Satyam

Even as much of the corporate India and the media are debating the fallout of B Ramalinga Raju’s

revelations about the mismanagement of finances at Satyam Computer Services, it is not yet clear what kind of offences the firm Satyam and his Chairman have committed. This would be vital for charge-sheeting the company chief and the company under the Court of Law as also other possible accomplices in this fraud including auditors and company directors. Market regulator, the Securities and Exchange Board of India (SEBI) has already initiated investigation into a number of issues related to buying, selling or dealing in shares of Satyam Computer Services. One obvious offence that could be leveled against Raju is that of cheating and fraud which is quite evident from the letter he has written to SEBI and Exchanges. But the enforcement agencies would need to probe further into financial records and transactions and come out with clear evidence on the intention of Ramalinga Raju to cheat the shareholders and regulatory agencies. One of the top items on SEBI’s agenda is to find out whether the promoter and the company had contravened any of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003. National Association of Small Investors (NASI), a registered NGO, has said it will file a complaint with the Economic Offences Department against Satyam for cheating shareholders and investors. The Satyam Board will meet as scheduled on January 10 to discuss the issues as well as actions emanating from the events of Wednesday, according to interim CEO, Ram Mynampati. The crucial issue in this Satyam fraud is the role of auditors, Pricewaterhouse Coopers and their responsibility for jacking up the figures in balance sheets so as to mislead anyone having stakes in the company. According to Namrata Mehta, Corporate Lawyer, Economic Laws Practice, the Indian laws are not clear on whether action can be taken by a company and shareholders against the auditors. “The contract that the auditor has with the company is not a contract the shareholders or other stakeholders are privy to. Hence, under Indian law it would be difficult for the shareholders or any other stakeholder to take any action against the auditors under the Law of Contract ”.Even if the company wants to take an action against the auditors, the maximum liability under the contracts will be usually restricted to the fees they have charged from the company. For shareholders action in law can be taken only in tort and for that they have to satisfy the Court on the following counts, Namrata Mehta said: a) That the auditors owe a duty of care to the shareholders and other stakeholders b) Tat the shareholders relied upon the auditors c)There was a breach of such duty, and d)Lastly that the shareholders suffered actual losses.

In Caparo Industries Plc v. Dickman, the plaintiffs being the investors, made a bid for a company relying on the accuracy of the accounts prepared by the auditors of such company. There was a negligent inaccuracy which resulted in huge economic losses to the investors. The investors sue to auditors in the capacity of shareholders and potential investors. The House of Lords held that the three criteria for imposition of duty of care were forsee ability of damage, proximity of relationship and the reasonableness or otherwise of imposing a duty. The statement made by the auditors must be known to have been relied upon for the purpose of any transaction to impose a duty of care on the auditors. The auditors do not owe any duty of care to the public at large or individual shareholders, but to the body of shareholders as a whole as the purpose for which accounts are prepared and audited is to enable the shareholder as a body to exercise informed control over the company. ”How an Indian Court will view the liability of the auditors of Satyam will depend upon the extent to which the Court is convinced about a claim for negligence. Indian Courts have been notoriously slow to provide final decisions and are also known for awarding relatively smaller sums in damages,” Namrata Mehta said.

Meanwhile many feel that if the two pending bills in Parliament related to company affairs- The Companies Bill 2008 and Limited Liability Partners Act were passed earlier, stringent action could have been taken against corporate fraudsters and protect the interest of shareholders. The Union Cabinet which approved the bill moved by Ministry of Corporate Affairs said that The Companies Bill, 2008 seeks to enable the corporate sector in India to operate in a regulatory environment of best international practices that fosters entrepreneurship, investment and growth and provides for :(i) The basic principles for all aspects of internal governance of corporate entities and a framework for their regulation, irrespective of their area of operation, from incorporation to liquidation and winding up, in a single, comprehensive, legal framework administered by the Central Government. In doing so, the Bill also harmonizes the Company law framework with the imperative of specialized sectoral regulation (ii) Articulation of shareholders democracy with protection of the rights of minority stakeholders, responsible self-regulation with disclosures and accountability, substitution of government control over internal corporate processes and decisions by shareholder control. The Bill also provides for statutory recognition to audit, remuneration and stakeholders grievances committees of the Board and recognizes the Chief Executive Officer (CEO), the Chief Financial Officer (CFO) and the Company

Secretary as Key Managerial Personnel (KMP). And as far as auditing is concerned it nails responsibility on the auditors by clearly defining the role, rights and duties of the auditors defined as to maintain integrity and independence of the audit process. The Limited Liability Partnership Bill, 2006, provides for Limited Liability Partnership (LLP) form of a body corporate. Once the law passed, LLP will be a separate legal entity, liable to the full extent of its assets, with the liability of the partners being limited to their agreed contribution in the new business structure. No partner would be liable on account of independent or unauthorised actions of other partners or their misconduct.

It is high time policy makers take steps to ensure passage of the two pending acts in Parliament even as regulators like SEBI and exchanges need to step up their vigilance on irregularities indulged in by listed companies. Class action suits by aggrieved investors for damages and compensation could now take a big toll on Satyam's finances. The next spell of trouble is certain to be a probe by agencies like the CBI that could mean a long prison term of up to seven years as well as civil law suits. But what India lacks at this stage is that there is no coordination mechanism among the bodies to investigate the case. The nearest to that is the Serious Fraud Investigation Office, under the ministry of corporate affairs. But despite coming up about four years ago the agency is yet to secure any major conviction. The Registrar of Companies, Hyderabad. This was done under a series of Sections from 235 to 249 of the Companies Act. {citation:- financialexpress.com}

EFFECTS OF THE SATYAM SCAM