Hyderabad/New Delhi: India’s ministry of corporate affairs (MCA) moved decisively on Friday to address the fallout of the country’s biggest corporate fraud, the Satyam scandal, and dissolved the company’s board, which was supposed to meet on Saturday, and said it would appoint 10 nominee directors on a new board that would meet within the next seven days.
A few hours after the ministry’s announcement, Satyam chairman B. Ramalinga Raju surrendered to the Andhra Pradesh police.
The ministry’s move means there will be no meeting of the company’s board on Saturday. Corporate affairs minister P.C. Gupta didn’t name the nominee directors on Friday, but it is likely that the board it puts in place will have a few bureaucrats, bankers and software industry heavyweights.
Tough measures: Minister of corporate affairs Prem Chand Gupta. Ramesh Pathania / Mint
The announcement came even as no attempt was made to arrest Satyam Computer Services Ltd’s chairman, who on Wednesday shocked peers, analysts and investors with the admission of falsifying accounts to the tune of at least Rs7,136 crore.
The head of India’s stock market regulator Securities and Exchange Board of India (Sebi) said it would file a complaint against Raju only after completing its investigation.
Sebi also announced that companies that are part of the Bombay Stock Exchange’s Sensex index, the National Stock Exchange’s Nifty index, and some others would have to have their financial results reviewed by a committee appointed by the regulator.
Five more class action suits were filed on Day 3 of the Satyam scandal and the Indian Railways said it would likely cancel a contract it had awarded the software services firm.
Also Read Full Coverage | Satyam Fiasco
MCA’s action came after the Company Law Board, the apex legal and regulatory body governing companies in India, allowed it to: restrain the current board from doing anything (it ceased to be the firm’s board at 6pm on Friday); pick 10 nominee directors; and hold a board meeting within seven days.
While television channel CNBC TV18 said the ministry would announce the new board later in the day, no announcement had been made till the time this paper went to press (see www.livemint.com for the latest updates on Satyam). Gupta, however, added that the government had no plan to take over the management of the company. He also said the Andhra Pradesh police were taking “necessary action” against Raju. Earlier in the day, several political parties had demanded that Raju be arrested immediately.
Where was Raju?
Until his dramatic late night surrender, reported first by CNBC TV18, Raju himself stayed out of sight just as he has done ever since he wrote to the board on Wednesday disclosing the fraud. He was asked to appear at 4pm Friday before the investigation team of Sebi that is in Hyderabad, but didn’t do so. His lawyer S. Bharat Kumar said the Sebi team had issued its summons at 2pm. “The time given was absolutely insufficient and my client was also not keeping well.” Raju was then scheduled to appear before the team on Saturday afternoon.
While some legal experts said Raju could have been arrested without a complaint and, indeed, should have been to prevent tampering of evidence, others said one was needed. Thus far, none of Satyam’s shareholders, investors or executives has filed a complaint against Raju. Nor has any regulatory agency or the government itself.
A senior police official in Hyderabad said before Raju’s surrender that while the state police’s criminal investigation department had created an investigation team, it hadn’t received an order on Raju’s arrest from the government. “This is because, for such white-collared crimes, we wait for documentary evidence. In this case, we are waiting for such evidence provided by either Sebi or ministry of corporate affairs or both. The police will normally not move on shareholders complaint because shareholders will not have documentary evidence,” added this official, who declined to be identified.
Still, other legal experts said that while Raju’s letter would not be enough to convict him, it had enough basis for the government to file a complaint. “The letter is enough for the state to swing into action and file a complaint, which could later lead to his arrest, subject to the discretion of the state authorities...,” said Supreme Court lawyer Sanjay Hegde.“A state agency like the economic offences wing should have registered a case, seized records and begun determining whether a crime has been committed.”
Of lawsuits & settlements
Five more lawsuits were filed in the US, taking the total number of suits filed against Raju or Satyam to seven. Meanwhile, Satyam has withdrawn its disparagement case against British telecom company Upaid Systems Ltd, the latter indicated.
The disparagement case was filed by Satyam in response to a case that Upaid filed in April 2007 against Satyam alleging fraud, forgery, misrepresentation and breach of contract. The Upaid case was in connection with the non-transfer of intellectual property rights arising from a project the companies jointly worked on in the late 1990s. Satyam was an IT outsourcing vendor for Upaid during the time. Upaid is seeking damages to the tune of at least a billion dollars. The case is set for trial in June.
