In July 2014, we had discussed
the order of the Securities and Exchange Board of India (SEBI) then passed
against several members of Satyam’s senior management for their role in
perpetrating the colossal financial fraud involving the company. In its order,
SEBI found several individuals guilty of violating various regulations issued
by SEBI, and restrained them from accessing the capital markets for a period of
14 years and required them to disgorge the wrongful gains made 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 order of the Securities and Exchange Board of India (SEBI) then passed
against several members of Satyam’s senior management for their role in
perpetrating the colossal financial fraud involving the company. In its order,
SEBI found several individuals guilty of violating various regulations issued
by SEBI, and restrained them from accessing the capital markets for a period of
14 years and required them to disgorge the wrongful gains made 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.
Against this, the senior
management, including Mr. Ramalinga Raju, the former chairman of the company,
preferred an appeal to the Securities Appellate Tribunal (SAT). Last week, the
SAT passed its
order on the appeal wherein it concurred with SEBI’s findings on the breaches
of various SEBI regulations by the senior management, but overturned the
sanctions imposed by SEBI and remanded the matter to SEBI for a review of the
sanctions afresh. While the fulcrum of SEBI’s findings on the merits stand, its
order on the consequences and sanctions has suffered a setback.
management, including Mr. Ramalinga Raju, the former chairman of the company,
preferred an appeal to the Securities Appellate Tribunal (SAT). Last week, the
SAT passed its
order on the appeal wherein it concurred with SEBI’s findings on the breaches
of various SEBI regulations by the senior management, but overturned the
sanctions imposed by SEBI and remanded the matter to SEBI for a review of the
sanctions afresh. While the fulcrum of SEBI’s findings on the merits stand, its
order on the consequences and sanctions has suffered a setback.
In its order, the SAT considered
three issues, of which the first two were held in SEBI’s favour, and the third
in favour of Satyam’s management. The first issue related to procedure and the
question of natural justice. The individuals against whom SEBI passed the order
argued that they were not conferred adequate opportunity to present their case,
such as to cross-examine witnesses. However, the SAT refused to entertain the
arguments and concurred with SEBI’s findings that the individuals sought
adjournments to prolong the proceedings, and that their interests were not
adversely affected.
three issues, of which the first two were held in SEBI’s favour, and the third
in favour of Satyam’s management. The first issue related to procedure and the
question of natural justice. The individuals against whom SEBI passed the order
argued that they were not conferred adequate opportunity to present their case,
such as to cross-examine witnesses. However, the SAT refused to entertain the
arguments and concurred with SEBI’s findings that the individuals sought
adjournments to prolong the proceedings, and that their interests were not
adversely affected.
Second, on the merits of the
case too, the SAT had no difficulty in finding that SEBI’s order is
sustainable. SAT’s finding was also well-supported in this regard by the facts
of the case, because the chairman himself had confessed to wrongdoing in his
well-known letter of January 9, 2009. Similarly, the other members of the top
management who had been arraigned were also party to the wrongdoing or had
knowledge of the same.
case too, the SAT had no difficulty in finding that SEBI’s order is
sustainable. SAT’s finding was also well-supported in this regard by the facts
of the case, because the chairman himself had confessed to wrongdoing in his
well-known letter of January 9, 2009. Similarly, the other members of the top
management who had been arraigned were also party to the wrongdoing or had
knowledge of the same.
It is the third issue
pertaining to the sanctions to be imposed on the top management where the SAT
disagreed with SEBI’s findings, and effectively quashed that portion of SEBI’s
order. For instance, the SAT found no basis for SEBI’s order that debarred the
individuals for accessing the capital markets for 14 years. Moreover, the sanction
was imposed uniformly on all of them, without any regard to their individual
levels of complicity in the wrongdoing. Similarly, the SAT found some discrepancies
in the precise amounts in respect of which SEBI had passed an order for
disgorgement of profits. For example, in the case of Mr. Ramalinga Raju and Mr.
Rama Raju, the disgorgement order covered the two individuals as well as other entities
connected with them. SEBI had in addition passed disgorgement orders against
the connected entities thereby causing some amount of double-counting. For
these and other reasons, the SAT decided to overturn the sanctions, and asked
SEBI to reconsider these and pass an order expeditiously within four months.
pertaining to the sanctions to be imposed on the top management where the SAT
disagreed with SEBI’s findings, and effectively quashed that portion of SEBI’s
order. For instance, the SAT found no basis for SEBI’s order that debarred the
individuals for accessing the capital markets for 14 years. Moreover, the sanction
was imposed uniformly on all of them, without any regard to their individual
levels of complicity in the wrongdoing. Similarly, the SAT found some discrepancies
in the precise amounts in respect of which SEBI had passed an order for
disgorgement of profits. For example, in the case of Mr. Ramalinga Raju and Mr.
Rama Raju, the disgorgement order covered the two individuals as well as other entities
connected with them. SEBI had in addition passed disgorgement orders against
the connected entities thereby causing some amount of double-counting. For
these and other reasons, the SAT decided to overturn the sanctions, and asked
SEBI to reconsider these and pass an order expeditiously within four months.
This state of affairs reveals
significant concerns relating to SEBI’s investigation of cases of such magnitude.
While SEBI’s investigation efforts on the merits of establishing a violation
have been upheld (which, arguably was a fait
accompli given the chairman’s confession that laid bare all the
shenanigans), it raises questions about the extent to which SEBI must support
its sanctions with logic and reasoning. For instance, the Securities and
Exchange Board of India Act, 1992 and the relevant regulations provide
considerable discretion to SEBI while passing its orders. However, when it
comes to imposing sanctions such as restraining persons from capital markets
for as long as 14 years, it must be supported by strong reasoning. While some
may argue that there could have been no better case than Satyam that warranted
such stiff sanctions, the issue relates to one of equity in whether all the
individuals concerned were equally responsible or whether some (such as the
chairman and managing director) were required to shoulder a greater burden. It
is the absence of such considerations in the SEBI order that may have led to
its fatality on this count.
significant concerns relating to SEBI’s investigation of cases of such magnitude.
While SEBI’s investigation efforts on the merits of establishing a violation
have been upheld (which, arguably was a fait
accompli given the chairman’s confession that laid bare all the
shenanigans), it raises questions about the extent to which SEBI must support
its sanctions with logic and reasoning. For instance, the Securities and
Exchange Board of India Act, 1992 and the relevant regulations provide
considerable discretion to SEBI while passing its orders. However, when it
comes to imposing sanctions such as restraining persons from capital markets
for as long as 14 years, it must be supported by strong reasoning. While some
may argue that there could have been no better case than Satyam that warranted
such stiff sanctions, the issue relates to one of equity in whether all the
individuals concerned were equally responsible or whether some (such as the
chairman and managing director) were required to shoulder a greater burden. It
is the absence of such considerations in the SEBI order that may have led to
its fatality on this count.
Similarly, disgorgement of
profits can be a rather complicated exercise. Courts in several jurisdictions
have sought to set out principles on how to compute wrongful profits or gains in
case of securities offences such as insider trading or market manipulation, but
this area is riddled with controversies. In the end, it might be necessary for
SEBI to establish clearer guidelines on determining sanctions so that the
outcome experienced in the Satyam case can be avoided in the future.
profits can be a rather complicated exercise. Courts in several jurisdictions
have sought to set out principles on how to compute wrongful profits or gains in
case of securities offences such as insider trading or market manipulation, but
this area is riddled with controversies. In the end, it might be necessary for
SEBI to establish clearer guidelines on determining sanctions so that the
outcome experienced in the Satyam case can be avoided in the future.