09 January 2009

Satyam - introduction to series

I'm going to run a series of pieces on Satyam - please ignore the series if you have had more than your fill of the issue. As more facts seep in, I will keep updating the series as new facts are unraveled, recall, there are very few facts in the public domain except a dubious confession letter.

First, the confession story doesn't add up. The facts don't really exhibit internal consistency. Something else is up.

Second, what should be done at this very moment by regulators (i.e. ad hoc and immediate as opposed to the longer investigations and recriminations).
What should regulators do - SEBI, exchanges, MCA, SFIO, Finance Ministry, Police, US-SEC, NYSE and the most important regulator of all - the shareholders.

Third, what are the provisions of law which could be used against a) Satyam b) Ramalinga Raju c) independent directors ca) audit committee d) auditors e) merchant bankers. And who will pay what in terms of money, industry bars and jail sentences.

Forth, which are all the types of action possible against these people and the limitations and at least vague time lines

Fifth, 10 questions to the audit committee.

Sixth, can we prevent this elsewhere and in the future?

While I pen this, listen to my podcast on the Satyam story till day before. This is my first podcast, so it is a bit experimental.

See also my piece in DNA Money today 'Confession to seek lower penalty'.

See also Joseph Leahy's piece in the Financial Times and Heather Timmon's piece in the New York Times to see the international coverage this has generated.

See my main blog.

1 comment:

sdd said...

Even after the recent developments, officials of SEBI do not appear to have learnt much.

There are numerous legal flaws in the order dated 7th Jan of P K Nagpal, Executive Director, SEBI, authorizing investigation into the Satyam affair. This can severely curtail SEBI’s ability to take enforcement action later.

In this case, the matters to be investigated mainly are cooking of books (violation of clause 49 of listing agreement) and Off market transfer of shares (through pledge etc). Both these violations fall under Securities Contracts (Regulation) Act, 1956/ Rules, 1957(Section 23, Rule 19 and Section 13 / section 18 of SCRA).

The investigation order of 7th Jan (as available on SEBI website) issued by Mr P K Nagpal, Executive Director, has following glaring mistakes:

1) It invokes powers under SEBI (Merchant Bankers) Rules. These Rules are no more in existence and were rescinded vide notification 1455 of 07/09/2006.

2) The order signed by Mr. P K Nagpal, mentions Securities Contract (Regulation) Act, 1956 as having been notified (made) under SEBI Act, 1992

3) For appointing the investigating authority, the order invokes Regulation 7 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Markets) Regulations, 2003; and Regulation 29(1) of the SEBI (Merchant Bankers) Regulations, 1992. Mr Nagpal should know that Regulation 5 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities market) Regulations, 2003 deals with the appointment of “Investigating authority” and not regulation 7. Further, Regulation 29(1) of SEBI (Merchant Bankers) Regulations, 1992 refers to the appointment of “Inspecting Authority” and not “Investigating Authority”, whereas vide the said order and under said Regulation 29(1) SEBI has appointed an “Investigating Authority”.

4) There is no order to investigate violations of SCRA. Therefore, there is no power vested with the Investigating Authority to inquire into all major aspects of the Satyam case, which prima facie mainly involves SCRA violations. The investigating authority is, thus, empowered with a defective order.

All of this points towards lack of application of mind. Later, Satyam may argue on these basic defects in the order of Nagpal and get relief. One can only hope that SEBI wakes up now