Shantanu Surpure is the Managing Attorney, Sand Hill Counsel, a Mumbai and Silicon Valley-based law firm.

The other lawyer has requested to be anonymous.

What are the various actions that can be taken against Raju?



Shantanu : The shareholders have locus standi to file a lawsuit against Raju as a chairman, board member and managing director.

As a director, Raju owed certain fiduciary duties to the company and the shareholders.  Of these, the foremost fiduciary duty that a director owes is the duty to act bona fide and in the interest of the company, ie. the duty of loyalty.  

In Dale & Carrington P. Ltd. v. P.K. Prathapan 122 Comp Cas 161 (SC), the Supreme Court of India held that “the fiduciary capacity within which the directors have to act enjoins upon them a duty to act on behalf of a company with utmost good faith, utmost care and skill and due diligence and in the interest of the company they represent. They have a duty to make full and honest disclosure to the shareholders regarding all important matters relating to the company.”

Therefore, the shareholders may claim a breach of fiduciary duty.  The shareholders may file a lawsuit on behalf of themselves or also file a derivative lawsuit brought by the shareholders on behalf of the Company against Raju.

There are also appear to be violations of the Companies Act (the “Act”) which may lead to action by the Registrar of Companies.  Pursuant to Section 210 and Section 211 of the Act, the Board of Directors must place before the Annual General Meeting a copy of the balance sheet and profit and loss of the company and that the balance sheet and the profit and loss account of a company must reflect the true and fair view of the state of affairs of the company at the end of the financial year.  Section 215 requires the balance sheet to be signed by a manager or secretary, if any, and by two directors, one of whom necessarily must be a managing director.   Any director who fails to take suitable steps to ensure that provisions of Section 210 and Section 211 are followed may be punished with imprisonment of up to 6 months and a fine which may extend to INR 10,000 or more.

Under section 628, if any return, report, certificate, balance sheet, prospectus, statement or other document required by or for the for the purposes of any provisions of the Act is made false or such a person omits any material fact, it shall be punishable with imprisonment for a term which may extend to two years.

Further, under section 635 of the Act, the Central Government may investigate the affairs of the Company including through the Serious Frauds Investigation Office.

In addition, under the Companies Act, Depositories Act and the Listing Agreement, SEBI will have a cause of action for violation of mailing a false annual report to the shareholders.

As Satyam’s ADSs are listed on the New York Stock Exchange, action may also be taken in the US, including by the SEC.  The company may face a class action lawsuit by its US shareholders.

Anonymous: Mr. Raju and his brother could be proceeded against under the various provisions under the Companies Act, 1956 and the Indian Penal Code for fraud, falsification of accounts and breach of fiduciary duties as a director. In addition, they could also be proceeded against for having violated the rules, regulations, laws and bye- laws of the stock exchanges and SEBI - in particular, the Listing Agreement. Since Satyam is listed on the New York Stock Exchange, they could also be prosecuted under applicable law of the United States of America. In addition to the above, there could also be criminal proceedings and civil shareholder lawsuits that could be brought against him and his brother in India and in the US.

Further, the news reports seem to suggest that the Government is considering referring the matter to the Serious Frauds Investigation Office and also mulling a concerted series of actions involving the SEBI, stock exchanges, Company Law Board etc.

What about criminal actions?

Shantanu: Certain of the violations of the Act as described above may lead to criminal action.

Anonymous: Mr. Raju and his brother could be prosecuted under S. 477A of the Indian Penal Code, 1860 for falsification of accounts and under S. 418 and S.420 of the Indian Penal Code, 1860 for cheating with knowledge that wrongful loss may ensue to person whose interest offender is bound to protect. In addition, certain provisions of the Companies Act too provide for imprisonment for violations by the directors and officers in default. In addition, they could also possibly be prosecuted under Section 406 of the IPC for criminal breach of trust.

Is it a bailable offence ?

Shantanu: Under section 621 of the Act, violations of the sections of the Act are cognizable offenses and are therefore bailable.   However, the offenses may be compounded which may lead to more serious charges.

Anonymous: The offence under S. 477A of the IPC carries a maximum punishment of 7 years’ imprisonment and/ or fine and is non- bailable. The offence under S. 418 of the IPC carries a maximum punishment of 3 years’ imprisonment and/ or fine and is bailable. The offence under S. 406 carries a maximum punishment of 3 years’ imprisonment and is a non-bailable offence.

What happens to the sons of Raju?

Shantanu: The sons do not seem to be directly implicated since they are involved with Maytas and not with Satyam.   Raju in his letter states that none of his immediate family members had any knowledge of the fraud.

Anonymous: It might be a little harder to bring proceedings against Mr. Raju’s sons since they were not involved in the falsification of accounts of Satyam. However, with respect to the aborted attempt to sell the two Maytas companies to Satyam at inflated valuations, one could possibly seek to bring criminal proceedings for criminal conspiracy against them for attempting to defraud the public shareholders of Satyam, in connivance with their father.

What about the independent directors on the board of Satyam. Are they equally responsible?

Shantanu: The entire board of Satyam will share liability.  Although Raju in his letter states that the other board members were not aware of the fraud, the independent directors will still face liability questions because they will have to prove that they were not in breach of fiduciary duty.   The independent directors also owe a duty of care and a fiduciary duty to the shareholders of the Company.

Anonymous: Unless the facts on record indicate that they were aware of the fraud or that they were blatantly and grossly negligent in their duties, it may not be possible to bring any proceedings against the independent directors. If they had not been aware of the falsification of the financial records of the company, one could not hold them responsible for relying on the genuineness of the accounts as provided to them, as they had been audited by a reputed accounting firm.

Do you think Indian judicial system is strong enough to book the culprit and bring justice faster?

Shantanu: This is an opportunity for the authorities to take quick legal action in order to demonstrate that although fraud has occurred, punitive action will be taken quickly.   It is imperative that action is taken quickly in order to provide investor confidence in the Indian markets.  As mentioned above, legal action may also be taken in the US against Satyam.

Anonymous:We have every reason to believe that the Indian judicial system is strong and committed enough to take action in the matter. Indian courts have historically been plagued with delays and overload, but given the sheer enormity and scale of the fraud involved, one would hope that a special court would be set up as in the case of the Harshad Mehta scam to deal with these cases. However, the spate of legal proceedings that will fly all around arising from the Satyam mess is not likely to come to a logical end anytime.


Leave Your Comment(s)