India Market Officials Probe Satyam Fraud

Four weeks to begin an investigation into a massive corporate scandal is a long delay even by the standards of India's sluggish judicial system. That's nearly how long it took for the Securities and Exchange Board of India (SEBI) to get permission from the country's highest court to question the men who were running Satyam Computer Services, India's embattled information technology giant, over the company's $1 billion accounting fraud.

Following a Feb. 3 Supreme Court ruling, officials from SEBI now have access to jailed Satyam founder and chairman Ramalinga Raju, his brother Rama Raju, and former chief financial officer Srinivas Vadlamani. Although the men are in police custody and face criminal charges, SEBI, the country's stock market regulator, is the only Indian body with the expertise to investigate allegations that Satyam officials used Byzantine accounting chicanery involving illegal transfers of money between hundreds of shell companies, possible insider trading, money laundering, and other acts to inflate the company's profits and defraud shareholders.

At a time when investors around the world are having doubts about India's standards of corporate governance, the manner in which the Rajus managed to forestall questioning by SEBI raises questions about the government's earnestness to bring the guilty to justice. SEBI's lawyer told the Supreme Court earlier this week that the regulatory body issued summons to Ramalinga Raju to appear before it in Hyderabad on Jan. 9, two days after Raju publicly confessed to falsifying the company's profits. But that same day, Raju surrendered to state police and once he was in custody, SEBI investigators couldn't touch him without a court order. (Rama Raju and Vadlamani were also later arrested.) SEBI's petitions to question the accused were denied by two Andhra Pradesh courts, forcing regulators to take their case to the Supreme Court.

The delay may make it more difficult to unravel the case. The police took a week to seize documents from Satyam's auditors, and there are concerns that crucial papers have been destroyed. Two weeks after Raju's confession, the state police arrested his cousin, Gopalakrishna Raju, who heads a sister company, for "concealing and causing disappearance of evidence"— mainly documents related to property acquisitions. Although an independent body under the central Ministry of Corporate Affairs, the Serious Crimes Investigation Office, has been investigating the case, it has a mandate to look mainly at violations of corporate law and not issues that affect Satyam's shareholders and the markets.

With the high court's blessing, SEBI may now be able to look into possible insider-trading violations revolving around the sale of 3,600,000 shares of Satyam stock in the months before the fraud came to light, as well as embezzlement and a host of other possible transgressions. According to reports in Indian newspapers, investigators for the Andhra Pradesh Crime Investigation Division have discovered Satyam funds were diverted into Maytas Properties and Maytas Infrastructure, property companies owned by the Raju family. Two senior partners of Satyam's auditors, Price Waterhouse, S. Gopalakrishnan and Srinivas Taluri, have also been arrested and charged with conspiracy, among other allegations. "SEBI will mainly look into any falsifications that may have had a [stock] price impact," says Anand Prasad, a partner at Delhi-based corporate law firm Trilegal. "They will look into how shareholders and the markets may have been impacted." Depending on the findings, SEBI can impose financial penalties or seek criminal convictions in court. It's unclear how long the investigation will take.

Meanwhile, the government is continuing its efforts to find a buyer for Satyam and to save some of the jobs of its 53,000 employees. In a statement released on Feb. 2, Satyam claimed to have retained 95% of its top 20 clients and to have won 15 new contracts in January. At least four groups including Indian construction and engineering giant Larsen & Toubro have shown interest in acquiring a controlling stake.

To facilitate a sale, SEBI is planning to relax the rules governing corporate buyouts. Currently, any group wanting to acquire a minimum 15% stake in a company must make an open offer to all shareholders based on a 26-week average share price. SEBI wants to waive this requirement to enable more realistic pricing of Satyam's shares, which plunged by more than 70% after the scandal broke and now trade at about $1.27 a share. Satyam's government-appointed board are discussing buyout options this week, but a sale cannot be completed until its accounts are restated, a process that could take several months. The company said this week it secured $133 million in working capital through bank loans and announced the appointment of a temporary CEO. In the end, the board may manage to save Satyam and its employees. But the fate of the officials who brought the company to its knees is still very much an unknown.