WTM/RKA/SRO/ 64 - 68 FINAL CASE OF SATYAM COMPUTER SCAM.... /2014 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA ORDER Under sections 11 (1) , 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 i n the matter of Satyam Computer Services Ltd. In respect of: S. No Name PA N Order No. (1) Mr. B Ramalinga Raju, Ex - Chairman , Satyam Computer Services Limited ACVPB8311J 64/2014 (2) Mr. B Rama Raju, Ex - M anaging Director , Satyam Computer Services Limited ACEPB2813Q 6 5 /2014 (3) Mr. Vadlamani Srinivas, Ex - C hief Financial Officer , Satyam Compu ter Services Limited ABEPV4019P 6 6 /2014 (4) Mr. G Ramakrishna, Ex - V ice President (Finance) , Satyam Computer Services Limited ACAPG1654L 6 7 /2014 (5) Mr. VS Prabhakar a Gupta, Ex - Head (Internal Audit) , Satyam Computer Services Limited AEAPP2815G 6 8 /2014 1. Securities and Exchan ge Board of India (SEBI ) received an email dated January 7, 2009 from Mr. B. Ramalinga Raju , Ex - Chairman , Satyam Computer Services Limited , now known as Tech Mahindra Limited (hereinafter referred to as Satyam Computers / the company ) admitting and conf essing the following: I would like to bring the following facts to your notice: 1. The Balance Sheet carries as of September 30, 2008 a. Inflated (non - existent) cash and bank balances of 50.40 billion rupees ($1.04 billion) (as against 53.61 billion ref lected in the books). b. An accrued interest of 3.76 billion rupees which is non - existent. c. An understated liability of 12.30 billion rupees on account of funds arranged by me. d. An overstated debtors position of 4.90 billion rupees (as against 26.51 bi llion reflected in the books) 2. For the September quarter (Q2) we reported a revenue of 27.00 billion rupees and an operating margin of 6.49 billion rupees (24 pct of revenues) as against the actual revenues of 21.12 billion rupees and an actual operatin g margin of 610 million rupees (3 percent of revenues). This has resulted in artificial cash and bank balances going up by 5.88 billion rupees in Q2 alone. ______________________________________________________________________________ Order in the matter of Satyam Computer Services Ltd. Page 2 o f 65 The gap in the Balance Sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance). What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has at tained unmanageable proportions as the size of company operations grew significantly (annualized revenue run rate of 112.76 billion rupees in the September quarter, 2008, and official reserves of 83.92 billion rupees). The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations -- thereby significantly increasing the costs. Every attempt made to eliminate the g ap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in a take - over, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten. The aborted Maytas acqu isition deal was the last attempt to fill the fictitious assets with real ones. Maytas investors were convinced that this is a good divestment opportunity and a strategic fit. Once Satyams problem was solved, it was hoped that Maytas payments can be del ayed. But that was not to be. What followed in the last several days is common knowledge. I would like the Board to know: 1. That neither myself, nor the Managing Director (including our spouses) sold any shares in the last eight years -- excepting for a s mall proportion declared and sold for philanthropic purposes. 2. That in the last two years a net amount of 12.30 billion rupees was arranged to Satyam (not reflected in the books of Satyam) to keep the operations going by resorting to pledging all the pro moter shares and raising funds from known sources by giving all kinds of assurances (Statement enclosed, only to the members of the board). Significant dividend payments, acquisitions, capital expenditure to provide for growth did not help matters. Every a ttempt was made to keep the wheel moving and to ensure prompt payment of salaries to the associates. The last straw was the selling of most of the pledged share by the lenders on account of margin triggers. 3. That neither me, nor the Managing Director too k even one rupee/dollar from the company and have not benefitted in financial terms on account of the inflated results. 4. None of the board members, past or present, had any knowledge of the situation in which the company is placed. Even business leaders and senior executives in the company, such as, Ram Mynampati, Subu D, T.R. Anand, Keshab Panda, Virender Agarwal, A.S. Murthy, Hari T, S.V. Krishnan, Vijay Prasad, Manish Mehta, Mural i V, Sriram Papani, Kiran Kavale, Joe Lagiola, Ravindra Penumetsa; Jayaraman and Prabhakar Gupta are unaware of the real situation as against the books of accounts. None of my or Managing Directors immediate or extended family members has any idea about t hese issues. Having put these facts before you, I leave it to the wisdom of the board to take the matters forward. However, I am also taking the liberty to recommend the following steps: 1. A Task Force has been formed in the last few days to address the situation arising out of the failed Maytas acquisition attempt. This consists of some of the most accomplished leaders of Satyam:, Subu D, T.R. Anand, Keshab Panda and Virender Agarwal, representing business functions, and A.S. Murthy, Hari T and Murali V representing support functions. I suggest that Ram Mynampati be made the Chairman of this Task Force to immediately address some of the operational matters on hand. Ram can also act as an interim CEO reporting to the board. 