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Sanu Kumar (Legal Aspects of Business Assignment)
Sanu Kumar (Legal Aspects of Business Assignment)
(Deemed to be University)
Registration No:
BVP20212891
(Starting with BVP)
Table of Contents
1. Overview .................................................................................................................................. 4
3. Analysis .................................................................................................................................... 5
Role of independent directors under the companies act, 2013 [4] .......................................... 7
5. Conclusions .............................................................................................................................. 8
1. Investors ............................................................................................................................ 8
2. Board................................................................................................................................. 8
Abstract:................................................................................................................................... 9
Getting down to the details of governance, we can focus on five issues .............................. 14
7. References .............................................................................................................................. 15
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1. Overview
Satyam Computer Consultancy Limited was established on June 24 1987.The founder of the
organization was Mr. RamalingaRaju. CEO at the time of thescam was Mr. Ram Mynampati
and CFO was Mr. ValdamaniSrinivas. Satyam computer consultancy limited has its
headquarter at Hyderabad.
The Satyam Computer Services scandal was a corporate scandal that occurred in India in
2009 where chairman RamalingaRaju confessed that the company's accounts had been
falsified. This scandal is a big example of corporate governance failure in a company. The
Global corporate community was shocked and scandalized when the chairman of
Satyam, Ramalinga Raju resigned on 7 January 2009 and confessed that he had manipulated
the accounts by US$1.47-Billion.
The case involves violation of various norms of corporate governance. In February 2009,
CBI took over the investigation and filed three charge sheets (on April 7, 2009, November
24, 2009 and January 7, 2010), which were later clubbed into one. The case is still going on
in the Indian court.
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o Inflated cash and bank balance Rs.5040cr
o Non existent accrued interest Rs.376cr
o Understated liability of Rs.1230cr
o Overstated Debtor position of Rs.490cr
o Inflated staff by 12000 (Actual were 40000)
o Revenue of Rs.2700cr (Actual were Rs.2112cr)
o Operating margin to be 6494 cr(Actual were 61cr) INDIA’S LARGEST FRAUD-
Rs.7800crore( now estimated as 14000crore)
3. Analysis
• Corporate governance includes various parties:
o Shareholders
o Employees
o Management
o Bankers
o Government
• Governance issue at Satyam arose because of non fulfillment of obligation of the
company towards the various stakeholders. It proved a poor relationship with all the
stakeholders.
• It is well known that a shareholder has a right to get information from the organization,
such information could be with respect to the merger and acquisition. Shareholders
expect transparent dealing in an organization. They even have right to getthe financial
reporting and records.
• In the case of satyam, the above obligations were never fulfilled. The acquisition of
Maytas infrastructure and properties were announced without the consent of
shareholders. They were even provided with false inflated financial reports. The
shareholders were cheated
• Employees were shown with a inflated figure. The excess of employees in the
organization were kept under VIRTUAL POOL who received just 60% of their salaries
and several were removed. The entire scam had its impact on management. Questions
were raised over the credibility of management.
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• Any organization has its obligation towards the Government by means of timely payment
of taxes and abiding by the rules and laws framed up by the Government. As per the case
with satyam, the company did not pay advance tax for the financial year 2009. As per the
rule, the advance taxis to be paid 4 times a year; such was not fulfilled by them
• SCS was blacklisted by World Bank over charges of Bribery.
• It was declared ineligible for contracts to providing
o Improper benefit to bank staff.
o Failing to maintain documentation to support fees
Actual scenario:
• Despite the shareholders not being taken into confidence, the directors went ahead with
the management’s decision.
• The government too is equally guilty in not having managed to save the shareholders, the
employees and some clients of the company from losing heavily.
• Simple manipulation of revenues and earnings to show superior performance.
• Raising fictitious bills for services that were never rendered.
• To increase the Cash & bank balance correspondingly.
• Operating profits were artificially boosted from the actual Rs 61 crore to Rs 649 crore
• Its financial statements for years were totally false, cooked up
• Never had Rs 5064 crores (US$ 1.05 Billion) shown as cash for several years.
• Its liability was understated by $ 1.23 Billions
• The Debtors were overstated by 400 million plus.
• The interest accrued and receivable by 376 Millions never existed. So when the case
came in light following are the actions that has been taken:
o Nasscum sets up panel to avoid satyam like case in future- formed a corporate
Governance & ethics committee, chaired by N.R.Narayana Murthy (chairman and
chief mentor of Infosys.)
o Hinduja Global chalks out 100 day plan for satyam.
o 8 Year ban on satyam to be reviewed.
