The infamous Satyam scam

Facts
Satyam Computers was once considered to be the rising and shining star of
Corporate India. It was formed in the year of 1987 by none other than Mr.
Ramalinga Raju with just twenty employees. Satyam Computers boomed and
progressed fastly during the period of 2003-2008 and by the end of March 2008,
it’s sales had reached as high as of US$467 with an unimaginable annual growth
compound rate of 35%. Around six months post ‘Satyam’ team received the
famous ‘Golden Peacock award’, in January, 2009, serious allegations of fraud
were categorically made and it was stongly contended that Mr. Raju had been
suppressing and consciously manipulating the accounts of Satyam Computers for
past years. Satymam Computers scandal is an example of one’s carelessness in
relation to its fiduciary responsibilities, collapse of ethic standards; fierce
competition and the need to impress stakeholders especially investors, analysts,
shareholders, and the stock market; low ethical and moral standards by top
management and, greater emphasis on short-term performance. 1

Issue of law
The charges under which the accused were booked by CBI, Hyderabad were
various provisions of the Indian Penal Code-  Section 120 B, 406, 420, 467, 471
and 477 A for violating various income tax laws.
Aftermath of the revelation This led to a complete downfall of the company. The
Citibank where Satyam maintained its bank accounts were frozen. Several
arrests were made including Mr. Raju and his brother. The BOD was disbanded
and the Central Government on its own motion appointed 10 new directors.
Satyam was removed from Sensex and Nifty. CBI took over the investigation and
filed three charge sheets.

The next concern for the government after happening of such events of great
concern was to somehow save this company.  This was done through the selling
of the company. The successful bidder in doing so was ‘Tech Mahindra’ which
overtook ‘Satyam’ and now it is known as ‘Mahindra Satyam’.

Mr. Raju was granted bail on the ground that the limitation period of filing the
charge sheet by the CBI had expired. Enforcement Directorate files a criminal
complaint against 47 persons and 166 corporate entities headed by Ramalinga
Raju. Ramalinga Raju and three others were given six months jail term by SFIO.

The Judge postponed the verdict citing voluminous documents. Ramalinga Raju
and nine others, two of their family members, were sentenced to seven years
rigorous imprisonment on Thursday in the country’s largest-ever corporate
fraud. Mr. Raju along with the other convicted individuals were out on a bail
given by a special court in Hyderabad2.

1
Corporate Accounting Fraud: A Case Study of Satyam Computers Limited,
Madan Lal Bhasin, SSRN-Id-2676467
2
Ibid
Judgment
The accused were found guilty of bogus inflation of the company’s revenue, the
accounts of the company were falsified, income tax return were falsified and the
invoices of the transactions were fabricated.

Mr Raju was granted bail on the ground that the limitation period of filing the
charge sheet by the CBI had expired. Enforcement Directorate files a criminal
complaint against 47 persons and 166 corporate entities headed by Ramalinga
Raju. Ramalinga Raju and three others were given six months jail term by SFIO.
The Judge postponed the verdict citing voluminous documents. Ramalinga Raju
and nine others, two of their family members, were sentenced to seven years
rigorous imprisonment on Thursday in the country’s largest-ever corporate
fraud. Mr Raju along with other convicted individuals were out on a bail given by
a special court in Hyderabad. [ii]The accused were found guilty of bogus inflation
of the company’s revenue, the accounts of the company were falsified, income tax
return were falsified and the invoices of the transactions were fabricated.

There were 10 accused in total (Let them be A1- A10) and all were found guilty
under Section 120-B and Section 420 of IPC, A1 and A2 were found guilty  under
409 of IPC, A3, A4, and A7 were founder guilty under Section 406 of IPC, A4 , A5
and A7 were found guilty under Section 419 of IPC, A1 to A5 and A6 to A9 were
found guilty under Section 467, Section 468 of IPC, Section 471 and 477A of IPC.
The ten accused were:-  Ramalinga Raju, Rama Raju, Vadlamani Seinivasu,
Subramani Gopalakrishnan, Talluri Srinivas, Byrrarju Suryanarayana Raju, G,
Ramakrishna, D. Venkapathi Raju, Ch. Srisailam and V. Suryanarayana Prabhakar
Gupta.

Now, we shall discuss the important regulatory bodies involved in

investigating this case.

SEBI
On 12th April 1992, under the provisions of the SEBI (Securities and Exchange
Board of India), SEBI was established. The Preamble of the Securities and
Exchange Board of India reads out the core function of the body which is “…to
protect the interests of investors in securities and to promote the development
of, and to regulate the securities market and for matters connected therewith or
incidental thereto”. This single body performs three functions:
1. Quasi-legislative: Rules and regulations are drafted,
2. Quasi-judicial: It gives orders and passes its rulings.
3. Quasi-executive: Investigation is done and enforces the orders.
Although this kind of composition of this body makes it very powerful, its orders
are checked by a higher authority, SAT (Securities Appellate Tribunal), the
appellate body3.
The Satyam case also changed the perspective of SEBI while discharging its
functions and nevertheless this had to be done since this scam is still the biggest
3
https://www.sebi.gov.in/about-sebi.html
scam in India’s corporate sector. Following the Satyam scam, SEBI has turned
instrumental and has started taking immediate and much effective actions.

Role of SEBI in the Satyam case

SEBI under Section 17 of the SEBI Act, 1992 took out an extensive investigation
into the conduct of Satyam and checked whether the provisions of the SEBI Act,
1992 and Rules, and Regulations framed have been violated. They also inspected
the available books of account and pertained to the financial statements of
Satyam. They also inspected the documents held by the auditors of Satyam which
was ‘Pricewaterhouse Coopers’.

