satyam case on pakistan law

8/13/2019 Satyam Case on Pakistan Law

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In The Name Of ALLAH The Most

Merciful &The Most Beneficent


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FINANCIAL STATEMENT FRAUD

& CORPORATE GOVERNANCE

THE SATYAM CASE


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Satyam Computer Services, Ltd. was a rising star in the Indian outsourcedIT services industry. The company was formed in 1987 in Hyderbad, India byB. Ramalinga Raju.

Operations of Company

Information Technology (IT)Business Process Outsourcing (BPO)

In Various Sectors

Aerospace and DefenseBanking and Financial ServicesEnergy and UtilitiesLife Sciences and HealthcareManufacturing and Diversified IndustrialsPublic Services and EducationRetail, Telecommunications and Travels

Emergence of Satyam ComputerServices


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7 January 2009, company Chairman Ramalinga Raju resigned after notifying board membersand the Securities and Exchange Board of India (SEBI) that Satyam's accounts had been

falsified.

Raju confessed that Satyam's balance sheet of 30 September 2008 contained:

Inflated figures for cash and bank balances of Rs 5,040 crore (US$1.09 billion) as against Rs5,361 crore (US$1.16 billion) reflected in the books.

An accrued interest of Rs 376 crore (US$81.59 million) which was non-existent.

An understated liability of Rs 1,230 crore (US$266.91 million) on account of funds wasarranged by himself.

An overstated debtors position of Rs 490 crore (US$106.33 million) (as against Rs 2,651 crore

(US$575.27 million) in the books).

A revenue of Rs 2,700 crore and an operating margin of Rs 649 crore(24 per cent of revenue)as against the actual revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore (3per cent of revenues)

This has resulted in artificial cash and bank balances going up by Rs 588 crore

Fabricated Income Statements of Satyam


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Raju claimed in the same letter that neither he nor the managing director had

benefited financially from the inflated revenues. He claimed that none of the boardmembers had any knowledge of the situation in which the company was placed.

Fabricated Income Statements of Satyam

PARTICULARS ACTUAL REPORTED DIFFERENCE

Cash & Bank 321 5361 5040Accrued Interest on BankLoans

Nil 376 376

Understated Liabilities 1230 Nil 1230

Overstated Debtors 2161 2651 490

Total --- --- 7136

Revenues 2112 2700 588

Operating Profits 61 649 588


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Though the precise numbers quoted vary, according to observers the stake of thepromoters fell sharply after 2001 when they held 25.60 per cent of equity in thecompany. Starting from 25.60 this fell to

Continuous Decline in Equity

22.26 per cent by the end of Mar, 2002

20.74 per cent in 2003 17.35 per cent in 2004 15.67 per cent in 2005 14.02 per cent in 2006 8.79 per cent in 2007

8.65 per cent at the end of Sep,2008 5.13 per cent in Jan,2009


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Why did it happen?

Greed for money, overshadowing the responsibility

Craving for Power and Prestige

Image as a Successful person

Overconfidence in his ability Short term goals emphasized

Low ethical and moral standards by top management

Ambitious corporate growth

Executive incentives

Weak Independent directors and Audit committee


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Who is Responsible?The responsibility for a case like Satyam scam to happen is due to people involved.

Individual Level Corporate Level Societal Level

Mr. RamalingaRaju, who is themaster mind behindthe Satyam scam is

personally responsiblefor the saga atindividual level.

The Top Management ofthe company.The Board of Directors ofthe company.

The Internal Auditors aswell as PWC.Satyam's Banks ICICIBank, HDFC Bank, Bank ofBaroda, etc.

The Institutional InvestorCommunity, RetailInvestors and ProfessionalInvestors.

Government should failto detect the manipulationof financial statements.Evaluation Committee:In 2008 Satyam wasAwarded by Golden Peacock

Award for CorporateGovernance under RiskManagement andCompliance Issues.

SEBI in December 2008 gave a clean chit toSatyam in the probe on violation of corporate

governance law.


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Charges Against RajuAccording to Indian Penal Code

Section 120 B for Criminal Conspiracy,Section 420 for Cheating,Section 409 for Criminal Breach of Trust,Section 468 for ForgerySection 471 for Falsification of Records.

All the charges are non-bail able offences.

