An Overview of Corporate Governance

by SEBI
Nimisha Srivastava: 11020241016 Priyanka Hirwani: 11020241093 Harika Reddy R: 11020241041

1992 Scam
Harshad Shantilal Mehta- a famous stockbroker of his time. Mehta was famous for ripping higher profits from stock market and trading, and for his famous financial scandal, worth of 5,000 crore (US$905 million) in Bombay Stock Exchange (BSE), of 1992. He was tried for 9 years, until he died in the late 2001.

Making of 1992 Security Scam

Bank Recipt
Ready Forward Deal

PREAMBLE
...to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto.

SEBI
It was formed officially by the Government of India in 1992 with SEBI Act 1992 being passed by the Indian Parliament. SEBI is headquartered in the business district of Bandra Kurla Complex complex in Mumbai, and has Northern, Eastern, Southern and Western regional offices in New Delhi, Kolkata, Chennai and Ahmedabad. Controller of Capital Issues was the regulatory authority before SEBI came into existence; it derived authority from the Capital Issues (Control) Act, 1947. Initially SEBI was a non statutory body without any statutory power. However in 1995, the SEBI was given additional statutory power by the Government of India through an amendment to the Securities and Exchange Board of India Act 1992. In April, 1998 the SEBI was constituted as the regulator of capital markets in India under a resolution of the Government of India. The SEBI is managed by six members, i.e. by the chairman who is nominated by central government & two members, i.e. officers of central ministry, one member from the RBI & the remaining two are nominated by the central government. The office of SEBI is situated at Mumbai with its regional offices at Kolkata, Delhi & Chennai.

ACTS
May 28, 2007 -Securities Contracts (Regulation) Amendment Act, 2007 Sep 20, 1995 -The Depositories Act, 1996 No. 22 of 1996 Jan 30, 1992 -Securities and Exchange Board of India Act Feb 16, 1957 -The Securities Contract (Regulations) Act 1956

Functions and Responsibilities

SEBI has to be responsive to the needs of three groups, which constitute the market:
the issuers of securities the investors the market intermediaries.

SEBI has three functions rolled into one body: quasi-legislative, quasi-judicial and quasiexecutive.

SEBI Rules as per Corporate Governance

Functions of SEBI
Regulating the business in stock exchange and any other securities market Registering and regulating the workings of intermediaries associated with securities market Prohibiting fraudulent and unfair trade practices in the securities market.

SEBI Organization
Primary Market

Secondary Market

Regulates

Foreign Institutional Investors

Mutual Funds

SEBI- Amendments to Clause 49 of the Listing agreement

The SEBI had constituted a Committee on Corporate Governance under the Chairmanship of Shri N. R. Narayana Murthy to further improve the standards of corporate governance in India. The significant features of these amendments may be summarized as under:

Broadening of the definition of independent director

At least one-third of the board members are required to be independent directors. SEBI has also made the minimum age for independent directors as 21 years. The gap between resignation or removal of an independent director and appointment of another independent director in his place shall not exceed 180 days, according to another modification introduced by SEBI. The new clause disqualifies material suppliers and customers from being independent directors.

SEBI- Amendments to Clause 49 of the Listing agreement

It disallows a shareholder with more than 2 per cent stake in the company from being an independent director as well as a former executive who left the company less than three years ago. Partners of current legal, audit and consulting firms, as well as partners of such firms that had worked in the company in the preceding three years, too, can't be independent directors. A relative of a promoter, or an executive director or a senior executive one level below an executive director, too, cannot be an independent director

Fixing of norms relating to Non-executive directors' compensation and disclosures

As per earlier clause 49, the compensation to be paid to non-executive directors was fixed by the Board of Directors, whereas the revised clause requires all compensation paid to non-executive directors to be fixed by the Board of Directors and to be approved by shareholders in general meeting. There is also provision for setting up of limits for the maximum number of stock options that can be granted to non-executive directors in any financial year and in aggregate.

SEBI- Amendments to Clause 49 of the Listing agreement

Additional duty on the independent director to periodically review the legal compliance reports prepared by the Company and steps taken by the Company to improve.

Increase in the powers of the Audit Committee

The original clause had stipulated that the audit committee must meet at least three times a year and at least once every six months. The new clause makes it mandatory for the audit committee to meet a minimum of four times in a year with a maximum time gap of four months. The original clause which was silent on the qualifications of audit committee members, the new clause states that all members should be financially literate and at least one should have financial or accounting management expertise.

