Author- AKANCHA KAILASH BBA.LLB 9th Semester Amity University Ranchi, Jharkhand
TASK- Legal case of Scam on The Satyam Computer Services fraud
Introduction
Corporate scams, as you may be aware, are frauds conducted by a corporation or individual to enrich themselves at the expense of their customers and investors. In other words, any illegal and unethical behaviour carried out by a firm or its executives constitutes a corporate fraud.
In 2009, India had one of its largest corporate frauds, the Satyam scam case, which not only altered the whole business landscape in India but also highlighted various issues about the role of corporate governance and its practices in the country. The corporate system as we know it today evolved because of this swindle and the numerous mechanisms put in place to avoid similar catastrophes from occurring in the future.
This candle revealed the flaws in India’s auditing system as well as the management system of large corporations. All the flaws, ranging from the centralisation of power in the board of directors to the lack of openness and disclosure of the company’s financial statements, will be explored in length throughout this article, along with events that happened during their occurrence.
What is the Satyam scam case
Satyam Computer Services Limited was the business at the centre of the fraud. During its peak, it was one of India’s largest information technology companies. In fact, it was so popular and successful regionally and globally for its global clients, investors, and partnerships that by 2008, it was named among the top IT businesses in Asia.
Unfortunately, everything came crashing down when its fraudulent methods were uncovered in early 2009, including financial statement manipulation, falsification of bank documents and Board of Directors resolutions, forging of sales invoices, and so on. All these fraudulent actions were carried out largely to raise the company’s statistics and for the personal gain of those involved, at the expense of the company’s investors and stockholders.
The investigation by several governmental entities focused on inconsistencies in the balance sheets and discovered that accounts, invoices, and even financial statements were falsified to manufacture around 7,800 crores of assets that did not exist in real life. This scam was not only massive, but also lengthy, exposing long-standing flaws in the Indian business sector.
Because of this controversy, the reputation of the Indian IT sector was seriously harmed, prompting even the Indian government to fret owing to the ripple effects. The previous CEO of Satyam, Ramalinga Raju, was primarily responsible for this scam.
Parties who were responsible for the Satyam scam case
Many people feel that Ramalinga Raju, the company’s Chairman and CEO, was primarily responsible for the Satyam scam. He confessed, and the investigation revealed how he altered bank statements to fabricate around Rs 7,800 crore in false firm assets.
However, other persons played a role in this, including Raju’s brother, the CFO, the managing director, and even Satyam’s internal auditors. Each of these individuals was detained by authorities for investigation and subsequently charged if proven guilty.
Even when not found guilty of the scheme, Satyam’s Board of Directors was nevertheless responsible for failing to notice these anomalies in the first place. Their failure to detect the scam early on exacerbated its severity.
- Significant role played by Ramalinga Raju in the Satyam fraud case
As previously stated, Ramalinga Raju was the primary culprit of the Satyam scam. In fact, the media and even the government used his face to represent the hoax when it was revealed. His efforts resulted in $1.47 billion in fraudulent Satyam assets, which were meant to be in the form of cash and bank loans.
According to the inquiry, Raju began this fraud around 7 to 8 years before it occurred, in the 2000s or so. During this time, the company’s profits were adjusted to reflect a larger number and match the financial analyst’s forecasts. Raju produced falsified bank statements and false sales invoices to back up his claims.
Raju successfully built 6,000 false bank accounts with the assistance of Satyam’s worldwide branch auditor, which he then used to falsify bank loans and redirect Satyam’s deposits into his own. Raju further admitted that the global head auditor assisted in the creation of profiles for phoney consumers whose names were used to charge fraudulent sale invoices.
Raju also fabricated documents related to Board decisions on these transactions. One of the forged rulings concerned cash provided by the United States through American Depository Receipts, which were not even recorded in the company’s balance accounts. Despite the facts, Raju stated during the initial interrogations that he did not transfer any corporate monies to his accounts or use any of them for personal gain. He argued that he did nothing more than influence the company’s revenues on paper. However, he eventually admitted that he had pocketed a large portion of the company’s cash and transferred them to front businesses held by him and his relatives over the last five years of his employment.
Victims of Satyam Case
The Satyam scam claimed many victims, both nationally and internationally. Direct victims include investors, creditors, and employees, as well as indirect victims such as banks, partner corporations, and linked enterprises.
