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2017 (5) TMI 794 - SECURITIES APPELLATE TRIBUNAL MUMBAI

2017 (5) TMI 794 - SECURITIES APPELLATE TRIBUNAL, MUMBAI - TMI - Guilty of violating the SEBI (PFUTP Regulations) and SEBI (PIT Regulations) - restraining the appellants from accessing the securities market and prohibiting the appellants from buying, selling or otherwise dealing in securities, directly or indirectly for a period of 14 years also the WTM has directed the appellants to disgorge the unlawful gains arising on sale/ pledge of Satyam shares during the period from 2001-2008 with intere .....

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to the charge of inflating/ manipulating the books of Satyam were made available to the appellants and inspite of receiving requisite documents appellants (excluding Prabhakara Gupta) failed and neglected to file detailed reply to the show cause notices till May 2014. Moreover, during the period from 2011 till May 2014 appellants, including Prabhakara Gupta consistently failed and neglected to participate in the proceedings before the WTM even though their request for keeping the proceedings in .....

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documents referred to in the show cause notices issued to the appellants clearly establish that the appellants were instrumental/ involved in inflating/ manipulating the books of Satyam during the period from 2001 to 2008. That information was a price sensitive information and while in possession of that unpublished price sensitive information, appellants had sold/ transferred shares of Satyam and made huge profits. In these circumstances, decision of the WTM that the appellants violated the pr .....

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the extent it relates to the period for which the appellants are restrained from accessing the securities market and the quantum of illegal gain directed to be disgorged by the appellants and remand the matter to the file of the WTM of SEBI for passing fresh order on merits and in accordance with law. Fresh order be passed as expeditiously as possible preferably within a period of 4 months from today. Appellants are directed to cooperate in the proceeding so as to enable the WTM to pass fresh o .....

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ndirectly till fresh order is passed by the WTM of SEBI on merits and in accordance with law. - Appeal No. 286 of 2014, Appeal No. 287 of 2014, Appeal No. 284 of 2014, Appeal No. 282 of 2014, And Appeal No. 285 of 2014 - Dated:- 12-5-2017 - Mr. J.P. Devadhar, And Jog Singh, JJ. For The Appellant : Mr. Joby Mathew, Advocate with Ms. Harshada Nagare and Mr. Hemanth Joseph, Advocates i/b Joby Mathew & Associates For The Respondent : Mr. Shiraz Rustomjee, Senior Advocate with Mr. Jayesh Asha .....

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Audit) of Satyam Computer Services ( Satyam for short) respectively are guilty of violating the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 ( PFUTP Regulations for short) and SEBI (Prohibition of Insider Trading) Regulations, 1992 ( PIT Regulations, 1992 for short). By the said order, apart from restraining the appellants from accessing the securities market and prohibiting the appellants from buying, selling or otherwise dealing in .....

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sed of by this common decision. 2. The accounting fraud committed by Satyam came to light on 07.01.2009 when the then Chairman of Satyam Mr. B. Ramalinga Raju addressed an email to the Board of Directors of Satyam and copy to SEBI, which reads thus:- From B. Ramalinga Raju Chairman, Satyam Computer Services Ltd. January 7,2009 Dear Board Members, It is with deep regret, and tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice: 1. Th .....

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2,700 crore and an operating margin of ₹ 649 crore (24% of revenues) as against the actual revenues of ₹ 2,112 crore and an actual operating margin of ₹ 61 Crore (3% of revenues). This has resulted in artificial cash and bank balances going up by ₹ 588 crore in Q2 alone. The gap in the Balance Sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance). Wh .....

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to carry additional resources and assets to justify higher level of operations -thereby significantly increasing the costs. Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in a take-over, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten. The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Mayt .....

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last two years a net amount of ₹ 1,230 crore was arranged to Satyam (not reflected in the books of Satyam) to keep the operations going by resorting to pledging all the promoter shares and raising funds from known sources by giving all kinds of assurances (Statement enclosed, only to the members of the board). Significant dividend payments, acquisitions, capital expenditure to provide for growth did not help matters. Every attempt was made to keep the wheel moving and to ensure prompt pay .....

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nampati, Subu D, T.R. Anand, Keshab Panda, Virender Agarwal, A.S. Murthy, Hari T, SV Krishnan, Vijay Prasad, Manish Mehta, Murali V, Sriram Papani, Kiran Kavale, Joe Lagioia, Ravindra Penumetsa, Jayaraman and Prabhakara Gupta are unaware of the real situation as against the books of accounts. None of my or Managing Director s immediate or extended family members has any idea about these issues. Having put these facts before you, I leave it to the wisdom of the board to take the matters forward. .....

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mmediately address some of the operational matters on hand. Ram can also act as an interim CEO reporting to the board. 2. Merrill Lynch can be entrusted with the task of quickly exploring some Merger opportunities. 3. You may have a restatement of accounts prepared by the auditors in light of the facts that I have placed before you. I have promoted and have been associated with Satyam for well over twenty years now. I have seen it grow from few people to 53,000 people, with 185 Fortune 500 compa .....

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ment at this crucial time. With the hope that members of the Task Force and the financial advisor, Merrill Lynch (now Bank of America) will stand by the company at this crucial hour, I am marking copies of this statement to them as well. Under the circumstances, I am tendering my resignation as the chairman of Satyam and shall continue in this position only till such time the current board is expanded. My continuance is just to ensure enhancement of the board over the next several days or as ear .....

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nt account as per BoB was ₹ 50.72 crore. b) Satyam was maintaining two sets of statements for its current account in BoB, i.e. daily bank statements and Monthly Bank Statements. Daily Bank Statement was received through email which was printed and filed in the accounts wing and the Monthly Bank Statement was received through internal courier from its Chairman s office. From the two sets of bank statements it was observed that the closing balances as well as the number of debit and credit e .....

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the current account with BoB were found to be steadily inflated during the years 2001-2008. c) As on 30.09.2008 the actual balance in the current account of Satyam as confirmed by BoB New York Branch was USD 1,08,36,569 whereas in the monthly bank statement, such balance was shown as USD 37,96,12,384. BoB confirmed the balances as reflected in the Daily Bank Statements but not the balances shown in the monthly bank statements. d) It was observed that the entries in the books of Satyam were passe .....

