Can Statutory and non-constitutional bodies help prevent corporate fraud?
An Analysis of the Satyam Scam Case 2009 and the Companies Act of 2013
Can Statutory and Non-Constitutional bodies help make laws and influence the judiciary to plan and prevent such scams in the first place or detect them earlier? I believe this is true. This article suggests that Statutory and Non-Constitutional bodies such as the CBI (Central Bureau of Investigation) and SEBI (Securities and Exchange Board of India) can collaborate together to make judicial laws by actively participating in the Judiciary, help in Early Fraud detection, and also reduce case timelines. Bodies such as the CBI cannot act this way formally yet but they do have some powers. If we do give both these agencies a way to work with the judiciary and learn more about it, it would drastically reduce case time and help these bodies make laws and regulations to combat such scams before they take place. Case times if reduced can drastically help those suffering get justice and also help pending cases get some attention. Justice Delayed is Justice Denied, a popular and true phrase. Let us look at the history of these two agencies to give you some understanding of what they do and how it relates to our topic.
History of the Central Bureau of Investigation (CBI)
In 1941 the special police were established by the British in India. It was created to find corruption and bribery in WW2 (World War 2) related transactions. The Committee on Prevention of Corruption consisting of the parliamentarian Santhanam as Chairman was appointed by the Government of India in 1962. It was to examine the various aspects of Corruption in Government departments and recommend corrective measures. The establishment of the CBI (Central Bureau of Investigation) was recommended, and it was formed under the ministry of Home Affairs (1st April 1963) and later was under the Ministry of Personnel.
History of the Securities and Exchange Board of India (SEBI)
SEBI’s (Securities and Exchange Board of India’s) establishment was based on SEBI Act 1992, and it was established on 12th April 1992. The Act was passed by the Indian Parliament. It supervises and regulates the Securities Market in the Country. It is Quasi-Legislative, and it can pass legislation based on its judicial capacity. It is also Quasi-Judicial and Quasi-Executive which gives it limited power to pass orders and investigate the executive branch of the Government. The SEBI tribunal was already in place by the time this scam happened so then why are we arguing for more participation in the law-making process for such agencies.SEBI has the power to adjudicate on serious breaches of law. This can be very helpful for SEBI, but unfortunately the CBI has received no similar grace.
CBI does not have such powers. In-fact the Securities Board does not delve into corruption and scams as much as the CBI does. The CBI is also exempt from Right to Information(RTI) despite being a body that deals in cases peculiar and unique in nature. In 2022 the Conviction Rate of CBI was 74.59% which was higher than in earlier years. The CBI website itself is testament to the fact that the due process of law takes eons to work (https://cbi.gov.in/faq#:~:text=Because%20of%20all%20these%20factors,one%20month%20to%20three%20months.). Why would the CBI have to take up such cases if it could work with the Judiciary to analyse and stop such scams in the first place? This finally brings to the Satyam Scam Case.
Case Study – The Satyam Scam Case and the Companies Act of 2013
In the early 2000’s a man named Byrraju Ramalinga Raju was working as the CEO of Satyam Computers (a company based in Hyderabad). He and his brother were heavily investing in real estate because of the boom in prices, one of the reasons being the lower interest rates after 2001. Raju got obsessed with investment, he and his brother took advantage of his position in the company and modified company revenue, inflated numbers to use company money and invest further in real estate. Auditors could not catch up with all these reports, and due to falsely reported profits their stock prices could dramatically rise because of financial fraud. Investors started investing more into growing businesses and rapidly growing ones like Satyam Computers. Finally, Raju was caught, he resigned and was sentenced to 15 years in jail. SEBI (Securities and Exchange Board of India) and the CBI (Central Bureau of Investigation) became aware of how auditors could manipulate data to take advantage and use company money. Seeing this they took years and finally managed to convince the Indian Legislature that an auditor would work for only 10 years at maximum in a private company. This decision was reflected in the Companies Act of 2013.
The Companies Act could have been incorporated much earlier if the CBI worked with the Judiciary formally and was given Constitutional Power to do so. Justice would have been served much earlier. Such a Scam could be predicted in the early days of independence if the CBI worked with the Judiciary to find out more and even establish a committee to analyse such issues, the fact of the matter being the Santhanam Committee was itself established in 1962. In the Early Days of Independance this could have been a far fetched idea, after all the focus of the Government was to Industrialise and form a stable electoral system. The Santhanam Committee had already led to the formation of the CBI. This does not take away the very basis of the argument to provide bodies like CBI legal powers at least like SEBI so they could work together.
Decades later though (decades after independence) emphasis could have been put on to give SEBI and CBI more powers in working with the Judiciary and take up important legal measures. Due to the Satyam Scam many people lost their money, investors and common people alike. The scam was over 7000 crore rupees. PwC (the auditors) were fined $6.6 million dollars by the SEC (US Securities and Exchange Commission). The final charge sheet was presented by the Enforcement Directorate to Raju. All of this happened because of the financial crash of 2008 which exposed the board to the suspicious work of Raju. This scam was to be presented in the Netflix Show Bad Boy Billionaires, but it was not. Raju didn’t even complete his jail time and was granted bail. The loss of money to the public was immense.
The CBI and SEBI thankfully managed to influence law after 4 years of the judgement in 2013. If we do give CBI a way to work with the judiciary and SEBI together it would drastically reduce case time and help these bodies make laws and regulations to combat such scams. If not for the financial crash of 2008 this scam would have never seen the light of day. Such bodies should be allowed to brainstorm, create law and work together in the judicial processes. Case time would reduce, pending cases would get more attention, it could be harder to get bails for such serious fraud. This effectively shows that the limitations on these bodies in terms of law making must be removed and Statutory and non-constitutional bodies could in fact prevent corporate fraud by taking active participation in the legal process.
References for the Reader
- Powers of SEBI- https://www.bajajfinserv.in/what-is-sebi#:~:text=SEBI%20possesses%20quasi%2Djudicial%20powers,disputes%20within%20the%20securities%20market.
- About Central Bureau of Investigation : https://cbi.gov.in/about-us?search=who-we-are
3. Companies Act 2013 Ministry of Corporate https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
Bibliography
- https://www.bajajfinserv.in/what-is-sebi#:~:text=SEBI%20possesses%20quasi%2Djudicial%20powers,disputes%20within%20the%20securities%20market.
- https://www.youtube.com/watch?v=vPiOOJOFvyI
- https://www.youtube.com/watch?v=vKuE-YtktuM
- https://www.youtube.com/watch?v=zsPfelLJElU
- https://www.youtube.com/watch?v=CJTWrrvtXH8&t=421s
- https://cbi.gov.in/faq#:~:text=Because%20of%20all%20these%20factors,one%20month%20to%20three%20months.
- There may be other sources scattered across the internet. (Google Chrome)