Will SEBI's Satyam penalty set a strong precedent?

Jul 16, 2014

In this issue:
» Will the new RBI norms help realty firms?
» A big fall in loan restructuring brings relief to banks
» The BRICS bank is born. Can it help infra firms?
» Is the Chinese economy out of the woods?
» ...and more!

Promoters of Indian companies are not known for showing concern for minority shareholders. Time and again investors have been swindled by unscrupulous insiders. From cases of insider trading to IPO fraud, minority shareholders have had to bear the brunt of the losses. In many cases, investors have been left in the lurch and the guilty have not been punished. The Securities and Exchange Board of India (SEBI) has strengthened the capital market regulations over the years. We believe it has done a commendable job. However, there have been cases were SEBI was caught off guard. Perhaps the most famous example is the Satyam Scam.

It was corporate India's biggest scandal. It came to light in January 2009 when the then chairman of Satyam Computers, B Ramalinga Raju, sent a confessional letter to the stock exchanges. In it he said that the company's accounts had been falsified by US$ 1.47 bn. This had made the company appear more profitable than it really was. The promoters had enriched themselves at the expense of shareholders. The money was diverted to many firms promoted by Mr. Raju and his family, mainly Maytas Properties and Maytas Infrastructure. These firms then used the funds to buy and develop infra and realty assets, mostly in the city of Hyderabad. These were obtained with the help of several politicians and bureaucrats; contacts that Mr. Raju had built over the years. When the news hit the markets, about 90% of investor wealth was wiped out. This corporate accounting fraud shook the country's well regarded IT sector. It also tarnished corporate India's reputation globally.

Since then, a lot of water has passed under the bridge. Satyam was acquired by Tech Mahindra. The company's books were cleaned up and its accounts were restated. However, it was of some concern that the perpetrators of the fraud had still not been penalized. SEBI has now put that issue to rest. In a hard hitting order, it has directed Ramalinga Raju, and four others to pay up nearly Rs 18.5 bn within 45 days. This penalty comes with a 12% interest applicable from Jan 2009. The five individuals have also been banned from the market for 14 years.

We applaud SEBI for this judgment. This order sends out a clear message that the regulator will be aggressive when it comes to dealing with fraud. It must be pointed out that the courts will deliver its final verdict by the end of this month. Whatever the punishment given out by the courts might be, we believe that SEBI has done well to take the initiative in this case. It is high time that a strong precedent was set against unethical managements. This order has done exactly that. Investors can take comfort from the fact that along with strict monitoring of the markets, SEBI is also up to the task of punishing the guilty. In its 65-page order, SEBI has stated that "this is a case where befitting enforcement action is necessary to send a stern message to the market to create an effective deterrence". We could not agree more.

Despite this, we believe investors should always remain vigilant. There will always be unethical people who will not be deterred by SEBI. Corporate fraud is a reality that we must guard against. This is why we recommend that investors buy stocks in those companies which are run by ethical managements. Even if a business has good prospects, unethical managements can always destroy shareholder value. In the world of investing, it is always better to be safe than sorry.

Do you think the SEBI has set a strong precedent with its Satyam order? Let us know in the Equitymaster Club or share your comments below.

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It is a well known fact that the power infrastructure in India leaves a lot to be desired. The supply of power has not been able to cater to the increasing demand every year across the country. The problems plaguing the sector are many. Loss making distribution companies, inefficiencies in the upstream segment, theft and loss of power, peak deficit are some of them to name a few. Hence, it has become critical for the government to implement effective policies that will go a long way in promoting investments in the sector. Take the case of ultra mega power projects (UMPPs). The erstwhile UPA government had come out with some guidelines for bidding norms which were rejected by some private players. Then the power industry has some issues with the purchase power agreements (PPPs) for UMPPs. According to the industry, these agreements have not adequately incorporated the government's earlier decision of complete fuel price pass through. It is critical that all these problems be addressed head on. Because continuing lack of clarity on polices will erode investor confidence and put a dampener on the investments that the sector so badly needs.

Can power supply keep up with demand?