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s were identified. It was also observed that certain transactions in the daily bank statement were not accounted for without assigning reasons. Further, transactions already accounted for were reversed. Monthly bank statements were found to be manipulated by showing additional entries largely in the nature of extra receipts. Thus, it was observed that fake monthly bank statements were being prepared at the end of every month containing desired debit/credit entries, which were additional to the d .....

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xed Deposit Receipts ( FDRs ) were maintained in the office of the Chairman of Satyam and taken from there by a single designated official of the accounts wing and handed over to another official of the wing who would in turn show them to the auditors as and when requested. From the records of Satyam as well as the books held with the auditors, it was noted that two sets of letters of confirmation of balances of FDRs were available with the auditors i.e.- (i) Confirmation received directly in th .....

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, HDFC Bank, HSBC Bank, HDFC, BNP Paribas received by the auditors through Satyam referred to above, several particulars were found to be missing and in some cases it was found that the letterheads were of an earlier period and persons who had signed the letters were not in the employment of the banks as on the date indicated on the letter. When enquired, the banks stated that the said confirmation letters were not sent by them, which means that the confirmation letters of the banks as available .....

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A/SPR/e-Support/ ONTIME/ PBMS etc. In other words, generating of invoice in the normal course of business began with the inception of a project with a unique serial number and project ID which was then passed on to other tools for approval and then finally the invoice for delivery to the customer was generated at the IMS level. j) Apart from the above, the system adopted by Satyam also enabled porting of data through MS Excel directly at the IMS stage. In such a situation, all the fields were en .....

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h included Mr. Srisailam Chetkuru, Mr. K. Malla Reddy and Mr. Suresh Kumar, who were responsible for entering invoice data on the system. k) Mr. Malla Reddy in his statement stated that he used to receive an excel attachment from Mr. Srisailam Chetkuru, who was his reporting manager, and Mr. Srisailam instructed Mr. Malla Reddy to hide the invoices mentioned in the attachment while updating collections in the IMS. At the end of the month, or mid-month, he used to import excel files from a server .....

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On updating, they used to return the monthly statement and excel sheet to the treasury. Above position was also corroborated by Mr. P.B.V. Suresh Kumar (then Executive, Finance of Satyam). Mr. Malla Reddy and Mr. Suresh Kumar stated that about 300 to 400 such fake invoices were generated each quarter resultantly showing inflated revenues in the books. l) Mr. V.V.K Raju the then Senior V.P., Finance of Satyam furnished details of 7,561 fake invoices ( S Series) generated in the IMS, out of which .....

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of genuine invoices. m) Fact that there were about 7561 fake invoices was also confirmed by Mr. Ramarao Remella, AVP (Finance) of Satyam. In his statement Mr. Ramarao Remella confirmed that two sets of MIS were prepared on the basis of changes suggested by Mr. V. Srinivas. When asked as to why the MIS coming from IMS tool should be changed, Mr. V. Srinivas told Ramarao Remella that the MIS coming from the IMS tools which matched with the published sales was not giving the correct MIS as the IMS .....

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erefore the changes in MIS be carried out as directed by Mr. Srinivas. n) Investigation revealed that there were 27 invoices in the IMS in relation to the development of certain customized products by the customers who were nonexistent. Investigation carried out in relation to one such non- existent customer called Cellnet Inc. revealed the follows:- i) On 9 April, 2006, Mr. Rama Raju, MD had sent an email to Mr. TR Anand requesting Mr. Anand to develop a proposal on the lines set out in the att .....

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was intended to help music and video companies to expand their offerings in the online space. iii) It is interesting to note that even before the DRM Rightsman software product proposal was conceived and designed, Mr. Anand had received an email dated 9th April, 2006 itself from one Mr. John V. Elite, of M/s Cellnet Inc, wherein it was stated that Mr. John V. Elite had approached Satyam vide purchase order dated 9, April 2009 for a project on DRM Rightsman and asked Mr. Anand to provide him (Mr .....

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.K Raju had also confirmed that the customers mentioned in all the 27 invoices including the invoices of Cellnet Inc. were fake. v) Mr. Anand in his statement had also stated that the aforesaid invoices which appear in the eIMS System, were not received by him for submission to the customers nor he had followed up with the customers for payment. Mr. Anand had also stated that Mr. Rama Raju was directly dealing with the said customers and that in the eIMS records it was shown that payments have b .....

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group, Bear Stearns & Agilent and found differences between the invoices reflected in the IMS as against those in the Oracle Financials. When the said differences were reported to the Finance Department of Satyam, he was told that the differences were being reconciled, however, thereafter, the Internal Audit team s access to the OFF module in Oracle Financials was removed. Mr. Prabhakara Gupta further stated that Mr. Rama Raju had directed him to close the observations regarding the reconcil .....

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ernal Audit team headed by Prabhakara Gupta, inspite of noticing the mismatch between the invoices in the IMS & Oracle Financials as far back as in the 1st quarter of 2007-08, closed its observations and filed false reports by recording that the observations has been settled or to check compliance on scheduled date or settled. To be verified in future . The above invoices indentified in the Internal Audit Reports were among the 7561fake invoices noticed during the course of investigation. p) .....

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Earnings Per Share ( EPS for short) and other ratios and norms used to evaluate the value of equity shares of Satyam in the market. q) For the September 2008 quarter, Satyam had reported a revenue of ₹ 2,700 crore and an operating margin of ₹ 649 crore (24% of revenues) as against actual revenues of ₹ 2,112 crore and an actual operating margin of ₹ 61 crore (3% of revenues). If the sales recorded in the fictitious invoices were excluded, then Satyam would actually have r .....

