satyam scam - interview q & a the legal prespective

8/8/2019 Satyam Scam - Interview Q & a the Legal Prespective

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Satyam Scam Interview _ Q & A _ The Legal Prespective

Here is a verbatim transcript of the exclusive interview with HP Ranina, Somasekhar Sundaresan,

Satish Maneshinde and Sanford Dumain on CNBC-TV18. Also watch the accompanying video.

Q: What action can Sebi or government of India take because we understand that Sebi and

the Ministry of Corporate Affairs will be working together? What are the lines of

investigation they can take and what is the final action in terms of penalty that Mr. Raju,

his management or his board as well as the auditors will have to face?

Sundersan: The powers that Sebi has are quite clearly laid out. There is prohibition of

fraudulent and unfair trade practice regulations where providing information or making a

statement which shouldnt believed to be true is defined as a fraudulent trade practice relating tosecurities market. So, a balance sheet which you know to be untrue is a fraudulent trade practice.

Its a criminal offence under section 24 of the Sebi act. It could mean penalty and imprisonmentof upto 10 years. There are also directions that can be passed such as stay away from the market,dont associate with the capital market dont deal in securities for a defined period that Sebi can

choose to define, so the powers with Sebi are quite wide.

Q: What are the powers of the Ministry of Corporate Affairs?

Sundersan: They will look at the accounts if they were actually with the requirements under the

Companies Act and the things there could be perceived will be slightly less toxic as compared tothe powers that Sebi has.

Q: So at the max we are talking about what? 10 years of imprisonment and what Rs 20-30

crore penalty?

Sundersan: Rs 25 crore criminal penalty you can also talk about putting a person out of themarket for a long period of time.

Q: So in this case both Mr. Raju if he has any accomplices and as well as Satyam could be

debarred from the market?

Sundersan: The powers that Sebi has enables it to put any person in charge and responsible for

the state of affairs out of the market system for a long period of time. Ketan Parekh was out for14 years and an appeal against it was failed. This is the kind of period which people have been

kept out of the market system, so the Powers at Sebis wheels are immense.

Q: What about the board in this entire process because clearly for many years and many of

the members of the board, independent directors as well has been on the board for many

years and then they seem to have a blind eye or unknowing of the fraud?

Ranina: I am worried about the audit committee of the board; surely they should have gone into

this and relied on statements on internal auditors from the statutory auditors and from banks.
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There is a failure on the part of audit committee on the board and thats where the independent

directors are culpable or guilty and that will be a major issue.

Q: But how can they be punished?

Ranina: They can be punished on the same ranks as Mr. Raju will be because it will benegligence, there will be fraudulent statements both on the Sebi and the Companies Act.

Independent directors will be held responsible, the audit committee is mandatory and no

accounts can be presented to the shareholders without the audit committee approving it and theaudit committee consists of independent directors.

Under the Companies act, if you present fraudulent accounts to shareholders, that itself is an

offence but the amount of punishment is not as severe as under Sebis law.

Q: But this is admission of fraud and not allegation of fraud?

Ranina: Under the IPC this is nothing but cheating under section 420 and that could involve atleast 7 years imprisonment.

Q: The most obvious case in this is fraud and criminal action and it would have to be

prosecuted under the IPC what is the liability of the management, Raju, the board if any in

this situation?

Maneshinde: This entire board should be held responsible, the company which is functioning on

the basis of the board of directors carrying on day to day activities. It cannot be like turning a

blind eye to the fact that Rs 7,000 crore worth of transactions were fraudulently shown as thetransactions of the company. Under the Sebi and Companies act all the directors cannot be held

responsible because institutional directors and independent directors, like you are naming them

are nominated directors of various financial institutions or the government nominees. They cantbe held responsible because nominated directors cant be held legally liable.

Q: Will regular independent directors not enjoy immunity?

Maneshinde: Regular directors cannot be absolved of any duties because as long as it can be

proved that they adhere to the in charge of the affairs of the company that they have some role to

play. Particularly in a large company like this but the fact that one of the directors has confessedthat this was going on in the company and it cant be absolved. Further more the provisions of

the IPC particularly section 420 of the IPC and if they have been forging the records of the

company in submitting forged returns to the share holders and to various authorities, all those persons including the ones who have made the confessional statement now can be held

responsible not only for cheating but for forgery of valuable securities of the company.

Q: What is the extent of punishment that they can face if found guilty?

