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indulged in insider trading on the basis of unpublished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.
Analysis
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. 

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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