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ith a view to create inflated receivables from fake customers. s) In the books of Satyam it was recorded that as on 30.09.2008 Satyam had accrued interest of ₹ 376 crore on FDR amounting to 3308.41 crore which were all fictitious. Thus, there was an overstatement of accrued interest to the tune of ₹ 376 crore as on 30.09.2008. Investigation revealed that such fictitious FDRs and fictitious interest were also recorded in the book of Satyam during the years from 2003 till 2008. t) Mr. .....

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wn on behalf of the said 37 entities on various dates in 2007- 2008, however, none of these receipts were reflected in the Oracle Financials. It was further observed that an amount of about ₹ 194.6 crore was paid by Satyam to various entities. These payments were reflected in the Oracle Financials, but shown as advances paid on behalf of Panchakalyani Agro Farms Pvt. Ltd. Various cheques amounting to ₹ 194.6 crore paid by Satyam were signed either by Mr. Ramalinga Raju or Mr. Rama Ra .....

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re and the actual amount of TDS for which the benefit was claimed in the income tax return filed by Satyam for the same period was only ₹ 42.68 crore. Similar, mismatch was noticed in the earlier assessment years as well. v) Under clause 49 of the Listing Agreement, the CEO, (Mr. Rama Raju) and the CFO (Mr. V. Srinivas) were required to issue periodic certification to the effect, inter alia, that (i) the financial statements of Satyam do not contain any materially untrue statement or omit .....

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rol systems of Satyam pertaining to financial reporting, have disclosed to the auditors and the Audit Committee, deficiencies in the design or operation of such internal controls and the steps they have taken or propose to take to rectify those deficiencies (v) they have indicated to the auditors and the Audit Committee, the instances of significant fraud of which they have become aware and the involvement therein, if any, of the management or an employee having a significant role in Satyam s in .....

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d with this ADS issue although he knew that it was being made on a fraudulent and false financial position. The ADS issue boosted the image of Satyam and its shares in the mind of investors. The prospectus contained inflated financial status of Satyam which were all false and manipulated. Thus, misleading picture of Satyam s financial position and business was given in the prospectus as regards the ADS issuance. x) In April 2006 it was announced that Satyam was considering issue of bonus shares .....

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ificial price of Satyam in the market. y) In December 2008, Satyam purported to acquire Maytas Properties Ltd. and Maytas Infra Ltd. which was abandoned on account of stiff opposition by the shareholders. Thereupon, Satyam announced that a proposal to buy back its shares would be considered at the Board meeting to be held on 29.12.2008. All these steps were taken even though Satyam was in financial crisis and was not even able to meet its regular payment obligations. Mr. Ramalinga Raju, in his s .....

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nvestorlink , in which various business and financial highlights and information regarding the performance of Satyam were given. Each edition of the Investorlink contained Chairman s address by Mr. Ramalinga Raju wherein Satyam was shown to have sound financial position when in fact the said information was false and misleading. Similarly, Mr. V. Srinivas and others had also made various public statements from time to time including press releases in which they had made various statements regard .....

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ing them from entering the securities market and to disgorge the unlawful gain made by them on account of sale of Satyam shares and/or borrowings against the said shares should not be issued against them under the said provisions. 5. By a letter dated 19.04.2010, advocates for Mr. Ramalinga Raju stated that their client was in judicial custody since January 2009 and hence he was not physically in a position to meet his legal advisors or to provide instructions to any person on account of ill hea .....

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on bail, the appellants addressed letters from time to time requesting that the proceedings be kept in abeyance on the ground that the criminal proceedings initiated against the appellants were going on a day to day basis and as per the order passed by the Apex Court it was necessary for the appellants to attend the criminal court on regular basis. Although, SEBI offered personal hearing on Saturdays when the criminal court was not functioning, the appellants expressed their inability to avail p .....

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clearly stated that pendency of CBI trial would not be accepted as a justifiable ground for their nonattendance on the date fixed for personal hearing. They were also advised that the proceedings cannot be kept abeyance anymore, as sufficient time and opportunities of being heard have been given to them in adherence to the principles of natural justice. It was also made clear, that if the appellants fail to avail the last opportunity of personal hearing (either in person or through their authori .....

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. However, rejecting the request for cross examination as a device adopted to delay the proceedings, the WTM of SEBI passed the impugned order on 15.07.2014 holding that the appellants are guilty of violating Section 12A (a) (b) (c) of the SEBI Act and regulation 3(b)(c) and (d) and regulation 4(1) and 4(2),(a),(e),(f),(k), and (r) of the PFUTP Regulations and regulations 3 and 4 of the PIT Regulations. By the said order the WTM of SEBI has restrained the appellants from accessing the securities .....

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ta have been directed to disgorge ₹ 29.5 crore, ₹ 11.5 crore and ₹ 5.12 crore respectively, being the unlawful gain made by them on sale of Satyam shares while in possession of UPSI. All the appellants were directed to disgorge the aforesaid unlawful gains made by them with simple interest @ of 12% per annum from 07.01.2009 till the date of payment. 7. Challenging the aforesaid order dated 15.07.2014 the appellants have filed these appeals. ISSUES 8. Basically three issues aris .....

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ther the WTM is justified in restraining the appellants from accessing the securities market for a period of 14 years and directing the appellants to disgorge unlawful gains quantified against each appellant with interest @ 12% per annum from 07.01.2009 till payment. Violation of the principles of natural justice. 9. Basic argument of the appellants is that, when the appellants had repeatedly sought inspection of the documents and had sought crossexamination of the persons whose statements were .....

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ill May 2014. In such a case, it is submitted that abruptly in May 2014 the WTM could not have proceeded to close the hearing and pass exparte order on 15.07.2014 especially when the criminal trial was nearing completion and in fact the criminal trial was concluded on 26.06.2014. Accordingly, appellants submit that the impugned order which is passed in gross violation of the principles of natural justice is liable to be quashed and set aside. 10. Appellants further submit that the WTM was not ju .....

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ciated with Satyam had no access to the records of Satyam and therefore, the appellants could not file detailed reply to the show cause notice. Moreover, since the criminal trial was going on day to day basis appellants could not appear before the WTM. In these circumstances, passing of the ex-parte order without giving inspection of documents has caused serious prejudice to the appellants. c) In case of relatives/ family members/ group entities of Mr. Ramalinga Raju and Mr. Rama Raju, the WTM h .....