The first to react were Satyam’s clients and customers, who promptly reevaluated their contracts with the company. Satyam’s reputation and credibility suffered significantly after the scam was uncovered. This also impacted companies that were publicly known to be collaborating with them. As a result, to prevent a bad reputation, many of its clients terminated their contracts and went to other IT companies. One of the biggest reasons clients switched companies was a lack of trust caused by corporate wrongdoing.
Big corporations like Cisco and Telstra withdrew their contracts immediately following the debacle.
Because to the drop-in clients and consumers, the company experienced more financial difficulties. The bogus assets were already a financial blow to the company, and its share price plummeting, combined with a shrinking client base, exacerbated the situation.
Shareholders, investors, and creditors of the corporation were all directly affected by the sudden financial loss, just like the company. Those who invested in Satyam’s shares saw the most evident fall as the company’s share price fell lower by the day. In effect, this swindle tarnished the reputations of other IT companies, causing people to lose trust and interest in the Indian IT sector.
Even the Indian government expressed concern about the impact of this scam on Indian outsourcing companies, as well as their international clients and investors.
Meanwhile, individuals working directly under Satyam felt the economic impact firsthand. Its employees were subjected to nonpayment of salaries for several months as a result of the company’s financial difficulties caused by the scandal. Satyam was at a low position financially, and its employees sensed and experienced it as well.
Furthermore, those who utilised Satyam’s shares as securities or mortgages for loans encountered numerous complications. The banks who held these shares as mortgages were concerned about the recovery of financial and non-financial risk after their value dropped overnight.
Not to account for the small companies that were under Satyam or had a direct partnership with them.
Legal compliance in case of fraud
Fraud can be published under both criminal and civil law depending on which provision the lawsuit is filed under. For criminal charges, IPC has several provisions based on the type of fraud committed, be it forgery (Section 463), cheating (Section 417) or dishonesty (Section 420).
Even the newly enacted Bharatiya Nyaya Sanhita, 2023 (that replaced IPC) has different provisions for different kinds of fraud, let it be dishonesty (Section 318), making false documents (Section 335), falsification of account (Section 344), counterfeiting marks or signs (Section 342) and many more. Section 447 of the Companies Act, 2013 also criminalises corporate fraud; a provision which was added as a reform after the Satyam scam was exposed.
For civil law, Section 17 of the Indian Contract Act, 1872 (hereinafter referred to as ‘ICA’) defines fraud as any act of the party or its agent to deceive the other party. Such acts can Include false representation, misleading assertions, or concealment of facts or even lack of transparency concerning Information that can be detrimental to the contract. The intention behind these actions is to gain unlawful benefit at the expense of the other party.
Promises that the party has no Intention to fulfil or are impossible to fulfil can also be considered fraud, especially if the promisor knew he wouldn’t fulfil the promise even before making it. Let us dive further into what exactly is fraud and the essentials that constitute it:
- As per Section 17 of the Act, fraud is committed by the party involved in the contract or at least his agent.
- There should be intention behind the actions of the party.
- The party that is deceived must have some kind of damage or injury. In case there aren’t any damages or injuries, seeking relief can be tricky.
Role of various regulatory bodies in the investigation
In this case, several regulatory bodies were involved, the role of most crucial of which are discussed below:
Securities and Exchange Board of India (SEBI)
As mentioned earlier, SEBI took an active role in the Investigation of the Satyam scam as well as in handling the company left behind as an aftermath of the fraud. Under Section 17 of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the ‘SEBI’ Act), SEBI was empowered to investigate all the perpetrators of the Satyam scam case who had violated any of the Act’s provisions.
The investigation led to a thorough examination of the balance sheets, audit records and bank statements of Satyam. Since this was an accounting fraud, a lot of attention was paid to the documents held by Satyam.
Before the scam was exposed, Satyam was already going through a major financial crisis. There was a high chance it would end up winding up since most of its assets did not exist due to all the account manipulation. To stop this from happening, Raju made a last attempt to resolve the fake assets by converting them into real ones. The only way to do that was by purchasing the two Maytas companies on paper without paying any actual consideration.
SEBI uncovered all the facts of the scams, the involvement, and roles of the perpetrators as well as the loopholes they had exploited to make the scam work. Every document and account were investigated along with all the companies affiliated with each member. They later released a 65-page report on its findings of the Investigation that highlighted the loopholes and issues behind the fraud case.
