Professional Documents
Culture Documents
Satyam and All
Satyam and All
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
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
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.
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.
4. Benami Transaction