Satyam Computers: What caused the delay in the Sebi order and how it exposes a key question

Disgorgement is an equitable remedy that is designed to prevent wrongdoers from unjustly enriching themselves as a result of illegal conduct.

The infamous Satyam scandal refuses to die down even after almost 15 years of the event.

The market regulator, the Securities and Exchange Board of India (SEBI), on November 30, 2023, issued a fresh order against the promoters of Satyam, this time disgorging an amount of Rs 624 crores along with 12 percent interest for the unlawful gains made by them by trading in the securities of Satyam.

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The Satyam fraud came to light in January 2009 after the company’s Chairman, Ramalinga Raju, admitted to manipulating the books of accounts of the company. During the period 2000-2009, while the promoters were aware of the cooked financial statements, they sold and pledged a large number of shares of Satyam at inflated values. SEBI, in its previous orders, had found them guilty of insider trading since these sales/pledges of securities were done while in possession of unpublished price-sensitive information (UPSI) (i.e., inflated financials), resulting in the promoters making illegitimate gains.

It is interesting to note that to date multiple orders have been issued by SEBI about this matter. While the guilt of insider trading has been upheld by the Hon’ble Securities Appellate Tribunal (SAT) and the Supreme Court, the quantum of disgorgement has consistently been struck down by the tribunal on the grounds of arbitrariness and not using appropriate methodologies for calculating unlawful gains. This latest SEBI order only dealt with the controversy of what should be the exact amount of illegitimate gains to be disgorged by the promoters.

The heart of the delay

One should keep in mind that disgorgement is an equitable remedy that is designed to prevent wrongdoers from unjustly enriching themselves as a result of illegal conduct. It is neither a penal action nor is it a punishment but a remedy, forcing a party who profits from wrongful acts to give up such profits along with interest. Therefore, it was essential for SEBI to calculate the exact amount of illegal gains made by the promoters while dealing in the scrip of Satyam.

SEBI, in its previous order dated November 2, 2018, had directed the promoters to disgorge a total amount of Rs 813 crores along with a 12 percent interest. While calculating the illegitimate gain (i.e., sale value – the cost of acquisition), SEBI had considered the cost of acquisition of shares by the promoters of Satyam as ‘nil’, since no value for the cost of acquisition was provided by the promoters.

However, SAT noted that the promoters had acquired the shares of Satyam much before the fraud was perpetrated and these acquisitions neither had any correlation to the fraud nor were they based on UPSI, therefore the calculation of unlawful gain should take into consideration the ‘intrinsic value’ of the stock and not the net profits method calculated by SEBI. Further, SAT held that every share has a value and that the value of the shares cannot be said to be zero. Notwithstanding the egregious breach of trust by the promoters, the shares of Satyam continued to hold value even after the fraud came to the fore and SEBI should determine the intrinsic value.

While calculating the ‘intrinsic value’ of the shares SEBI had to answer the hypothetical question of “what might have been” the value of shares had there been no fraud since it is impossible to know what the precise answer would have been. SEBI noted that Tech Mahindra Limited had made an open offer on April 22, 2009, to acquire Satyam for Rs 58 per share, arrived at after being aware of the fraud and discounting the price, SEBI concluded that the open offer price at Rs 58 per share qualified best as the anchor for determining the intrinsic value of SCSL.

Once the anchor intrinsic value was determined, it was critical to factor in any overall movements in the market themselves owing to systemic factors. SEBI noted that the IT index rose by about 10.11 percent between December 16, 2008, before the rumours started to affect SCSL’s price, and April 22, 2009, when Tech Mahindra made the public announcement. Thus, to compute the ‘intrinsic value’ of the SCSL share as of December 16, 2008, given that the anchor for the same was Rs 58 as of April 22, 2009, one must reduce this by 10.11 percent to account for the overall change in the market in the interim period. Accordingly, SEBI determined the ‘intrinsic value’ of the share of SCSL to be Rs 52.67, or 23.25 percent of the market price of Rs 226.6 on December 16, 2008.

Regulator's lax approach

SEBI’s approach in the Satyam investigation is a classic case of laxity on the part of the regulator, resulting in a dragged investigation and multiple orders by SEBI, SAT and the Supreme Court. That being said, there can be no science to computing unlawful gains and the disgorgement amount in a particular case. Since such an amount has to be calculated by determining the value of a listed entity’s shares as if no fraud had taken place, no methodology would give an accurate number when calculating the said amount. Such scenarios call for the disgorged amount to be computed reasonably, keeping in mind the inflated value of the listed entity’s shares.

Considering this, SEBI’s approach to taking the open offer price announced by Tech Mahindra as the anchor intrinsic value makes logical sense. Tech Mahindra, a third party in this case, made the public announcement to acquire the fully diluted share capital of SCSL at a price determined after being fully aware of the fraud and the resultant market fluctuations. Any other methodology would have probably been unreasonable, without taking into account the market impact, thus resulting in significantly less liability and skewed numbers in favour of the promoters. This order also holds great significance since this is one of the rare instances when SEBI has considered a private transaction as the key to computing the disgorgement amount.

Also read: SAT pulls up SEBI for 'lackadaisical' approach in Kirloskar matter, imposes fine of Rs 5 lakh

Need of the hour

It is safe to say that while SEBI may have come as close to hitting the bull’s eye as possible in calculating the disgorged amount, questions regarding the ‘intrinsic value’ method will continue to be debated. This Satyam order as well as the back and forth between SEBI and its Appellate Authority regarding the quantum of unlawful gains exhibits that it is high time that the regulator devises a fixed methodology or guidelines to lead the way for adjudicating authorities in computing the disgorged amount and not leave it to their complete discretion in each matter. Such guidance can go a long way in not only bringing about uniformity in the manner of computation of unlawful gains but can also significantly reduce the number of pending appeals and remand orders, thus, enabling speedy resolution of matters.

(Choudhary is a Partner at Finsec Law Advisors. The article has been co-authored by Navneeta Shankar, an Associate at Finsec Law Advisors.)