1. Today, when SATYAM is the buzz-word of corporate talks and a rejuvenating revival of corporate governance being hailed as the need of the hour, the institution which should have been in the lime-light is M.I.A. The need for a specialized, equipped and pro-active investigator incumbent upon unearthing the manipulations and frauds in the Indian corporate markets is not new. The matter was raised right at the time when Harshad Mehta became a house-hold name. The Securities and Exchange Board of India (SEBI) was brought to fore as the market-regulator in 1992 and given wide powers to call for records and take action against erring listed-companies, but the ensuing corporate frauds nonetheless put in clear terms the need for a specialized investigating agency and not just the entrustment of the investigative functions with the market regulatory.
2. The lack of effective enforcement and foresight in corporate regulation became particularly evident in the aftermath of the Ketan Parakh episode which expose the fallacies and misguided temperaments of the existing agencies. The Report on ‘Corporate Audit and Governance’ submitted by the Naresh Chanda Committee [click here for perusing the Report] brought to fore this urgent need and it was on these lines that the Central Government approved the establishment of a new investigative agency, meant to specialize in corporate frauds which was rechristened as the ‘Serious Frauds Investigation Office’. [Click here for the official notification to this effect.]
3. A Charter was unveiled on 21.08.2003 to put on record the official duties, functions and responsibilities of the SFIO. This Charter of 2003 stated that “the responsibilities and functions of the SFIO will include, but not be limited to, the following;
(a) The SFIO is expected to be a multidisciplinary organization consisting of experts in the filed of accountancy, forensic auditing, law, information technology, investigation, company law, capital market and taxation for detecting and prosecuting or recommending for prosecution whitecollar crimes/frauds.
(b) The SFIO will normally take up for investigation only such cases, which are characterized by –
i) complexity and having interdepartmental and multidisciplinary ramifications ;
ii) substantial involvement of public interest to be judged by size, either in terms of monetary misappropriation or in terms of persons affected, and;
iii) the possibility of investigation leading to or contributing towards a clear improvement in systems, laws or procedures.
c) The SFIO shall investigate serious cases of fraud received from Department of company Affairs. SFIO may also take up cases on its own, subject to para (d) below. The SFIO would make investigation under the provisions of the Companies Act, 1956 and would also forward the investigation reports on violations of the provisions of other acts to the concerned agencies, for prosecution / appropriate action.
d) Whether or not an investigation should be taken up by the SFIO would be decided by the Director SFIO, who will be expected to record the reasons in writing.”
This Charter also stated that “SFIO is expected to be set up as a modal office with state of the art facilities” and “it may outsource work to professional agencies, on case to care basis”.
4. From these it appears reasonably clear that all complex matter involving corporate frauds and requiring expertise for investigations would normally be taken up by the SFIO. In this background, let us see the role of SFIO hitherto in the SATYAM fiasco, if fiasco it is.
5. The facts that can be culled out from the downride SATYAM has been facing in the last month are as under;
- Its CEO Mr. Ramalinga Raju is accused to have siphoned off amounts to the tune of thousands of crores of Rupees from the company accounts. [Therefore corporate fraud]
- The balance sheets of the Company have been said to be fudged to the extent that even the auditors have issued a disclaimer that the audited balance sheets may be considered unaudited. [Therefore failure of statutory audit requirements]
- Some of the auditors involved in checking / verifying / auditing its affairs have been arrested and are being examined at their own end towards their involvement (in terms of illegal gratification or otherwise) in the fudging of statutory records [Thus professional negligence and malpractices]
- The employee pay-rolls are said to be inflated and investment lists of the company said to be based on fraudulent and forged documentation [Thus a mass fraud on the investors and overall other stake-holders]
6. Moreover, this fraud is said to have been perpetrated for more than five years and rapidly increasing in dimensions until the bubble burst. In these circumstances, it definitely seems to be a case in which SFIO should be involved and should proceed with its examination. In fact, one look at the SFIO’s website would also tell that the amount of stakes involved in the fraud is the key and foremost criteria for SFIO to come into action. [check question no. 1 at this link]
7. But surmises apart, what has SFIO done till now? News reports [1] [2] show that unlike SEBI, which got permission from the Supreme Court to quiz the accused, SFIO is yet to pursue the denial of its investigating powers before the lower courts. In the matter which involves billions, delay of hours itself (not even days and months) is crucial to obtain information and evidence before they are destroyed by the interested parties. This lethargy, therefore, reflects well upon the diligence and role of SFIO. It seems that the SFIO is yet waiting for the Government to arm it with ammunition in the form of personnel and resources to carry out its role at a point when a lot of water has already flown down the bridge.
8. On a philosophic note, it is important to remind ourselves that the existence of a democratic society is based on one fundamental principle; Rule of Law. This axiomatic principle has been incumbent upon the functioning of all the three wings, viz. the legislature, executive and judiciary and the manner in which governmental action is undertaken. Of this one important facet is that ‘justice must not only be done but must also seem to be done’. The stakeholders, not only of Satyam bus also of this country, can they not expect the supposedly primer and specialized agency to take lead in this issue and settle the controversy to rest?