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as contemplated under Article 20(3) of the Constitution of India. As per Article 20(3) of the Constitution no person accused of any offence shall be compelled to testify against himself. Therefore, SEBI could not have recorded the statements of the appellants after the FIR was filed by CBI on 09.01.2009. Consequently, the WTM could not have passed the impugned order based on the inadmissible statements of the appellants. e) In the absence of any independent corroborative evidence, the WTM could .....

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ecorded by those officers of SEBI were involuntary statements which had no evidentiary value. g) Even if it is held that the email sent by Mr. Ramalinga Raju on 07.01.2009 was admissible in evidence, the WTM ought to have considered the email in its entirety and not only a part of that email. h) Relying on various decisions of this Tribunal as well as the decisions of the Apex Court including the decision of this Tribunal in case of Price Waterhouse (Appeal No. 208 of 2011 decided on 01.06.2011) .....

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We see no merit in the above contentions. 12. Ramalinga Raju in his email dated 07.01.2009 and also in his statements recorded by SEBI had admitted that the books of Satyam were inflated/ manipulated for several years. Similarly other appellants have also admitted in their statements recorded by SEBI that the books of Satyam were inflated/ manipulated for several years. However, appellants contend that without giving inspection of documents sought for and without permitting cross-examination of .....

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n of the persons whose statements are relied upon and further provide reasonable opportunity of personal hearing. 14. In the present case, along with the show cause notice/ supplementary show cause notices, SEBI had annexed documents on the basis of which charges were levelled against the appellants. In their preliminary reply, appellants, generally denied the allegations made against them and submitted that they could not file detailed reply due lack of access to the records and documents of Sa .....

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the WTM whenever personal hearings were offered to them. During the period from March 2010 till May 2014 appellants repeatedly sought adjournment either on ground that inspection of documents/ crossexamination was not offered or on ground that the criminal trial initiated against them was going on a day to day basis. Even Prabhakara Gupta in his reply stated that unless records of Satyam are furnished he cannot give meaningful reply to the charges levelled against him. 15. Argument of the appell .....

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nal trial, inspection of any other document was necessary for filing their detailed reply to the show cause notices issued to them by SEBI. Thus, the conduct of the appellants in expressing their inability to file detailed reply on ground that all documents were taken away by CBI and other governmental agencies without disclosing the fact that requisite documents of Satyam were furnished to them in the criminal trial is wholly unjustified. Appellants have not made out a case that any other speci .....

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er would be passed if the appellants fail to avail the opportunity of hearing offered. Inspite of repeated warnings given, appellants, repeatedly failed and neglected to attend on the dates when personal hearings were offered. In fact, appellants were offered personal hearing even on Saturdays when the criminal trial was not scheduled for hearing, however, the said proposal was not accepted by the appellants on ground that on Saturdays they were holding conferences with their counsel appearing i .....

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e appellants to keep the proceedings in abeyance had adjourned the proceedings from time to time could not be a ground for the appellants to presume that adjournment would be granted on 12.05.2014, because, while adjourning the matter, every time the appellants were warned that ex-parte order would be passed if they fail to appear on the next date of hearing. Similarly, fact that V. Srinivas by his letter dated 09.05.2014 (received by SEBI on 12.05.2014) and Ramalinga Raju & Rama Raju by the .....

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contending that the impugned order is passed in violation of the principles of natural justice. 18. Argument advanced on behalf of the appellants that once CBI filed FIR on 09.01.2009, appellants became accused persons under Article 20(3) of the Constitution and therefore, statement of appellants who were accused persons could not be recorded after 09.01.2009 under Article 20(3) of the Constitution is without any merit, because, firstly, FIR filed by CBI was not in relation to the violation com .....

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their statements recorded while in custody by SEBI are in contravention of Article 20(3) of the Constitution. Hence, the WTM was entitled to dispose of the show cause notices, inter alia based on the statements of appellants recorded by SEBI. 19. If at all the appellants were aggrieved by the decision of SEBI in refusing to keep the proceedings in abeyance till the criminal trial was over, the appellants could have challenged that decision of SEBI. However, the appellants neither challenged the .....

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rhouse v/s SEBI (Appeal No. 208 of 2011 decided on 01.06.2011) & decision of the Apex Court in case of SEBI v/s Price Waterhouse (Civil Appeal No. 6003-6004 of 2012 decided on 10.01.2017) wherein the Apex Court directed SEBI to furnish all statements recorded during the course of Satyam s investigation and further directed SEBI to give inspection of all the documents collected during the investigation of Satyam. 21. In our opinion, aforesaid decisions are distinguishable on facts, because, f .....

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ments/ statements/ cross- examination by filing an appeal before this Tribunal. In the present case, repeated requests made by the appellants to keep the proceedings in abeyance till the criminal trial was over was repeatedly rejected and the appellants were repeatedly warned that ex-parte order would be passed if they do not avail the opportunity of personal hearing. However, the appellants neither challenged the aforesaid decision nor participated in the proceedings by availing the opportunity .....

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that the directions given in that case are general directions given as and by way of clarifications without going into the merits of the case. Therefore, directions given in the facts of Price Waterhouse cannot be said to be the ratio laid down by the Apex Court applicable to all other cases. In these circumstances, appellants are not justified in contending that the directions given by the Apex Court in case of Price Waterhouse must be applied to the case of the appellants. 22. Argument of the .....

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orted in (2013) 1 SCC 1, the rules of natural justice being founded on principles of fairness can be available only to a party which has itself been fair, and therefore, deserves to be treated fairly. In the present case, appellants who are guilty of not being fair for the reasons stated above are not justified in contending that the WTM acted unfairly by refusing to grant further adjournment to the appellants. 23. Various decisions of this Tribunal as also the decisions of the Apex Court relied .....

