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Satyam violated company law: RoC

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Hope for Satyam even as investigations reveal more skeletons.

The Registrar of Companies (RoC) in Hyderabad has said it found preliminary evidence that had violated key provisions of the Companies Act in its controversial December 16 proposal to acquire two promoter-related companies.

The RoC’s report was submitted to the department of corporate affairs a few days before Satyam founder Ramalinga Raju’s confessions to a massive accounting fraud January 7 in India's fourth-largest software services firm.

Satyam was forced to withdraw the proposals December 16 following strong shareholder objections. Raju later said the acquisitions were an attempt to make good gaps in cash flows on Satyam's books.

The RoC’s findings — which it said will be made final after all documents are made available — suggest that in approving the acquisition of 100 per cent in Maytas Properties and 51 per cent in Maytas Infrastructure, Satyam’s board had violated Section 372A of the Companies Act.

Sub-section 1 of Section 372A stipulates that no company can acquire shares in any other “body corporate” through “subscription purchase or otherwise” for an amount exceeding 60 per cent of the acquiring company’s share capital and free reserves or 100 per cent of its free reserves, whichever is higher, after loans, guarantees and investments.

Doing so would require shareholder authorisation through a special resolution passed in a general meeting. The law also states that such a resolution has to be passed only through a postal ballot and with advance intimation to the RoC.

The RoC report pointed out that Satyam’s 2007-08 balance sheet shows total share capital and free reserves of Rs 2,136.37 crore; 60 per cent of this works out to Rs 1,281.82 crore and 100 per cent free reserves works out to 2,002.27 crore. As on March 31, 2008 the total amount of investments, loans and guarantees and outstanding amounts given by Satyam stood at Rs 493.80 crore. Therefore, Satyam could make further investments of up to Rs 788 crore without prior shareholder approval.

Satyam’s board — which included such prominent personalities as former cabinet secretary T R Prasad, Harvard Business School’s Krishna Paleppu, designer of the Pentium chip Vinod Dham, among others — approved a proposal to invest Rs 7,920 crore in the Maytas firms.

Violating Section 372A would make the officers-in-default (which include the managing director, company secretary and whole time director) liable for punishment, which includes a fine of Rs 50,000 or imprisonment up to two years.

The report also pointed out that Satyam has not filed any resolution as required by section 293 of the Companies Act regarding the nature and proposed acquisition of stakes in Maytas Infrastructure and Maytas Properties.

On the question of the alleged diversion of funds for the benefit of promoter companies, the RoC report said Satyam’s annual report reveals several transactions with subsidiaries and other group companies by way of investments, purchase of assets and other receivables.

The RoC has also raised questions on the applicability of sections 297, 299, 300 and 301 of the Act that deal with related party transactions like rules on broad sanctions for resolutions in which directors are interested. RoC said the books show that the Raju family and its holding companies own 36.4 per cent in Maytas Infrastructure and 100 per cent in Maytas Properties.

The RoC’s report added that the 2007-08 annual report of Maytas Properties also shows that the company had several transactions with group companies. The RoC said it looks apparent that the investments and loans made by Maytas Properties were far in excess of the limits laid down by Section 372A of the Companies Act

Against a paid up capital and free reserves of Rs 5 crore Maytas Properties had made an investment of Rs 90.25 crore and loans and advances to group companies of Rs 419.63 crore. Maytas Properties had received all the funds for these investments by way of unsecured loans (compulsory convertible debentures) of about Rs 600 crore.

The company also invested Rs 25.6 crore in 2 per cent redeemable convertible non-cumulative preference shares, and 10.5 per cent compulsory convertible debentures of Rs 3.6 crore in group companies at a rate of interest lower than the prevailing bank rate, which is also considered a violation of 372 of the Companies Act

Similarly, the 2007-08 annual report of Maytas Infastructure revealed that against a paid up capital and free reserves of Rs 301.417 crore , the company made investments of Rs 256.231 crore and advanced loans and advances to group companies of Rs 102.045 crore and guarantees of Rs 10 crore. The company received all the funds by way of a share issue of Rs 327.450 crore.

The report also pointed out that Satyam has not filed any resolution as required by section 293 of the Companies Act regarding the nature and proposed acquisition of stakes in Maytas Infrastructure and Maytas Properties.

On the question of the alleged diversion of funds for the benefit of promoter companies, the RoC report said Satyam’s annual report reveals several transactions with subsidiaries and other group companies by way of investments, purchase of assets and other receivables.

The RoC has also raised questions on the applicability of sections 297, 299, 300 and 301 of the Act that deal with related party transactions like rules on broad sanctions for resolutions in which directors are interested. RoC said the books show that the Raju family and its holding companies own 36.4 per cent in Maytas Infrastructure and 100 per cent in Maytas Properties.

The RoC’s report added that the 2007-08 annual report of Maytas Properties also shows that the company had several transactions with group companies. The RoC said it looks apparent that the investments and loans made by Maytas Properties were far in excess of the limits laid down by Section 372A of the Companies Act

Against a paid up capital and free reserves of Rs 5 crore Maytas Properties had made an investment of Rs 90.25 crore and loans and advances to group companies of Rs 419.63 crore. Maytas Properties had received all the funds for these investments by way of unsecured loans (compulsory convertible debentures) of about Rs 600 crore.

The company also invested Rs 25.6 crore in 2 per cent redeemable convertible non-cumulative preference shares, and 10.5 per cent compulsory convertible debentures of Rs 3.6 crore in group companies at a rate of interest lower than the prevailing bank rate, which is also considered a violation of 372 of the Companies Act

Similarly, the 2007-08 annual report of Maytas Infastructure revealed that against a paid up capital and free reserves of Rs 301.417 crore , the company made investments of Rs 256.231 crore and advanced loans and advances to group companies of Rs 102.045 crore and guarantees of Rs 10 crore. The company received all the funds by way of a share issue of Rs 327.450 crore.

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