Prespective: The Scam That Shook Entire 'Corporate India'

Byrraju Ramalinga Raju, the once poster boy of India's IT sector and Brand Hyderabad, proved to be the proverbial big tree that not only shook the Indian IT sector but also the very foundations of the `so called' stringent corporate laws and accounting standards of the country.

The Satyam saga ­ which offers a good case study on how a government can do crisis management ­ made authorities finally sit up and get cracking on putting in place an `early warning system' through various provisions of the New Companies Act (2013).
The Securities and Exchange Board of India (Sebi) finally got more teeth, auditing standards were revamped and Indian corporate laws underwent a sea change.

Perhaps one of the biggest fallouts of the Satyam scam was that Sebi made it mandatory for promoters of listed companies to disclose the quantum of shares pledged (mortgaged) with lenders to raise funds. The reason: It was only after Raju confessed to cooking the books, that investigators found that he, along with his family , held barely 2.18% shares in Satyam Computers as the rest of the promoter shares were pledged.

The capital markets watchdog, which described the Satyam scam as `a sophisticated white collar financial fraud', was even allowed to issue disgorgement orders (a repayment of ill-gotten gains that is imposed on the company by courts) wherein Sebi could park money from fraud ulent 
deposit schemes in its Investor Protection and Education Fund.

Similarly, the New Companies Act laid more emphasis on `self regulation' than `government regulation', which was the hallmark of the previous Companies Act (1956).“The new Act clearly defined the roles and responsibilities of company managements, independent directors, promoters and even charted out the code of conduct, which was missing in the old one,“ said Hyderabad­ based chartered accountant B Ganesh.

This meant that independent directors could no longer remain `adornments' but would have to shoulder responsibilities and would be held equally accountable for any decision taken by the board of a company .

In fact, in late 2014 a Hyderabad court fined Satyam's erstwhile illustrious line of independent directors for failing to perform their duties. These included some big names like Harvard Business School professor Krishna G Palepu, who was ordered to cough up Rs 2.66 crore, as well as Vinod Dham (popularly known as the father of the Pentium chip), former AP cabinet secretary TR Prasad, former Indian School of Business dean M Rammohan Rao, former IIT Delhi director VS Raju and renowned management consultant Mangalam Srinivasan, all of whom were fined Rs 20,000 each.

It must be recalled that Satyam's independent directors had green signaled the merger of the real estate company Maytas, promoted by Raju's sons, B Teja Raju and B Rama Raju, with Satyam, which was later opposed by investors and subsequently led to the downfall of Satyam.

This apart, even the auditors, including the internal and external ones, who failed to blow the whistle on this massive accounting fraud, came under the scanner. Apex auditing body , Institute of Chartered Accountants of India (ICAI), took disciplinary action against the Satyam auditors, fining them and cancelling their memberships.

“The biggest impact of the Satyam Scam was the introduction of the concept of `rotation of auditors' for the first time in India via the new Act.The main purpose behind this is the `demolition' of the comfortable relationship that existed between the auditors and a company ,“ said ICAI president K Raghu.

This apart, ICAI has, in March this year, also issued guidance note on the concept of `fraud reporting' asking auditors to apply “professional skepticism“ in reporting on any company's accounts.