INTRODUCTION
Satyam Computer Services Limited is the crown jewel of the Indian IT sector. The financial fraud done under the corporate veil brought Satyam Computers to its knees in 2009 by its founders. The market went down soon after the company’s fall. It harmed the reputation of the Indian markets at the global level. This scam highlights the role of corporate governance in building a nation and assures the importance of auditing the finances and the role of decisions of the board. It shows the importance of a CEO chief executing officer in managing the company’s affairs and his relations with the board of managing directors and forming committees.[1]
Story so far
The small company led to global business, the fourth largest IT business in India, M. Ramalinga Raju founded Satyam Computer Services Limited in Hyderabad in 1987. The company started small with 20 members. The company was a leading success in offering services like IT and BPO Business Process Outsourcing. Soon it went to IPO on the Bombay Stock Exchange in 1992. The company was an example of leading businesses for governance, corporate accountability, and innovation. At the same time, real estate in Hyderabad also boomed, Ramalinga Raju was attracted to it, and he started buying properties with the money he had, and as greed increased, he thought of buying more. He came up with the idea of manipulating the accounts of Satyam the annual income of the company as 100% when it is 10%. Due to these manipulations by overstating the profits and cash balance, Satyam seemed to grow too fast, attracting many investors to buy the shares of the company at high prices. It led to an increase in the share value of Satyam and Raju started buying more properties by selling his part of shares in the company. A person was allowed only to buy 50 to 60 acres of land, so he started registering the properties in the name of his family members. He was of the idea of selling the properties when the price goes on a hike and recovering the accounts that he had manipulated. Ultimately this left him with 2% shares in the company in 2008 which is 24% in 1999. But destiny has a different story, the land values had decreased in 2008 due to the recession, and his idea of selling the lands at high prices had failed. He is in danger. Now to get out of this problem, he made another idea it was the last chance he had to balance the accounts. This time he thought of buying the companies belonging to his family members and managing the accounts of Satyam that he had manipulated. But here is the twist the investors in the company didn’t like the idea of buying the Maytas companies. At the same time, the World Bank announced a bar for eight years from business with Satyam for showing improper balance sheets, data theft, and bribing its staff. Raju confessed his mistakes to the company’s employees, board members, and SEBI in the mail. Satyam is disclosed as a financial fraud after five months of winning the Global Peacock Award in 2008. He stated that “it was like riding a tiger without knowing how to get off without being eaten”.[2]
CBI investigated it and found out the real value of the company. The company’s share value decreased from 169 to 9. Because of Raju’s actions, the investors had to face a loss of 14000 crores. The police arrested Raju, his brothers, and others like Srinivas Vdlamani, former managing director, heads of the internal company’s auditors and its CFO involved in the fraud. Mahindra company bought the Satyam for ⅓ of its value and changed the name to Tech Mahindra.[3]
These types of scams often prevail when there are corrupt officers.
LIFTING OF CORPORATE VEIL
Company
The company is defined under section 2(20) of the companies act 2013.[4] A company having a personality is found in old corporate law. A company is treated as a separate legal entity like its rights, obligations, assets, profits, and duties apart from its members or shareholders. It attains its legal entity form immediately after issuing the certificate of incorporation under the act. In the landmark England case of Saloman v. Saloman[5] it was held that a company should be treated as a separate legal entity irrespective of the individual in the company. A company is apprehended as an artificial person which has rights and duties and it can sue and be sued. In company law, the doctrine of the separate legal entity of a company is vital. It enables us to make more exaggerations about the company.
Separate legal entity
The lifting of the veil in corporate law is to hold the shareholders liable for the wholesome acts of the company. It imposes liability on the shareholders of the company. This helps in disclosing the conspirators, the real person behind the corporate veil disregarding the concept of a separate legal entity of a company. Hence the courts consider the lifting of the corporate veil as an exception to the rule of a separate legal entity of a company. The companies are in an artificial position, They cannot commit any crime or tort without any kind of intention (men’s rea).[6]
LIFTING OF CORPORATE VEIL IN INDIA
The apex court in the case of ChiranjitLal Chowdhury v. Association of India[7] held that the concept of a separate legal entity of a company falls under the purview of the fundamental rights of the constitution of India.
