Satyam Update 1 – some quick points

Some quick thoughts and updates from my side, based on published data.

Later, I propose to list a few of the legal provisions that would need to be examined. The idea is to see what the present law provides for dealing with the allegations in the alleged “Satyam Fraud”.

1. The Justice Kania Committee chaired by ex-Chief Justice of India, Mr. Justice M. H. Kania, opined as early as 2005 that, under the SEBI Act, “there is no provision for monetary penalty for giving false information.”. Recommending amendment to the law, it stated “The Group recommends that SEBI Act, may be amended so as to empower SEBI to initiate adjudication proceedings for furnishing false information knowingly.”. This gap is of course in a narrow compass but it may come to haunt lawmakers and SEBI in taking action since even today, this recommendation made in 2005 has not been acted upon.

2. PwC, auditors of Satyam, in their report of 31st March 2008, have given an “unqualified report” to simplify, they reported as required under law that the accounts show a true and fair view and this view was without any reservations.

a. Interestingly, also note the specific statement made in the Annexure to their Report:-

        “During the course of our examination of the books and records of the company, carried out in accordance with the generally accepted auditing practices in India, and according to the information and explanations given to us, we have neither come across any instance of fraud on or by the company, noticed or reported during the year, nor have we been informed of such case by the management.”(emphasis supplied).

3. Clause 49 requires that the CEO and CFO should certify, inter alia, that:-

a. “They have reviewed financial statements and the cash flow statement for the year and that to the best of their knowledge and belief: (i) these statements do not contain any materially untrue statement..”.

b. “There are, to the best of their knowledge and belief, no transactions entered into by the company during the year which are fraudulent, illegal or violative of the companys code of conduct”.

c. They have indicated to the auditors and Audit Committee…instances of significant fraud of which they have become aware and the involvement therein, if any, of the management or an employee having a significant role in the companys internal control system over financial reporting”.

        (emphasis supplied)

d. This “certificate” is to be given to the Board. Since the auditors (see below) have certified that the requirements of corporate governance have been complied with, such certificate would have been given placed before the Board.

e. Quick points:-

i. The CFO also has to sign this certificate, apart from the CEO.

ii. This report is to be given to the Board. However, it will be interesting to examine what role this certificate will play in holding some guilty and relieving some others.

iii. In particular, see the statement they make to the auditors and the Audit Committee about the “significant frauds” if any of which they are aware.

iv. Note that even the cash flow statement has to be certified as to be free from materially untrue statements.

4. Satyam had adopted a “whistle blower” policy which incidentally is an optional corporate governance requirement under Clause 49. The Company says that “no personnel have been denied access to the audit committee”. Incidentally, clause 49 describes the whistle blower policy as “…a mechanism for employees to report to the management concerns about…actual or suspected fraud…”.

5. The auditors, PwC, have also certified, without any qualification/reservation, that conditions of corporate governance specified in clause 49 have been complied with.

– Jayant Thakur

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CA Jayant Thakur


  • There may not be a provision for imposing monetary penalty for giving out false information in SEBI Act, but i do not understand the relevance of the same.

    Companies Act, 1956, has ample provisions imposing monetary penalty as well as imprisonment for giving out false information by an officer of a company.

    To my understanding SEBI Act is more on the lines of the powers and functions of the Board, not laying down specific consequences for violation of its provisions (except for some).

    Could you please explain the relevance of lack of a similar penal provision in SEBI Act.

  • Thanks, Renu, for your comments.

    You are right. There are more than adequate other provisions to punish false statements. What I am highlighting is that, for a narrow compass and scope of filing information with SEBI, the Kania Committee had pointed out there is a lacuna in the SEBI Act since there was no provision to levy monetary penalty. In fact, after this report, an adjudicating officer had passed two orders dropping adjudicating proceedings against 2 entities who were alleged to have filed false information and adjudicating proceedings were initiated. He quoted this report as the basis for dropping the proceedings.

    As proceedings will be taken against officials at Satyam, a question may come that why the lawmakers did not fill this gap pointed by ex-Chief Justice led Committee in 2005.

    This obviously does not mean filing of information cannot be acted upon and punished – under the Companies Act (as you pointed out), under the IPC and even FUTP Regulations of SEBI and so on, action could be taken.

    These and other provisions – and their strengths, weaknesses and gaps – are being sought to be examined by a series of posts and updates. The gap in SEBI Act – which, fortunately, can be compensated by other statutes – is one of such that I recollected and so highlighted.

    Thanks again.

    – Jayant

  • The following are two provisions that are likely to apply in case of the Satyam Fraud:

    1. Under the IPC: Falsification of Accounts; Cheating; Breach of Trust. Criminal Breach of Trust is an offence under S.405 of the IPC.
    2. Under the Companies Act: Section 628 prescribes a term of two years in jail for making a statement in a balance sheet “which is false in any material particular, knowing it to be false”.

  • Thanks, Hemant, for pointing out the specific provisions. I propose in a later post to compile some of the laws under which action is possible and will include your points. I am sure this list is going to be large – everything except the proverbial kitchen sink is likely to be thrown against Satyam and Raju! The issue to be seen – and it will probably take a decade or more to know – is how many of them can be proved and how many can actually lead to punishment.

    – Jayant

  • Its a major irresponsibility on the part of the law makers that there is still no provision stating the penalty for filing false information under SEBI laws..

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