Clause 49

Continuing from the previous Post, Pathik sends me the following on Clause 49 and the Sarbanes Oxley Act;

The Sarbanes Oxley Act was primarily introduced subsequent to the Enron Scandal in order to regulate corporate governance in the US. India however failed to learn from US’s mistakes and did not introduce similar measures in India. The SEBI did introduce Clause 49 of the listing agreement requiring more disclosures from the Company. However, we are aware that Satyam managed to pull off a fraud of such magnitude despite formally complying with all the requirements under Clause 49 as well as other SEBI regulations such as the DIP Guidelines and so forth.

One also finds the need to reassess the liabilities and responsibilities of auditors under the Indian legal regime. The very fact that a member of the elite Big Four, Pricewaterhouse Coopers was caught completely unawares of the reality as it existed distinct from that portrayed in Satyam’s books of accounts indicates the need for more stringent checks on the role of auditors and to make them more accountable.

It is indeed encouraging that SEBI has already initiated steps towards strengthening the laws pertaining to Corporate Governance with the SEBI Committee on Disclosures and Accounting Standards (SCODA) met in Mumbai on January 9, 2009 and  after detailed deliberations, the SCODA recommended that a peer review of the working papers (relating to financial statements of listed entities) of auditors would be conducted in respect of the companies constituting the NSE – Nifty 50 and the BSE Sensex. Such a review would be in relation to the last quarterly results and the last audited annual financial results. For this purpose, a panel of auditors would be prepared by SEBI. This exercise would be taken up following the publication of 3rd quarter results and is expected to be completed by end of February 2009. This recommendation has been accepted by SEBI. In light of the Satyam fiasco, SEBI needs to take a re-look at the mandatory requirements prescribed and set up more checks on the lines of the Sarbanes Oxley Act. Hopefully, the Companies Bill, 2008, shall be passed by the Parliament soon and provide us with a solution to avoid frauds of such magnitude, which end up tarnishing India’s corporate image in todays era of globalization.

Satyam ‘Quick Bytes’

The Times of India reports of a teacher in a village near Ludhiana losing upto 15 lakhs as a result of the Satyam debacle. Being shocked by the loss, he was about to commit suicide when he was stopped.

Im pretty sure that he is not the only one who has been affected by India’s biggest corporate scandal and that there are millions more who can be placed in his shoes.

I am also told from close friends of mine and Mr. Raju’s family that Ramalinga Raju is not a bad person as he is made out to be by the media. My sympathies are for him if this is true. Maybe its just the greed for money that has compelled him to engage in this seemingly fraudulent transaction.

Going further, newspapers report that the ‘scandal’ re-emphasies the need for independent directors to be appointed to companies. I’d like to correct a lot of these authors in this area. Two years ago, the Securities and Exchange Board of India amended its listing agreement to insert a certain Clause 49. This pertains to corporate governance. One key provision of this amendment is that at least one-third of the board must consist of independent directors. Other measures include stronger audit standards and better financial disclosure norms.

I am told that this amendment comes from the Narayana Murthy Report on the need for independent directors and corporate governance.

Let me get this clear to the readers, Satyam has followed all the guidelines relating to the need for independent directors as prescribed by this clause. Legal compliance with this provision then is not an issue. The problem arises from fraudulent transactions that Mr. Raju has engaged in; as evident from his letter and the aspect of insider trading. The SEBI has flown down a team to investigate this aspect and the Institute for Chartered Accountants of India (ICAI) has given a show cause notice to Price Waterhouse Coopers for forged audit reports.

In light of Mr. Raju’s arrest, It would be better if ways are found to protect the investors rather than focusing on the downfall of Mr. Raju though.

I would like the readers to read India Corporate Law and Law and Other Things on the issue. Both the blogs give detailed insights to the problem at hand and the consequences.