1. Background

Satyam Case is a tale of irony in the name of the company. The word ‘Satyam’ means truth whereas the Satyam Case is about the untruthful deeds by the promoters of the company. Satyam was a public-listed company enjoying high level international reputation. The company was also very well known for having good corporate governance practices and was even the winner of Golden Peacock Global Award for that. Despite of this, in connivance with auditors and other parties, the company indulged in the fraudulent accounting practices to mislead the investors, regulators, board and other stakeholders.[1]The scandal was unravelled when the Chairman of the company Mr. Ramalinga Raju confessed about the misrepresentation in the accounting practices and thereafter regulators like SEBI stepped in and started taking actions.[2] The issue started with Satyam’s attempt to invest Rs. 7,000 crores in Maytas Properties and Maytas Infrastructure. These firms were owned by the family members of chairman Mr. Raju up to 1.6 billion dollars. These investments were cleared by the board on 16th December 2008 but were opposed by the investors. The accounts of the firm were manipulated by assets like cash and bank deposits being overstated, debts being understated and so on. As a result, the investors filed various lawsuits against the company. Maytas deal was the major bone of contention for which the various lawsuits were filed. Following thereafter, the decision of Satyam board got reversed, World Bank banned Satyam for 8 years to conduct any kind of business and even four independent directors resigned from the company.[3]

2. Understanding the Lacuna in Corporate Governance

“Business is all green, only Philosophy is grey”

  • Karl Marx

Corporate Governance is about the rules and regulations through which a company is governed. This is more important in the scenario where the ownership is separate from management and control which is the case in most of the companies, corporate governance mechanisms help provide security to the shareholders and other parties while dealing with the company because it protects their rights and responsibilities and at the same time ensures fairness, transparency and accountability in the dealings of the company.[4]

In the present case scenario, the major factors related to the occurrence of scam were lacuna in auditing practice. Even though the firm complied with the provisional requirement of having an audit committee, but the work done did not yield any good results. The auditing firm for Satyam was Price water house Coopers which is one of the best accounting firms in the world and despite of that the firm was not able to detect any kind of fraudulent practice. The firm signed all the accounting statements and hence is also responsible for the fraud.[5]Further, Chief Financial Officer is also responsible for signing off the final financial statements and therefore the same responsibility lies on them as well. CEO and CFO instead of working towards the interests of the company, worked towards a scam and thereby neglected their fiduciary responsibilities as well.

Companies Act, 1956 did not specifically require independent directors and in the present case even though they were appointed but their appointment was done by the promoters only who were in fact the people carrying out the fraudulent activities, this lead to a mockery of the concept of appointment of the Independent directors. As a result, they did not play any major role in playing their part for calling out such kind of activities. They violated their fiduciary duties towards the company. It also hints towards the fact that the directors involved were all chairman friendly. The Investors were also at the same time not vigilant.[6] The company also lacked enough vigilant mechanisms like an adequate whistle-blower policy, Shareholders in India could not even sue because of non-recognition of “class action” of shareholders.[7] Then this case also involves the issue of insider trading and related party transactions as the promoters and their family members manipulated share prices and derived profits by selling their shares at a very high cost.[8]

3. Review thereafter and the redressal through Companies Act, 2013

The Satyam case sparked a reaction from various corners for the globe and hence it called for an urgent change in the policy measures. Several different agencies like Confederation of Indian Industries, National Association of Software and Services committee, SEBI Committee on disclosure and accounting standards etc. started looking into the policy changes regarding the Audit Committee, Shareholder Rights, Whistle-blower policy etc. These committees prepared various kinds of suggestions which were later dealt with by the legislature.[9]

The amended version of the Companies Act, 2013 also as a response envisaged very specific changes to ensure better corporate governance. The mechanisms provided in the amended act are more vigil as compared to the earlier versions, they make corporate fraud as a criminal offence. [10]Section 245 of the new act gave a statutory recognition to the class-action suits by the shareholders. Section 241 further ensured shareholders activism and provisions were made for any kind of mismanagement by the company, oppression of the minority shareholders etc.[11] Then there were further some provisions made to increase overall transparency in the functioning of the companies. Firstly, LODR Reg 17 provided that Non-executive directors in a company cannot be less than half of the board. This provision was made to ensure that executive directors do not end up dominating.  To ensure the voice of small shareholders is also heard, Section 151 also provides for election of a Small Shareholder’s directors. There is also a requirement under Section 149 of 1/3rd of the board to be comprised of Independent Directors and their duties and responsibilities are very clearly provided under the act. There are also limitations and conditions with regards to who can serve as an independent director. Section 166 further lays down duties of directors of a company which are aimed at enhancing the corporate governance mechanisms. There are also now limits on the number of companies where a same person can hold the office of a director and further some caps on the limit of renumeration of directors.[12] Then there are other provisions which aim at enhancing fairness in the accounting process. These are mainly governed by Companies (Audit and Auditors) Rules, 2014. The auditor cannot serve same listed company for more than one term of five years and in case of an audit firm, not more than two terms of five years. There are other provisions as well governing the relation between the auditor of the firm and the firm. Section 141 provides that only C.A. firms can be auditors and the person who signs the final accounts necessarily must be a Charted Accountant. Also, if a firm is an auditing firm for a company, they cannot provide other services to the firm like maintaining their books of accounts, actuarial services, or any other kind of financial service and the auditing firm must necessarily have access to all the books of the company. Section 143 lays down the duty on auditor to disclose frauds detected in the functioning of the company to board or central government depending up on the magnitude of the fraud. Section 177 and Reg 18 of LODR establishes other vigil mechanisms like the whistle-blower policy. Lastly, there are other regulations with regards to Related Party Transactions. Section 2(76) defines what kind of transactions are covered under Related Party Transactions. Section 188 lays down that consent of board is required for Related Party transactions by the company and certain types of transactions require even the consent of the shareholders. In general, Reg 23 provides that all types of Related Party Transactions require the approval of auditing committee. These all were the key changes in the Companies Act, 2013 which were aimed at addressing the key gaps of the Satyam Case.

