Satyam Scam: An Inconclusive Saga

The matter has been travelling across the regulator and the superior courts for the past 14 years.
MDP & Partners - Ravishekhar Pandey
MDP & Partners - Ravishekhar Pandey

Background of the Case

Satyam Computers Services Limited (“Satyam”) was one of the major information technology companies until January 2009 when B. Ramalinga Raju, CEO and Chairman of Satyam, addressed a letter to the board of directors of Satyam stating that its financial statements were manipulated and inflated for several years. Satyam was listed on Pink Sheets, Bombay Stock Exchange and National Stock Exchange. Most people believe that this admission of guilt was a strategic move to prevent the foreign enforcement agencies from prosecuting Raju in foreign jurisdiction.

Given that the financial statements form the core of the disclosure-based regime and the essence of corporate governance, especially in the case of listed companies, the Securities Exchange Board of India (“SEBI”) took cognizance of the matter and initiated proceedings for alleged violations of various provisions of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”), the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (“PFTUP Regulations”) and the Securities and Exchange Board of India (Prohibition of Insider Trading Regulations, 1992 (“PIT Regulations”). After consideration, the Whole Time Member (“WTM”) of SEBI passed an ex-parte order against B. Ramalinga Raju and other directors of Satyam holding them guilty of the alleged violations for the fraud committed in relation to the manipulation of books of accounts of Satyam. Vide this order, SEBI inter alia directed B. Ramalinga Raju and Rama Raju to disgorge the unlawful gains made on account of sale and pledge of shares of Satyam using artificially inflated prices, jointly and severally.

Upon the filing of an appeal against the aforesaid order of SEBI, SAT upheld the violations but set aside the directions regarding (i) disgorgement on the ground that the method for calculation of the amount of disgorgement was incorrect and directed SEBI to decide the matter afresh; and (ii) joint and several disgorgement. SEBI filed an appeal before the Hon’ble Supreme Court of India (“SC”) wherein SC passed an order directing SEBI to decide the matter afresh pursuant to SAT order; however, stated that the same would not be given effect without the permission of the SC. As of date, appeal is pending before the SC

Meanwhile, the WTM passed another order (“2nd Order”) against SRSR Holdings Pvt. Ltd. and other relatives of B. Ramalinga Raju holding them guilty of violations of the SEBI Act, PFTUP Regulations and PIT Regulations on the ground they had sold/pledged shares of Satyam while being in possession of UPSI. Vide the 2nd Order, SEBI directed them to disgorge the unlawful gains jointly and severally along with interest at 12% per annum. Upon appeal, SAT set aside the calculation of disgorgement stating that it did not take into consideration the cost of acquisition and directed SEBI to decide the matter afresh in this regard. This was again appealed before the SC. The SC upheld the violations against certain persons but also exonerated certain relatives of B. Ramalinga Raju.

After the back and forth, two fresh orders were passed by SEBI directing the appellants to inter alia disgorge unlawful gains jointly and severally along with interest. Further, the appellants were also debarred from accessing the securities market for a period of 14 years. These orders were brought in Appeal before SAT wherein the present order under analysis has been passed.


Quantification of disgorgement amount: In the present case, SEBI used the net profit method to compute the amount of disgorgement amount, which is the difference between the cost of acquisition of shares and the amount realized by sale, less statutory taxes. SAT relied on the WTM order in the case of Kirloskar Brothers Ltd. and held that SEBI in past has used intrinsic value to determine unlawful gains. SAT held that the calculation must be done by taking into account the intrinsic/underlying value of shares.

Joint and several liability: Regarding the direction to disgorge the amount jointly and severally, SAT held that when the damage caused by the persons acting in concert or joint tortfeasors is divisible, in that each person shall be held liable for the damage attributable to their actions therefore, the direction to disgorge the unlawful gains jointly and severally was set aside.


Manipulation of financial statements can greatly impact the price of the shares. For instance, if a company shows artificial cash balances or increased profit in its financial statements, the same has a  significant impact on price of its shares. The investors based on the manipulated and artificial appearance buy shares expecting a good return because of the profitability and cash flow of the company. Due to the increase in demand, the price of the shares rises and becomes overvalued.