2. Merrill Lynch can be entrusted with the task of quickly exploring some Merger opportunities. 3. You may have a restatement of accounts prepared by the auditors in light of the facts that I have placed before yo u. ______________________________________________________________________________ Order in the matter of Satyam Computer Services Ltd. Page 3 o f 65 I have promoted and have been associated with Satyam for well over twenty years now. I have seen it grow from few people to 53,000 people, with 185 Fortune 500 companies as customers and operations in 66 countries. Satyam has established an excellent l eadership and competency base at all levels. I sincerely apologize to all Satyamites and stakeholders, who have made Satyam a special organization, for the current situation. I am confident they will stand by the company in this hour of crisis. In light o f the above, I fervently appeal to the board to hold together to take some important steps. Mr. T.R. Prasad is well placed to mobilize support from the government at this crucial time. With the hope that members of the Task Force and the financial advisor, Merrill Lynch (now Bank of America) will stand by the company at this crucial hour, I am marking copies of this statement to them as well. Under the circumstances, I am tendering my resignation as the chairman of Satyam and shall continue in this positio n only till such time the current board is expanded. My continuance is just to ensure enhancement of the board over the next several days or as early as possible. I am now prepared to subject myself to the laws of the land and face consequences thereof. 2. In view of the above , SEBI carried out an investigation into the affairs of Satyam Computers to ascertain , particularly , whether the provisions of the SEBI Act, 1992 (hereinafter referred to as “SEBI Act”) and Rules and Regulations framed thereunder have been violated. SEBI also carried out inspection of the available books of account of Satyam Computers . As the subject matter of the investigation pertained to financial statements of Satyam Computers , SEBI also inspect ed the documents available with the au ditors of Satyam Computers i.e. Price Waterhouse (hereinafter referred to as PW or the auditors ) . 3. Pursuant to the investigation, SEBI issued Show Cause Notices (SCNs) to Mr. B Ramalinga Raju (Ex - Chairman) , Mr. B Rama Raju (Ex - Managing Director) , Mr. V adlamani Srinivas (Ex - Chief Financial Officer) , Mr. G Ramakrishna (Ex - Vice President, Finance) and Mr. V . S . Prabhakar a Gupta (Ex - Head Internal Audit) { hereinafter referred to as the noticees } . The d etails of dates of the SCNs issued to each of the not icees are as follows: Sl no. Name of person Date of SCNs Date of 1st supplementary SCNs Date of 2nd supplementary SCN 1 Mr. B Ramalinga Raju 9/3/2009 2/6/2009 22 - Mar - 10 2 Mr. B Rama Raju 9/3/2009 2/6/2009 22 - Mar - 10 3 Mr. Vadlamani Srinivas 9/3/2009 2 /6/2009 22 - Mar - 10 4 Mr. G Ramakrishna 28/04/2009 1/7/2009 22 - Mar - 10 5 Mr. V . S . Prabhakar a Gupta 28/04/2009 1/7/2009 22 - Mar - 10 4. In response to the above SCNs issued in the year 2009, the noti c ees made general denials and submitted that they were in judi cial custody and not in a position to submit written submissions due to lack of access to the records and documents of Satyam Computers. The noticees did not ______________________________________________________________________________ Order in the matter of Satyam Computer Services Ltd. Page 4 o f 65 make any specific submissions with regard to allegations made in those SCNs. An opportunity of per sonal hearing was also granted to the noticees on October 10, 2009 when Mr . R. Sridhar Reddy, Advocate, Mr. L. Venkateshwar Rao, Advocate and Mr. K. S. Rahul, Advocate appeared for Mr. B. Rama Raju, Mr. Vadlamani Srinivas and Mr. G. Ramakrishna, respective ly and made a request for inspection of documents, which was allowed and they were advised to submit their reply to the SCNs. Other noticees chose not to avail this opportunity of personal hearing. On October 14, 2009, the advocates of Mr. B. Rama Raju and Mr. Vadlamani Srinivas inspected the documents relied upon by SEBI in the SCNs issued to them. 5. Subsequently, SCNs dated March 22, 2010 were issued in continuation of and as supplementary