It is no surprise that the infrastructure sector is top on the list of priorities of the present Government. And therefore some positive steps were announced for the sector in Union Budget. Now, even the banking regulator RBI has attempted to do its bit to revive infrastructure growth in the country. What it has done is simply sweeten the concessions granted in the budget. It should be recalled that the budget had exempted banks from maintaining CRR and SLR on funds raised to finance infra loans. Now, the RBI has gone ahead and included affordable housing into the mix. Therefore, loans earmarked for affordable housing will also be exempt from the two ratios we just highlighted. It should be noted that affordable housing also has a new definition where loans up to Rs 5 m in metros and up to Rs 4 m in other cities will now come under affordable housing. The move is indeed a huge positive as being exempt from ratios would lower the cost of funds for banks which can then be passed on to the end consumer.

In what has come to be a huge relief to the banking sector, the quantity of loans getting restructured has plunged. The rally in the equity markets must be thanked for this. In addition, companies have also been proactive in selling assets to pay off loans. Distressed sale of assets to asset reconstruction companies have helped in no small measure. Plus the RBI's action against willful defaulters have also led to errant company managements relenting on their loan obligations. It may be recalled that the RBI had last year tightened the debt recast norms, making promoters more accountable in cases of loan recast. Hence promoters were more than keen to sell off non-core assets to clean their credit record. As per Economic Times, the proposal for loan recast so far in 2014 is less than half of those received in 2013. We believe that while the level of stressed loans in the banking sector remains high, efforts to recover loans and economic revival could help.

The leaders of the BRIC nations had recently met at the summit held in Brazil. The BRICS group of emerging powers has finally taken the long awaited decision of creating a development bank, which will be headquartered in Shanghai. The institution will help to finance the infrastructure projects in the emerging markets and other economies. A reserve of US$ 100 m is also set up to help the short term liquidity issues in various countries. The experts view this development as quite positive but what difference will this new development bank achieve? If funds were a problem, we also have the IMF and the World Bank to provide the same. Each of the BRIC nations is currently facing growth challenges on one hand, and lack of well-defined polices on the other. Thus, the benefits from setting up a development bank are still far-fetched. Therefore, what these countries need to do in the first place is to undertake large scale reforms for their respective economies which will put them on a much firmer footing.

While we here in India are struggling with reviving the stubbornly sluggish growth, China too has been contending with similar problems. The government has a target of 7.5% GDP growth this year. They have also been stepping on the gas over the last few months as far as stimulus measures are concerned; so as to be able to meet the target. This has included steps like decreasing the proportion of cash that banks have to hold as reserves, directing state governments to quicken their spending, and accelerating the building of railways and public housing. Not surprisingly, leaders in China are currently an anxious bunch. A lot of growth data is due over the next few days. Thus how much of an actual effect this stimulus has been having on the real economy is something that will be known over a period of time. And will also perhaps be an indicator of just how much one should expect the Chinese economy to pick up in the latter part of the year.

In the meanwhile, the Indian stock markets remained buoyant in the post noon trading session. At the time of writing, the BSE-Sensex was trading higher by 119 points. Barring IT, all the sectoral indices were trading in the green led by Realty and Banking stocks. Most of the Asian indices were trading in the green led by Indonesia. However, indices in China and Japan are trading in the red. European markets have opened on a firm footing.

 Today's investing mantra
"You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing." - Warren Buffet

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11 Responses to "Will SEBI's Satyam penalty set a strong precedent?"


Oct 9, 2014

Fine of Rs. 1849 Crores after more than 5 years seems small compared to the fraud of Rs. 7000 crore admitted by Raju himself. Even this has been stayed by SAT.
I wonder how the investor will get compensated.

Like (1)

ajay k gupta

Jul 29, 2014

The punishment has to be harsh, beside this there should be conditions to return the moneies to the investors,, who lost because of their deeds, like people few corporates lost money in MAYTAS.

Like (1)

r v iyengar

Jul 17, 2014

You have posted the story of SEBI penalizing Satyam and it's Directors and high ranking officials. The punishment has to be harsh so that the perpetrators feel the pinch.
However there were many companies which were floated during the euphoric days of Harshad Mehta lead sham Bull Market. During that period a number of Companies came out with IPO's which gullible fellows lapped up. Most of those companies existed perhaps only on paper
and disappeared within years with the money collected. Can Sebi not bring these sham companies and their promoters to book?
This is one issue which can be considered on a retrospective basis.

