It is early days yet, so it's difficult to say if Ramalinga Raju will be convicted in the Satyam fraud case, and how many years of imprisonment he'll get. Certainly past history, with cases going back to Harshad Mehta, suggest he'll get away lightly, but why be pessimistic, maybe India has changed? The point, however, is that even if Raju is sentenced to jail for the rest of his life, how does it help the investors he's duped — indeed, his family members will continue to live in style. If the PriceWaterhouse auditors are convicted, how will this help investors? If the independent directors like Krishna Palepu, Vinod Dham, RamMohan Rao and TR Prasad don’t get any more directorships thanks to their role — in the case of Palepu, even consulting assignments — how does this help investors? Contrast this with Worldcom where those involved — investment banks that helped the company raise funds, firms whose ratings helped the company, basically all those who should have been able to unearth the fraud and were suspec ed to have colluded with the company’s manangement — paid over $6bn in damages (see graphic) to investors in order to avoid lengthy trials and potentially even larger damages.
This is where the Midas Touch Investors Association petition to the National Consumer Disputes Redressal Commission comes in. Midas, for those who don’t know, has done sterling work in the vanishing companies case; it forced Canara Bank to pay investors in Canstar Mutual Fund Rs 475 crore more than the bank had originally planned; and Virendra Jain’s Investors Beware still remains one of the best chronicles of investor frauds in the country. Midas’ petition makes a few broad points:
# Section 2(1)(i) of the Consumer Protection Act includes stocks and shares under the category of goods — that is, the case does come under the ambit of consumer protection law.
# That, had Raju not been fudging the books, the value of his shares would have been a fraction of what they were before they crashed — in other words, the fudging cost investors thousands of crores.
# That Price Waterhouse’s Rs 3.73 crore fees for 2007-08 was a huge hike over its fees in previous years and was abnormally high in relation to what companies of Satyam’s size were paying. The independent directors got paid around Rs 5 crore over four years.
# That Price Waterhouse’s failure to check the bank balances of Satyam was unacceptable since, unlike in the case of other firms they audited, these balances were very large in relation to the company’s net worth — Rs 4,500 crore versus Rs 7,200 crore, respectively, in 2007-08.
# That Price Waterhouse had its eyes wide shut is even more obvious from the fact that the interest rates earned on these deposits was very low — 5-6 per cent from 2003-04 to 2006-07, around 8 per cent in 2007-08 and half this in 2008-08. Even the exceptionally low interest earnings never woke the auditors up.
# The independent auditors are equally to blame since they should have asked why the interest rates were so low; indeed, why was the company sitting on so much cash if it was earning so little?; why not return it to the shareholders?
# Worse, at the time when they agreed to buy Raju’s family companies for Rs 7,651 crore (a figure equal to 90 per cent of Satyam’s net worth), they never questioned the valuations. The net worth of Maytas Properties for which the independent directors agreed Satyam could pay Rs 6,314 crore for was under Rs 21 crore. That the independent directors didn’t publicly defend the purchase and just chose to resign later, the petition says, just confirms that they themselves realized they were negligent in their duties.
# Based on the average of the highest stock price in the last five years, and the number of public shareholders, Midas calculates the shareholder-loss at Rs 5,000 crore — the price that Tech Mahindra has to pay in the open offer is considered to be today’s price.
Even if Midas wins the petition, it is going to be a long journey since it will certainly be challenged in various courts. The point, however, is that it is only when the principle of vicarious liability is accepted and enforced that firms like Price Waterhouse, independent directors, the firms routinely doing valuations of Maytas’ land banks, and so on will realize that their job involves more than just collecting their fees. More so in a country like India where firms accused of colluding with clients continue to be feted and their owners/managers continue to be held in high esteem.