CBI v. B. RAMALINGA RAJU AND OTHERS

Court: CBI special Court, Hyderabad

Bench: Samudrala Govindarajulu, B. Prakash Rao, A. Gopal Reddy

Date of judgement: April 5, 2015

Facts:

Ramalinga Raju who was the chairperson of Satyam computer Services had established the Satyam computers in 1987, which grew into one of the leading IT services in India. The company is listed in NSE, BSE and even New York stock exchange. On January 7, 2009 the company chairman Ramalinga Raju had admitted the crime of Accounting Fraud of approximately 7136 crores ($1.4 Billion) through a confession letter and resigned from his position.

On January 9, 2009 Ramalinga Raju and his brother B. Rama Raju and 8 others belonging to  Satyam computers top management and auditing company were arrested and removed from the stock exchanges. The Government had intervened in the case to manage the employees and clients. Along with Ramalinga Raju, the company CFO and the auditing company PricewaterhouseCoopers (PwC) made liable in this case, as they couldn’t find the crime. After that CBI had taken up the case for further scrutiny of the crime and it  was found that Mr. Ramalinga Raju had involved in manipulating the cash and bank balances, misrepresentation of fixed deposits and maintaining false accounting statements which violated the basic objective of the companies act The primary  charge sheet has been filed under the section 120B (Criminal conspiracy), section 420  (Cheating),  section 428 (Forgery), section 477A (Falsification of accounting statements) of Indian penal  code. On the other hand, not maintaining proper account books, filing of false accounting statements and misleading the investors will come under the violation of companies act, 1957. In the letter of confession, it was mentioned that none of the board members are aware of the scam so the government just dissolved the board without taking any legal action on them. The Satyam computers chief finance officer (CFO) Vadalamani Srinivas had admitted that he was insisted to not look into bank statements by Ramalinga Raju and his brother and the manipulation of accounts was done since 7 years and also, he does not pay much attentions to the details in the balance sheet.

The top management of the Satyam computers allotted certain employees to create fake receipts for the non-provided services and to fabricate non existent customers by giving the login credentials to the employees. From this, false revenue had been generated and representation of non-existent cash reserves of approx. 5000 crores which misled the retail investors who follows company financial information. Misrepresenting the fixed deposits which are already dissolved into the existing ones, not only that also generted forged FD receipts and alter of assets and liabilities by showing more profits and less liabilities to rig the price of the share and attract the investors. The money was acquired from the Fixed deposits was transferred to various accounts but in books it will be misrepresented as active^[1].

Ramalinga Raju and 9 other people were convicted under this Accounting Fraud scam^[2].  The other people are his brother B Rama Raju, Vadalamani Srinivas and auditors from PwC company.

Issues 

• Whether the auditing company will be held liable for the misrepresentation of financial statements done by Satyam computers?
• Whether the PricewaterhouseCoopers (PwC) auditors are negligent in their duties?
• Did Ramalinga Raju really have the intent to mislead the investors?
• Whether the board of directors of Satyam computer services Ltd fulfill their duty and responsibility?
• Whether the small and retail investors are misled due to the falsification of statements?
• Were the surveillance system of regulatory authority failed to detect the fraud?
• Why there is no effective inspection and checks in one of the leading IT companies in India?

Prosecution Argument

• The accused Ramalinga Raju had involved in various crimes like Falsification of financial statements, Misrepresentation of fixed deposits, altering of assets and liabilities of the company and publishing of False accounting statements which comes under section 420, 477A, 428, 120B of Indian penal code.
• Most of the investors like who had trust on one of the leading IT companies lost their investment amount. Mrs. Leena Mangat who is one of those investors had purchased share worth ₹19000, after the scam was exposed her shares value dropped to ₹500. In this way most of their retail investors got mislead and suffered.
• The auditors S. Gopalakrishnan and Talluri Srinivas from price water coopers had falsely signed the financial statements without getting the confirmation from the bank which will come under negligence. Based on the confession of CFO Vadalamani Srinivas the auditors didn’t even raise a query about deficiencies in the accounting statements while discussions. It is the basic duty of an auditor to verify and certify the financial statements of the company.
• The sales invoices, fixed deposits certificates and receipts had been forged to increase the revenue and to mislead the investors and stakeholders which will come under breach of public trust and crime under section 420, 428 and 477A of Indian penal code.
• The confessions of Ramalinga Raju and Vadalamani Srinivas can be considered as the Validated evidence and CBI has submitted the financial statements, auditor reports and internal reports to prove the guilt.