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Prabhakara Gupta failed to avail opportunity of personal hearing offered to them for several years. Thus, the conduct of the appellants in not appearing before the WTM (either personally or though their representative) for several years, inspite of repeated warning given to them is wholly unjustified. In these circumstances, impugned decision cannot be said to have been passed in violation of the principles of natural justice. Violation of SEBI Act, PFUTP Regulations, 2003 & PIT Regulations, .....

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sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder; (b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognized stock exchange; (c) engage in any act, practice, course of business which operates or would operate as .....

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this Act or the rules or the regulations made thereunder; (f) acquire control of any company or securities more than the percentage of equity share capital of a company whose securities are listed or proposed to be listed on a recognized stock exchange in contravention of the regulations made under this Act.] Regulation 3 & 4 of PFUTP Regulations, 2003. Prohibition of certain dealings in securities 3. No person shall directly or indirectly- (a) ……….. (b) use or employ, .....

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s which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made thereunder. 4. Prohibition of manipulative, fraudulent and unfair trade practices (1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securit .....

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he does not believe to be true prior to or in the course of dealing in securities; (k) an advertisement that is misleading or that contains information in a distorted manner and which may influence the decision of the investors; (r) planting false or misleading news which may induce sale or purchase of securities. Regulation 3 & 4 of PIT Regulations, 1992. PROHIBITION ON DEALING, COMMUNICATING OR COUNSELLING Prohibition on dealing, communicating or counselling on matters relating to insider .....

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icable to any communication required in the ordinary course of business [or profession or employment] or under any law. Violation of provisions relating to insider trading. 4. Any insider who deals in securities in contravention of the provisions of regulation 3 or 3A shall be guilty of insider trading. Mr. Ramalinga Raju 25. Decision of the WTM that Mr. Ramalinga Raju had violated aforesaid provisions contained in the SEBI Act, PFUTP Regulations & PIT Regulations cannot be faulted for the f .....

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st of ₹ 376 crore on nonexistent fixed deposits, contained understated liability of ₹ 1230 crore which was arranged by him and that there was overstated debtors position to the extent of ₹ 490 crore. He had stated in the email that for the September quarter (Q2), revenue of ₹ 2700 crore and an operating margin of ₹ 649 crore was reported as against the actual revenue of ₹ 2112 crore and an actual operating margin of ₹ 61 crore, which had resulted in arti .....

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ded in the books of Satyam) clearly shows that Mr. Ramalinga Raju was instrumental in inflating/ manipulating the books of Satyam for several years. In the email, it was further stated that the gap between actual operating profit and the one reflected in the books of Satyam which was initially marginal continued to grow over the years and attained unmanageable proportions and since the promoters shareholding in Satyam was small, his concern was that reporting actual poor performance of the Compa .....

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Ramalinga Raju to arrange ₹ 1230 crore over a period of two years which were admittedly not reflected in the books of Satyam. This fact recorded in the email of Mr. Ramalinga Raju clearly justifies the conclusion drawn by the WTM that Ramalinga Raju was the chief orchestrator in inflating/ manipulating the books of Satyam. e) Contents of email dated 07.01.2009 were reiterated and confirmed by Mr. Ramalinga Raju in his statements recorded on 4th, 5th & 6th February 2009. The said statem .....

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d price sensitive information. ( UPSI for short). Dealing in shares of a listed company while in possession of the UPSI of that company is prohibited under the PIT Regulations, 1992. f) Very fact that the books of Satyam were directed to be prepared on the basis of monthly bank statements received from the office of Chairman Ramalinga Raju and the fact that Ramalinga Raju in his unretracted statement had admitted to have given instruction to V. Srinivas (CFO) to inflate performance of Satyam so .....

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to mislead the investors in believing that Satyam was financially strong which was not factually true. In the news update called Investorlink published by Satyam, Mr. Ramalinga Raju as Chairman of Satyam made false and misleading statements to the effect that the financial status of Satyam had reached greater heights which were factually incorrect and false. h) Argument advanced by counsel for Ramalinga Raju that no reliance was placed on copies of the manipulated monthly statements, fabricated .....

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r than the aforesaid documents. It is also not the case of Ramalinga Raju that the documents referred in the show cause notices were not fictitious. Therefore, the above argument advanced by counsel for the appellant is without any merit and hence rejected. i) Although statements of V. Srinivas, G. Ramakrishna and other employees of Satyam further establish that Ramalinga Raju was involved in inflating/ manipulating the books of Satyam, in our opinion, the email dated 07.01.2009 and the unretrac .....

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iod the books of Satyam are found to have been inflated/ manipulated. b) As MD of Satyam, Mr. Rama Raju had access to all the financial dealings of Satyam. On 21.01.2002 the Board of Directors ( BoD for short) of Satyam had passed a resolution authorizing either Mr. Ramalinga Raju/ Mr. Rama Raju to invest or place any fixed deposit from the surplus funds of Satyam without any limit. Investigation carried out by SEBI revealed that fictitious bank balances have been shown in the books of Satyam fr .....

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uivalent to ₹ 316.75 crore to the Chennai branch on value dated 27.10.2006 and requested that the said funds be placed in rupee deposits as per the instructions given therein. Above letter was found to be a false letter addressed by Mr. Rama Raju, because, HSBC to whom the letter was addressed, confirmed that no such wire transfer was received from Satyam. Investigation carried out by SEBI further revealed that the amount set out in the above letter was one of the fictitious fixed deposits .....

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t email Mr. Rama Raju had stated that other team members should not know that he had sent the email and directed Mr. T. R. Anand to mark to the team members only the annexure to the email and not the email itself. Copy of the said email was marked by Mr. Rama Raju to Mr. Ramalinga Raju. Accordingly Mr. T.R. Anand and his team developed a software proposal called DRM RightsMan and forwarded the same to Mr. Rama Raju on 18.04.2006. Investigation carried out by SEBI revealed that Satyam had receive .....

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I revealed that CellNet Inc. was a fictitious entity and in fact Satyam had not received any payment from CellNet Inc. Above facts clearly show that Rama Raju was involved in inflating/ manipulating the records of Satyam. e) From 2005 onwards Mr. Rama Raju as M.D. of Satyam had signed CEO Certification in compliance with Clause 49 of the Listing Agreement whereby he had assured the investors that the books of Satyam are maintained in accordance with law. However, investigation carried out by SEB .....