SEBI- Amendments to Clause 49 of the Listing agreement

Obligation on the Board of Directors to lay down a Code of Conduct for all Board members and senior management of the Company. Certification by CEO/CFO

Change in the Format of reporting to Stock Exchanges relating to Corporate Governance

put under an obligation to certify that, to the best of their knowledge and belief, they have reviewed the balance sheet and profit and loss account and all its schedules and notes on accounts, the cash flow statements as well as the Directors Report and these statements do not contain any materially untrue statement, omits any material fact or do they contain statements that might be misleading. Further they are required to certify that these statements together present a true and fair view of the company, and are in compliance with the existing accounting standards and/or applicable laws/regulations.

THE SATYAM SCAM

- Company Profile
Satyam was established in 1987 4th largest IT company in India On 26th August, 1991 it was converted into a Public Limited Company and went for PUBLIC ISSUE in 1992. BSE IPO oversubscribed 17 times when made public. It had 9% market share Revenues of $ 2.1 bn It is the first company of India to have listed on three international exchanges i.e. NYSE, DOW and EURONEXT (Amsterdam) The company employed 53,000 IT professionals across development centers in 6 continents. It served over 654 global companies, 185 of which are Fortune 500 corporations. B.Ramalinga Raju: Founder & Chairman, Satyam Computers Ltd. B. Rama Raju: Promoter & CEO, Satyam Computers Ltd

Controversies
World Bank : The World Bank had banned Satyam from doing business with it for 8 years due to inappropriate payments to the World Bank's staff. The World Bank accused Satyam of giving improper benefits to its (the Bank's) staff and of failing to maintain documentation to support fees charged for its subcontractors. Upaid lawsuit: UK mobile payments company Upaid Systems sued Satyam for over 1 billion US dollars on complaints of fraud, forgery and breach of contract. On 9December-2009 Satyam settled the lawsuit with UPAID for $70MM, of which $45MM was payable upon regulatory approval, and the remaining $25MM is payable a year after the initial payment. Maytas Acquisition Accounting scandal of 2009

MAYTAS ACQUISITION CONTROVERSY

Maytas Infrastructure: Rajus hold 36.64 per cent while institutional holding is 10.92 per cent The company had raised Rs 327.45 crore through IPO. It had a turnover of Rs 1,660 crore and net profit of Rs 100 crore in the last financial year Satyam planned to acquire 51 per cent stake for Rs 1, 440 crore or $0.3 billion Maytas Properties Rajus family owns 35% of Maytas properties Founded in 2005, it has a land bank of 6,800 acres It has clearances for three IT SEZs based on 148 acres An undisclosed stake is held by Infinite India Investment Management, a realty fund jointly promoted by JM Financial and US-based SRM Investments, which invested Rs 600 crore in February

MAYTAS ACQUISITION CONTROVERSY

Satyams justification for Maytas buyout deal De-risk the core business The integrated organization would be stronger and more diversified to deal with the uncertainty of the market. Feeling that in the recent times it is difficult to make a strategic deal with other IT companies. Reaction of Investors The shareholders realised that the buyout was not profitable for them. Satyam using the reserve cash to purchase Maytas Infra and Maytas Properties was a big risk. Result of Investors Reaction Investors succeeded to thwart an attempt by the minority-shareholding promoters to use the firms cash reserves to buy out two companies owned by them Maytas Properties and Maytas Infra. That aborted attempt at expansion precipitated a collapse in the price of the companys stock and a shocking confession of financial manipulation and fraud from its chairman, B. Ramalinga Raju

ACCOUNTING SCAM OF 2009

ACCOUNTING SCAM OF 2009

Satyam faced is the biggest fraud in India's corporate history. The company management, mainly, disgraced chairman B Ramalinga Raju, kept everyone in the dark for a decade. On 7 January 2009, companys previous Chairman Ramalinga Raju resigned after notifying board members and 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: 1. Inflated figures for cash and bank balances of Rs 5,040 crores as against Rs 5,361 crore reflected in the books. 2. An accrued interest of Rs. 376 crore which was non-existent. 3. An understated liability of Rs. 1,230 crore on account of funds was arranged by himself. 4. An overstated debtors' position of Rs. 490 crore (as against Rs. 2,651 crore in the books.

ACTUAL DEBT WAS 2161. OVERSTATED 490 CRORES.

NO ACCRUED INTEREST 376.34 CR.

ACTUAL CASH IN BANK WAS 321 CRORES, INFLATED 5040 CR.