“We are currently prepared to offer patience in our pursuit of justice so that we can move forward with the development of Upaid’s business,” said Joanne Hunter, Upaid’s senior vice-president (marketing and communications). “Upaid hopes that this move by Satyam indicates a new realism by their management and board, and a willingness to resolve the mistakes of the past in a straightforward and honest manner.”
“We are saddened, but not surprised by the nightmare unfolding for other Satyam customers and stakeholders,” Hunter said, referring to the revelations by Raju. However, Satyam itself did not comment on the status of the disparagement case.
Five law firms have filed class action suits against Raju, Satyam’s executives and Satyam since Thursday evening India time. The suits are on behalf of those who invested in Satyam’s American depository shares (ADS) listed and traded on the New York Stock Exchange (NYSE). The firms that have filed suits include Glancy Binkow and Goldberg Llp, Harwood Feffer Llp, Federman and Sherwood and Finkelstein Thompson Llp, Brodsky and Smith Llp that have filed their suits in the US district court for the southern district of New York. The fifth firm Sarraf Gentile Llp has filed a similar lawsuit in the Manhattan federal court.
Two other law firms, Vianale and Vianale Llp and Izard Nobel Llp, had earlier filed similar class action lawsuits against Satyam in the southern district court of New York and the federal court in Manhattan, respectively. Class action suits are filed by legal firms that invite interested parties, investors in Satyam ADS in this case, to become party to the case to claim damages from company. As on 31 March, 295,141,400 ADS of Satyam were traded on NYSE.
In response to an email questionnaire from Mint, William B. Federman, managing partner at Federman and Sherwood, said more than 20 investors had contacted the company, hours after the suit was filed.
The Maytas angle
Regulators also intensified their coordinated probe into the books of Satyam, Maytas Infra Ltd and Maytas Properties Ltd. The officials of the ministry of corporate affairs’ serious fraud investigation office (SFIO) have began inspecting the records of these three companies. The ministry has also seized Satyam’s books.
The Registrar of Companies at Hyderabad, Richard Henry, is coordinating the inspection along with officials of the ministry, Sebi and SFIO, an official from the ministry said.
“The inspection of books of accounts and records of Satyam and Maytas firms by the SFIO officials will primarily focus on whether there were any related party transactions between these entities and see whether the promoters were benefited unduly. The inspection will also see if there was any siphoning of funds from Satyam to the entities of Maytas,” added this official, who did not want to be identified.
“SFIO authorities are currently inspecting our records and we are cooperating with them,” said a spokesperson for Maytas Infra.
“No official from the regulatory agencies have so far come to our offices till evening to inspect our records, though we learnt it through media,” said a spokesperson for Maytas Properties.
While Gupta had earlier said India’s apex body of the accounting profession, the Institute of Chartered Accountants of India (ICAI), would take “strictest possible” action against Satyam’s auditor Price Waterhouse (part of PricewaterhouseCoopers), which signed off on the company’s accounts, it emerged on Friday that at least two members of the body’s executive council are partners at the audit firm.
However, Sanjeev Maheshwari, a member of the central council of ICAI, said the fact that S. Gopalakrishnan and Harinderjit Singh from PricewaterhouseCoopers are members of the body’s central council does not pose a conflict of interest and that the two would not be part of the disciplinary committee that looks at the Satyam case.
Before Gupta’s late evening press conference on Friday, rival political parties alleged that the Congress government in Andhra Pradesh was trying to shield the promoters of Satyam.
A spokesperson for the state’s main Opposition party Telugu Desam, Nagam Janardhan Reddy, asked for an investigation into Satyam and the Maytas entities.
“The state government had doled out large scale favours to the Maytas entities in the last three-four years, without following any competitive bidding process while awarding large projects to them,” said Reddy.
The other opposition parties in the state such as the Communist Party of India-Marxist, the Communist Party of India, the Bharatiya Janata Party and the newly formed political party of film star Chiranjeevi, Praja Rajyam, also accused the state government of favouring firms promoted by Ramalinga Raju’s family.
Khushboo Narayan in Mumbai, Sangeeta Singh in New Delhi, and PTI also contributed to this story.