The Satyam Case

7/31/2019 The Satyam Case

1/40

The Satyam Case


2/40

The Company Was founded in 1987 by Ramalinga Raju and DVS Raju (brothers-in-law) in

Hyderabad

Started Satyam Renaissance, Satyam Infoway, Satyam Spark Solutions & SatyamEnterprise Solutions in the 90s

Nipuna, Satyams BPO arm was started in 2002

Has rapidly and consistently grown across industries, geographies, internationalclients, awards and stature

Is a key player in the IT, consulting, systems integration, and outsourcing solutionsspace

Has domain expertise in verticals such as Automotive, Banking & Financial Service,Insurance & Healthcare, Manufacturing, Telecom, Infrastructure, Media,Entertainment, and Semiconductors

Is Indias 4th largest software services company

Is part of the SWITCH companies

Is present in 6 continents, 65 countries & 20 industries

Has up to 52000 employees & 690 clients

Won the Golden Peacock award (administered by WCFCG) for excellence incorporate governance in 2008 (now stripped of it)

Pattern of shareholding: promoters ~2%, institutional investors ~60%, generalpublic ~13%


3/40

The Raju BrothersRamalinga Raju Ex Chairman, Satyam Hails from a family of farmers from Vijaywada Is an MBA from Ohio University Has 2 sons Teja Raju (CEO, Maytas Infra) & Rama Raju (Vice Chairman, Maytas Properties) Started a textile business in 1977 and then a real estate business

Founded Satyam in 1987 with 20 employees Has won several awards

Ernst & Young Entrepreneur of the Year Services Award 1999 Dataquest IT Man of the Year Award 2000 CNBC's Asian Business Leader - Corporate Citizen of the Year Award, 2002 Lifetime Achievement Award, given by Hyderabad Management Association (HMA), 2005 E&Y Entrepreneur of the Year 2007 ( Revoked after the scam )

B. Rama Raju Ex MD/CEO, Satyam Is Ramalinga Rajus younger brother Is an MBA from Loredo State University, Texas Has served as a director with Maytas Infra Was also on the board of Satyam BPO & Satyam Venture Engineering Services


4/40

Timeline of Events Dec 16 Satyam announces that it is buying 51% stake in Maytas

Infra & 100% stake in Maytas Properties in a $1.6 billion deal. Thedecision comes in for severe criticism.

Dec 17 Under pressure, the deal is called off within 12 hours.Satyams stock dips 30% to close at Rs. 158.05.

Dec 23 The World Bank confirms it has banned Satyam for eightyears for bribery

Dec 26 Independent director, M. Srinivasan resigns Dec 29 3 more independent directors resign

M. Rammohan Rao, Dean, ISB Vinod Dham, VP, Intel & Pentium chip inventor

Krishna Palepu, Senior Dean, HBS Jan 7 Ramalinga Raju resigns, admits to fraud. He says the

company's cash and bank balance sheet has been inflated andfudged to the tune of Rs 5,040 crore.


5/40

The Maytas Deal Deal involved acquiring 100% stake in Maytas Properties for $1.3 billion & a majority 51%

stake in Maytas Infra for $0.3 billion Raju stated that the deal was struck to diversify the companys business & make it less

vulnerable to global risk; to stave off takeovers; and as a last ditch attempt to closeprofitability gaps

Decision was approved by the board comprising independent directors but was met withsevere investor revolt; criticism was centered around such a huge spending during theslowdown & lack of minority shareholder approval

Listed companies are bound by SEBI's Listing Agreement, which calls for certainproportion of independent directors in the board for keeping a check on the managementof companies and work as an oversight mechanism. Apart from value addition they are alsoentrusted with the task of representing the financial interests of others investors. Thecontention, rightly so, is that Satyams independent directors did not perform their duty.

