Mumbai/Hyderabad: The ministry of corporate affairs (MCA), which administers and regulates the functioning of companies, has recommended prosecution against the promoters, the chief financial officer (CFO), the company secretary, the auditors and a few independent directors of Satyam Computer Services Ltd for serious violation of norms under the Companies Act and the Indian Penal Code.
A 93-page internal review by MCA on the findings of the Serious Fraud Investigation Office (SFIO), its investigative arm, mentions 32 violations of company law by the Hyderabad-based IT services company, whose promoter B. Ramalinga Raju confessed to a Rs7,163 crore accounting fraud in January. Mint has previewed a photocopy of the report, signed by MCA joint director K.L. Kamboj.
Fraud fallout: B. Ramalinga Raju. Madhu Kapparath / Mint
The report, running into 29 volumes and 14,000 pages, was submitted in May.
Kamboj could not be contacted. An MCA official said the prosecution will take place only after the ministry approves it. MCA is also discussing this with the law ministry. According to this person, SFIO can prosecute executives for violations of company law, but it needs to move court for punishing criminal offenders.
The MCA internal review, a summary of the SFIO report, has touched upon the modus operandi of the fraud, perpetrated over 13 years between 1995 and 2008; manipulation of Satyam’s share price; flotation of a large number of group companies for rigging the share price and purchasing land; and persistent misrepresentation of facts leading to the confession of the largest fraud in Indian corporate history by its promoter.
“Investigation reveals that profits of the company have been inflated and the actual position for 2007-08 was a loss of Rs243.38 crore as against reported profit of Rs1,941.86 crore. MCA has ordered SFIO to initiate recovery proceedings against the non-executive directors of Satyam, who received commissions during 2007-08. The commission was wrongly paid to non-executive directors on the basis of profits, and the directors are liable to refund the money,” the report said.
Also See The Satyam Timeline (Graphics)
It has also found that Satyam’s board of directors, headed by Raju, approved a proposal to pay a dividend of Rs274.38 crore, including tax components of Rs39.86 crore and an interim dividend of Rs66.86 crore in 2007-08, when the company incurred losses.
According to the review, the annual returns filed by Satyam with the Registrar of Companies (RoC) provided wrong information on the shareholding pattern of the directors and their relatives. It also filed incomplete balance sheets for fiscal years 2007 and 2008.
MCA wants to issue a show- cause notice against company secretary Savita Joshi before initiating prosecution against her. Joshi is a Hyderabad-based practising company secretary and a member of the Institute of Company Secretaries of India (ICSI), who certified several documents of Satyam for years.
The report said Joshi “has knowingly signed” Satyam’s annual returns, and recommended penal action against her. She was responsible for certifying wrong figures. Joshi said she “never suspected anything wrong going on in the company till the shocking confessions by its founder chairman on 7 January”.
“I was associated with the company as a practising company secretary only for certifying the documents prepared and already certified by its secretarial department personnel,” she said.
According to Joshi, the ICSI committee that probed the role of company secretaries in the accounting fraud had given her a clean chit. She said she “relied on the documents that were prepared and already certified by the officials of Satyam’s secretarial department while certifying them for submitting to the RoC”.
Among other violations of company law, the MCA review said Satyam had not disclosed the market value of unquoted investments, including distinctions between trade and non-trade investments, and the aggregate amount of these investments since 2003.
Besides, Satyam had failed to disclose the detailed break-up of audit expenses paid to the auditor from 2003 to 2008.
The electronic filing records with RoC show that Satyam has not filed details of employees under the Companies Act since 2003. The government has already ordered prosecution against people liable for not filing the details.
Coming down heavily on the firm’s auditors, the review said they had violated norms by certifying financial statements without proper verification.
“(S.) Gopalakrishnan and Talluri Srinivas, partners of PricewaterhouseCoopers, have failed to exercise their basic audit functions, such as balance sheet verification with bank, and verification of sundry debtors, sundry creditors, which shows that there was dereliction of duties...” it said.
The review also said when Satyam shares dropped in June 2006, in order to boost investor sentiment, the company announced a bonus issue and issued bonus shares in October 2006. “This could be the trigger point to the promoters of Satyam as almost all members of the promoters’ group (except Raju, R. Rama Raju, B. Nandini Raju and B. Radha Raju), sold their entire shareholdings by September 2005 and the company could be facing credit crunch on account of falsified financial affairs on continual basis,” it said.
Till then, the Satyam promoters were raising funds to meet their financial obligations by way of sale of shares. At the next stage, they had no other option but to pledge the core promoter holding to raise funds, the MCA review added.
According to the review, Satyam brought only $50.25 million (Rs237 crore today) of the total $152.70 million raised by the sale of American depository shares (ADS), into India. Both Ramalinga Raju and CFO S. Vadlamani did not give definite answers about the fund utilization and diversions. So, the investigating agency has referred the matter to the Enforcement Directorate, the agency that probes foreign exchange violations.
Quoting the SFIO report, the The MCA review said the promoters of Satyam floated a large number of companies and used them for making investments and holding shares of various group companies, and purchasing and holding land for promoters. “...All of these companies were mainly promoted by about 15 individuals related to the Raju family and there were only three-four auditors for all these companies,” the report said.
SFIO plans to probe the original source of funds, bank account details and other statements of some 123 companies of the Raju family that were in the land business.
S. Bharat Kumar, counsel for the Raju brothers and Vadlamani, said his clients were not served any copy of the SFIO report. “I cannot respond to the charges levelled against my clients under certain provisions of the Companies Act and (the) Indian Penal Code unless I go through the SFIO report copy served (to) my clients,” he said.
Prasenjit Roy, marketing director and spokesman of Tech Mahindra Ltd, the firm that has saddled itself with the task of turning around Satyam, expressed his inability to comment on the impact of SFIO’s findings on the financials of both the firms “owing to matter under investigation and also being in the silent period”.
Meanwhile, Tech Mahindra has extended the date for approaching the shareholders of Satyam with an open offer to buy an additional 20% from them in accordance with the capital market regulator’s guidelines on substantial acquisition of shares and takeovers. In a filing with the Bombay Stock Exchange on Friday, Tech Mahindra said it has revised the last date by which the letter of offer would be despatched to Satyam shareholders to 9 June, from 3 June. The company has also revised the last date of withdrawal by shareholders to 26 June, from 27 June. Dates for all other activities of the schedule announced on 22 April remains unchanged, it said.
Through Venturbay Consultant Pvt. Ltd, its acquisition vehicle for the Satyam purchase, Tech Mahindra had announced an open offer on 22 April for buying an additional 20% from its shareholders.
The open offer followed Tech Mahindra buying a 31% stake in Satyam for Rs1,756 crore through the issue of preferential shares after an auction process conducted by the government-appointed board of Satyam.
Graphics by Sandeep Bhatnagar / Mint