Execs may have to refund benefits in cases of fraud

In order to deter chief executives and other senior functionaries from indulging in Satyam-type accounting fraud, the Companies Bill 2011 stipulates that such officials will have to refund the remuneration received in case the accounts are re-stated.

According to the Companies Bill, which is awaiting approval of Parliament, “where a company is required to re-state its financial statement due to fraud or non-compliance. The company shall recover from any past or present managing director or whole-time director or manager... The remuneration received (including stock option)...”

The provision, according to Diljeet Titus, Senior Partner of law firm Titus & Co “is meant to deter senior functionaries of companies from indulging in Satyam type accounting fraud”.

He added, “However, the provisions needed to be more deterrent to refrain them from such activities which have wide implications not only for for shareholders and stakeholders, but also for the overall image of corporate sector.”

Following admission of Rs 14,000-crore accounting fraud by Founder Chairman B Ramalingam Raju, the account books of Satyam Computer Services had to re-stated to ascertain the actual tax and other liabilities.

Besides causing loss to the shareholders and employees, the Satyam accounting fraud also impacted the image of Indian Inc within and outside the country.

Commenting on the provisions, Ashivn Parekh, Partner of Ernst and Young, said, "The move seeks to make whole time directors directly responsible... While immediate stimulus seems to be Satyam, the fact that whole time director should take personal responsibility is a welcome move." "The trouble is with independent directors. There should be proper set of regulations for them also although we are getting difficulty in finding independent directors," he added.

The Companies Bill also provides for “disgorgement of assets, property or cash” from directors, key managerial personnel and other officers obtained by fraud.

These provisions, according to another taxation expert Amit Jain, Partner, BMR Associates, would give more powers to the government to tackle accounting frauds.

“The idea is to make more robust legislation to avoid Satyam like situation. This will give more power to the government to take active action while dealing with such problems. The government also hopes to control misrepresentation of statement of frauds,” he said.

The crisis-ridden IT company Satyam Computer Services was later taken over by Tech Mahindra and renamed as Mahindra Satyam.