Maneshinde: Under the IPC there are various offenses disclosed in a matter like this, first of all

section 420 of IPC entrails a punishment of seven years and as far as forgery of records is


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concerned then using improper documents is genuinely concerned. It could lead upto life

imprisonment but we are yet to see such drastic punishments handed down by the courts and the

records go upto Rs 7,000 crore and a special court should be constituted and a number of shareholders have been taken for a ride, a large number of institutions, banks and also the corporations

have been taken for a ride.

Q: Whats the extent of punishment can the audit member get except his licensebeing suspended?

Jain: Yes and presently thats the way the Chartered Accountant act is but there is alsonow a financial penalty of Rs 5 lakh which can be levied on the guilty member.

Q: Is there anything beyond this that the ICAI can do that can prove to be a deterrent and

set a precedent for future such precedent fraud cases?

Jain: The ICAI is bound to act with the powers given to it by the parliament and currently we

can only debar our member for the membership of the institute for life also depending upon thegravity of the punishment and the kind of crime they have committed but that s obviously doneafter a proper routine enquiry is done and we have a proper disciplinary procedure andafter that only the punishment is meted out.

Q: Where do you hope this case will go?

Doshi: We have filed the case under 5 sections of IPC and this was filed today at 5 pm by ourPresident Dr. Kirit Somaiya with the economic offenses wing in Bombay. We are not sure as to

what would be the action taken by the Police but just to take the matter forward we are planning

to have a meeting with the Ministry of Corporate Affairs next week and also with the regional

directors in Hyderabad next week and also try to see how to support the whole action where theemployees of 53,000 shareholders and the whole business is smoothly transferred to another

entity.

Q: What I want to understand is what action shareholders can take? I understand the class action

instrument is not available in India but it is available overseas and Satyam is listed on NYSE.

There are a number of Foreign Institutional Investors (FIIs) in Satyam; can they initiate class

action proceedings against Satyam?

Dumain: Yes, in fact they can. Satyam has been defended in its securities case in the United States for

number of years and there are many precedents of that. We represented Canadian Institutional Investors

against Nortel Networks Company in New York and got a successful job there. The Dutch company sued

in New York by a German Institutional Investor, so there are many precedents to that. If companies takeadvantage of the American Securities market they subject themselves to American Securities Laws.

Q: Can we then also expect some action from the Securities and Exchange Commission(SEC)?

Dumain: Yes, I think we can expect that and there are certainly going to be investors, who will be filing

lawsuits on the US Securities Law against Satyam and PwC.


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Q: Going by previous precedents of Enron, WorldCom what kind of action can SEC take against

an offshore company that is listed on the American Exchange and therefore comes under the SEC

purview?

Dumain: They can take a variety of actions. But I think the bottomline here is that it is more of effective

results for shareholders that will be through file litigation and the class actions in United States. If there is

a limit to what the SEC is going to do against a foreign company, even though the SEC would haverestriction over the foreign company because the American Depositary Receipt (ADRs) are traded here.

Q: Will the class action will be against Satyams management Ramalinga Raju, who has confessed

this fraud or will it be more towards the auditors considering that the the management and Raju

maybe penniless to pay anything of?

Dumain: Certainly, there will be defendants but you are right, I think the focus have to be on auditors in

terms of recovering significant amounts for shareholders.

Q: Clearly action does take place when fraud takes place at least in the United States of America.What is the hope of any concrete action taking place in India, I know this is precedent setting but

any justice being delivered shareholders aside, they come under risk capital, whatever class

action suite foreign shareholders wants to take thats their problem. But what in terms of fraud

will be done here?

Sundaresan: The provisions of the prohibition of fraudulent practice regulation are quite explicit, SEBI is

known to have acted to put people out of the market for long periods of time, within a rather reasonable

time frame by Indian standards.

Q: But that is Security scam, this is corporate fraud do we not distinguish between the two?

Sundaresan: The two are completely linked. The corporate fraud has led to trading in securities at pricesthat are not reflective of the real worth of the company.

Q: So you think that there can be a link established and you think the punishment can be as

severe as meted out in previous cases?

Sundaresan: Yes, of course I see something pretty drastic coming out here from Sebi. This is subject to

investigation, as somebody said this earlier today; this is an unsigned document, there is obviously some

strategy behind making this disclosure, perhaps the idea was to set out the parameters of presenting

what the fraud is and hoping that the investigation remain within those parameters. So, one cant assume

that the letter today is all there is to be. At the end of the investigation you will know how deep it is, how

bad it is after which there would be a sentence.