• Govt. orders CBI to probe fraud (concerned about 52000 employees)
o Serious fraud investigation office (SFIO)
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o Market regulation SEBI
o Institute of chartered accountancy India (ICAI)
o Andhra police
➢ Role of Auditors
PricewaterhouseCoopers was the statutory auditor of Satyam Computer Services when
the report of scandal in the account books of Satyam Computer Services broke. The
Indian arm of PwC was fined $6 million by the SEC (US Securities and Exchange
Commission) for not following the code of conduct and auditing standards in the
performance of its duties related to the auditing of the accounts of Satyam Computer
Services.
Following independent directors were fined for not doing their duty in shareholder’s
interest:
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• M RammohanRao: Former dean of Indian School of Business, Hyderabad, Rao
is now professor emeritus at ISB. Fined Rs 20,000
• VS Raju: Former IIT director is now retired. Fined Rs 20,000
• MangalamSrinivasan: Former professor in US universities, Mangalam served as
an advisor to Center for Kennedy School of Government of Harvard University.
Fined Rs 20,000
5. Conclusions
This is case depicts major failure of corporate governance. Various stakeholders should
take necessary precautions; the company should define proper code of conduct and
accounting standards.
1. Investors
• Investors play an important role in detecting financial position of a company.
• Investors must ensure that the share value which is listed is genuine and as per its
financial status.
• Institutional investors should take more responsibility.
• Information about the company should be latest, from trusted source, easily
accessible and correct.
• New regulation for information Act.
• Investors should take more care before investing.
• No risk involved if CEO is the founder of the company
2. Board
• Must monitor the ethical policies and the way they are being maintained in the company.
• Accountable for the financial information being projected.
• No to inactive board members
• Authority to independent board of directors.
• Clear understanding of responsibility between the board and next level employees.
• Qualified Board members
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3. Government Regulations, Policies and intervention
• Government should always plays an active role in the company affairs because the
company runs with the public money.
• The government must frequently check the company’s performance in the market and
take necessary steps in curtailing any malpractices or falsification.
• Government is not taking any corrective measures in case of any violations
• If the auditor do their work sincerely then any balance sheet and income statements
would show the fair value of the company’s financial records.
• Government intervention must be increased to have a foolproof mechanism in the
company policy matters
4. Accounting Standards
• Auditors main responsibility is to check fairness and trueness of financial statements.
• Proper Audit Tools
• Freedom for auditors
• Reputation of auditing firm/individual can’t avoid scandals.
• Most of the companies involved in mega scandals were audited by reputed auditing firms
Abstract:
Corporate governance is the set of processes, customs, policies, laws, and institutions
affecting the way a corporation is directed, administered or controlled. Corporate
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governance also includes the relationships among the many stakeholders involved and the
goals for which the corporation is governed. The principal stakeholders are the
shareholders, management, and the board of directors. Other stakeholders include
labor(employees), customers, creditors (e.g., banks, bond holders), suppliers, regulators,
and the community at large.
This article reveals various reasons for failure of Corporate Governance, Corporate
Governance conists of, various examples of Corporate Governance Failures like Enron,
Satyam, Cadbury, Wal-Mart, Xerox and why Corporate Governance failed in such big
organizations. Article also describes various mechanisms of Corporate Governance like
(1) Company's Act (2) Security law (3) Discipline of capital market (4) Nominees on
company board (5) Statutory audit (6) Codes of conduct etc. Some factors that influence
the Corporate Governance like ownership structure, Structure of company board,
financial structure, Institutional Environment etc. Various systematic problems in
Corporate Governance and Recent Corporate Governance failures.
There has been renewed interest in the corporate governance practices of modern
corporations since 2001, particularly due to the high-profile collapses of a number of
large U.S. firms such as Enron Corporation and Worldcom. In 2002, the U.S. federal
government passed the Sarbanes-Oxley Act, intending to restore public confidence in
corporate governance.
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Factors influencing corporate governance
2. The structure of company boards: Along with the structure of ownership, the structure
of company boards has considerable influence on the way the companies are managed
and controlled. The board of directors is responsible for establishing corporate objectives,
developing broad policies and selecting top-level executives to carry out those objectives
and policies.
3. The financial structure: Along with the notion that the structure of ownership matters
in corporate governance is the notion that the financial structure of the company, that is
proportion between debt and equity, has implications for the quality of governance.
4. The institutional environment: The legal, regulatory, and political environment within
which a company operates determines in large measure the quality of corporate
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governance. In fact, corporate governance mechanisms are economic and legal
institutions and often the outcome of political decisions. For example, the extent to which
shareholders can control the management depends on their voting right as defined in the
Company Law, the extent to which creditors will be able to exercise financial claims on a
bankrupt unit will depend on bankruptcy laws and procedures etc.