Statutory provisions
Section 2(60)[8] of the Companies 2013 Act says about the officer who is in default that any officer who commits any illegal offense or wrong shall be imprisoned or a fine is imposed on him.
If any person commits fraud under Section 7(7), the courts have been provided with powers to punish them under the lifting of the corporate veil.[9]
Under section 7(6)[10] of the Act if it is proved any fraud is being committed then the promoters or the main head of the company making decisions under section 7(1)(b),[11] will be held liable according to section 447[12] of the Companies Act.
Section 248(2)[13] of the Act provides for the removal of the company’s name in the manner prescribed as per section 249(1)[14] if any fraud is found at the time of dissolving the company that is to escape from liabilities then the officers liable are jointly and jointly liable for the same under section 251[15] and are punished according to section 447.[16]
Under section 339[17] if any conduct is found to defraud the other in conducting certain business activities then the person responsible shall be adjudged by the tribunal
Judicial interpretations
Though the companies are considered corporate personalities, their members are liable for the acts of the company. Courts are given the privilege of lifting the corporate veil to find the actual wrongdoer under the corporate veil.
In Re: Dinshaw Maneckjee Petit[18] the Supreme Court applied the concept of lifting the corporate veil to examine the intention of the company.
In the case of Santanu Ray v. Union of India[19] the Supreme Court lifted the corporate veil to examine tax evasion.
CONCLUSION
The concept of the lifting of the corporate veil was not much developed in India but the Indian courts have a lot of discretion in this matter. It acts as a watchdog for the companies. Financial fraud often prevails in many companies in any sector and these statutory provisions and judicial interpretations somewhat provide relief to some extent but the loss has already happened leaving many in a financial crisis. It must be within oneself, to be frank being in an administrative position.
Author(s) Name: Lankadi Uma Devi (Dr. B.R. Ambedkar College of Law, Andhra University)
References:
[1] R. Kerthana, ‘The Satyam Scandal: True Lies’, (The Hindu, 16 April 2015) <https://www.thehindu.com/in-school/news-bytes/1/article7109243.ece> accessed 25 December 2022
[2] Aron Almyda, ‘Satyam Scam – The Story of India’s Biggest Corporate Fraud!’ (Trade Brains, 03 January 2022) <https://tradebrains.in/satyam-scam/> accessed 30 December 2022
[3]‘1:8.5 swap for Tech Mahindra, Mahindra Satyam merger’, (The Hindu, 25 June 2013) ,https://www.thehindu.com/business/Industry/185-swap-for-tech-mahindra-mahindra-satyam-merger/article4849296.ece> accessed 20 December 2022
[4] Companies Act 2013, s 2(20)
[5] Saloman v Saloman (1897) AC 22
[6] Tejaswini Kaushal, ‘Separate Legal Entity’(IPleaders, 14 June 2022) <https://blog.ipleaders.in/separate-legal-entity/> accessed 30 December
[7] ChiranjitLal Chowdhury v Union of India and Ors. (1951) AIR 41
[8]Companies Act 2013, s 2(60)
[9]Companies Act 2013, s 7(7)
[10]Companies Act 2013, s 7(6)
[11]Companies Act 2013, s 7(7)(b)
[12]Companies Act 2013, s 447
[13]Companies Act 2013, s 248(2)
[14]Companies Act 2013, s 249(1)
[15]Companies Act 2013, s 251
[16]Companies Act 2013, s 447
[17]Companies Act 2013, s 339
[18] Re: Dinshaw Maneckjee Petit (1927) AIR Bom 371
[19] Santanu Ray v Union of India (1989) 65 CompCas 196
