Satyam case tests foreign investors’ rights

A legal case brought in New York against Satyam Computer Services will test the ability of overseas shareholders in Indian companies to seek damages through class-action lawsuits.

The suit against Satyam, which was India’s fifth-largest outsourcing company until its chairman confessed to a $1bn fraud early last year, and PwC, its auditor, will particularly test the rights of investors holding American Depositary Shares.
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Lawyers for the Satyam investors, who include large US and foreign pension funds, are seeking to block an attempt to shift the case from the New York Southern District Court to India.

They argue that, in cases of securities fraud, only the regulator, the Securities and Exchange Board of India (Sebi), is allowed to act, effectively ruling out civil class-action lawsuits.

“The substantive laws of India provide no means of individual or class recovery for private investors in securities fraud matters because the civil courts in India are barred from hearing such cases where, as here, Sebi is empowered to act,” the lawyers for the investors said in a document filed with the court.

Satyam nearly collapsed in January 2009 after B Ramalinga Raju, its then chairman, confessed to fixing the company’s accounts over a period of years.

India’s business world has argued that the case reflects a one-off breakdown in an otherwise sound corporate governance regime but analysts argue it has revealed cracks in the country’s ability to handle large instances of securities fraud.

Mr Raju and a number of others suspected of involvement in the fraud, including two PwC auditors, are awaiting the matter to come to trial. The two PwC auditors have denied any involvement in the fraud.

Concerned that any collapse of Satyam would lead to mass redundancies among the company’s former workforce of 50,000 people and undermine confidence in India’s multibillion-dollar outsourcing industry, the government facilitated last year the sale of the company to a rival, Tech Mahindra.

To try to seek compensation, leading investors such as the UK-based Mineworkers Pension Scheme, Skagen – a Norwegian mutual fund, Sampension KP Livsforsikring – another Scandinavian fund, and the US-based Mississippi Public Employees Retirement System, sued the company in New York.

But one of the defendants, PwC and its affiliates, has applied to the court to shift the case to India.

PwC says that most of the witnesses and evidence are in India, Satyam’s underlying shares mostly trade in Mumbai and the main plaintiffs in the lawsuit, the pension funds, are mostly sophisticated foreign investors.

But last month, the investors responded with a detailed statement saying India does not have the proper legal structure to support class-action suits.

In addition, India’s courts, particularly those in Andhra Pradesh, the home state of Satyam, are so clogged with cases, the matter would fester there for years, they said.

“The inadequacy of the proposed Indian forum is further established by a wealth of public information demonstrating that the court system in the state of Andhra Pradesh is so overwhelmed with a staggering caseload that significant delays in the administration of justice, often extending for decades, are inevitable,” the lawyers for the investors said.

Asian corporate governance experts say that some of the region’s regulators have laws enabling class-action lawsuits but few in practice, are legally viable.