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| Edited By: |Source: DNA |Updated: Apr 12, 2015, 12:21 PM IST
The conviction of Ramalinga Raju and nine of his associates on charges of criminal conspiracy, cheating, forgery and breach of trust by a special CBI court brings closure to India’s biggest corporate accounting fraud case.
However, the sentence of seven years imprisonment and fine of Rs5 crore imposed on each of the convicts is light, considering the hefty punishments imposed by the US, which places a high premium on honesty in corporate governance. Earlier, market regulator SEBI had found the top management of Satyam Computers guilty of unfairly manipulating stock prices and insider training and imposed a fine of Rs1,850 crore. In January 2009, Raju, one of the early poster-boys of India’s IT revolution, admitted to cooking up his company’s books by overstating its revenues, profit margins, and quarterly profits between 2003 and 2008 in a vain attempt to keep the company attractive to investors, employees and stock market analysts. SEBI found that Raju concocted fictitious clients, put teams to work on projects for such clients, and inflated revenues by Rs4,782 crore through falsifying 7,561 invoices for non-existent sales. In the company’s balance sheets, these imaginary “clients” became debtors who never paid their bills, even as Raju forged bank statements to show high cash and bank balances.
Only when the company ran out of money to pay salaries did Raju “confess” his crimes and resign. The Satyam scam raised several questions of corporate governance and the sanctity of the auditing process. Among those indicted alongside Raju in the various cases pursued by the CBI, SEBI, Serious Fraud Investigation Office and Enforcement Directorate include his family members, the company’s former Chief Financial Officer, the company’s internal and external auditors, and even the independent directors. After misleading investors about the company’s financial health, the Rajus benefited from high stock prices by transferring shares to their own private entities and then selling them in the stock market to net huge profits. Among the biggest failures in this saga were the external auditor, PricewaterhouseCoopers, bound to protect the interests of prospective investors, and the independent directors, who should have effectively represented the small and minority shareholders on the Board.
Clearly, the government has more to do to hold promoters culpable and deter them from malpractices that hurt investors. The maximum sentences handed down in the Enron accounting fraud scandal was 24 years and compensations to the tune of $11 billion were granted to shareholders. There is a consistent pattern to how the US Securities and Exchange Commission and the Federal Bureau of Investigation have pursued those indulging in insider trading and securities fraud as the convictions of Rajat Gupta, Raj Rajaratnam and Mathew Martoma show. In contrast, SEBI’s attempts to take a tough line on companies, like the recent Sahara case, have been embroiled in frivolous litigation and a lengthy appellate process, which must be streamlined if investor confidence is to improve. But where the government got its act right in the Satyam case was the success in staving off the company’s collapse and the sale to Tech Mahindra. This saved jobs and salvaged clients’ trust in the Indian IT industry. Unfortunately, a similar course was not pursued to save Kingfisher Airlines, another company undermined by its promoter’s vanity. Mahindra Satyam proceeded to compensate US investors $125 million but Indian investors were not so lucky. Their lawsuit demanding Rs5,000 crore compensation was dismissed by the Indian Supreme Court. Herein lies the inequity Indian small investors are forced to put up with. Notwithstanding Raju’s conviction, the levels of vigilance are still not adequate to prevent more such frauds — as the 2013 NSEL scam proves.