Why was the deal dubious? Questions about corporate governance, especially the role of independent directors &

transparency

Deal would have wiped out Satyams surplus cash & put it $400 million in debt Related party transaction & benefit to shareholders Unrelated diversification; this diversification would have amounted to a change in the object

clause of the company High valuations; Maytas Properties was valued at Rs. 91 lakh/acre while it realistically should

have been around Rs. 40 lakh/acre Alternate structures of acquisition such as a merger through a stock swap were not even

considered


6/40

The World Bank Ban Debarred Satyam from applying for contracts for 8 years Reason cited was Satyam providing improper benefits to bank staff for favors & lack of

documentation on invoices WBs VP Mohamed Muhasin had bought Satyams preferential shares in 2007. Whether

this was done with shareholder approval is not known. Muhasin is no longer with the bank. 5 year $10 million contract in 2003 ($100 million in 2007) to design, write & maintain

information systems has not been renewed Services included in the contract were ERP implementation, document management &

integrated messaging system

WB has banned Wipro until 2011 for the same reason and Megasoft for participating in ajoint venture with bank staff while also conducting business with the bank

Wipro has however, stated that its actions were in keeping with the then (2000) SEC-compliant policy of the bank which has now been modified

TCS has been the beneficiary of a large portion of these contracts

Unconfirmed reports accuse Satyam of data theft from WB, which even the WB hasclarified that it has no evidence of

Data theft was done by installing spy software on workstations


7/40

The Scandal & the Aftermath Balance Sheet disclosures

Inflated cash & bank balances of Rs. 50.4 billion as opposed to Rs. 53.6 billion

Non existent accrued interest of Rs. 3.76 billion

Overstated debtors position of Rs. 4.9 billion as opposed to reflected Rs. 26.5 billion

Share price on Jan 7 reached a low of Rs. 11.50

Ramalinga Raju, Rama Raju (could be put away for 10 years) & Srinivas Vadlamani (ex-CFO) have been arrested

PwC auditors, S. Gopalakrishnan & Srinivas Taluri have been arrested

Satyam cut out from the 30-share benchmark index Sensex

The new board of members comprises

Deepak Parekh, Chairman, HDFC

Kiran Karnik, ex-President, Nasscom

C. Achutan, SEBI

SEBI to investigate insider trading violations, embezzlement & other transgressions

Serious Fraud Investigation Office to investigate Satyam, PwC & 325 other companies for violations of corporate law,(diversion of funds, etc.)

Registrar of Companies to inspect books of accounts as allowed by Sec 209 A, Companies Act

Enforcement Directorate to investigate violations of the Foreign Exchange Management Act (FEMA) and the Prevention ofMoney Laundering Act (PMLA)

Inspector-General of Stamps & Registration to probe into land transactions of Ramalinga Raju

IT department to investigate potential tax fraud

CBI may coordinate the entire investigation , state CID is currently performing this function

AS Murthy appointed CEO


8/40

PricewaterhouseCoopers Though Raju claimed full responsibility for the

accounting irregularities, commonly held opinion isthat auditors of PwC were in the know & that the

fraud could not have been possible without theirparticipation Major clients in India are Maruti Suzuki, United

Breweries, United Spirits, GMR Infra, PiramalHealthcare and Marico

Glenmark Pharma has stated that its contract withPwC will now be reviewed

Institute of Chartered Accountants of India (ICAI)has decided to issue a show cause notice to PwC


9/40

The Clients Satyam claims that over 90% of its clients have promised to remain with it Satyam has long-term strategic relationships with Unilever, Nestle, DuPont, Cisco, GE,

Sony, Applied Materials Other key clients include ArcelorMittal, Nissan Motors, Qantas Airways, General Motors IT sourcing contracts of up to $200 million are up for renewal In the context of the global recession, the scenario looks grim for Satyam as clients are

adopting cost-cutting measures Clients would prefer Satyams untainted competitors with clean track records of corporategovernance