Like (1)

Ravindra Kumar Karnani

Jul 17, 2014

Yes it indeed is a strong message and creates the right precedent. It would be much much better if it took much much less time in delivering the judgement.
As in most Legal tussles in India we find that justice is severely delayed which amounts to denial. Well, better late than never!!! :)

Like (1)


Jul 16, 2014

as hire as possible to mr. ramling raju punishment , also micro tech,fcs,alok how can investment trust in equity some cimpany

Like (1)


Jul 16, 2014

Director SEBI,Mumbai
Dear sir myself and my wife were from poor Agricultural family and we invested our entire savings during the 1993,94 IPO with a good intention of contributing our savings for the welfare of our Nation but we were utterly deceived by numerous unsrupulous IPO companies who sucked our blood and betraying our Nations G rowth.our hard earned money to about Rs. 10 to 15 Lakshs have been deceived by UN_CONCERNED purposely un left Thieves least cared by then So called SEBI Officers who too co-acted with the thieves and took no action against the Betrayers ,instead encouraged the thieves.some how my hard earned money have been lost due to the slackness of SEBI Officials. Hence i request the SEBI officials to find the ways and means to atleast get back my bloodshedded money and punish the /take action against the planned , intentended Cheating in coherence with the SEBI officials and there by bring credit to our Nation and bring confidence to the Retail investors like us right from 1993 to till date.I have all the Registrars, banks who accepted their money and all other detail BUT UNABLE TO DO NOTHING IN OUR SELFISH PERSONALISED PEOPLE OF OUR COUNTRY.I have about 50 to 100 companies who had cheated the ignorant citizens of INDIa for their gain and not for our Countries Prosperity.I feel and Pray GOD to give good mind to SEBI Officials who have been ignoring them for the past 25 years without taking any initiative or action on the Cheaters.I can send the full details of the Cheatted companies who are enjoying their lives with others bloodshedded money.hence I humbly request the SEBI DIRECTOR to lookinto the matter and take appropriate action against the BETRAYERS of Our INDIA.Pl. do not iignore them or be un concerned for we retail investors have got v.much depressed by the inactive SEBI PEOPLE-Iam sorry to say sir.I request to get back my hard earned money earned during my v.young age for the interest of our Nation.Iam now 61 years old having lost my huge valid money with unconcerned SEBI officials.if needed I shall send all the records with me keeping alive since 25 years praying GOD for a solution one day or other by a GOOD SAMARITAN of ,for our INDIA.
Pl do reply me sir and solve my problem of my money.I and people like me arev.much afraid of investing for the welfare of our Nation with the presence of in active SEBI and GOVT. Officials.Pl.find me solution and help me sir
Thankingyou sir
sinscerely yours
sivagurunathan and Vijayalakshmi, Madurai Eagerly await your early reply sir with a solution for my money

Like (1)

Ramesh Bajaj

Jul 16, 2014

Is this the end, (or the beginning) of the issue.
You have commented about politicians (people with connections) having helped SATYAM.
It looks as of they have been spared,(or will be spared) does it not?
If they are spared, surely something like this will happen again, but the people who are well connected, will be very, very,very careful.
Please think about this and IF YOU ARE IN A POSITION , DO SOMETHING, IF YOU CAN.

Like (1)

Roopchand Bajaj

Jul 16, 2014

Its a good signe. But in India there are so many big fraud and even no 1 say or talk for that ......

I would like to say only on Satyam 's Promoters. And why not on Promoters of ICICI Bank they kept fund (on back merger of ICICI with ICICI Bank) ICICI holding of ICICI Bank over70% approx not cancelled & kept in SPV and later on sold but not paid the value to share holder of ICICI .

How Bank kept it with them.

Like (1)

Prem Khamesra

Jul 16, 2014

While SEBI's order may appear harsh, let's have a contrarian look. The fraudsters have been banned for 14 years. Why 14 years? Why not for life? How did SEBI come to this golden number of 14 years? Although SEBI has banned them for 14 years, they are banished for life SEBI order notwithstanding, as despite its memory being short the public will not forget these fraudsters ever for the sheer size of the fraud.
Now the penalty. Is it on paper or will it be recovered? If it will be recovered, to whom will it go? The people who lost their wealth or the file pushers in SEBI. If it goes to SEBI a revenge may have been extracted but justice not done. SEBI was sleeping all through the fraud and would have kept on sleeping but for the confession by the fraudster himself. Why should its coffers get filled? Why should the poor shareholders who trusted the entire system not be compensated? These are many questions that need to be answered.

Like (1)


Jul 16, 2014

Immediately govt should bring an ordinance to remove the fundemental rights to own immovable properties by such fraud commiting people. This looks to be difficult but essential to save the country from such elements.

Like (1)
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