This series was proposed by the first post to take the Satyam Episode as a case study to understand what laws apply and whether and how are they appropriate to punish wrong doings.
For this purpose, let us consider what are the alleged wrongs? To start with, let us shortlist some of these wrongs and then see which of them are punishable and/or capable of being compensated by law.
So, without linking these wrongs to specific provisions of law at this stage, let us make a working list. I say “working list” since we are at too early a stage to know even some of the facts. The only “fact” available today is of Raju’s “confession letter” and even its authenticity is being questioned by some! However, since what we are doing here is a “what-if” study, we are not judging the truthfulness of the statements and the allegations. What we are doing here is only asking that, what if, say, the cash was overstated? What are “wrongs” thereby committed and what are the laws to punish the wrong doer and compensate those who have suffered losses? Whether these are wrongs under present laws are not would be the next step for discussion. But, whether the wrongs were really committed or not will of course be determined under law, after due investigation, by courts/institutions.
So let me start making a preliminary and partial working list of at least some wrongs that I could think of with my limited imagination. Obviously, this list will need constant revision.
The following are the allegations.
1. Falsification of records:- Sales and profits were overstated. Perhaps wholly consequently, assets such as cash, debtors and reserves were also overstated. This was done incrementally and cumulatively over the last many years. Meaning that not only was an extra falsification done each year, but the backlog of earlier years added to it.
2. Release of falsified accounts to the public and the authorities.
a. Filing false accounts with institutions such as stock exchanges, Registrars, etc. are wrong by itself. Such filings are also specifically intended for public display and consumption.
b. Such accounts are also displayed at the company’s website for download by public. They are still available! – I downloaded some more yesterday.
c. It can be expected that the falsified accounts were given in many other ways to many other persons. E.g., certificates of net worth are routinely required for various purposes, etc. Thus, many other persons may have been misrepresented.
3. Siphoning off of funds:- Raju’s letter specifically states that no such thing was done but press reports – appear to be speculative only at this stage – suspect otherwise. If there is siphoning off of funds, then the scenario substantially changes and becomes far more serious. The wrong would be directly committed against the shareholders whose monies were stolen – perhaps even against those who have lent monies or supplies to the Company or who otherwise have dues from the Company.
4. Loss to persons who may have relied on such falsified accounts:-
a. The shareholders who have purchased or held on to such shares on reliance of such false accounts. Note also that as per balance sheet as on 31st March 2008, the Company has shown Share Premium of Rs. 1368 crores, after some utilization from time to time. Share premium, as readers are aware, is the amount higher than the face value the Company receives on issue of shares.
b. The lenders who may have lent from time to time funds to the Company based on such false accounts. (The 5000 cr. “cash rich” Satyam’s balance sheet as on 31st March 2008 shows secured loans (for vehicles) of Rs. 23.67 crores and current liabilities and provisions of Rs. 1441 crores. One also has to see what picture the “restated accounts” will show.
c. The lenders who may have lent monies to the Promoters based on such accounts and on the security of shares of Satyam.
d. The vendors who supplied goods and services to Satyam relying on such “strong” accounts.
e. The employees who joined and continued with the Company based on a “strong” company as appeared from such accounts.
f. The employees who accepted ESOPs of Satyam at Exercise Prices based on market prices that were based on such falsified accounts. The loss to the employees is that ESOPs are an accepted part of remuneration and typically part of the cash remuneration is substituted by ESOPs. Loss also to the employees who exercised ESOPs and thus committed further funds.
g. Loss to customers who assumed Satyam to be a strong company – a going concern - and committed to it.
h. The general wrong in running an insolvent company (this could be the case if the assets are overstated by the reported Rs. 8000 odd crores).
And so on.
5. Personal benefit of falsification to accounts by Promoters:-
a. Selling of shares over a period at high prices in the market to persons who were not aware of the reality. Allegations are that the Promoters directly or indirectly sold shares over a period of time to reduce their stake from about 25% to 3% now.
b. Funds obtained through alleged siphoning off of funds to Promoter entities.
6. Violations of forex laws:-
a. It is possible that much of the overstated revenues are through billings to overseas clients. Some of the overstated bank balances and other assets may also have been stated to have been kept abroad. Alleged siphoning off of funds may also be done abroad. These would be wrongs against the system generally.
7. Numerous misstatements:-
a. Numerous misstatements made not only relating to falsified accounts but also over the last few weeks following the aborted acquisitions.
I know the above is only a partial list and my imagination is running short of the many other wrongs done.
It would be next worth thinking of at least three things.
Firstly, who are the persons who have done these wrongs and to what extent would be their role? The obvious persons are the Promoters themselves, the Company, the senior executives who knowingly or negligently participated (including the CFO, CS, senior accounting executives), the Independent Directors (those on the Audit Committee may have special liability), auditors (statutory and internal and, where different, international auditors), merchant bankers, advisors, brokers, etc.
Secondly, who can take action against Satyam and for which of the wrongs? The list is going to be large – SEBI, the Reserve Bank of India, Registrar, the police, Institute of Chartered Accountants of India, shareholders, lenders employees, creditors, customers, tax authorities, etc. It is likely that there will be overlapping jurisdiction and some turf war. This aspect is also important since in some cases, those who have suffered injuries may not be able to, under Indian laws, proceed directly against the culprits and may have to depend on the Company or others to pursue action.
There are also likely to be cross claims and suits. E.g., the auditors may be sued against and may themselves sue those who “mislead” them – in fact, they may sue the same persons who sued them. This confusion will become confounded considering the fact that there would be action under Indian as well as foreign laws and thus there would be claims and actions in India as well as abroad. This confounded confusion is likely to be comic to bystanders and tragic to those who suffered.
Thirdly, what are the laws that would apply to these wrongs? This list is also likely to be large. An interesting aspect will be how the legal safeguard of double jeopardy will apply. It is likely that for the same wrong, punishment may be under different laws having different scopes.
At the early stages, we can discuss all these aspects very broadly only. Maybe later, as there is more development and time, we can focus on micro aspects such as meaning of specific words in laws and other fine distinctions and issues.
In the meantime, see also this report in Business Standard, of 9th January 2009, discussing some of the legal remedies.
- Jayant Thakur