Applied Materials is likely to restructure the $200 million 5 year contract that it awarded toSatyam in 2008

PwC, already in the fray, is reportedly planning to review its continuance with thecompany

GE, Cisco, Nestle Coca Cola have all expressed their decision to stay but are also closely

monitoring the developments and considering alternative solutions UK-based mobile and online payments firm Upaid Systems Ltd., which is an old client ofSatyam, filed a motion in Texas district court, alleging that Satyam had devised a plandesigned to deplete its assets and divert resources out of the company before a judgment ispassed on its $1 billion lawsuit against the tech firm after the latter falsely levelled chargesof fraud, forgery and breach of contract against its client

Competitors like TCS & Infosys, keeping in line with Nasscoms guidance, have stated thatthey will desist from poaching Satyams clients and have admitted to having received offers


10/40

Those who have leftState Farm Insurance Fortune 500 company, largest auto insurer in USA Based in Bloomington, Illinois The only company so far to have abandoned Satyam, it ended its contract

within 10 days of the accounting scandal emerging Satyams reaction has been nonchalant Had been a client for almost a decade with about 400 Satyam employees at

State Farm offices in the US State Farm was reportedly uncomfortable with the uncertainty ofSatyams

future Was able to sever its ties quickly since the nature of the outsourced jobs was

basic (primarily claims processing). Other outsourcing partners may not beable to defect easily or quickly.

National Australia Bank Has suspended all new contracts with Satyam, until the future is clearer


11/40

The FuturePotential buyers Suitors are interested in buying parts of Satyam rather than the whole

iGate was interested in buying Satyam if its liabilities are not in excess of $1.25 billion but is said to have backedout now

Essar has evinced interest in Satyam's BPO business

Both Satyam & Tech Mahindra have shot down reports of a merger

Mindtree has denied its interest in an acquisition

Reports have also proclaimed HP, IBM & HCLs interest in acquiring Satyam

The Spice Group & the Hinduja Group have both evinced interest in an acquisition

L&T is the keenest party with already 12% stake in the company

Takeover code

An offer price under the current regulations would be the higher of the average of the past 6 months or the averageof the past 2 weeks

Any group wanting to acquire a minimum 15% stake in a company must make an open offer to all shareholdersbased on a 26-week average share price

As per the existing SEBI guidelines, a company holding 15% stake in another company is mandated to make anopen offer for another 20% stake

The highest quote in any competitive bid could be used as a benchmark for determining the open offer price forthe company

The open offer price may be set at two-week average to reflect more genuine value in a shorter and more recentperiod

SEBI will also discuss how to compensate shareholders retrospectively if large amounts of cash siphoned off bySatyam promoters is recovered by investigators and returned to the company balance sheet at a future date


12/40

Industry Opinion Ganesh Natarajan, Chairman, Nasscom opined that Satyam

is a one-off case:

"We believe the entire IT sector will not be impacted muchas we consider this as a specific case of a particular firm."

Nandan Nilekani, Co-Chairman, Infosys however feltotherwise:

"This incident is a black-eye because we have beenpromoting Indian entrepreneurs, Indian corporate as theflagship of brand India and when one of the lot really has adeplorable behaviour then obviously it is not a good thing.

Narayan Murthy, Chief Mentor, Infosys made acontroversial statement which was later clarified:

"We will not touch such a tainted company.


13/40

Legal Action Raju can be prosecuted for violating provisions of

mainly, the IPC, SEBI Act & Companies Law General practice in India is to pick the crime that

attracts the longest and harshest sentence andimpose that

In the US, sentences are either aggregated orallowed to run consecutively

In rare cases, the US legal approach may be adopted

Kamalanatha vs. State of Tamil Nadu case, 2005Double life sentence for rape and murder given bythe Madras high court was upheld by the SupremeCourt