The shareholders may claim a breach of fiduciary duty. The shareholders mayfile a lawsuit on behalf of them or also file a derivative lawsuit brought by the

shareholders on behalf of the Company against Raju. There are also appearing tobe violations of the Companies Act which may lead to action by the Registrar ofCompanies.


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LEGAL IMPLICATION ON AUDITOR ANDTHEIR DUTY OF CARE

The role of PricewaterhouseCoopers (PWC) the statutory auditors in Indias Enroncomes under the spotlight amid allegations that large Indian companies regularlyuse misleading accounting techniques and bully analysts, accountants andauditors into staying quiet.

An Auditor, first and foremost has to be a Chartered Accountant under the

Chartered Accountants Act, 1949.

The Companies Act, 1956 requires that every balance sheet and profit and lossaccount of a company should give a "true and fair view" of the state of affairs ofthe company according to the standards.

Every company in compliance with the sections 224, 225 , 226 and 227 of theCompanies Act, 1956 appoints an auditor in a general meeting.The auditor owes a duty to the shareholders of the company to ensure that therights of the shareholders are safeguarded.

The audit is intended for the protection of the shareholders with a view toinform the shareholders of the true financial position of the company.


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The companys operating margin of 3 percent now reported appears to

be far below industry standards. It has claimed that it specializes inenterprise-based solutions, where margins in the industry are close to 20percent. The only explanation for the low revenues earned could be thatSatyam was heavily discounting its services to its clients in order to secureorders and clients.

The companys September 2008 financials state that it had as many as690 clients, suggesting a large number of small clients. It does not havemany clients who are billed more than US$100 million a year.

The sizeable dressing up even with a new Board in place, and

investigations launched by SEBI, the Ministry of Corporate Affairs and thepolice, it would be difficult for Satyam to do business as usual.

Any merger or takeover would also have to payoff the debts of Satyam.

Unraveling the transactions and the flow of funds is likely to takeconsiderable time.

Issues in front of New Board


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Under the Companies Act, any person who makes a false statement or who omits any material

fact knowing it to be material, in any return, report, certificate, balance sheet, prospectus,statement or other document may be held liable to a fine or imprisonment or both.

The shareholders of a company also have the right to file a suit against the directors of acompany on the grounds of oppression and mismanagement.

Under the Indian Penal Code, any person who is a party to a criminal conspiracy, commits a

criminal breach of trust, is guilty of cheating, falsifies accounts or forges documents is liable to afine or imprisonment that may extend to 10 years or both.

The SEBI has the powers to issue orders and suspend the trading of any security.

The SEBI can also impose a penalty in the amount of the higher of Rs.250 million(approximately US$5.2 million) and three times the profit from transactions relating toinsider trading.

Additionally, the SEBI can initiate criminal prosecution for these offences and hold a personliable for imprisonment for up to 10 years or a fine of up to Rs.250 million or both.

The stock exchanges also have the power to suspend the dealings with respect to thesecurities of such company.

Applicable Regulations of SEBI


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CODE OF CORPORATE GOVERNANCE OF

PAKISTAN 2012What is Corporate Governance?

Corporate Governance involves a set of relationships between a

companys management, its board, its shareholders and otherstakeholders. (OECD Principles Define Corporate Governance Comprehensively, 2004)

What are five (5) basic Parameters of Corporate Governance?

Good Board Practices. Shareholder Rights. Control Environment. Disclosure & Transparency. Commitment.


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Core values / Principles of Corporate Governance are?

Accountability

Fairness Transparency Responsibility

What are the benefits that corporate governance can bring to a

company?

Optimizes Operational and Financial Efficiency. Streamlines business processes, leading to better operating performance &lower capital expenditures. Improves the companys ROCE. Better share price performance, higher profitability, larger dividend payouts &lower risk levels than peers. Improves Access to Outside Capital. Improves Valuation and Lowers the Cost of Capital. Builds/Improves the Companys Reputation.