Mr Raju in his declaration letter about his mischievous and fraudulent activities
claimed that the reason behind his declaration was because annually he was
juggling with the revenue figures because he couldn’t juggle with the
expenditure figures so easily, the gap between the ‘book’ profit and ‘actual profit’
kept on increasing every year. He went ahead to buy Maytas Infrastructure and
Maytas Properties in order to end the gap and show a real profit of the company
or else the company might die. His target was to wipe out the fictitious profits by
doing a real deal in which he ultimately failed and subsequently he wrote the
letter4.

After this breathtaking revelation which was being termed as the biggest
corporate fraud which had shaken everybody, SEBI had kept a target for itself to
sell off the company since it was the last resort through which the company
could have been saved. SEBI met with the government appointed Board Of
Directors, accountants, bankers, government officials and lawyers in order to
come up with a plan immediately.

All of them worked superbly and diligently and brought back the company’s
stability and confidence within the 100-day deadline. SEBI has geared up and
pulled up its socks after this scam and has enhanced its working. The SEBI chief
at the time of this case, Mr C.B. Dave said “Meanwhile, we are looking at some
long-term system improvement. There will be quite a few things we will learn
from this incident and we will take steps for necessary changes accordingly. 5”

SEBI relaxed the takeover norms at the request of the government-appointed

board of directors of Satyam and the Company Law Board (CLB) permitted
selection of the strategic investor fulfilling certain regulatory requirements. SEBI
laid down that the interested investor should buy the stake from the newly
issued shares amounting to 31 percent of the company’s share capital.

The Securities and Exchange Board of India (SEBI) approved to Satyam

Computer Services for choosing a strategic investor to acquire 51 percent of
stake in the embattled company through a global competitive bidding process
which led to the buying of Satyam Computer services by Tech Mahindra 6.

4
https://www.sebi.gov.in/about-sebi.html
5
Off SEBI hook?FRONTLINE, Volume 26-Issue 03, Jan 31- Feb 13, 2009
SAT (Securities Appellate Tribunal)
Securities Appellate Tribunal is a statutory body which was established under
the provisions of Section 15K of the Securities and Exchange Board of India Act,
1992. Its main function looks after the appeals in reference to the orders by the
SEBI or any adjudicating officer under the SEBI Act and to exercise jurisdiction,
powers, and authority conferred on the Tribunal by or under this Act or any
other law for the time being in force7

PwC (PricewaterhouseCoopers)
PricewaterhouseCoopers is a multinational professional services network
headquartered in London, United Kingdom. It is the second largest professional
services firm in the world.  It deals with the auditing work of huge organizations
and is the most reliable option.

In January 2009 PwC was criticised along with the promoters of Satyam, an
Indian IT firm listed on the NASDAQ, in a $1.5 billion fraud 8.

PwC wrote a letter to the board of directors of Satyam that its audit may be
rendered “inaccurate and unreliable” due to the disclosures made by Satyam’s
(ex) Chairman and subsequently withdrew its audit opinions 9.

Recent developments – Price waterhouse about the SEBI’s order and SAT
In the order given by SEBI on 10th January 2018, SEBI has come hard on PwC
with this order. It has imposed a ban on all the firms in the PwC network from
auditing listed companies and intermediaries (brokers) 10 for a period of two
years held guilty under the Satyam scam.  The 108-page SEBI’s order said that
they were not complying with the auditing standards and did not report such a
wide gap developing in the balance sheets of Satyam and PwC was deceitful
along with the main parties involved in the biggest corporate fraud. 11 The order
against PwC was passed as per Section 11 of the SEBI Act and the Prevention of
Fraudulent and Unfair Trade Practices(UFTP). Section 11 of the SEBI Act gives
authority to SEBI to pass orders in the favor of the investors 12.
Current development of the case
Following the ban on PwC, in an email conversation, the spokesperson of the
firm said, “We are disappointed with the findings of the Sebi investigations and
the adjudication order. The Sebi order relates to a fraud that took place nearly a
decade ago in which we played no part and had no knowledge of”13.

6
SEBI nod for Satyam to choose strategic investor, The Hindu, November 18,
2016
7
http://sat.gov.in/scripts/detailsat.asp?releaseId=E0000US1
8
”Satyam: A Rs 7,000cr Lie\”. The Times of India. 8 January 2009
9
\”PWC says Satyam audit opinions may be unreliable\”. Reuters. 14 January
2009
10
http://sat.gov.in/scripts/detailsat.asp?releaseId=E0000US1
11
Satyam case: Price Waterhouse moves SAT against Sebi ban, Live mint, 17th
January 2018
12
Ibid.
The Bombay High court had ruled in the year 2010 that ‘no direction can be
issued against PwC if there is only some omission without proof of connivance
and intent to fraud’, SEBI was probing the audit firm’s role in the accounting
fraud. PwC was appointed as the auditor of Satyam between 2000-2008. PwC
showed a complete negligence and carelessness while performing its practice of
auditing. According to SEBI, PwC showed a total disregard of stipulated auditing
practice which indicated their complicity in the manipulation.
Following these developments, PwC has decided to challenge the order passed
by SEBI in the SAT (Securities Appellate Tribunal). The petition filed is set aside
the order and remove the ban on an interim basis until the final order comes.
Conclusion
In wake of the biggest corporate fraud in India where India is the third largest
developing economy in entire Asia, its high time that India should take stringent
measures to fill in the loopholes so that the economy of our country is saved by
masterminds and greedy people. Though after the Satyam scam, the regulatory
bodies have advanced their functioning and have taken stringent measures
against the wrongdoers. The order against PwC can be seen as one example. It
shall be very interesting to see the development of this case when the appeal gets
heard at SAT.

13
Sebi bars Price Waterhouse: What is the firm\’s role in the Satyam scam?
Hindustan Times, 11th January 2018