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Off SEBI hook?

Print edition : Feb 13, 2009 T+T-
in Mumbai

THE Securities and Exchange Board of India (SEBI) may not have foreseen, as experts claim, the fraud committed in Satyam Computer Services, but there is plenty the market regulator can do to ensure that another one like this does not occur in the country.

The SEBI wears several hats: it regulates the market; facilitates information flow between the stock exchange, the listed companies and the investors; and keeps tabs on the operations of listed companies. Its responsibility towards investors is to ensure that any information regarding listed companies is placed in the public domain. If fraud exists in a listed company, SEBIs job is to probe the matter to protect the investors.

The market regulators job is to provide every bit of information available on a listed company to the investors. It would have been difficult to have seen the signs [of fraud] but SEBI must now put in place a system to prevent such a fraud from happening again, said corporate lawyer Jai Diwanji.

Satyam was among the top four information technology (IT) majors in the country. It played a crucial role in the stock market as one of the 30 largest and most actively traded stocks that determined the Bombay Stock Exchanges (BSE) value-weighted index, Sensex. Industry analysts say Satyam promoter B. Ramalinga Rajus biggest crime was perhaps in misleading investors completely.

Thousands of investors across the spectrum have lost unfathomable amounts of money owing to the scam, which obviously took a toll on Satyams stock. Stock market traders and lawyers say it is the responsibility of SEBI and other government agencies to bring to book the culprits of the worst corporate fraud in the country.

As soon as Ramalinga Raju admitted to the fraud on January 7, the regulator, empowered by the provisions of the SEBI Act, 1992, ordered an investigation and sent its officials to Hyderabad to inspect the books and records.

The officials were, however, not allowed access to Raju as he had already surrendered before the Hyderabad police. It is essential for SEBI to interrogate Raju as he has insisted that only he was involved in the scam.

A senior official said that perhaps Raju was advised well to get himself arrested in order to stall a probe by SEBI. A lawyer said the police would not be able to deny SEBI access to Raju as the regulator is armed with the provisions of the 1992 Act.

SEBI moved a Hyderabad court seeking permission to interrogate Raju and his brother Rama Raju. However, on January 23, the court rejected the plea and refused to entertain another petition by the Serious Fraud Investigation Office.

Speaking to mediapersons, SEBI chief C.B. Bhave said the regulator was working with two or three other agencies and was hopeful that at least crucial parts of the investigation would be completed soon. Bhave said that unless Raju was questioned it would be difficult to estimate the actual size of the Satyam scam. He said several procedures needed to be followed and SEBI had to go through a whole lot of documents before drawing any conclusions. The 1992 Act allows SEBI to investigate Satyam and its promoters on three counts: insider trading, fraud and unfair trade practices.

Bhave specifically told his team that no notice would be sent to the persons who were to be investigated. There are unconfirmed theories that Raju destroyed a lot of documents before surrendering, and SEBIs decision to open investigations without giving notice will hopefully prevent other material from disappearing mysteriously.

A corporate lawyer said a listed company was expected to disclose information periodically to SEBI about itself. Failure to furnish information is punishable under the SEBI Act. There is a higher penalty if insider trading is proved.

Information gathered by the regulator indicates that Raju and some top officials of Satyam had been offloading shares for about 22 quarters. Could this mean that they were trying to cut their losses before the big fall? SEBI is examining bank accounts and other relevant data to determine the extent of violations. Only after we have fully understood the entire scam will we be in a position to penalise Raju, said Bhave. Meanwhile, we are looking at some long-term system improvement. There will be quite a few things we will learn from this incident and we will take steps for necessary changes accordingly.

On January 21, the SEBI board met in Mumbai to take preventive actions so that another Satyam does not hit the markets. Announcing the new measures at a media conference, Bhave said the regulator made it mandatory for companies to make full disclosures on the shares they pledged. Pledging of shares takes place when promoters need to raise money. The promoter pledges his/her or the companys shares to a lender against a loan. If the promoter defaults, the shares can be sold to make up the money owed to them. Raju had apparently pledged his Satyam shares to lenders in the market and was, therefore, able to reduce his stake in the company to less than 3 per cent. His official stake in SEBIs books was 8.6 per cent.

An analyst from a brokerage firm said: Any increase in pledging such as what Raju did will come as a warning signal for investors and will raise their concerns. For a promoter to reduce his stake in the company means something fishy is going to happen. Essentially, total transparency of a listed companys movement is required for investors and this is one step towards ensuring that, he said.

Bhave said SEBI was also considering appointing external auditors or a peer review panel. This would mean that listed companies in the Sensex and Nifty (an index of all the major companies on the National Stock Exchange) would be subject to a review of their accounts by a panel of auditors constituted by SEBI. Bhave said the board had agreed to the concept.

SEBI is also planning to ask all the listed companies to restate profits if a random scrutiny of the accounts throws up unpleasant surprises.

Satyam ranked among the top firms listed on the BSE but was never quite in the same league as Wipro, Tata Consultancy Services (TCS) or Infosys, a stockbroker said. Satyam did not have the calibre or reputation that other IT companies enjoyed. Smarter money always viewed it with suspicion.

He said that during the technology boom in the 1990s, Satyam had been involved in a Rs.500-crore deal with a certain Rajesh Jain. Questions were raised about the amount Satyam paid for a relatively unknown outfit. SEBI had ordered a probe at that time. Since then traders were cautious in dealing with Satyam. There was always some suspicion of dishonest activities but those were baseless and we did not apply it to trading, he said.

In the BSEs 52-week high-low index, Satyam was trading at Rs.544 on May 30, 2008. On January 9, 2009, a day after the scandal broke out, it crashed to Rs.11.50. Unfortunately too many people have lost too much many of them are small investors. At a time when the economy is facing a downturn, the Satyam stock slide has come as a double whammy for many whose life savings are invested in equities, the broker said.