14/40

Indian Penal Code Raju has been charged under 6 sections of the Indian Penal

Code for falsification of accounts, cheating, forgery, fraud andbreach of trust

Section 120B criminal conspiracy

Section 409 criminal breach of trust Section 420 cheating Section 468 forgery Section 471 & 477A falsification of accounts

About IPC, 1860 Came into force in 1862 Contains 511 sections in all An exhaustive document that covers crimes of all natures,

including new age cyber crime


15/40

Section 120B Section 120A. Definition of criminal conspiracyWhen two or more person agree to do, or cause to be done,(1) An illegal act, or

(2) An act which is not illegal by illegal means, such an agreement is designated a criminal conspiracy: Providedthat no agreement except an agreement to commit an offence shall amount to a criminal conspiracy unless someact besides the agreement is done by one or more parties to such agreement in pursuance thereof.

Explanation: - It is immaterial whether the illegal act is the ultimate object of such agreement, or is merelyincidental to that object.

Section 120B. Punishment of criminal conspiracy

(1) Whoever is a party to a criminal conspiracy to commit an offence punishable with death, [imprisonment forlife] or rigorous imprisonment for a term of two years or upwards shall, where no express provision is made in thisCode for the punishment of such a conspiracy, be punished in the same abetted such offence.

(2) Whoever is a party to a criminal conspiracy other than a criminal conspiracy to commit an offence punishableas aforesaid shall be punished with imprisonment of either description for a term not exceeding six months, orwith fine or with both.


16/40

Section 409 Section 409. Criminal breach of trust by public

servant, or by banker, merchant or agent

Whoever, being in any manner entrusted withproperty, or with any dominion over property in hiscapacity of a public servant or in the way of hisbusiness as a banker, merchant, factor, broker,attorney or agent, commits breach of trust in respectof that property, shall be punished with[imprisonment for life], or with imprisonment ofeither description for a term which may extend toten years, and shall also be liable to fine.


17/40

Section 420 Section 420. Cheating and dishonestly inducing

delivery of property

Whoever cheats and thereby dishonestly induces theperson deceived any property to any person, or tomake, alter or destroy the whole or any part of avaluable security, or anything which is signed orsealed, and which is capable of being converted into

a valuable security, shall be punished withimprisonment of either description for a term whichmay extend to seven years, and shall also be liable tofine.


18/40

Section 468 Section 468. Forgery for purpose of cheating

Whoever commits forgery, intending that the[document or Electronic Record forged] shallbe used for the purpose of cheating, shall bepunished with imprisonment of eitherdescription for a term which may extend toseven years, and shall also be liable to fine.


19/40

Section 471 Section 471. Using as genuine a forged document or

electronic record

Whoever fraudulently or dishonestly uses asgenuine any [document or electronic record] whichhe knows or has reason to believe to be a forged[document or electronic record], shall be punishedin the same manner as if he had forged such

[document or electronic record].

Imprisonment up to seven years and a fine


20/40

Section 477A Section 477A. Falsification of accounts

Whoever, being a clerk, officer or servant, or employed or acting in the capacity of aclerk, officer or servant, wilfully, and with intent to defraud, destroys, alters,

mutilates or falsifies any [book, electronic record, paper, writing], valuable securityor account which belongs to or is in the possession of his employer, or has beenreceived by him for or on behalf of his employer, or wilfully, and with intent todefraud, makes or abets the making of any false entry in, or omits or alters or abetsthe omission or alteration of any material particular of any material particular formor in, any such [book, electronic record, paper, writing], valuable security or account,shall be punished with imprisonment of either description for a term which may

extend to seven years, or with fine, or with both.

Explanation-It shall be sufficient in any charge under this section to allege a generalintent to defraud without naming any particular person intended to be defraudwithout naming any particular person intended to be defrauded or specifying anyparticular sum of money intended to be the subject of the fraud, or any particular dayon which the offence was committed.