Q: Multiplicity of authorities the police under the IPC, the Ministry of Corporate Affairs, Sebi all

investigating, plus if you have class action suit coming upon from foreign institutional investors

are they going to result in confusion or are they going to result in correction and punishment?

Ranina: I think they will only result in delays- delays all around that is unfortunate thing in India. But the

US courts will take a immediate stand and possibly what will happen is that Raju and others may have to

go there and face the authorities in those countries. But in India courts will take its own time unless Mr.

Maneshinde says you have a special court set up for this purpose.
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Q: Which means that it requires an ordinance?

Ranina: Yes, and that can be done. So, unless you have a special court things will take at least 5-7 years

in India.

Q: So if it is criminal proceeding it could take 4-5 years of civil proceedings. It could take 10-12years. If a special court is not set up likelihood being that if foreign investors do take action

chances are thatRamalinga Raju and his accomplices will be answerable in a faster fashion to the

American justice system than the Indian justice system. Am I correct in assuming that?

Maneshinde: The Indian system so far we are seeing is slow inspite of the special courts of 1992 we still

have lot of trials going on. If he faces the American system, I think he will go in much faster than trial

being completed in our courts.

Q: There is no class action suit instrument available in India. How hopeful are you that

shareholders will have any legal recourse whatsoever, even ifRamalinga Rajuand his accomplices

are prosecutors under the Indian Penal Court and by Sebi shareholders are unlikely to be able to

get anything back either from the company, the management or even the auditors?

Doshi: What we are planning is that at least 10% of the shareholders may get together or maybe 100 in

numbers, we may try to file a petition under section 397 and 398 with the company law board to

investigate. Secondly, our major role is to see that the current status of the company is not disturbed,

otherwise if all employees leave the company there is nothing in the company, the loss is to the investors.

Our idea is that somebody should takeover this company on lock stock barrel basis without the liabilities,

and see that the employees and the investors are protected that is our major issue as of now.

Q: IfRamalinga Raju and his accomplices are prosecuted under the American justice system by

way of class action suit, by foreign institutional investors what could they be facing in terms of a

punishment?

Dumain: The class action mechanism in United States is a civil mechanism and not a criminal

mechanism. So, there is no mechanism for punishment under the class action. The class action was

designed to do recovery as quickly as possible against whoever is responsible for the fraud. So, we are

talking more of that economic recovery for shareholders in US class action more than any kind of

punishment.

Q: Do you really believe that justice will be delivered in this case?

Sundaresan: It can be delivered, I have always maintained we are in an over regulated and under

enforced system, so this is a good test case to see how well we can enforce it. The multiplicity of

regulators is something that is even there in United States.

Q: But they deal with it differently, we deal with it differently, so what can be the advantage and

what can be the problem in India?

Sundaresan: The Department of Justice thinks the SEC is not good enough and thinks that the SEC is

sleeping.
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Q: Put your money where your mouth is this is unprecedented fraud, will we see justice delivered

in a span that makes any sense- not over 15 years?

Sundaresan: We can see a punitive justice being done against whoever is responsible after

investigations. I dont see any remedial justice being done, because I think the money would be recovered

from people in terms of damages in any reasonable form and given to Indian shareholders, within a

reasonable time. If you file a civil suit today, maybe 20 years down the line the trial will be over- the firsttrial stage and then there would be appeals and that is the sort of delays we are talking about in the

Indian system.

Q: Is there a chance that we will see the auditor having to shut shop as was the case with Arthur

Andersen if found guilty of severe negligence?

Jain: No, we can take action only against the member concerned; we have no jurisdiction over the firm

itself.

Q: So, it is time for the audit community and at least the Institute of Chartered Accountants of

India (ICAI) to look for an expansion and its ability to met out punishment?

Jain: No, I dont think so, because as far as we are concerned it is a member concerned who is always

held responsible for his actions, just because one person has not done his job properly within a firm does

not mean that the entire firm is not doing his job properly. And I think lets keep this issues specific to

Satyam and this is an issue, which needs to be thoroughly investigated.

Ranina: I think this is a type of financial terrorism that has been unleashed on the Indian nation because

this will have a very bad impact internationally. Therefore we need new set of laws and special courts to

deal with the situation hereafter.

satyam scam - interview q & a the legal prespective

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