Wednesday, July 16, 2014

SEBI Order in the Satyam Case

Facts and Sanctions

Yesterday, more than five years after the Satyam ex-chairman’s much talked about revelations, SEBI passed an order in the case against five individuals, being the ex-chairman, ex-managing director, ex-Chief Financial Officer, ex-Vice President Finance and ex-Head (Internal Audit). In the 65-page order, SEBI considers the various acts of these individuals in detail that include reporting fictitious bank accounts, fictitious invoicing and other matters that resulted in a misrepresentation of the financial position of the company to its investors.

The SEBI order itself is steeped quite heavily on the facts, which are only too well known given the extensive coverage the case have received through media reports and other commentaries. SEBI’s findings are summarized as follows:

132. … From the material available on record, I find that the noticees individually as well as acting in concert falsified the books of account and mis-stated the financials of Satyam Computers and thus portrayed a false picture of its published quarterly / annual results. They also provided false CEO/CFO certification, made various announcements and issued advertisements/ press releases on the basis of falsified and mis-stated financial position of the company. The notices also indulged in insider trading on the basis of unpublished price sensitive information (UPSI).

The order finds violations of the provisions of the SEBI Act as well as two different sets of regulations, being the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market) Regulations, 2003 (the PFUTP Regulations) and the SEBI (Prohibition of Insider Trading) Regulations, 1992 (the PIT Regulations). On the PFUTP Regulations, it was found as follows:

135. It goes without saying that the financial position and networth of a listed company have direct bearing on its share price and trading behaviour of investors in its scrip, apart from impacting the reputation of the company. Thus, they have potential to influence investment decisions of the investors in the scrip of the company. Considering the facts and circumstances described in the [show cause notices], I am of the view that by creating and certifying the false and overstated financial results over the years as true and fair, the noticees have misled the investors of Satyam Computers. The acts and omissions of the noticees as found in this case were, in my view, clearly a device, scheme and artifice employed by the noticees to defraud in connection with dealing in securities of Satyam Computers and fall in the ambit of prohibited activities under section 12A(a) (b) (c) of the SEBI Act and regulation 3(b)(c) and (d) and regulation 4(1) and 4(2),(a),(e),(f),(k), and (r) of the PFUTP Regulations.

Similarly, a case of insider trading was found because the concerned ex-officials of Satyam Computers had traded in the company’s stocks while they were in possession of the information that the accounts of the company did not represent its true financial position.

SEBI’s sanctions carry two components. First, these individuals are restrained from accessing the capital markets for a period of 14 years. Second, they are required to disgorge the wrongful gains made by them to the extent of nearly Rs. 1,850 crores (Rs. 18.5 billion) with interest @ 12% per annum from January 7, 2009 till the date of payment.


The first question that arises from this order: is it too little, too late? Considering the fraud of such magnitude that shook the entire country, it appears inadequate that the regulatory process took five long years to reach some level of fruition. Swift action would have sent a clearer message regarding the intentions of the regulator. It is understandable that SEBI had to delay matters given the lack of cooperation from the parties involved. They used the fact of the ongoing criminal trial as an excuse to prolong SEBI’s regulatory process. SEBI’s concern for natural justice ended up providing greater leverage in terms of time to the parties. The order at this stage may do very little in terms of either reparation to the investors or deterrent to the errant parties, who may simply shrug their shoulders at the order. The remedy of disgorgement of profits may also not be of much avail if there are no assets remaining with the parties in order to meaningfully execute the order. The risk is that the order for disgorgement may remain on paper without much bite.

This order also speaks to the types of actions that might have an impact on cases of this kind. The first is a criminal action, which in this case is expected to see the light of day sometime in the near future. The criminal court is expected to deliver its verdict. The second is a regulator order of the kind SEBI has just passed, which imposes sanctions but is not penal in nature. The third is a civil action by affected parties (such as a class action), which is initiated with a view to compensate the victims. In the Indian context, it is clear that parties fear criminal actions more than any other, as witnessed in the present case too where the parties were busy defending themselves in that action and effectively paid short shrift to SEBI’s investigation. What receives least impetus is private shareholder action, which is evident in the Satyam Computers’ case as not a single shareholder in India has received any compensation from a court of law, although US investors have received settlement amounts from both the company as well as its auditors. All of these raise questions regarding the satisfactory nature of India’s legal regime to deal with corporate frauds of this kind.

As for the future, some of the lessons from the Satyam scenario have been incorporated into the corporate and securities law reforms such as the Companies Act, 2013 and the revised clause 49 of the listing agreement. While those would certainly result in a different outcome, it is not clear how superior they are in comparison with the erstwhile regime under which the Satyam case is being tried. 

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