Truth lessons

By imposing rigorous imprisonment of seven years, apart from monetary fines, on Ramalinga Raju and nine others (including the company’s statutory auditors) in the Satyam fraud case, the special court has sent a strong signal that white-collar crimes will be dealt with sternly. The rate of conviction of financial fraudsters in India is abysmally low and the verdict may well be a much needed deterrent for white-collar crime. On the flip side, it hardly behoves the prosecution machinery that a crime about which a perpetrator confessed to in writing should take six long years to see a judicial verdict. And, remember, the story is not over yet — there will be appeals to higher courts and the case may drag on for a long while.

When Raju made his public confession in 2009, it triggered a clutch of investigations by organisations such as SEBI, the Enforcement Directorate and Income Tax department into different aspects of the case. The CBI’s case may have come to some sort of conclusion but most other cases are still hanging fire. Even SEBI’s order, passed last July, which directed Raju and four others to disgorge their unlawful gains of ₹1,850 crore from unfair manipulation of the stock price, has not yet been enforced. The order was stayed by the Securities Appellate Tribunal, which is yet to take a final view on the case. Even if SEBI does succeed in getting a favourable ruling from SAT, it will face a Herculean task in tracking down the actual victims of this fraud and compensating them for the losses suffered. By now, most of the original Satyam investors are likely to have either sold their shares at distress prices, or exited during the merger with Tech Mahindra.

Even if the last word on the case hasn’t yet been spoken, there have been positive spinoffs for investors at large from the accounting fraud at Satyam. The case has already triggered a comprehensive review and tightening of extant corporate governance norms both in the Companies Act and SEBI’s listing agreement. In this review, the role and quotas for independent directors on company Boards have been expanded. Related party deals have been discouraged; they now require shareholder approvals. And to address the issue of auditor negligence, which played a large role in the fudging of Satyam’s books, statutory auditors have been vested with a whistle-blower function as well as personal liability for negligence. Rotation of individual auditors every five years, and audit firms every ten, has been mandated to ensure objectivity. But we will still have to wait and see if these measures prove effective in ridding Corporate India of accounting malpractices. Reacting to the verdict, both the industry chambers and the auditor’s body have insisted that Satyam Computers was an aberration. Only time will tell whether they are right.

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