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RULES AND REGULATION IN CODE OF

CORPORATE GOVERNANCE OF PAKISTAN 2012

1. Composition of the Board

2. Maximum Number of Directorships to Be Held By a Director

3. The Board of Directors of A Listed Company Shall Ensure That

4. Meetings of the Board

5. Significant Issues to Be Placed For Decision of Board of Directors

6. Directors Training Program

7. Chief Financial Officer (CFO), Company Secretary and Head of Internal Audit

8. Qualifications of CFO and Head of Internal Audit

9. Requirement to Attend Board Meetings

10. Corporate and Financial Reporting Framework

11. Directors Reports of Listed Companies

12. Directors Remuneration

13. Frequency of Financial Reporting

14. Responsibility for Financial Reporting and Corporate Compliance

15. Committees of the Board16. Audit Committee

17. Reporting Procedure

18. Internal Auditors

19. External Auditors

20. Compliance with the Code of Corporate Governance

21. Criteria for Institutions Desirous Of Offering Directors Training Program

22. Additional General Requirements


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S.No. Issue Code 2002 Code 20 121

Independent DirectorEncouraged a minimum of one independent

director on the board of a listed company.

One independent director is mandatory while

preference is for 1/3rd of the total members of

the board to be independent directors.

2 Criteria for assessment of

independence

Very scanty criteria provided Criteria has been substantially expanded

3 Executive Directors Number of Executive Directors not to bemore than 75% of elected directors

including CEO

Maximum number of Executive Directors

cannot be more than 1/3rd of elected

directors including CEO.

4

Number of directorshipsA director can be on the board of no

more than 10 listed companies at any

one time

A director can be on the board of 7 listed companies

at the most at any onetime.

5 Board evaluation - Within two years of the implementationof the Code 2012, the Board has to put in

place a mechanism for undertaking annual

Evaluation of the performance of the Board.

6 Office of Chairman and

CEO

The Chairman of a listed company

shall preferably beelected form among the non-

executive directors of the listed

company.

The Chairman and CEO shall not be the same

person, unless specifically provided in any otherlaw.

The Chairman shall be elected from amongst the

non-executive directors of the listed company.

7 Training of the Board of

Directors

It is mandatory for directors of listed

companies to attain certification.

Initially, the PICG was to provide the

training but later it was opened to

other institutions, provided they met the

criteria specified by the SECP.

It will be mandatory for directors of listed

companies to attain certification under

any director training program (DTP) offered

by any institution (local or foreign), which meets

the criteria specified by the SECP. The criteria are

available at the websites of the stock exchanges andthe SECP.

COMPARISON OF 2002 AND 2012

CODES OF CORPORATE GOVERNANCE


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S.No. Issue Code 2002 Code 20 128 Appointment and

removal and qualification

criteria for Chief Financial

Officer (CFO) and

Company Secretary (CS)

Appointment, remuneration and terms and

conditions of employment of CFO and CS

determined by CEO and approved by

Board. The same mechanism followed for

removal.

The appointment, remuneration and terms and

conditions of employment of the CFO, CS and the

Head of Internal Audit (IA) of listed companies

shall be determined by the Board. The removal will

also be by the Board for CS and CFO.

9 The Head of Internal

Audit (IA)

- Qualification introduced for Head of IA. The removal of

Head of IA is with the approval of the Board only upon

recommendation of the Chairman of the Audit

Committee.

10 Remuneration of

Directors

- A formal and transparent procedure to be followed

and disclosure of aggregate remuneration in the

annual report.11 Board Committees Audit Committee: The Chairman of the audit

committee shall preferably be a non-

executive director.

Reporting Procedure: The Audit Committee

of a listed company shall appoint a

secretary of the Committee

Audit Committee: The Chairman of the audit

committee shall be an independent director, who

shall not be the chairman of the board. Audit Committee

shall comprise of non- executive directors.

The secretary of Audit Committee shall either

be the Company Secretary or Head of Internal

Audit However, the CFO shall not be appointed

as the secretary to the Audit Committee.

Human Resources and Remuneration Committee

introduced.

12 Internal Audit There shall be an internal audit function inevery listed company. The head of internal

audit shall have access to the chair of the

Audit Committee

The internal audit function may be outsourced by a

listed company to a professional services firm or

be performed by the internal audit staff of the holding

company. In the event of outsourcing the

internal audit function, the company shall appoint

or designate a fulltime employee other than

the CFO, as Head of Internal Audit, to act as

coordinator between the firm providing

internal audit services and the board


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PENALTIES IN THE COMPANIES

ORDINANCE, 1984 OF PAKISTAN

Meetings and Proceedings

Directors

Chief Executive Bar On Appointment Of Managing Agents, Sole Purchase

And Sale Agents, Etc.

Accounts

Dividends and Manner and Time of Payment Thereof Disposal of Books and Papers of Company

General Legal Proceedings, Offences, Etc

Accounts Records


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satyam case on pakistan law

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