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Balance Sheet for the same year. g) Rama Raju as MD of Satyam was party to various issues, announcements and press releases relating to financial performance, assets, liabilities etc. of Satyam wherein rosy picture was shown about Satyam which were all false and intended to maintain an artificially high price of Satyam in the market. Adopting a manipulative device to lure the investors to invest in the shares of that company is prohibited under the SEBI Act and the PFUTP Regulations. h) While i .....

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erit in the above contention, because, firstly, it is not the case of Rama Raju that the dealing with Cellnet Inc. was in fact genuine and secondly, in the books of Satyam it was shown that payments have been received from Cellnet Inc., but actually amounts were not received. In these circumstances, inference drawn by the WTM that Cellnet Inc. was a fictitious entity cannot be faulted. j) Counsel for Rama Raju argued before us that neither the letter addressed by Rama Raju to HSBC on 26.10.2006 .....

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m. Similarly, the conduct of Rama Raju in directing T. R. Anand not to disclose the email dated 09.04.2006 to the other team members, clearly shows that the entire exercise was not genuine and therefore, Rama Raju did not want the steps taken by him in that behalf were known to many people in the team. In these circumstances, findings recorded by the WTM that Rama Raju had violated SEBI Act, PFUTP Regulations and PIT Regulations cannot be faulted. k) Although statements of V. Srinivas (CFO), G. .....

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reasons. a) During the period i.e. during the period from 2001 to 2008 V. Srinivas was the Senior Vice president/ Chief Financial Officer ( CFO for short) overseeing the departments of Finance, Legal, Secretarial and Corporate Services of Satyam. b) In his statement recorded on 10.01.2009, V. Srinivas admitted that although he had doubts about the availability of the bank deposits of Satyam shown in the books, he had not taken any specific action because the same were verified and certified by t .....

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ers, employees etc. and they used to say that we shall show inflated results. This, they said, needs to be done only for a limited period of time after which we can stop the practice. Both myself and G. Ramakirishna were not convinced of his argument and used to resist these directions. But, we yielded to their pressure fully believing that they will quickly rectify the situation. But that was not the case and this practice was continued for quite some time for reasons better know to them - mayb .....

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n 14.10.2010 i.e. after more than one and half years, by merely stating that the said statements were false, untrue and involuntary. No explanation was given as to why he gave false statement on 20.02.2009 and why there was undue delay in retracting the statement. In the absence of any explanation for the delay, it is apparent that the belated retraction after one and half years was only an afterthought and does not cast doubt on the statements of V. Srinivas recorded on 20.02.2009. It is true t .....

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s of Satyam were not true, as CFO and Head of Finance, V. Srinivas was party to the issuance of bonus shares, raising funds through ADS issue and buy back of Satyam shares etc. from time to time, which were all intended to mislead the investors in believing that Satyam was financially sound which were factually not true. e) As CFO of Satyam, V. Srinivas had signed CFO Certification as required under Clause 49 of the Listing Agreement to the effect that the books of Satyam were maintained in acco .....

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ng press releases regarding financial performance, assets, liabilities etc. of Satyam wherein he had stated that year after year Satyam was achieving greater heights which are all found to be false. It is apparent that all those false statements were made by V. Srinivas only with a view to facilitate creation of artificial market credibility for Satyam in gross violation of SEBI Act and PFUTP Regulations. g) From the facts set out hereinabove it is apparent that V. Srinivas as CFO was privy to t .....

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not justified in taking only the inculpatory part of the retracted statement ignoring the earlier statement of V. Srinivas dated 10.01.2009. In our opinion, reading the statements of V. Srinivas dated 10.01.2009 and 20.02.2009 together with the retracted statement of V. Srinivas dated 14.10.2010 it is apparent that the statement made by V. Srinivas on 20.02.2009 is in consonance with the investigation report which reveals that the books of Satyam could not be inflated/ manipulated during the per .....

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o merit in the above contention, because, admittedly V. Srinivas was furnished with requisite documents relating to manipulation of the books of Satyam before commencement of the criminal trial in February 2011 and without making out a case that inspection of any other document was necessary to reply to the charges levelled against him and without establishing that failure to give inspection of those documents has caused prejudice, V. Srinivas is not justified in contending that the impugned ord .....

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order is liable to be quashed and set aside. j) Reliance placed on a decision of the Apex Court in the case of State Bank of India v/s Chandra Govindji reported in (2000) 8 SCC 532 is misplaced, because, in that case adjournment was granted by accepting the plea for adjournment. In the present case, plea raised for keeping the proceedings in abeyance till the criminal trial was over has been specifically rejected from time to time. Therefore, reliance placed on the decision of the Apex Court in .....

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gulations, 2003 and PIT Regulations, 1992 cannot be faulted for the following reasons:- a) During the period from 2001 to 2008, Ramakrishna worked as General Manager (Finance), Assistant Vice President (Finance) & Vice President (Finance) of Satyam. b) In his statement recorded on 13.01.2009 Ramakrishna stated that he was responsible for taking care of Global Payroll, Indian, US & IFRS GAAP financial statements and their audit, raising of invoices with correct local taxes, treasury funct .....

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ri Venkatapathy Raju, we were informed about a banking arrangement having being drawn up with the Bank of Baroda, New York, for the account no. 120559 for the purpose of restricting the access to all the funds which get deposited from customers and are available there. The arrangements resulted in treasury getting a daily statement from the bank and a summary of the daily statement every month from the bank. The balances in this and the daily statement were the ones based on which the cash flows .....

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USA or India. The transactions in the monthly statement had transactions additional to the transactions in the daily statements. Since the type of transactions which occur in both the daily statements and monthly statements were similar, the accounting for the same was done similarly. d) In his statement recorded on 13.01.2009 Ramakrishna further admitted that he had noticed differences in the entries that appear in the daily bank statements vis a vis the monthly bank statements of BoB New York .....

