Mumbai: Soon after B. Ramalinga Raju, the founder of Satyam Computer Services Ltd, confessed to having fudged the company’s books to the tune of Rs7,136 crore, India’s stock market regulator Securities and Exchange Board of India (Sebi) swung into action.
Although Sebi doesn’t have the powers to look into issues outside the stock market, it decided to get involved given that Raju’s confession would have an impact on the stock of Satyam and other information technology (IT) companies.
On the day of Raju’s confession, 7 January 2009, it appointed Sunil Kumar, a general manager at its Chennai office, as the investigating authority for the Satyam case. A four-member team led by Kumar reached Hyderabad the same day and was mandated to look into the affairs relating to buying, selling or dealing in Satyam’s shares.
Within a few days, the stock exchanges dropped the Satyam scrip from their benchmark indices and suspended trading in the stock in the futures and options segment.
However, there were still issues related to the stock exchange that needed to be clarified. These included norms on share pledges—Satyam’s promoters had pledged their shares to raise money—and regulations governing the behaviour of auditors (its auditors had, after all, signed off on the company’s accounts).
Among the first Sebi announcements in the wake of the swindle was one on a peer review of working papers of the external auditors of all companies that were part of the Bombay Stock Exchange’s benchmark index, the Sensex, and the National Stock Exchange’s Nifty index. Sebi’s committee on disclosure and accounting standards met on 9 January and announced the peer review process.
The regulator has so far completed peer review of 47 companies out of the 50 listed on Nifty.
On 21 January, the regulator’s board met and decided that promoters have to declare the amount of shares they have pledged to raise money. Sebi said this has to be done on a quarterly and continuous basis. Promoters of listed firms routinely pledge their equity holdings discreetly to lenders, largely to raise personal loans, a practice that has heightened investment risk on Indian stocks.
Besides these two significant measures, Sebi also sought to play an active role in reviving the beleaguered software services firm.
On 2 February, it said it would amend its rules to allow the new government-appointed board of the company to sell Satyam.
“We will amend our regulations through guidelines to enable a transparent process for arriving at a price in case of such acquisitions,” Sebi chairman C.B. Bhave said on 2 February.
He added that rather than creating a one-off exemption for Satyam, the regulator would amend its regulations. “We must have a mechanism to deal with abnormal cases,” he said.
Under India’s takeover code, an investor who acquires 15% of a company needs to make an open offer for another 20% at a price that is not less than the average share price of the previous six months.
On 14 February, Sebi amended the “substantial acquisition of shares and take overs regulation” for distressed companies whose boards have been reconstructed by the government.
The regulator also said Satyam would be sold to the highest bidder in a “transparent” and “competitive” process. It also ruled out any hostile bids thereafter.
On 13 April, Satyam’s board announced that Venturbay Consultants, a subsidiary of Tech Mahindra Ltd, had emerged as the highest bidder to acquire a controlling stake in the company, subject to the Company Law Board’s approval.
The regulator in September also put up for discussion a paper on better accounting practices. The paper suggested making the audit committee of a firm responsible for ensuring that the chief financial officer “has the necessary accounting or related financial management expertise”.
The discussion paper also suggested changes in the ways companies report and publish their financial statements. It favoured reducing the time available for companies to file their audited financial results from 60 days to 45 for each of the first three quarters of a fiscal year. For the last quarter and full year, firms could continue to follow the 60-day norm, it said.
Sebi is yet to take a decision on the recommendations of the paper.