to the SCNs i ssued in the year 2009. It was clarified that the con tents of the SCNs issued in the year 2009 and the SCNs issued on March 22, 2010 shall be read together making out a comprehensive charge. The noticees were given opportunities to file their replies to each of the three SCNs. Vide the aforesaid SCNs , all th e noticees , were called upon to show cause as to why appropriate directions in terms of sections 11, 11(4) and 11B of the SEBI Act , r egulations 11 and 11 (1) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices R elating to the Securities Market) R egulations, 2003 ( hereinafter referred to as the PFUTP Regulations , 2003 ) and regulation 11 of Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 (hereinafter referred to as the PIT Regulations , 1992 ) , should not be issued against them. They were also called upon to show cause as to why direction s to disgorge the unlawful gain made by them on account of the sale of shares of Satyam Computers and/or borrowings against the said shares should not be issued against the m under the said provisions. 6. Reply of Mr. Ramalinga Raju : The advocates of Mr. Ramalinga Raju vide letter dated April 19, 2010 submitted that their client was in judicial custody since January 2009 and c o ntinu e d to b e so and that he was not physically in a position to meet his legal advisors or to provide instructions to any pe r son on account of ill health. F urther , it would not be possible to reply to the SCN s without requisite papers and documents of Satyam Computers as well as the necessary discussions and explanations from Mr. Ramalinga Raju. They sought three months time to file the reply to the SCN after the aforesaid conditions change and requested that the personal hearing may be granted to him after submissions of the written reply. 7. Reply of Mr .Rama Raju: Vide his letter dated October 14, 2010, Mr. Ra ma Raju submitted that certain documents pertaining to him were impounded by the CID of Andhra Police and subsequently handed over to CBI and hence , he had no access to those records. He stated that the SCN s do not contain any evidence of him being involved in the manipulation of accounts except with an assumption that he was the Managing Director of Satyam Computers at that time. According to him he was not in a position to read the account books on his own and ______________________________________________________________________________ Order in the matter of Satyam Computer Services Ltd. Page 5 o f 65 come to a conclusion and that the financial statements of Satyam Computers given to him by finance executives at the time he was employed with the company did not give an indication that the accounts were improper and incorrect. H e further sub mitted that he did not have any personal knowledge of the misstatement of accounts and he was in no way connected to the fraud and the loss caused to investors would only be a temporary phase. He also stated that he would need further time to reply to the SCN dated March 22, 2010 . 8. Reply of Mr. Vadlamani Srinivas: V ide his letter dated October 14, 2010, Mr. Vadlamani Srinivas, s ubmitted t hat he could not respond to SEBI‟s notices due to his being in prison and having no access to records. He submitted that , as CFO of Satyam Computers, he was spending most of his time in Investor relations a nd Business process facilitation functions and very limited time in accounts time in the accounts function . He stated that he was not involved in falsification o f accounts / operational aspects of fabrication of accounts and though he could have exercised more care and caution, he was not responsible for the misstatement of accounts nor was it his idea of creation. He also stated that he never ha d any r o le t o p lay in intern al audit and that his only failure was not being able to detect falsification . He further stated that he was not able to reply to the SCN issued on March 22, 2010 . 9. Reply of Mr. G Ramakrishna: Vide his letter dated October 14, 2010 , Mr. G Ramakrishna , subm itted that he did not have information from Satyam Computers, PW and Bank of Baroda (BoB) and t hus he was not sufficiently equipped to respond to the SCN effectively and completely. Further , he had no knowledge of the facts and circumstances of the case ot her than his depositions to SEBI. According to him, there was no act of commission or omission done by h i m , he ha d not misused the position held by him in Satyam Computers and he was not involved in misstating the account . He further submitted that he woul d need more time to reply to the SCN dated March 22, 2010. 