eye to management fraud” 88/3, Corporate law advisor, 188, February (1), 2009.

Surabhi, Fraud office gets mandate, but not people, the financial express, January 9^th 2009, at p 3

Srinivasan K, “Satyam episode - Concerns stemming from a corporate fraud”, 88/3, Corporate law advisor, 169, February (1), 2009.

Ibid at 170

Srinivasan K, “Satyam episode - Concerns stemming from a corporate fraud”, 88/3, Corporate law advisor, 170, February (1), 2009.

Kumar Naresh, “Satyam episode – Role of directors and auditors”, 88/3,Corporate law advisor,     184, February (1), 2009.