Satyam and All

ENRON SCHEME
Derivatives
Enron’s corporations extensive use of derivatives resulted into huge accounting failures and
finally bankruptcy of the company in 2001. Derivative is a type of financial contract whose
value is depended on an underlined asset or group of assets.
Types of Derivatives
1. Lock – future forward

2. Option – stock option
Deregulation
Deregulation is the reduction or elimination of governments’ power in a particular industry
usually enacted to create more competition within the industry. Enron contributed to both the
political parties [Republican and Democrats]. However, their contribution to the Republican
Party was based on fast-track procedures for deregulation of electricity market at State and
Federal Level.
Accounting is done approval/accrual basis which means that the day you perform the part of
the contract money shall accrue. Even if the cash/contract is received in advance it shall not be
considered as incurred.
Mark to mark accounting required that once a long-term contract is signed the income is valued
as the present value of the net future cash flow. [Example]
Special Purpose Entities
Enron used Special Purpose Entities like limited Partnership, shell companies to fulfil a
temporary or specific purpose to fund or manage the risk associated with specific assets.
Wire Fraud
Wire Fraud is a scheme to defraud or obtain money based on false representation or promises
this criminal act is done using electronic communication or interstate communication facility.
For Example: Bank Fraud, Money Laundering, Securities Fraud.
Role of ESOPs [Employee Stock Option]
Excessive Stock Option and Corporate Compensation were given to the executive directors
thereby creating incentives to manipulate the financial accounts and stock price of the company.
Insider Trading
Insider Trading is a form of security form that happens when an investor uses price sensitive
inside information concerning a company in order to gain on financial trades.
Hindustan legal Limited case
• 2000 amendment
• Who is an insider
17.01.24
1. Rakesh Agrawal v. SEBI
Purchases were being made prior to the announcement of Bayer acquiring control stake in ABS
ltd. It was alleged that this was purchase was on the basis of insider-trading information given
to the brother-in-law of Rakesh Agrawal, I.P. Kedia. Further the court held that under
Regulation 3 of SEBI (PIT) Regulation 2015, mens rea does not have to be taken into
consideration to prove insider trading as the legislative intent behind Regulation 3 was to
prohibit person with UPSI, to deal in securities and make secret profits.
2. Chairman SEBI v. Shri Ram Mutual Funds 2006
It was reaffirmed that since Section 15A-Section 15 HB of SEBI Act 1952 only provides for
monetary penalties there was no requirement of mens rea in cases involving insider trading.
3. Balram Gaar v. SEBI 2022
It was held that circumstantial evidence cannot be the sole ground for conviction in cases
involving insider trading
4. Hindustan Legal Ltd. v. SEBI 1998
One of the first cases regarding insider trading

SEBI alleged insider trading when Hindustan legal ltd bough 8 lakh shares of Group Bond
Lipton Ltd 2 weeks prior to the merger of Brook Bond Lipton India with Unilever London. The
SEBI held that since Hindustan Legal Ltd was a subsidiary of Unilever they effectively had the
same management and therefore the directors had prior information and knowledge of the
merger. They have defined UPSI as
• Information which is not generally known or published by the company
• If published or known, it is likely to materially affect the prices of securities of that

company in the market. Therefore Section 2(k) was incorporated in the SEBI (PIT)
Regulation 1992.
5. Rakesh Jhunjhunwala Case 2021

The brother and sister of Rakesh Jhunjhunwala bought the shares of Aptech Computers in
September 2016 for the total worth of ₹ 100 Cr in a few days Aptech announced its entry into
pre-school education sector. SEBI flagged this transaction as violative of insider trading norms
because the stock price of Aptech Computers rose to 10% higher after the purchase. Rakesh
Jhunjhunwala settled to pay Rs 37 Cr to SEBI for violation of Regulation 3(1), Regulation 4
(1) and regulation 12 (k) of SEBI PIT Regulation 2015 under the scheme of SEBI (settlement
proceeding regulation 2013)
Regulation 23,25,28 – settlement
6. General Insurance Company Insider trading case 2019