21/40

SEBI SEBI regulation will apply for violating stock market laws & other statutory violations, which include

unfair trade practices, insider trading regulation and takeover code. Relevant regulations could be: SEBI (Prevention of Fraudulent and Unfair Trade Practices) Regulations, 2003 punishable under Section

24(1) of the SEBI Act, 1992 SEBI (Prohibition of Insider Trading) Regulations, 1992 SEBI (Merchant Bankers) Rules and Regulations, 1992 SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 Securities Contract (Regulations) Act, 1956

Imprisonment could be up to 10 years and a fine of Rs. 25 crores or both Soon, SEBI will legislate that, in their quarterly statements, companies would be required to disclose the

percentage of shares encumbered within the overall promoter holding It will also make it compulsory for promoters to disclose their shareholding if part of it is pledged or

hypothecated

About the SEBI Act, 1992 The act was modeled on the benchmark FSAP (Financial Services Assessment Programme) introduced byWorld Bank & IMF

Imprisonment and monetary penalty could be awarded "if any person contravenes or attempts tocontravene or abets the contravention of the provision of this Act or of any rules or regulations madethere under".


22/40

Section 24 Section 24. Offences

(1) Without prejudice to any award of penalty by the adjudicatingofficer under this Act, if any person contravenes or attempts to

contravene or abets the contravention of the provisions of this Actor of any rules or regulations made there under, he shall bepunishable with imprisonment for a term which may extend to oneyear, or with fine, or with both.

(2) If any person fails to pay the penalty imposed by the

adjudicating officer or fails to comply with any of his directions ororders, he shall be punishable with imprisonment for a term whichshall not be less that one month but which may extend to threeyears or with fine which shall not be less than two thousand rupeesbut which may extend to ten thousand rupees or with both.


23/40

Fraudulent and Unfair Trade Practices

Regulations, 2003

Fraud includes an active concealment of a factby a person having knowledge or belief of the

fact; a promise made without any intention ofperforming it; a representation made in areckless and careless manner whether it be trueor false; any such act or omission as any other

law specifically declares to be fraudulent, anddeceptive behaviour by a person deprivinganother of informed consent or fullparticipation.


24/40

Insider Trading What is it? Insider trading is the trading of a corporation's stock or other securities (e.g. bonds or stock options)

by individuals with potential access to non-public information about the company. In most countries,trading by corporate insiders such as officers, key employees, directors, and large shareholders may belegal, if this trading is done in a way that does not take advantage of non-public information.

The Insider Trading Act is governed by SEBI Regulations,1992 and The Company Act,1956

Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992

An insider means any person who

(is) is or was connected with the company or is deemed to have been connected with the company andwho is reasonably expected to have access to unpublished price sensitive information in respect ofsecurities of a company, or

(ii) has received or has had access to such unpublished price sensitive information.

Under the present SEBI (Prohibition ofInsiderTrading) Regulations, 1992 theshareholder/director/officer of a listed company is required to disclose to the company informationregarding the shareholding or voting rights within 4 working days of receipt of intimation of allotment ofshares or the acquisition or sale of shares or voting rights or of becoming the director or officer of thesaid company, as the case may be.


25/40

Insider Trading at Satyam A 12 member team of Serious Frauds Investigation Officers prepared an interim report intothe fraud and insider trading was one of the charges against the founders of the company

Ramalinga Raju and his brother through their firm (SRSR Holdings) admitted that theirstake in Satyam of around 8.3 percent(around 5.57 crore shares) has been pledged with thelenders

What raised many eyebrows was that between December 23rd

2008 and January 5th

2008,the lenders started to offload the Satyam shares. It was a coordinated action by the lenders,who gave money to Mr Raju, to get rid of shares day before Raju revealed the scam and itsshare plunged.