9. In this scenario one can only hope (and hope and hope) that the wrong-doors would be meted with justice and faith in the system (which may perhaps be too high to think) be restored to a level where one would be deterred of the consequences (and not just think twice) of impugning such a fraud with the citizens of the country on a whole. And more importantly, this delivery of justice be timely and actually compensatory (if not economically, at least morally) to the persons who have been effected by this fraud and not just a battle worn for the sake of academic discussion and statistical purposes.
10. Perhaps the Supreme Court was right to observe that ‘even God cannot save this country’.
2. The lack of effective enforcement and foresight in corporate regulation became particularly evident in the aftermath of the Ketan Parakh episode which expose the fallacies and misguided temperaments of the existing agencies. The Report on ‘Corporate Audit and Governance’ submitted by the Naresh Chanda Committee [click here for perusing the Report] brought to fore this urgent need and it was on these lines that the Central Government approved the establishment of a new investigative agency, meant to specialize in corporate frauds which was rechristened as the ‘Serious Frauds Investigation Office’. [Click here for the official notification to this effect.]
3. A Charter was unveiled on 21.08.2003 to put on record the official duties, functions and responsibilities of the SFIO. This Charter of 2003 stated that “the responsibilities and functions of the SFIO will include, but not be limited to, the following;
(a) The SFIO is expected to be a multidisciplinary organization consisting of experts in the filed of accountancy, forensic auditing, law, information technology, investigation, company law, capital market and taxation for detecting and prosecuting or recommending for prosecution whitecollar crimes/frauds.
(b) The SFIO will normally take up for investigation only such cases, which are characterized by –
i) complexity and having interdepartmental and multidisciplinary ramifications ;
ii) substantial involvement of public interest to be judged by size, either in terms of monetary misappropriation or in terms of persons affected, and;
iii) the possibility of investigation leading to or contributing towards a clear improvement in systems, laws or procedures.
c) The SFIO shall investigate serious cases of fraud received from Department of company Affairs. SFIO may also take up cases on its own, subject to para (d) below. The SFIO would make investigation under the provisions of the Companies Act, 1956 and would also forward the investigation reports on violations of the provisions of other acts to the concerned agencies, for prosecution / appropriate action.
d) Whether or not an investigation should be taken up by the SFIO would be decided by the Director SFIO, who will be expected to record the reasons in writing.”
This Charter also stated that “SFIO is expected to be set up as a modal office with state of the art facilities” and “it may outsource work to professional agencies, on case to care basis”.
4. From these it appears reasonably clear that all complex matter involving corporate frauds and requiring expertise for investigations would normally be taken up by the SFIO. In this background, let us see the role of SFIO hitherto in the SATYAM fiasco, if fiasco it is.
5. The facts that can be culled out from the downride SATYAM has been facing in the last month are as under;
- Its CEO Mr. Ramalinga Raju is accused to have siphoned off amounts to the tune of thousands of crores of Rupees from the company accounts. [Therefore corporate fraud]
- The balance sheets of the Company have been said to be fudged to the extent that even the auditors have issued a disclaimer that the audited balance sheets may be considered unaudited. [Therefore failure of statutory audit requirements]
- Some of the auditors involved in checking / verifying / auditing its affairs have been arrested and are being examined at their own end towards their involvement (in terms of illegal gratification or otherwise) in the fudging of statutory records [Thus professional negligence and malpractices]
- The employee pay-rolls are said to be inflated and investment lists of the company said to be based on fraudulent and forged documentation [Thus a mass fraud on the investors and overall other stake-holders]
6. Moreover, this fraud is said to have been perpetrated for more than five years and rapidly increasing in dimensions until the bubble burst. In these circumstances, it definitely seems to be a case in which SFIO should be involved and should proceed with its examination. In fact, one look at the SFIO’s website would also tell that the amount of stakes involved in the fraud is the key and foremost criteria for SFIO to come into action. [check question no. 1 at this link]
7. But surmises apart, what has SFIO done till now? News reports [1] [2] show that unlike SEBI, which got permission from the Supreme Court to quiz the accused, SFIO is yet to pursue the denial of its investigating powers before the lower courts. In the matter which involves billions, delay of hours itself (not even days and months) is crucial to obtain information and evidence before they are destroyed by the interested parties. This lethargy, therefore, reflects well upon the diligence and role of SFIO. It seems that the SFIO is yet waiting for the Government to arm it with ammunition in the form of personnel and resources to carry out its role at a point when a lot of water has already flown down the bridge.
8. On a philosophic note, it is important to remind ourselves that the existence of a democratic society is based on one fundamental principle; Rule of Law. This axiomatic principle has been incumbent upon the functioning of all the three wings, viz. the legislature, executive and judiciary and the manner in which governmental action is undertaken. Of this one important facet is that ‘justice must not only be done but must also seem to be done’. The stakeholders, not only of Satyam bus also of this country, can they not expect the supposedly primer and specialized agency to take lead in this issue and settle the controversy to rest?
9. In this scenario one can only hope (and hope and hope) that the wrong-doors would be meted with justice and faith in the system (which may perhaps be too high to think) be restored to a level where one would be deterred of the consequences (and not just think twice) of impugning such a fraud with the citizens of the country on a whole. And more importantly, this delivery of justice be timely and actually compensatory (if not economically, at least morally) to the persons who have been effected by this fraud and not just a battle worn for the sake of academic discussion and statistical purposes.
10. Perhaps the Supreme Court was right to observe that ‘even God cannot save this country’.
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