New Delhi: The management, promoters and independent directors of Satyam Computer Services Ltd could face punitive action, including imprisonment, fines and possibly attachment of personal assets and the company could also be banned from the stock markets in the wake of Wednesday’s confession by the firm’s chairman B. Ramalinga Raju that Satyam overstated its revenue and profits.
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Regulators such as the ministry of corporate affairs (MCA), Institute of Chartered Accountants of India (ICAI), Institute of Company Secretaries of India and the Securities and Exchange Board of India (Sebi) are launching investigations against auditors, company secretaries, the chief financial officer and the chairman, managing director and independent directors of the firm.
While, Sebi has already ordered a probe into the case, MCA is gathering more evidence, including the extent of involvement, if any, of the independent directors.
Corporate lawyers maintain that Raju as well as directors could be booked on several counts.
“First, under the Companies Act, a director is supposed to act in the interest of the company. It is a fiduciary obligation and he can be punished for a breach of this obligation. Also, under the Securities Contract Regulation Act (legislation that checks undesirable securities transactions) an offence can be made out. Even under the Indian Penal Code, there is clear offence of criminal breach of trust and cheating,” said Akil Hirani, managing partner at Mumbai-based law firm Majmudar and Co.
He added that the independent directors would not be spared either. “Company Law does not distinguish between independent and non-independent directors. The authorities will have to investigate the board meeting minutes and records. The onus will be on the directors to show they are innocent,” he said.
Somasekhar Sunderesan, securities law expert and partner at the Mumbai office of law firm J Sagar Associates, said that Raju’s letter admitting misappropriation could make for a clear case of cheating. “Anyone who buys shares, buys them on the basis of the data given by the company. There is a clear assumption that the information furnished is correct. If it is held that the disclosures are false, it is deemed to be a case of cheating.”
On the offensive: Sebi chairman C.B. Bhave says Satyam could face charges in the US since it was listed on the New York Stock Exchange. Harikrishna Katragadda/Mint
For violation of Sebi laws, Raju could face criminal prosecution leading to 10 years imprisonment and a fine of up to Rs25 crore. Sunderesan said Sebi could ban those responsible for fraud from participating in any capital market activities.
The new Companies Bill, pending in Parliament, also lays down that the offence for misleading investors is non-compoundable (which cannot be settled between two parties) and involves imprisonment and penalties depending on the gravity of the situation. Under the existing Companies Act, this is compoundable and penalties are much lower.
The new Bill, unlike the existing law, also has the provisions of class action suit, which investors can collectively file against the promoters.
The legal recourse currently available to shareholders, according to Hirani, is that they can file a civil suit for damages or approach Sebi or MCA for “disgorgement” of profits.
Sunderesan added that Sebi is equipped with regulations to handle this situation, but said that the agency’s enforcement has to improve.
Some legal experts, however, said the independent directors may be spared. “Whole-time directors will certainly be booked while it’s very difficult to prove independent directors had a role to play in it (the fraud),” said Rajan Gupta, partner at FoxMandal Little.
Meanwhile Sebi chairman C.B. Bhave said that Satyam could also face charges in the US since it was listed on the New York Stock Exchange.
Officials at the Securities and Exchange Commission, the stock market regulator in the US, could not be reached for comment.
According to Prem Chand Gupta, minister for corporate affairs, the government was awaiting Satyam’s response to queries raised by the Hyderabad office of the registrar of companies. The company has till Thursday to respond.
The case may also be referred to the serious fraud investigation office (SFIO), Gupta added.
SFIO, which is part of MCA, is a multidisciplinary body to look into various kinds of corporate frauds, has experts from various fields, including corporate law, customs and revenue, banking and accountancy. It has so far filed around 30 cases of corporate frauds since it started functioning in 2003.
“Action can be taken against Satyam’s chartered accountants, chief financial officer, internal auditors, etc. The punishment may range from cancellation of their CA certificates to imposing a lifetime ban on their practice and membership of ICAI,” said Ved Jain, president of ICAI.
Khushboo Narayan and Ravi Krishnan and PTI contributed to this story.
Video by Mehak Kasbekar