After the sale in the open market, SRSR Holdings has around 2.3 percent stake inSatyam(which of course, include the pledges shares)

Also, Mr Raju had floated companies like Bangar Agro Farms, Amaravathi Greenlands,Arjuna Farms etc. which had borrowed huge amount of cash by pledging Satyam shares tothe institutional investors

On Jan7th, SEBI ordered an investigation into the affairs of buying and selling or dealingwith the Satyam share


26/40

Insider Trading at Satyam Also, it is believed that Ramalinga Raju pledged his holdings at the time when the stock was

quoting at a higher level and hence they would have pocketed around 1230 crores till now,which are worth around 70 crores now.He also sold 92,000 shares on a single transactionwhich raises suspicion and was a perfect case for insider trading.

Now, Company Law Board(CLB) has prevented Ramalinga Raju and other topfunctionaries not to sell or mortgage their shares and other assets without priorpermission.

SEBI is right now examining whether, in law, pledging of shares amounts to insidertrading. The SEBI Committee, as the report importantly adds, will also consider whetherthe law should be amended whereby pledge of Promoters shares would now be required to

be disclosed.

Pledge may be for many reasons for raising of finance for persons or corporate purposesor even further acquisition of shares, etc. In fact, if funds are raised by Promoters forfinancing further acquisitions of shares, then this may be even indicative of their ownconfidence in the Company. Of course, in some cases, this disclosure may help initiating

investigation of the bona fide nature of the pledge.

If in the heat and pressure of action, to somehow find the Promoters of Satyam guilty ofInsider Trading, a stretched interpretation is taken that any pledge of shares should also bedeemed to be Insider Trading and it can cause a serious crisis to the whole corporate worldgenerally. Firstly, Promoters of numerous other companies would also be deemed to havecommitted Insider Trading through pledge. Secondly, this process may bring out the realpicture of the status of finances of Promoters in India post stock market meltdown!


27/40

Insider Trading The Details

Current CEO Mr. AS Murthy sold 40,000 shares of Satyam Computers betweenDecember 12 and December 16 2008, days before the Maytas deal was announced. Mr.Murthy very frequently sold his shares from October 2006. He has sold around 3,14,763ESOPs till now at a regular interval.

Jailed CFO Mr. Srinivasa Vadlamani sold in all 3.65 lakh shares till now during theperiod from mid 2006 till mid 2008. He is the highest by any Satyam employee.

Mr Ram Mynampati, interim president, sold around 1.83 lakh shares in Indian marketand 56250 of ADS during the same time

Mr. V Murali , Senior Vice President, sold around 1.71 lakh shares during the same time

Mr. TR Anand, COO, sold around 1.41 lakhs shares

Mr. Manish Mehta, sold around 1.01 lakh shares

Most of these shares were sold between mid-2006 and mid-2008 when the Satyam'sscrip ruled high between Rs. 350 and Rs. 480, fetching fat sums.

BSE is working in tandem with SEBI in analysing Satyam Computers trading data tofind out if there was insider trading.


28/40

Legal Violations

Section 205A: Deals with the case of Unpaid dividend to betransferred to special dividend account

Section 207: Specifies the Penalty for failure to distributedividends within thirty days

Section 272 : Deals with respect of certain contracts relatingto sale, purchase or supply of any goods, materials or servicesit is obligatory for the concerned company to obtain necessaryconsent of its board of directors. Also, deals with the penaltyfor the director who doesnt hold any shares.

Section 299: Deals with the Disclosure statements

Section 372A of the Company Act,1956 :Deals with intercorporate Loan, Investment, Guarantee and Securities inconnection with loan


29/40

Companies Act Can be charged under Companies Act for large-scale fudging of companys books

Imprisonment can range between 6 months & 7 years along with a fine underSections 209, 628 & 629

Under section 628 of the Companies Act, which deals with misrepresentation ofaccounts, Raju could be punished for a maximum of 2 years along with penalty.However, the punishment term could be extended to 7 years for producing false

affidavits and other documents. Violations of Sections 370 & 372 have also been made

Section 370 of the Companies Act deals with loans to companies under the samemanagement. Under this Section, a company could not give loans or any form ofguarantee to companies under the same management unless it has been approved bya special board resolution.