10. Reply of Mr. V S Prabhakara Gupta: Vide his letters dated July 23, 2009 and February 13, 2012 , Mr. Prabhakara Gupta submitted that he does not have any records to provide a meaningful reply to t he allegations made against him. He has claimed that he had written to Satyam Computers for certain records but he had not received them and he is constrained from giving any meaningful relies to the allegations. According to him he w as a victim of the all eged manipulation of accounts and there was no benefit derived by him at the cost of other investors and that h e has not duped other investors . He has further contended that Internal Audit manual o f Satyam Computers which the SCN alleges to have been vio l at ed by him is not a legal document but only an internal document t o guide the Internal Audit Team . He has also submitted that he had made statements before the Investigation team voluntarily and pro actively with good intention to help ascertain the truth and that the manipulation of accounts is ______________________________________________________________________________ Order in the matter of Satyam Computer Services Ltd. Page 6 o f 65 not due to design weakness but due to management override not in the knowledge of internal audit. 11. After issuance of SCNs dated March 22, 2010, the noticees were provided several opportunities to submit their repl ies and appear for personal hearing in the matter on May 14, 2010, June 16 , 2010, October 23 , 2010, December 3, 2010, February 23, 2012, June 13, 2012, March 7, 2013, June 6, 2013, March 11, 2014 and May 12, 2014. In response to the notices of per sonal hea rings issued by SEBI after issuance of SCNs dated March 22, 2010 , the noticees cited uniform reasons for seeking adjournments of hearings as summarised in the following table : Name of noticee Brief submissions made in reply to notices of hearings Mr. Ra malinga Raju Earlier, for the hearings scheduled in the years 2010 and 2011, Mr. Ramalinga Raju stated that : a. he was under treatment for Hepatitis C at the Nizams Institute of Medical Sciences, Hyderabad; b. he was not in possession of documents for replying to SEBI. Subsequently, he requested SEBI to keep the proceedings in abeyance till a reasonable period after the final conclusion of the C BI trial pending against the noticess before the Special Court at Hyderabad . Mr. Rama Raju Mr. Rama Raju submitted t hat he was not in a position to find time to prepare and send complete replies to SEBIs SCNs or instruct a Counsel or representative to attend the SEBI hearing on his behalf as he was pre - occupied with CBI trial. He also requested SEBI to keep the proceed ings in abeyance till the conclusion of the aforesaid CBI trial. Mr. Vadlamani Srinivas Mr. Srinivas inter - alia stated that : a. he is not in possession of documents for replying to SEBI; b. the CBI trial court proceedings are is continuing on a day to day basi s and it would be very difficult to prepare and send replies to the SCNs of SEBI ; c. he has requested that the SEBI proceedings should be kept in abeyance till the conclusion of the CBI trial. Mr. G Ramakrishna Mr. G Ramakrishna requested SEBI to keep the p roceedings in abeyance till the conclusion of CBI trial. Mr. V S Prabhakara Gupta Mr. Prabhakara Gupta : a. stated that he d oes not have access to the records for replying to the SCNs ; ______________________________________________________________________________ Order in the matter of Satyam Computer Services Ltd. Page 7 o f 65 b. requested SEBI to defer the hearing in the present case until the conclus ion of the CBI trial and he may be granted access to internal audit records in the possession of Satyam Computers. 12. W ith a view to conduct the present proceedings on the dates which do not clash with th e dates fixed by the trial court , SEBI , vide letter d ated April 25, 2012 , sought details of the dates of hearing in the trial court from the noticees and asked them to indicate whether the proceedings are fixed before the trial court on Saturdays also . However, the noticees replied inter alia that the CBI tr ial was continuously in progress and the Saturdays were to be used by them to correspond with their counsel / indulge in work relating to the CBI trial and hence, the SEBI proceedings would be required to be kept in abeyance till the CBI trial is co ncluded . 13. Considering the facts and circumstances of this case, a last and final opportunity of personal hearing was granted to the noticees on May 12, 2014 and a notice dated April 30, 2014 was issued to them in that regard. They were clearly advised that the p endency of CBI trial cannot be accepted to be a justifiable reason for their non - attendance on all the dates fixed for personal hearing s . T hey were also advised that t he proceedings cannot be kept in abeyance anymore, as sufficient time and opportunities o f bei ng heard have been given to them in adherence to the principles of natural justice. They were also advised that if they fail to avail th is last opportunity of personal hearing (either in person or through their authorized representative), SEBI will pr oceed to conclude the matter and pass such order as it deems fit, based on the material available on record without any further intimation. However, the noticees again chose not to avail the said opportunity of personal hearing despite service of notices u pon them in that regard. 