4. Critical Analysis

A general overview shows as a robust legislative change followed the Satyam Scandal but a deeper insight and comparative study with other jurisdictions will lead us to think that the regulatory framework is a bit too much. The question in front of us now is that if it is all possible to be followed verbatim or are the companies indulged in the process of ticking the boxes to just show the compliance with the rules. For an example, the process of having independent directors is easy but the companies can very well exert influence up on the independent directors without coming into scrutiny. Although, compliance to regulations has increased and there has not been a fraud of such a large scale as Satyam but frauds have not reduced drastically even after these stricter regulations[13], maybe the acceptance of new rules is in letter and not in spirit. There is also not much shareholders activism seen in the Indian market. This points towards the conclusion that there is a need for a collective conscience to develop for these capitalist practices to flourish with trust. This might come with more awareness, highlighting larger consequences of trivial lies etc. and questions like these possess even greater relevance in the current times where the companies are already at risk due to the ongoing global pandemic and are making strategies and plans for a swift revival.

[1] Satyam scam: All you need to know about India’s biggest accounting fraud, Hindustan Times (2015), https://www.hindustantimes.com/business/satyam-scam-all-you-need-to-know-about-india-s-biggest-accounting-fraud/story-YTfHTZy9K6NvsW8PxIEEYL.html (last visited Jun 5, 2020).

[2] What was Satyam scam which toppled India’s fourth largest IT company from the top slots, Financial Express (2018), https://www.financialexpress.com/industry/what-was-satyam-scam-which-toppled-indias-fourth-largest-it-company-from-the-top-slots/1010389/ (last visited Jun 5, 2020).

[3] The Satyam Scandal, Forbes (2013), https://www.forbes.com/2009/01/07/satyam-raju-governance-oped-cx_sb_0107balachandran.html#bb53483044cc (last visited Jun 5, 2020).

[4] Lisa Mary Thomson, What is corporate governance? The Economic Times (2009), https://economictimes.indiatimes.com/money-you/what-is-corporate-governance/articleshow/3995278.cms (last visited Jun 5, 2020).

[5]  V. Gopalan, Corporate Scams in India: Lessons to be learnt, Company Law Journal, 2009, p.76.

[6] Bhasin Madan Lal, Corporate Accounting Fraud: A Case Study of Satyam Computers Limited, Open Journal of Accounting 26–38., 1 Jayadeep Kaur, Corporate Governance- An overview of Satyam Tragedy ‘SEBI & Corporate Law, Vol. 104, 2010, p.50.

[7] J P Sharma, WHAT WENT WRONG WITH SATYAM? http://www.iodonline.com/ (last visited Jun 5, 2020).

[8] S.Harish, Insider Trading With Special Reference to The Satyam Saga, NLIU Law Review, Vol II No. 1, February 2011.

[9] Rebecca Furtado, The Satyam Scandal and It’s Effect on Corporate Governance Strategies in India iPleaders (2016), https://blog.ipleaders.in/satyam-scandal-effect-corporate-governance-strategies-india/ (last visited Jun 5, 2020).

[10] K V Kurmanath, How Satyam scam raised the bar of corporate governance @businessline (2018), https://www.thehindubusinessline.com/companies/how-satyam-scam-raised-the-bar-of-corporate-governance/article7085855.ece# (last visited Jun 5, 2020)

[11]Moneycontrol,https://www.moneycontrol.com/news/business/companies/what-changed-in-the-legal-landscape-post satyam-scam-2480623.html (last visited Jun 5, 2020).

[12] FE Online, The positive fallout: Better laws to govern corporates The Financial Express (2015), https://www.financialexpress.com/industry/satyam-scam-the-positive-fallout-better-laws-to-govern-corporates/62355/ (last visited Jun 10, 2020).

[13] The Satyam Scandal, Forbes (2013), https://www.forbes.com/2009/01/07/satyam-raju-governance-oped-cx_sb_0107balachandran.html#52095fd63044 (last visited Jun 10, 2020).

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Company: Jindal Global Law School
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