Section 372 deals with purchase of shares of one company by another

About Companies Act, 1956

Basic law which governs the creation, continuation, the winding up of companies andalso the relationships between the shareholders, the company, the public and thegovernment

Contains 658 sections


30/40

Section 209

Section 209. Books of account to be kept by company

(1) Every company shall keep at its registered office proper books of account withrespect to-(a) all sums of money received and expended by the company and the matters inrespect of which the receipt and expenditure take place;(b) all sales and purchases of goods by the company;

(c) the assets and liabilities of the company; [and](d) in the case of a company pertaining to any class of companies engaged inproduction, processing, manufacturing or mining activities, such particulars relatingto utilisation of material or labour or to other items of cost as may be prescribed, ifsuch class of companies is required by the Central Government to include such

particulars in the books of account:

Provided that all or any of the books of account aforesaid may be kept at such otherplace in India as the Board of directors may decide and when the Board of directorsso decides, the company shall, within seven days of the decision, file with theRegistrar a notice in writing giving the full address of that other place.


31/40

Section 211 Section 211. Form and contents of balance sheet and profit and loss account

(1) Every balance sheet of a company shall give a true and fair view of the state of affairs ofthe company as at the end of the financial year and shall, subject to the provisions of thissection

(2) Every profit and loss account of a company shall give a true and fair view of the profit orloss of the company for the financial year

(3A) Every profit and loss account and balance sheet of the company shall comply with theaccounting standards

(3B) Where the profit and loss account and the balance sheet of the company do not

comply with the accounting standards, such companies shall disclose in its profit and lossaccount and balance sheet, the following, namely :-

(a) the deviation from the accounting standards;(b) the reasons for such deviation; and(c) the financial effect, if any, arising due to such deviation


32/40

Section 372 Section 372. Purchase by company of shares, etc., of other companies

No company can acquire shares in any other body corporate throughsubscription purchase or otherwise for an amount exceeding 60 per centof the acquiring companys share capital and free reserves or 100 per cent ofits free reserves, whichever is higher, after loans, guarantees andinvestments

Doing so would require shareholder authorisation through a specialresolution passed in a general meeting

Such a resolution has to be passed only through a postal ballot and withadvance intimation to the RoC

Violating Section 372A would make the officers-in-default (which includethe managing director, company secretary and whole time director) liablefor punishment, which includes a fine of Rs 50,000 or imprisonment up totwo years


33/40

Section 628 Section 628. Penalty for False Statements

If in any return, report, certificate, balance sheet, prospectus,statement or other document required by or for the purposes

of any of the provisions of this Act, any person makes astatement -

(a) which is false in any material particular, knowing it to befalse; or

(b) which omits any material fact knowing it to be material;

he shall, save as otherwise expressly provided in this Act, bepunishable with imprisonment for a term which may extendto two years, and shall also be liable to fine.


34/40

Section 629 Section 629. Penalty for False Evidence

If any person intentionally gives false evidence

(a) upon any examination upon oath or solemn affirmation,authorized under this Act; or(b) in any affidavit, deposition or solemn affirmation, in orabout the winding up of any company under this Act, or

otherwise in or about any matter arising under this Act;

he shall be punishable with imprisonment for a term whichmay extend to seven years, and shall also be liable to fine.


35/40

Corporate Governance

Lack of majority shareholder approval & transparency inMaytas deal

Raju was on the executive board of ISB & had been makingdonations and contributions to the premier business school

PwCs remuneration rose sharply by nearly 80% in the last 4years

About corporate governance Set of processes, customs, policies, laws, and institutions

affecting the way a corporation is directed, administered orcontrolled; also focuses on stakeholders Principles commonly include shareholder rights,

responsibilities of the board, integrity and transparency


36/40

Listing Agreement 3 violations of Clause 49, Listing Agreement have been made:

Half of the board size should be non-executive directors and half of the board size should beindependent directors. Since the resignation of the four directors, the board size has reduced to five

with two independent directors and three executive directors.

