IT company Mahindra Satyam has filed a lawsuit against its former chairman Ramalinga Raju and ex-employees for fraud related to a $200 million accounting scandal. This is seen as a precedent setting case as it is the first of its kind civil suit seeking damages for fiduciary duties. If successful, a decision could take 5-6 years due to backlog in courts. The case highlights the need for stronger corporate governance norms and accountability of directors and auditors in India.

2.  IT company Mahindra Satyam have filed a lawsuit against
founder and former Chairman of Satyam Computer, Ramalinga
Raju along with some ex-employees and former auditor Price
Waterhouse in Hyderabad court seeking damages for
committing fraud, breach of fiduciary
responsibility, obligations and negligence in performance of
duties.
 Top corporate lawyers have termed this as “first of its kind” .
 According to media reports, the firm has also sought
damages, which some people estimate could be as high as $200
million.

3.  Leading corporate tax lawyer and Supreme
Court advocate, Mr H.P. Ranina, told Business
Line that the main reason behind the suit seems
to be the new management's (led by the
Mahindra Group) interest in recouping the losses
incurred by the company due to the alleged
accounting fraud.
 Since it is a civil suit, a final decision could take
at least 5-6 years due to the long list of pending
civil cases in the respective civil courts, he said.

4.  Significantly, the other fall-out would be on directors.
“Due to the possibility of such civil suits, not many
people will now be ready to take up the offer of joining
the board of companies as directors as these liabilities
will be much more than the negligible amount that they
are offered as fees,”.
 Another corporate lawyer, speaking on condition of
anonymity, said the case seems to be
‘unprecedented', adding that nothing in law stops the
company from ensuring that it recovers all its money
from the ‘fraudsters'.

5.  The scale of irregularities is indeed a shock from which
the financial world will take some time to recover.
 Here was a company with more than 50,000
employees, offices in more than 60 countries, a multi-
layered professional management, more than 650
clients (one third of which were Fortune 500
companies), a pedigreed Board (till very recently), a
company that was very well tracked by sell-side and
buy-side analysts, a stock listed in multiple global
exchanges and to top it all, one that had Price
Waterhouse as its auditor. For such a highly visible
company with a seemingly real business, the scale of
the fraud looks too unpalatable to digest.

6.  The Companies Bill, which seeks to replace a half-a-century-old Act, will be
presented in parliament in the ongoing budget session, said the finance
minister.
 The new Companies Bill promises greater share-holder democracy and
stricter corporate governance norms. The Bill introduces for the first time in
India the concept of class action suits, which would empower investors to
sue a company for “oppression and mismanagement” and claim damages.
 The Bill also proposes to tighten the laws for raising money from the public.
There will be a single forum for approval of mergers and
acquisitions, whether domestic or with foreign entities. Also, the procedure
for merger of holdings and wholly-owned subsidiaries will be shortened. It
also seeks to prohibit insider trading by company directors or key
managerial personnel by treating such activities as a criminal offence. Listed
companies to have mandatory 33% independent directors and formation of
a One Person Company will find its way, while empowering the government
to have a simpler compliance regime for small companies.

7. Definition of Independence
 The definition of an ID has been considerably tightened.
For example, if a director is a chief executive of an NGO
that receives funding from the company to a certain
extent, the person would not qualify as an independent
director.
 Moreover, the definition now includes positive attributes
of independence (that was not the case under clause 49):
the candidate must be “a person of integrity and possess
the relevant expertise and experience” in the opinion of
the board. The Central Government is also vested with the
power to prescribe qualifications for IDs. Every ID is also
required to declare that he or she meets the criteria of
independence.

8. Remuneration
 Under the Bill, IDs are entitled only to fees for
attending meetings of the board, and
possibly commissions within certain limits.
 The Bill expressly disallows IDs from
obtaining stock options is companies.
Attempts to achieve a proper balance may be
fraught with difficulties under the present
dispensation.