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d never brought to the notice of the audit committee the material impact of reliance upon monthly bank statements on the books of accounts maintained by Satyam especially when the monthly bank statements were not tallying with the daily bank statements. Ramakrishna however, stated that he did not ever think that there was anything wrong with the banking arrangements. Ramakrishna further stated that he did not know of concealment/ misreporting and whenever he had raised question, V. Srinivas (CFO .....

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deviation. The application itself had inbuilt controls to make sure that no invoice can be raised without the consolidation billing advice being available for my team. The invoices raised were the only ones which were accounted in the financials and to that extent, periodic reconciliations were made. Any fictitious invoice could have come into existence only because a fictitious billing advice was made available in the application. Even in the case of excel porting, the advice for the excel port .....

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asked since the work of raising invoices could be done only in admin login. Investigation carried out by SEBI revealed that fictitious invoices were generated by using the admin ID and password. Since Ramakrishna was the authorized person having admin ID and password, he cannot feign ignorance about the books of Satyam being inflated/ manipulated on the basis of fictitious invoices generated by using admin ID and password. Apart of the above, Ramakrishna has further admitted in his statement tha .....

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nd V. Srinivas to his subordinates to prepare the draft accounts on the basis of monthly statements. h) Aforesaid unretracted admissions contained in the statements of Ramakrishna clearly negate the statements/ arguments of Ramakrishna he was not aware of the fact that the books of Satyam were manipulated for several years. In these circumstances, decision of the WTM that Ramakrishna was involved in inflating/ manipulating the books of Satyam for several years in gross violation of SEBI Act and .....

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l gains in violation of SEBI Act and PIT Regulations cannot be faulted. j) Argument of the appellant that failure to give inspection of documents, failure to furnish statement of Venkatapathy Raju and failure to give an opportunity to cross-examination of the persons whose statements were relied upon, has caused prejudice is unsustainable, because, G. Ramakrishna is himself guilty of not filing detailed reply to the show cause notices even after requisite documents were furnished to him before c .....

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cted unfairly against him. k) Although statement of V. Srinivas and several others further establish involvement of Ramakrishna in inflating/ manipulating the books of Satyam for several years, in our opinion, facts set out hereinabove would justify the conclusion drawn by the WTM that Ramakrishna had violated SEBI Act, PFUTP Regulations and PIT Regulations. Mr. Prabhakara Gupta 29. Decision of the WTM that Prabhakara Gupta had violated SEBI Act, PFUTP Regulations, 2003 and PIT Regulations, 1992 .....

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e invoices reflected in the IMS as against those in the Oracle Financials. Investigation carried out by SEBI revealed that the invoices detected in Oracle Financials which were not appearing in IMS were among the fake invoices inserted in the system to inflate performance of Satyam. d) Prabhakara Gupta in his statement admitted that subsequent to the Internal Audit reporting the disparity in the invoices shown in the IMS and Oracle Financials, the access to OFF module in Oracle Financials was re .....

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that the audit observation has been settled. e) Investigation carried out by SEBI revealed that the audit observations were closed in case of Citigroup without any reconciliation. Very fact that Prabhakara Gupta even after noticing the mismatch of invoices, agreed to close the observations without any reconciliation clearly justifies the conclusion drawn by the WTM that Prabhakara Gupta ensured that fake invoices detected during the course of audit were not pursued further. In these circumstanc .....

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nal Audit. Although it is contended that the mismatch in the IMS and Oracle Financials was not considered to be a major irregularity so as to report it to the Audit Committee, in our opinion, very fact that Prabhakara Gupta closed the audit observations without any reconciliation clearly shows that Prabhakara Gupta made false observations in the audit report obviously with a view to ensure that the audit committee is kept in dark about the fake invoices noticed during the course of internal audi .....

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ation. Very fact that the audit observations were closed without reconciliation and the same was concealed from the audit committee, clearly shows that Prabhakara Gupta aided and abetted Ramalinga Raju and others in ensuring that the basis on which the books of Satyam were inflated/ manipulated, were not exposed. h) Fact that the mismatch between the two systems were brought to the notice of the Finance Department and the Business Unit of Satyam did not absolve Prabhakara Gupta from his obligati .....

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from the obligation to ensure that the financial statements were prepared in accordance with law. Very fact that Prabhakara Gupta sought to close the audit observation without reconciliation and failed to bring it to the notice of the audit committee itself is in gross violation of the Inter Audit Manual. Therefore, the finding recorded by the WTM that Prabhakara Gupta even after noticing serious irregularities in the financial statements permitted the inflated/ manipulated financial statements .....

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w to ensure that the fictitious invoices on the basis of which the books of Satyam were inflated/ manipulated were not exposed. k) Various decisions were relied upon by the counsel for Prabhakara Gupta in support of the contention that the impugned order passed without offering inspection of documents/cross-examination is bad in law. We see no merit in this contention, because, admittedly requisite documents were furnished to the appellant before commencement of the criminal trial in February 20 .....

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hereinabove, it is apparent that Prabhakara Gupta, Head (Internal Audit) was privy to the fact that the books of Satyam were inflated, which was a price sensitive information and while in possession of that UPSI, Prabhakara Gupa had sold 95,064 shares of Satyam and 4950 ADS of Satyam during the period from 2001- 2008 and made illegal profits, in violation of PIT Regulations. In these circumstances, decision of the WTM that Prabhakara Gupta violated SEBI Act, PFUTP Regulations & PIT Regulatio .....

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ugned order is an ex-parte order passed by the WTM as the appellants failed to appear before the WTM even though repeated opportunities of personal hearing were given to them. In such a case, the WTM was duty bound to consider all material facts on record before issuing the impugned direction against the appellants. 32. In the email dated 07.01.2009 Ramalinga Raju had admitted that the basic reason for inflating the books of Satyam was that the promoter group of Satyam apprehended that reporting .....