UNDERSTATED LIABILITY 1230 Cr. Which was ARRANGED BY MR.RAJU

5,040 + 376 + 490 (Rs. Cr)

Rs. 1,230 Cr

Rs. 7,136 Cr

MINUTES AFTER REVELATION

Satyam Shares Stock Market Companys worth
HOW DID IT START???? CFO revealed during investigation: Started 6- 7 years ago 10 crore was inflated to 200 crore in Balance Sheet This marginal gap went on expanding over the years Raju wrote in the confession letter: Every attempt to fill the gap failed. It was like riding a tiger, not knowing how to get off without being eaten
Biggest single fall for a stock market Rs. 175/- (Jan 6th) 77 % fall BSE Sensex fell by 749.05 i.e 7.25% NSE fell by 182.40 points i.e.6.18% 11464 crore 1607 crore

All time low of Rs. 11.50 /- on 9th Jan 2009 and closed at Rs. 23.75 /Compared to highest of Rs. 524.90 /- on 29th May 2008

The GUILTY and the REFORMERS

The Guilty:
Price Waterhouse Coopers(PWC) : So what were the auditing company,Pricewater houseCoopers, doing? The Bankers: If the auditors were conned, it means that either the bank statement and certificates were forged. Satyam's banks -- ICICI Bank, HDFC Bank, Bank of Baroda, etc SEBI: The SEBI had in December given a clean chit to Satyam in the probe on violation of corporate governance law. The promoters The other bigwigs in the company: Satyam's CFO Srinivas Vadlamani already arrested. Many others were also arrested after this scam, mainly due to their own mistakes of not actively participating in the management of the organisation.

The Reformers:

On 11 January 2009, the government nominated noted banker Deepak Parekh, former NASSCOM chief Kiran Karnik and former SEBI member C Achuthan to Satyam's board.

The Takeover Of Satyam MAHINDRA SATYAM

Tech Mahindra paid Rs1757 Crore for a 31% stake in the company, at Rs 58 per share.
Satyam Computer Services zoomed 15% to Rs 54.20 ahead of the announcement of the highest bidder for the company on April 13, 2009. In India this moment was full of praise for the manner and speed with which the reconstituted board of Satyam Computer Services found a strategic investor . NEW POLICIES Compliance with Laws, Rules and Regulations. Legal, Honest and Ethical Conduct. Suspected Fraudulent behavior.

Applicable regulations under Indian Law

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 a company 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 a fine 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, restrain any persons from accessing or buying, selling or dealing in securities, impound and retain the proceeds of any transaction and attach bank accounts.

Applicable regulations under Indian Law

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 to insider trading, the substantial acquisition of shares or unfair and fraudulent trade practices. Additionally, the SEBI can initiate criminal prosecution for these offences and hold a person liable for imprisonment for up to 10 years or a fine of up to Rs.250 million or both. Further, under the SCRA, a company can be held liable to a penalty of up to Rs.250 million for the failure to comply with the listing conditions. The stock exchanges also have the power to suspend the dealings with respect to the securities of such company There are also various liability provisions and penalties specified under the FEMA and the Income Tax Act and other legislations such as the EPF Act. The auditors may be liable under the Companies Act, the Indian Penal Code and the CA Act

Changes due to the Satyam Fiasco

SEBI has made numerous changes in recent years including: Revising and strengthening Clause 49 in relation to independent directors and audit committees Revising Clause 41 of the Listing Agreement on interim and annual financial results Amending other listing rules to protect the interests of minority shareholders New rules were introduced requiring greater disclosure by promoters (i.e., controlling shareholders) of their shareholdings and any pledging of shares to third parties In November 2009, SEBI announced it would be making some further changes to the Listing Agreement, including requiring listed companies to produce half yearly balance sheets.

The Ministry of Corporate Affairs (MCA) published a new set of Corporate Governance Voluntary Guidelines 2009 , designed to encourage companies to adopt better practices in the running of boards and board committees, the appointment and rotation of external auditors, and creating a whistle blowing mechanism.

Has India learnt?

Satyam was a wakeup call for India to clean up its act. But did India Inc wake up? Experts and industry watchers remain divided in the aftermath. While there is a set of people who believe that Satyam definitely made promoters sit up and make alterations, there is an equally strong lobby that says nothing has changed in the real sense of the term. One of the main factors that is prompting independent directors to sit up and take active interest is the fear of punitive action, like the one that Satyams independent directors faced after promoter Ramalinga Raju owned up to his fraud. There has certainly been a bit of a change in the way boards are functioning. Audit committees are being more careful to ensure that the external auditors perform their role more diligently. We also find that the chairman of the board and members of the audit committee are being more careful and thorough in their questioning. Boards, too, are taking care to ensure that there are no slip-ups at their end.

THANK YOU