Afterwards, SEBI stepped up to help financially stabilise Satyam and plan the strategy for its sell-out instead of winding it up. The government-appointed Board members along with lawyers, accountants and other officials provided by the government helped in the financial stabilisation of Satyam before it was put up for sale.
Satyam regained some of its financial stability within the next 100 days of the government taking over. SEBI helped in this whole process and even planned for a long-term system to Improve the aftermath of the scam.
This long-term system proposed by SEBI included the strategy of a complete takeover of Satyam but in gradual progression. In simple words, they planned to let other companies acquire Satyam as a subsidiary but at a gradual pace. Even the takeover rules and regulations were relaxed by SEBI to promote this plan.
In 2009, Tech Mahindra acquired the newly issued 31% shares of Satyam. It resulted in Satyam becoming Tech Mahindra’s holding company. Later in 2012, Tech Mahindra bought a total of 51% shares of Satyam and decided to merge to form ‘Mahindra Satyam’. All of this was performed with the approval of SEBI.
- Securities Appellate Tribunal
Securities Appellate Tribunal (hereinafter referred to as ‘SAT’) is a statutory authority under Section 15K of the SEBI Act, 1992. Its main function is to exercise the powers and functions conferred in the Act and exercise jurisdiction in cases of appeals against the orders of SEBI or its officers or any other authority under the SEBI Act, 1992.
Since SAT has the jurisdiction in cases of appeal against SEBI orders, PwC had approached the tribunal to challenge the judgement of the case Price Waterhouse & Co. vs. Securities and Exchange Board of India (2010) and SEBI’s order as discussed in the said judgement.
After the investigation was completed, SEBI had issued orders against PwC, one of which prohibited them from auditing any listed company for the term of 2 years. The other order was for the listed companies, warning and suggesting them to not avail the services of PwC or any of its affiliated auditing agencies, given the then-recent scam.
Both orders were made in the context of PwC’s assumed role in the scam. Obviously, PwC had argued against the same, stating that they were not involved in the Satyam scam and had not even been found guilty in the Investigations conducted by SEBI. While their negligence over auditing was a proven fact, there was no malicious planning or participation in the scam.
SEBI disagreed with their arguments and contended that PwC failed to detect a scam of this magnitude for several years even when they were the ones auditing the accounts of Satyam. Thus, the order is justified as a penalty of the same.
The Bombay High Court held the judgement against PwC and in favour of SEBI, stating that the court could not make any discretion for them due to their negligence playing a major role in the Satyam scam case. Aggrieved by this judgement, PwC approached SAT and challenged the previous decree as well as all orders of SEBI related to them.
SAT overturned the Bombay High Court’s decree, stating that SEBI was a regulatory body that only had the authority to pass orders that were either preventive in nature or remedial. However, the order made against PwC was neither of the above and thus, didn’t fall under the authority of SEBI. They cannot make any orders or take any actions that are corrective in attire.
Moreover, SEBI also did not have the authority to set the standards of auditing or judge any firm for the same. Further, the allegations made by SEBI were not backed by any evidence beyond the fact that PwC worked as an external auditor for the Satyam company.
As per the tribunal, it was not the duty of the auditors to detect whether there was a scam going on. Their auditing duties only included the verification of the bank statements and balance sheets. In a way, auditors are supposed to be “watchdogs and not bloodhounds.”
Based on this view, the aforesaid order of SEBI was quashed along with their directions Issued to the listed companies to avoid PwC or their connected agencies for auditing services.
Conclusion
Every action has consequences, and the Satyam scam case shown how a lack of openness and irresponsibility can lead to a scheme that devastates the Indian economy. While this scan was a financial failure, the innovative changes it resulted in were equally, if not more, influential. Indian corporate laws have become more controlled in favour of shareholders and investors, who are typically the most vulnerable parties when a firm suffers a loss.
Following the reforms prompted by the Satyam cheating case, shareholders and investors now have more authority to express their thoughts, as well as the right to band together and oppose if they believe the firm is not working in their best interests. This incident has served as a wake-up call for the Indian corporate sector about the importance of good corporate governance, as well as the impetus for reforming our laws to achieve that goal.