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Gupta (Head, Internal Audit) inspite of noticing introduction of fictitious documents, allowed the books of Satyam being prepared on the basis of those fictitious documents. In such a case, reason as to why V. Srinivas, G. Ramakirshna and Prabhakara Gupta have been treated on par with Ramalinga Raju and Rama Raju and uniformly restrained from accessing the securities market for 14 years is not set out in the impugned order. In the absence of reasons recorded in the impugned order, it is difficu .....

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ld not be directed to disgorge jointly and severally ₹ 543.93 crore being the illegal gain arising on sale/transfer of Satyam shares while in possession of UPSI during the period from 2001-2008 which were sold/ transferred by Ramalinga Raju, Rama Raju and several other connected entities/ persons ( connected entities for convenience) named therein. Thus, the show cause notice requited Ramalinga Raju and Rama Raju to disgorge not only the illegal gain made by them but also required them to .....

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Raju and on the other hand, illegal gain made by the connected entities were considered to be the illegal gain made by each member of the connected entity group individually. From the aforesaid two sets of show cause notices it is apparent that SEBI itself was not clear as to who had made illegal gains and who should be directed to disgorge the illegal gains arising on sale/transfer of Satyam shares by the connected entities. b) By the impugned ex-parte order dated 15.07.2014 the WTM held that .....

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amalinga Raju and Rama Raju especially when the show cause notice dated 19.06.2009 seeking to recover the said illegal gain from the connected entities was pending. The WTM was very well aware of the said show cause notice dated 19.06.2009 and in fact, the very same WTM was considering the cause shown by the connected entities in reply to the show cause notice dated 19.06.2009. Therefore, decision of the WTM in treating the illegal gain made by the connected entities as the illegal gain made by .....

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WTM has passed two different orders which are mutually contradictory. It is unfortunate that SEBI is defending both the orders passed by the very same WTM which are mutually contradictory. d) Very fact that the WTM by his order dated 10.09.2015 has held that the illegal gain made by the connected entities are liable to be disgorged by individual member of the connected entity group jointly and severally with Ramalinga Raju and Rama Raju clearly shows that the WTM did not agree with his own decis .....

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nforce the direction contained in the order dated 15.07.2014 in relation to the illegal gain made by the connected entities, even after finding it to be erroneous is wholly unjustified. e) Fact that two sets of mutually contradictory show cause notices issued by SEBI to the parties could be decided by two separate orders, did not mean that the WTM must also pass two orders which are mutually contradictory in nature. f) Argument advanced by counsel for SEBI that Ramalinga Raju and Rama Raju canno .....

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nsider the question, as to who had made illegal gain on sale/transfer of Satyam shares by the connected entities while in possession of UPSI and accordingly direct that person/ entity to disgorge the illegal gain. By the impugned order dated 15.07.2014 the WTM without assigning any reason held that the said illegal gain was made by Ramalinga Raju and Rama Raju and accordingly directed them to disgorge the illegal gain jointly and severally. In the subsequent order dated 10.09.2015 the WTM has he .....

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ga Raju & Rama Raju must jointly and severally disgorge ₹ 1258.88 crore is also without any merit. According to SEBI, in September 2006, Ramalinga Raju, Rama Raju and their spouses had transferred shares of Satyam held by them to SRSR Holdings Pvt. Ltd. ( SRSR for short) a company wholly owned by Ramalinga Raju, Rama Raju and their family members. Between October 2007 and September 2008, SRSR pledged the Satyam shares transferred by Ramalinga Raju, Rama Raju and their spouses with a vi .....

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g loan to the 10 group entities took the market value of Satyam shares pledged by SRSR and the market value of Satyam shares was based on inflated/manipulated books of Satyam could not be a ground for the WTM to hold that the sanctioned loan of ₹ 1258.88 crore was the unlawful gain made by Ramalinga Raju and Rama Raju. Even if higher loan was sanctioned on the basis of inflated price of Satyam scrip, loan sanctioned with an obligation to repay could not by itself constitute gain under any .....

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cision of the WTM holding that the sanctioned loan of ₹ 1258.88 crore represents the illegal gain made by Ramalinga Raju and Rama Raju clearly shows total non-application of mind on part of the WTM. j) It is interesting to note that on one hand show cause notices were issued to Ramalinga Raju and Rama Raju in the year 2009-2010 for disgorgement of ₹ 1258.88 crore which was the loan amount sanctioned on pledge of Satyam shares by SRSR and on the other hand on 19.06.2009 show cause not .....

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the illegal gain made by SRSR and held that ₹ 1258.88 crore was liable to be disgorged by SRSR jointly and severally with Ramalinga Raju and Rama Raju. Thus, the WTM has passed mutually contradictory orders and mechanically, SEBI is seeking to defend both the orders. Without expressing any opinion on the merits of the order dated 10.09.2015, we hold that the impugned order dated 15.07.2014 passed by the WTM treating ₹ 1258.88 crore being the loan sanctioned on pledge of Satyam shares .....

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was the illegal gain made by SRSR. k) Similarly, quantum of illegal gain determined in case of V. Srinivas, G. Ramakrishna and Prabhakara Gupta are also faulty, because in all the three cases the WTM has taken the closing price prevailing on the dates on which Satyam shares were sold/ transferred by those three persons and not the amounts actually received by them on sale/transfer of Satyam shares. Apart from the above, V. Srinivas in his reply dated 14.10.2010 had specifically stated that whil .....

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ng the appellants from accessing the securities market and the quantum of illegal gain directed to be disgorged by V. Srinivas, G. Ramakrishna & Prabhakara Gupta. 34. In the result, we pass the following order:- a) Argument of the appellants that the impugned order passed on 15.07.2014 without giving inspection of documents and without permitting the appellants to cross-examine the persons whose statements were relied upon in the show cause notice, is violative of the principles of natural j .....

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y failed and neglected to participate in the proceedings before the WTM even though their request for keeping the proceedings in abeyance till conclusion of the criminal trial was repeatedly rejected and repeatedly the appellants were warned that ex-parte order would be passed if they fail to avail the opportunity of hearing. In these circumstances, in the facts of present case, argument of the appellants that the impugned order is violative of the principles of natural justice cannot be accepte .....

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