Calculation of disgorgement amount

SEBI at its discretion uses various methods to calculate unlawful gains such as net profit or market absorption method according to the facts and circumstances of each case. As stated above, the net profit method is based on the calculation of the difference between the cost of the acquisition of shares and the amount realized by sale, less statutory taxes. On the other hand, shares are valued at the intrinsic value, which will indicate the true value of shares by taking into consideration the company’s actual valuation.

In this case, SEBI had adopted the “net profit” method but since the appellants had not provided any information regarding the cost of acquisition, an adverse inference was drawn and the value of the shares was taken as “nil”. In this manner, the entire sale value was taken as the unlawful gain. In this context, SAT held that merely because the appellants did not provide the details, the value of shares cannot be taken as nil.

It is well-settled law laid down by the SC in several judgments that fraud vitiates everything. For instance, in the case of State of Andhra Pradesh v. T Suryachandra Rao it was held by the SC that “fraud vitiates every solemn act. It is an anathema to all equitable principles, and any affair tainted by fraud cannot be perpetuated or saved by any equitable doctrine”.

Essentially the SAT order directs SEBI to identify the real value of the shares of Satyam, deduct that from the artificial value and then direct the Appellants to disgorge the unlawful gains which would be the difference between the artificial value and the intrinsic value. Practically, in such facts, it is not feasible to adopt this method and calculate unlawful gains. Since the very financials of the company were manipulated and the values are vitiated by fraud, it would be impracticable to arrive at the intrinsic value based on company financials. The reliance placed by SAT on the WTM order in the case of Kirloskar Brothers Ltd is also completely misplaced as that case was in relation to insider trading and did not involve fraudulent financial results. In such a case, it is our humble view that the SAT ought to have suggested a more practical method of calculations of unlawful gains and not left the issue unattended. Realistically, this would be the 3rd remand of the issue which is yet to be decided finally since 2009.

Joint and several liability in cases of disgorgement

As stated above on this issue, SAT held that if the persons are acting in concert or are joint tortfeasors and the damage caused by them is capable of apportionment, in that case, each one is liable to pay the damage attributable to them individually.

There have been various cases in which the courts have held that regardless of the extent of apportionment between joint tort feasors, the liability of the tort feasors would remain joint and several. To quote a few, in the case of Khenyi v. New Assurance Co. Ltd. & Ors., the SC held that “In cases, all the joint tort feasors have been impleaded and evidence is sufficient, it is open to the court/tribunal to determine inter se extent of composite negligence. However, determination of the extent of negligence between the joint tort feasors is only for the purpose of their inter se liability . Similarly, the High Court of Kerela in the case of Managing Director, Tamil Nadu State Transport Corporation v. Shoby Paul also held that “Even if all the wrongdoers are made party to the proceedings and the Court renders a finding as, to the extent of negligence of each wrongdoer, their liability to the injured would remain joint and several”. Even in the United States, the U.S. District Court Northern District of Georgia in the case of US Securities Exchange Commission v. Peter et al., held that “joint and several liability is appropriate in securities laws when two or more individuals or entities have a close relationship and engage in illegal conduct”. Thus, in cases where persons have a close relationship and engage in illegal conduct relating to the securities market, they can be held liable jointly and severally, even if the damage is divisible.


In these circumstances, it is evident that the order of SAT has not concluded the controversy and remanded the matter back to SEBI to once again determine the disgorgement amount. We cannot lose sight of the fact that the matter has been travelling across the regulator and the superior courts for the past 14 years. In such a situation, an inclusive conclusion of the controversy by exercising its inherent powers under Rule 21 of the SAT (Procedure) Rules, 2000, could have been a possible remedy. The matter will now involve the WTM Office recalculating the disgorgement amount and thereafter another probable round of appeals. Given the nature of pendency Indian Judiciary is faced with, conclusion of controversy is the need of the hour.

Ravishekhar Pandey is a securities law practioner and Senior Associate at MDP & Partners. The author would like to thank Amarpal Singh Dua for their contribution.

Bar and Bench - Indian Legal news