(1) Companies Act: Companies in our country are regulated by the companies Act,
1956, as amended up to date. The companies Act is one of the biggest legislations with
658 sections and 14 schedules. The arms of the Act are quite long and touch every aspect
of a company's insistence. But to ensure corporate governance, the Act confers legal
rights to shareholders to
(2) Securities law: The primary securities law in our country is the SEBI Act. Since its
setting up in 1992, the board has taken a number of initiatives towards investor
protection. One such initiative is to mandate information disclosure both in prospectus
and in annual accounts. While the companies Act it self mandates certain standards of
information disclosure, SEBI Act has added substantially to these requirements in an
attempt to make these documents more meaningful.
(3) Discipline of the capital market: Capital market itself has considerable impact on
corporate governance. Here in lies the role the minority shareholders can play effectively.
They can refuse to subscribe to the capital of a company in the primary market and in the
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secondary market; they can sell their shares, thus depressing the share prices. A
depressed share price makes the company an attractive takeover target.
(4) Nominees on company boards: Development banks hold large blocks of shares in
companies. These are equally big debt holders too. Being equity holders, these investors
have their nominees in the boards of companies. These nominees can effectively block
resolutions, which may be detrimental to their interests. Unfortunately, the role of
nominee directors has been passive, as has been pointed out by several committees
including the Bhagwati Committee on takeovers and the Omkar Goswami committee on
corporate governance.
(5) Statutory audit: Statutory audit is yet another mechanism directed to ensure good
corporate governance. Auditors are the conscious-keepers of shareholders, lenders and
others who have financial stakes in companies.
Auditing enhances the credibility of financial reports prepared by any enterprise. The
auditing process ensures that financial statements are accurate and complete, thereby
enhancing their reliability and usefulness for making investment decisions.
(6) Codes of conduct: The mechanisms discussed till now are regulatory in approach.
They are mandated by law and violation of any provision invites penal action. But legal
rules alone cannot ensure good corporate governance. What is needed is self-regulation
on the part of directors, besides of course, the mandatory provisions.
• Demand for information: A barrier to shareholders using good information is the cost
of processing it, especially to a small shareholder. The traditional answer to this
problem is the efficient market hypothesis (in finance, the efficient market hypothesis
(EMH) asserts that financial markets are efficient), which suggests that the shareholder
will free ride on the judgments of larger professional investors.
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• Monitoring costs: In order to influence the directors, the shareholders must combine
with others to form a significant voting group which can pose a real threat of carrying
resolutions or appointing directors at a general meeting.
o Chairman and CEO: It is considered good practice to separate the roles of the
Chairman of the Board and that of the CEO. The Chairman is head of the Board and
the CEO heads the management. If the same individual occupies both the positions,
there is too much concentration of power, and the possibility of the board supervising
the management gets diluted.
o Audit Committee: Boards work through sub-committees and the audit committee is
one of the most important. It not only oversees the work of the auditors but is also
expected to independently inquire into the workings of the organisation and bring
lapse to the attention of the full board.
o Independence and conflicts of interest: Good governance requires that outside
directors maintain their independence and do not benefit from their board membership
other than remuneration. Otherwise, it can create conflicts of interest. By having a
majority of outside directors on its Board.
o Flow of information: A board needs to be provided with important information in a
timely manner to enable it to perform its roles. A governance guideline of General
Motors, for instance, specifically allows directors to contact individuals in the
management if they feel the need to know more about operations than what they are
being told.
o Too many directorships: Being a director of a company takes time and effort.
Although a board might meet only four or five times a year, the director needs to have the
time to read and reflect over all the material provided and make informed decisions.
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Good governance, therefore, suggests that an individual sitting on too many boards looks
upon it only as a sinecure for he or she will not have the time to do a good job.
7. References
1. http://en.wikipedia.org/wiki/Satyam_scandal
2. http://www.iodonline.com/Articles/Inst%20of%20Directors-
WCFCG%20Global%20Covention-Paper%20Prof%20J%20P%20Sharma-
What%20Went%20Wrong%20With%20Satyam.pdf
3. http://www.iodonline.com/Articles/Inst%20of%20Directors-
WCFCG%20Global%20Covention-Paper%20Prof%20J%20P%20Sharma-
What%20Went%20Wrong%20With%20Satyam.pdf
4. http://www.msglobal.co.in/downloads/Role%20of%20Independent%20Directors.pdf
5. http://www.business-standard.com/article/companies/satyam-fine-sends-signals-to-all-
independent-directors-114120900792_1.html
6. http://www.indianmba.com/Faculty_Column/FC974/fc974.html
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