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TV channels have flashed the news that Satyam CEO and his brother (who, I think, is the MD of SIFY Technologies, the Nasdaq listed company) have been arrested.

They (the TV channels) are speculating that the CFO might also get arrested soon.

We will be in for some good breaking news as the investigations start and the mystery is unraveled by the perpetrator himself.

What is perplexing is the delay in the arrests; it took good three days before the arrest was made. Where there any negotiations going on behind the scenes all the while? We cannot rule out that.  Read this story “Raju treated with kid gloves”, in The Hindu.   The newspaper contrasts the treatment given to Mr. Ramoji Rao, Eenadu group Chairman when he was arrested for Margadarsi Chit Funds issue.

Was Mr. Raju and his fraud scripting team getting trained on “how to give non-contradicting statements?”.  Was the time used by Mr. Raju to destroy/ move away crucial evidences?  We cannot rule out these either.

There was no raid conducted of Mr. Raju’s residence or friends/ relatives’ places by the government sleuths during this period.  If it was done, the chances for destroyal of evidence would have lessened.

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After all, Mr. Raju made a fraud confession.  Why he was not arrested immediately?  Take for example, some one murders somebody and sends a letter to the police station saying he has murdered so and so.  Will the police wait to arrest the person?

If some one who is a thief faxes a letter to the government and police giving details of his escapades, will the police wait for three or four days to arrest him?

While the delay in arrest causes suspicion, what gives confidence is the Government action to revamp Satyam Board.  Most likely this means, Mr. Mynampati will also be out of the Board and may be will not be the “Acting” CEO of the Company.  Note that he was part of the Board that approved the Maytas deal that would have helped “reverse” “SATYAM” problems to “MAYTAS”.

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There will be new directors appointed by the Government, which is a very good development and augurs well for all the stake holders.  The Central Government I think has acted through the Company Law Board for this action using the provisions available under the Companies Act, 1956.   (These could have been used by Central Government evenwhen the Maytas deal was proposed or immediatley after the confession was made by Mr. Ramalinga Raju, without waiting for three or four days).  The extract of the provisions are given for your knowledge herebelow.

Sec 398 – Application to Company Law Board for relief in cases of mismanagement.

(1) Any members of a company who complain,

(a) that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner  prejudicial to the interests of the company ; or

(b) that a material change (not being a change brought about by, or in the interests of, any creditors including debenture holders, or any class of shareholders, of the company) has taken place in the management or control of the company, whether by an alteration in its Board of directors or manager, or in the ownership of the company’s shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company;

may apply to the Company Law Board for an order under this section, provided such members have a right so to apply in virtue of section 399.

(2) If, on any application under sub-section (1), the Company Law Board is of opinion that the affairs of the company are being conducted as aforesaid or that by reason of any material change as aforesaid in the management or control of the company, it is likely that the affairs of the company will be conducted as aforesaid, the Company Law Board may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit.

Under Section 399, however, to make an application to the Company Law Board, atleast 100 shareholders have to get together or people holding 10% of the shares of the Company have to get together.   This in reality takes little time to happen.

But, there is a wonderful provision in Section 401, that arms the Central Government of India to act on its own as under:

Sec 401 – Right of Central Government to apply under sections 397 and 398.

The Central Government may itself apply to the Company Law Board for an order under section 397 or 398, or cause an application to be made to the Company Law Board for such an order by any person authorised by it in this behalf.

(Note: I have supplied the emphasis in blue color)

The Company Law Board has been granted powers by the Companies Act, 1956, under Section 402 and 403, to direct the company to cancel the contracts considered prejudicial to the Company and the shareholders’ interest and also can provide for regulation of the company’s affairs in the future as can be seen below:

Sec 402 – Powers of Company Law Board on application under section 397 or 398.

Without prejudice to the generality of the powers of the Company Law Board under section 397 or 398, any order under either section may provide for

(a) the regulation of the conduct of the company’s affairs in future ;
(b) the purchase of the shares or interests of any members of the company by other members thereof or by the company ;
(c) in the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its share capital.
(d) the termination, setting aside or modification of any agreement, howsoever arrived at, between the company on the one hand, and any of the following persons, on the other, namely
(i) the managing director.
(ii) any other director,
(v) the manager,
upon such terms and conditions as may, in the opinion of the Company Law Board, be just and equitable in all the circumstances of the case ;
(e) the termination, setting aside or modification of any agreement between the company and any person not referred to in clause (d),

provided that no such agreement shall be terminated, set aside or modified except after due notice to the party concerned and provided further that no such agreement shall be modified except after obtaining the consent of the party concerned ;
(f) the setting aside of any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against the company within three months before the date of the application under section 397 or
398, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference ;
(g) any other matter for which in the opinion of the Company Law Board it is just and equitable that provision should be made.

Sec 403 – Interim order by Company Law Board

Pending the making by it of a final order under section 397 or 398, as the case may be, the Company Law Board may, on the application of any party to the proceeding, make any interim order which it thinks fit for regulating the conduct
of the company’s affairs, upon such terms and conditions as appear to it to be just and equitable.

Thus, the powers of the Company Law Board are very wide .  Any directions for the administration and management can be given by the Company Law Board. In Shoe Specialities Ltd vs Standard Distilleries & Breweries (P) Ltd & Others (reported in Chartered Accountant, March 1997), it was held that when a case of oppression is made out, it is within the powers of CLB to end the matter and make such orders as it thinks fit. While considering to end the matters complained of and when given the power to make any such order as it thinks fit to rectify the same, the CLB is empowered to remove the Board of directors so that the affairs of the company could be set right.

You might be already aware of these or may be getting to know of these only now.   I just thought it would be beneficial for the readers to know about these sections so that in future they suspect any act of mismanagement in a Company they can move to the Company Law Board or the Ministry of Company Affairs, (www.mca.gov.in) Indian Government for moving the Company Law Board.

The only problem is unscrupulous promoters moving the Honorable Courts, contesting the order of the Company Law Board and getting a stay and thus buying time    .

One interesting action as part of shareholder activism can be using the Right to Information Act and seeking from Company Law Board, details (including status) of the complaints made by the shareholders of various companies under Section 397 of the Indian Companies Act, 1956 or by the Central Government under Section 401 of the said Act.

Anybody game?

On the side lines – I liked this quote I received in a newsletter:

“We are suspicious of those CEOs who regularly claim they do know the future – and we become downright incredulous if they consistently reach their declared targets. Managers that always promise to “make the numbers” will at some point be tempted to make up the numbers.” – Warren Buffett

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