Defence Argument

• The Defense argued that there was no criminal intention or intention to rig the share price. The inflating of revenues was not intended to hurt anyone or make them to suffer. It was to protect the company’s image.
• The accused argued that there was no personal gain from the acts he had done. The crime has been done to protect the interest of the company. To protect the image of the company he started manipulating the profits from over time. Day- by- day it is getting difficult for him to manage the difference between the real profits and fake profits. In that way he confessed to the court how he went into the trap in a way to protect the image of the company.
• He pleaded for the consideration of mitigation factor as the Satyam computers was acquired by Tech Mahindra in a very short time and no employee or investors were left unsettled^[3].

Judgement

After years of legal battle, a historical verdict was delivered on April 5,2015 in the case of CBI V. B. Ramalinga Raju and others at CBI special court, Hyderabad under the bench of three judges Samudrala Govindarajulu, B. Prakash Rao, A. Gopal Reddy. The court ruled in favour of prosecution and imposed imprisonment and penalty on A-1 and others.  The main accused Ramalinga Raju and along with his brother Rama Raju had sentenced with 7 years of imprisonment and ₹5.5  crore of fine has been imposed. The Auditors of PwC company S. Gopalakrishnan and Talluri Srinivas found guilty and sentenced for 7 years of imprisonment. The chief finance officer of Satyam computers Vadalamani Srinivas had sentenced for 7 years of imprisonment.

REASONING

• The accused forged the Fixed deposits certificates and receipts and generating fake invoices for the non-existent customers will comes under cheating and forgery of Indian penal code and it is a punishable offence as it is violating the SEBI act also.
• The manipulation of profits, altering the assets and liabilities and creating non existent reserves had violated the companies act 1956.
• The defense argued the reason for the crime is to protect the interest of the company but the court held that even though the act was done in the interest of the company falsification of financial statements is a punishable offence as it violated the companies act, 1956.
• The auditors were found guilty under negligence for not detecting the fraud and sentenced with imprisonment and penalty. The PwC company had faced ban and penalty from Securities and Exchange Board of India.

Ratio Decidendi

The ratio decidindi of this case is falsification of accounting statements, manipulating profits, generating fake invoices and creating false revenue to attract the investors and creating non existent cash reserves. The misrepresentation of fixed deposits as the existing ones which are already dissolved. Altering of assets and liabilities which violates the companies act 1956. This case involves cheating, forgery of receipts and certificates, publication and alteration of company’s financial information is a serious crime which comes under Indian Penal Code, 1860.

Altering of assets and liabilities and publishing them will come under violation of SEBI norms. The auditing company will be held liable for negligence of their duty.

Obiter Dicta

The judges in the bench had made several comments on this white-collar crime. Even though there is no personal gain the accused should be convicted because there is breach of public trust and manipulation of financial statements will come under a punishable offense.

It’s the preliminary duty of the auditor to verify the accounting statements of company before certifying it. The PWC company can be held liable for not detecting the fraud and certifying it without getting confirmation from the bank. The white-collar crimes should be severely punished so that public will not lose their trust towards stock market.

The confession was made due to external pressure and the crime has been intentionally but not accidently. only the accused confession will not be sufficient to reduce the punishment.

Final decision

The case CBI V. Ramalinga Raju is not just a scam but also a breach of public trust. After the years of trial, the CBI special court of Hyderabad had given its verdict on 5 April, 2015 by imposing 7 years of imprisonment and 5.5 crore of penalty to the main accused Ramalinga Raju and 9 others which includes Rama Raju, Vadalamani Srinivas (CFO), auditors from PwC company and other top management people in Satyam computers. This case will convey the severity of punishment for the white-collar crimes and listed as one of the biggest Corporate frauds in India.

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