Sebi conducted an investigation when it ensured that the GIC (state owned) delayed in making
disclosure related to its shareholding in Axis Bank Ltd. as mandated under Regulation 7(2)(a)
of the SEBI (PIT) Regulation, 2015.
SATYAM SCAM
Important
Background
[Satyam reading 1 – Para 5 &6 ]
3. Emergence of Satyam
Satyam was a ‘rising-star’ in the Indian ‘outsourced’ IT-services industry. The company was
formed in 1987 in Hyderabad (India) by Mr. Ramalinga Raju. The firm began with 20
employees, grew rapidly as a ‘global’ business, which operated in 65 countries around the
world. Satyam was the first Indian company to be registered with three International Exchanges
(NYSE, DOW Jones and EURONEXT). Satyam was as an example of India’s growing success;
it won numerous awards for innovation, governance, and corporate accountability (Agrawal
and Sharma, 2009). As Bhasin (2013a) commented, “From 2003-2008, in nearly all financial
metrics of interest to investors, the company grew measurably, as summarized in Table 1.
Satyam generated Rs. 25,415.4 million in total sales in 2003-04. By March 2008, the company
sales revenue had grown by over three times. The company demonstrated an annual compound
growth rate of 38% over that period. Similarly, operating profits, net profit and operating cash
flows growth averaged 28, 33 and 35%, respectively.” Thus, Satyam generated significant
corporate growth and shareholder value too. The company was a leading star (and a
recognizable name) in a global IT marketplace.
4. Ramalinga Raju and Fraudulent Financial Reporting Practices at Satyam

Unfortunately, less than five months after winning the Global Peacock Award, Satyam
became the centrepiece of a ‘massive’ accounting fraud. Satyam’s top-management
simply cooked the company’s books by overstating its revenues, profit margins, and
profits for every single quarter over a period of 5-years, from 2003 to 2008. Shockingly,
on January 7, 2009, Mr. Raju disclosed in a letter (see Exhibit-1), “He had been
manipulating the company’s accounting numbers for years. He overstated assets on
Satyam’s balance sheet by $1.47 billion, and nearly $1.04 billion in bank loans and cash
that the company claimed to own was non-existent. Satyam also under-reported
liabilities on its balance sheet and overstated its income nearly every quarter over the
course of several years in order to meet analyst expectations.” For example, the results
announced on October 17, 2009, overstated quarterly revenues by 75% and profits by
97%. Mr. Raju and company’s global head of internal audit used a number of different
techniques to perpetrate the fraud (Willison, 2006). As Ramachandran (2009) pointed
out, “Using his personal computer, Mr. Raju created numerous bank statements to
advance the fraud. He falsified the bank accounts to inflate the balance sheet with
balances that did not exist. He also inflated the income statement by claiming interest
income from the fake bank accounts. Mr. Raju also revealed that He created 6,000 fake
salary accounts over the past few years and appropriated the money after the company
deposited it.” As Bhasin (2016c) pointed out, “The Satyam’s global head of internal
audit created fake customer identities and generated fake invoices against their names
to inflate revenue. The global head of internal audit also forged board resolutions and
illegally obtained loans for the company.” It also appeared that the cash that the
company raised through American Depository Receipts in the United States never made
it to the balance sheets (Wharton, 2009)
Methods used by Satyam to Defraud the Shareholders

1. Fake Invoices
Fake Invoices were created demanding payment from Satyam in exchange for the services
rendered by Satyam Computers Ltd. Investigation into these fake invoices were made to find
out who within the company was authorizing these payments to be paid or received and it was
revealed that the Vice President Finance was responsible for this.
2. Collusion and Forgery
There was collusion and criminal conspiracy to commit the fraud between the HR department
and the Finance department of Satyam Computers. These departments created more than 600
fake employee identity cards, appointment letters to prove the existence of fictitious
employees. They created salary accounts and fake Provident Funds accounts to further prove
the existence of these employees.
3. Fake Customers were created

Ramalinga Raju initiated the process of creating 7 companies as the customer of Satyam
Computers even when these 7 companies never interacted directly with the organization.
Purchase orders were generated, invoices were raised, and income was shown against these
invoices. The creation of fake customers was done in order to inflate the sales upto ₹ 430
Crores.
4. Benami Transaction

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ENRON SCHEME

1. Lock – future forward

One of the first cases regarding insider trading

• Information which is not generally known or published by the company

• If published or known, it is likely to materially affect the prices of securities of that

5. Rakesh Jhunjhunwala Case 2021

6. General Insurance Company Insider trading case 2019

4. Ramalinga Raju and Fraudulent Financial Reporting Practices at Satyam

Methods used by Satyam to Defraud the Shareholders

3. Fake Customers were created

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