9. Liability
 In order to balance the extensive nature of functions and
obligations impose on IDs, the Bill seeks to limit their
liability to matters directly relatable to them. The Bill
limits the liability of an ID “only in respect of acts of
omission or commission by a company which had
occurred with his knowledge, attributable through board
processes, and with his consent or connivance or where he
had not acted diligently.”
 This again seems to be a reaction to specific instances in
the recent past where IDs were subject to legal action for
no fault of their own, as evident from the Nagarjuna
Finance episode that occurred in 2009.

10. It becomes a prime focus for
the share holders. We need to
build corporate governance in
the country, otherwise there is
no future,” he warned.

11.  He said the government, for the first
time, was working on developing corporate
rating index. “We need to get to work in new
area. We are working on our own Corporate
Rating Index.” At present, India is following
the Corporate Rating Index developed in
other countries.
 According to him, India is ranked 163 in the
Global Corporate Rating Index.

12. In this context, Prof. O’Brien spoke of the need
to shift from:
a. government to governance
b.to accountability
c.to responsibility
d.finally to integrity, a process which requires
inter-disciplinary collaboration and an
application of behavioural economics.

13.  The unravelling of the Satyam scam, India’s fourth
largest IT company, has put a big question mark on
not only the role of corporate entities but also the
urgent need for re-examining the issue of corporate
governance and the role of the company auditors.
Clearly, with competitiveness and the need for rapid
growth becoming crucial better corporate governance
has become imperative. Plainly, at Satyam the
governance framework has not been effectively
implemented and nor have the auditors been
judicious in examining the company accounts.

14.  In fact, Cadbury Chief Sir Adrian Cadbury
captured the spirit of corporate
governance by stating: “Corporate
governance is holding the balance
between economic and social goals and
between individual and communal
goals.

15.  Take the case of Nagarjuna Finance where its
head was eventually arrested but that did not
mean that the over 85,000 depositors would
recover their savings of Rs 100 crores. At
Duncan Industries too, the depositors are
running from pillar to post trying to make
sense of the repayment scheme which is
intended to fool them and inordinately defer
payment.

16.  SEBI has been seriously considering the idea to
float a public body to carry out the review audit
of listed companies and guidelines in this regard
are expected shortly. According to SEBI sources
the investor protection funds would be used to
carry out this review audit. The review audit
could also be funded by the companies
themselves but the independent body would
empanel auditors with a good track record for
carrying out such audit.

17.  According to a report prepared by the Pune-based
Indiaforensic Consultancy Services (ICS) at least 1200
companies listed on the domestic stock exchanges
have forged their financial results in recent times. The
ICS study has alleged that such improper accounting
includes deferring revenue and inflating expenses. The
figure includes 20-25 firms whose stocks make the
benchmark Sensex. Obviously keeping this in
view, the Government has decided to inspect the
books of as many as 150 companies under section
209A of the Companies Act to review whether the
accounts are in order.

18.  The Bribery Act 2010 into force on 1 July
2011, amends and reforms the UK criminal
law and provides a modern legal framework
to combat bribery in the UK and
internationally.

19.  The Bribery Act creates the following
offences:
 Active bribery: promising or giving a financial
or other advantage.
 Passive bribery: agreeing to receive or
accepting a financial or other advantage.
 Bribery of foreign public officials.
 The failure of commercial organisations to
prevent bribery by an associated person
(corporate offence).

20.  Penalty
Under the current law imprisonment for up to seven years with
unlimited fine will increase under the Bribery Act to a maximum of
10 years imprisonment.
 Jurisdiction
The scope of the law is extra-territorial. Under the Bribery Act, a
relevant person or company can be prosecuted for the above
crimes if the crimes are committed abroad.
 Application
The Bribery Act applies to UK citizens, residents and companies
established under UK law. In addition, non-UK companies can be
held liable for a failure to prevent bribery if they do business in the
UK.

21.  A company or corporate entity is culpable for
board-level complicity in bribery, including
bribery through intermediaries. There is also
personal liability for senior company officers
that turn a blind eye to such board-level
bribery.

22. Vodafone International Holdings BV
vs. Union of India (“theVodafone
case”).
Apt Example of Non Lifting of Corporate Veil