At least three members of the audit committee should be there out of which two-thirds of themembers should be independent directors. Previously, the size of the audit committee was four

members out of which two members have already resigned. So, there also the minimum requirementof three members on the audit committee has not been complied with.

There is a time period of 180 days available to the board to fill in the gap of an independent director

About Clause 49, Listing Agreement

SEBI monitors and regulates corporate governance of listed companies in India through Clause 49

Was amended in 2003 to redefine independent directors, audit committees, financial disclosures, code of

conduct, etc; a whistleblower policy was also included On independent directors:

"All fees/compensation, if any, paid to non-executive directors, including independent directors, shall befixed by the board of directors and shall require previous approval of shareholders in general meeting.The shareholders' resolution shall specify the limits for the maximum number of stock options that can

be granted to non-executive directors, including independent directors, in any financial year and inaggregate."


37/40

Sarbanes-Oxley Act Satyam has come to be called Indias Enron Satyam is governed by SEC & SOX is applicable to it as it has been listed on NYSE since

2001 The PCAOB examined the Indian arm of PwC (Satyams auditor since 2000) in 2008

About SOX Following the accounting scandals of Enron & WorldCom, the Sarbanes-Oxley Act (SOX)

was enacted in 2002 It is also known as Public Company Accounting Reform and Investor Protection Act of

2002 It has 11 titles The legislation established new or enhanced standards for all US public company boards,

management, and public accounting firms The Act established a new quasi-public agency, the Public Company Accounting Oversight

Board (PCAOB), which is charged with overseeing, regulating, inspecting, and discipliningaccounting firms in their roles as auditors of public companies. The Act also covers issuessuch as auditor independence, corporate governance, internal control assessment, andenhanced financial disclosure.


38/40

Company Bill 2008

Introduced in October 2008 by Ministry of Corporate Affairs Aims to keep Indian business globally competitive and future- ready It will replace the Companies Act, 1956

New Dynamic initiatives include:

MCA 21 E Governance project Introduction of a new Limited Liability Partnership Law Comprehensive Revision of Companies Act, 1956 Indian Institute of Corporate Affairs (IICA)

National Foundation for Corporate Governance (NFCG) New Accounting Standards for reforms Reaching out to investors through education and awareness Rebuilding Indian Corporate Law Services Transforming Regulatory framework of effective enforcement


39/40

References ibnlive.in.com www.time.com www.business-standard.com

www.livemint.com www.vakilno1.com/ economictimes.indiatimes.com en.wikipedia.org www.thehindubusinessline.com

www.legalserviceindia.com www.satyam.com www.rediff.com/money/satyam.html infotech.indiatimes.com CMIE database
http://ibnlive.in.com/http://www.time.com/http://www.business-standard.com/http://www.livemint.com/http://www.vakilno1.com/http://economictimes.indiatimes.com/http://en.wikipedia.org/http://www.thehindubusinessline.com/http://www.legalserviceindia.com/http://www.satyam.com/http://www.rediff.com/money/satyam.htmlhttp://infotech.indiatimes.com/http://www.rediff.com/money/satyam.htmlhttp://www.rediff.com/money/satyam.htmlhttp://infotech.indiatimes.com/http://www.rediff.com/money/satyam.htmlhttp://www.satyam.com/http://www.legalserviceindia.com/http://www.thehindubusinessline.com/http://en.wikipedia.org/http://economictimes.indiatimes.com/http://www.vakilno1.com/http://www.livemint.com/http://www.business-standard.com/http://www.business-standard.com/http://www.business-standard.com/http://www.time.com/http://ibnlive.in.com/


40/40

Thank You!

Documents

The Satyam Case