14. I note that, in this case, several opportunities have been provided by SEBI to the noticees adhering to the principle of natural justice and considering the importance of the case and mixed questions of facts and law being involve d therein. While these considerations were weighing in the mind of SEBI authorities and they were making a sincere effort to afford the noticees adeq uate opportunities to represent their matter before the com petent authority with reference to the SCNs iss ued to them, the noticees did not show any sincerity in availing the se opportunities and instead, employed delaying tactics. From their written replies, I note that all the noticees have generally denied the charges/allegations mentioned in the SCNs but no ne of them have submitted their specific replies on merits. It is pertinent to mention that the noticees were in charge of affairs of Satyam Computers regarding its management, administration and /or its finances and accounts. As such they could have filed their replies on merits. However, they chose to avoid the same citing extraneous reasons such as non - availability of information from Satyam Computers, etc. ______________________________________________________________________________ Order in the matter of Satyam Computer Services Ltd. Page 8 o f 65 15. I further, note that v ide various notices of personal hearings, all the noticees had been give n option by SEBI to appear in person or through their advocate(s) and/or through their authorized representative(s). It had also been clarified to the noticees that the pendency of CBI trial cannot be accepted as a justifiable reason for their non - attendan ce on the dates fixed for personal hearing s and they could appear for personal hearing through authorised representative/s. However , they chose to evade the opportunities and delay the proceedings for extraneous reasons as cited in above para . I further no te that even during pendency of CBI trial, the noticees could have appeared on any Saturday/s . I find that the reason cited by them for their inability to appear on Saturday / s is not cogent as they could appear on Saturday /s , either in person or through th eir authorised representatives(s). E ven when the final and last opportunity of personal hearing in these proceedings was afforded to the noticees on May 12, 2014 they chose to avoid and evade the same too despite service of notice dated April 30,2014 where by they were clearly advise d that if they fail to appear for personal on this final date, the proceedings shall be completed on the basis of material available on record. 16. It is noted that while the matter was proceeded for consideration on the basis of material available on record , since the noticees had chosen to avoid the opportunities , Mr. Vadlamani Srinivas (vide letter dated May 9, 2014 received by SEBI on May 12, 2014), Mr. B Ramalinga Raju (vide letter through his advocates dated May 26, 2014) and Mr. Rama Raju, (vide letter dated May 26, 2014), requested for cross - examination of certain persons/entities. It is relevant to mention here that, though the instant proceedings had commenced by issuance of the first set of SCNs in the year 2009, these no ticees never made such a request. I note that the request of cross - examination , subsequent to or on the last date of personal hearing despite clear advice that SEBI shall proceed in the matter on the basis of material available on record if they fail to a vail the opportunity of personal hearing , is also a device adopted to further delay the proceedings. Nonetheless, I note that these requests are open requests without making out a case for cross - examination. In the facts and circumstances of this case, no prejudice would be caused if the cross - examination as requested by some of the noticees without making a case for the same is denied . In this regard , it is relevant to refer to the following judgment of Honble Supreme Court in the matter of Transmission Corpn of A. P. Ltd. and others vs. Shri Rama Krishnan Rice Mil (2006) 3 SCC 74 : “In order to establish that the cross - examination is necessary, the consumer has to make out a case for the same. Merely stating that the statement of an officer is being ut ilized for the purpose of adjudication would not be sufficient in all cases. If an application i s made requesting for grant of an opportunity to cross - examine any official, the same has to be considered by the adjudicating authority who shall have to eithe r grant the request or pass a reasoned order if he chooses to reject the application. In that event an ______________________________________________________________________________
Posted on: Wed, 16 Jul 2014 12:35:21 +0000