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Published : September 26, 2015 | Author : Manmeet Singh
Category : Company Law | Total Views : 2412 | Rating :

Manmeet Singh
I am B.A.LL.B (Hon's) final year of LL.M at Himachal Pradesh University

Business Ethics and Corporate Frauds: Issues and Case Study

Corporative Legislation has been actively debated subject, particularly during post independence period. In India, the framers of Corporative Legislation laid down certain board basic norms for the formation of Cooperative Societies and their functioning. While moving to the Cooperative Credit Societies Bill of 1904 in the Central Legislative Assembly, Sir Denzil Lbbeston said;

“Certain broad principles must be laid down and certain precautions must be insisted upon, but within those principles and subject to those precautions, the people must be left to work out their own Salvation on their own lines, the functions of government being confined to herty sympathy assistance and advice.”

However, in India since Cooperation has not developed on the initiative of people., approach to Cooperative Legislation has facilitated the State partnership in the Cooperative Institution, notwithstanding the significance of self-regulation based on the principle of democratic management. In other words, the Cooperative Legislation gave ample power to the State for regulation and control. The increasing diversification of State activity as a consequence of State aid has led to acceleration and strengthening cooperative movement as an instrument of economic upliftment of rural and urban masses. Therefore, different States of India have enacted Legislations with a view to simplifying, rationalizing and modernizing the management of Cooperative Societies, though there is a broad similarity of provision in Cooperative Laws of the States.

Corporate Governance

The root of the word Governance is from ‘Gubernate’, which means to steer. Corporate Governance would mean to steer an organization in the desired direction. The responsibility to steer lies with the board of directors/governing board. Governance is concerned with the intrinsic nature, purpose, integrity and identity of an organization with primary focus on the entity’s relevance, continuity and fiduciary aspects.

Contrary to popular misconception about corporate governance in modern times, the roots of corporate governance are not besmirched in negative trial. That is to say, corporate governance did not have its raison d’etre in the negative happening in the corporate world. Looking at corporate governance from that perspective is to undermine its creative, position regenerative and prosperous aspects. Good governance has been an eternal source of inspired thinking and dedicated action.

Kautilya’s Arthashastra maintains that for good governance, all administrators, including the king were considered servants of the people. Good governance and stability were completely linked. There is stability if leaders are responsive, accountable and removable. These tenets hold good even today.

Kautilya elaborates on the four fold duty of the king as –
i) Raksha – literally means protection, in the corporate scenario it can be equated with the risk management aspect.

ii) Vridhi – literally means growth, in the present day context can be equated to stakeholder value enhancement.

iii) Palana – literally means maintenance/compliance, in the present day context it can be equated to compliance to the law in letter and spirit.

iv) Yogakshama – literally means well being in Kautilya’s Arthashastra it is used in context of a social security system. In the present day context it can be equated to corporate social responsibility.

The substitution of the state with the corporation, the king with the CEO or the board of the corporation, and the subjects with the shareholders, bring out the quintessence of corporate governance, because central to the concept of corporate governance is the belief that public good should be ahead of private good and that the corporation’s resources cannot be used for personal benefit.

Definition of Corporate Governance

According to James D. Wolfensohn, President of World Bank, “Corporate Governance is about promoting corporate fairness, transparency and accountability.”

Standard & Poor’s has defined Corporate Governance as “the way a company is organized and managed to ensure that all financial stakeholders (shareholders and creditors) receive their fair share of a company’s earnings and assets.”

Cadbury Committee, U.K. has defined corporate governance as follows:

“(It is) the system by which companies are directed and controlled”.

It may also be defined as a system of structuring, operating and controlling a company with the following specific aims: -
(i) Fulfilling long-term strategic goals of owners;

(ii) Taking care of the interests of employees;

(iii) A consideration for the environment and local community;

(iv) Maintaining excellent relations with customers and suppliers;

(v) Proper compliance with all the applicable legal and regulatory requirement.

In United States v. Milwaukee Refrigerator Co. it was held that, “A corporation will be looked upon as a legal entity as a general rule but when the notion of legal entity is used to defeat the public convenience, justify wrong, protect fraud or defend crime, will regard the corporation as an association of persons”.

Role of Companies

In a Corporate World, Companies play on important role in country's economy and make a great contribution to national progress. Company generally means on association of people formed to carry some common purpose with a view to take profit. From the date of its incorporation company becomes in law a different person from the members who compose it.Thus an incorporate company has its legal personality distinct from that of its members from the date of its incorporation.

The advantages of incorporation are to be enjoyed only by those who want to make an honest use of the company. In case of dishonest and fraudulent use of the facility of incorporation the law lifts the corporate veil and identifies the person who is behind the scene and is responsible of fraud.

Types of Companies
There are various types of companies, which may be better understood by the following chart:




Charted companies

Registered companies

Statutory companies

Companies limited by shares

Companies limited by Guarantee

Limited Companies







One Person Company

Management of Company

The company is an artificial being, does not possess the body of natural person. It has to act through same human agency, namely, the directors, officers, etc. The management of the company can be divided under two heads:
1) Internal management;
2) External management

Internal Management

Internal Management

Memorandum of Association

Article of Association

Name Clause

Registered Office Clause

Objects Clauses

Liability Clause

Subscription Clauses

Capital Clause

Business Ethics

Business ethics (also corporate ethics) is a form of applied ethics or professional ethics that examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and entire organizations.

Business ethics has normative and descriptive dimensions. As a corporate practice and a career specialization, the field is primarily normative. Academics attempting to understand business behavior employ descriptive methods. The range and quantity of business ethical issues reflects the interaction of profit-maximizing behavior with non-economic concerns. Interest in business ethics accelerated dramatically during the 1980s and 1990s, both within major corporations and within academia. For example, most major corporations today promote their commitment to non-economic values under headings such as ethics codes and social responsibility charters. Adam Smith said, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Governments use laws and regulations to point business behavior in what they perceive to be beneficial directions. Ethics implicitly regulates areas and details of behavior that lie beyond governmental control. The emergence of large corporations with limited relationships and sensitivity to the communities in which they operate accelerated the development of formal ethics regimes.

Business Ethics
Attracting and retaining talent
Customer Satisfaction
Investor Loyalty

1. Attracting and retaining talent – People aspire to join organizations that have high ethical values. Companies are able to attract the best talent and an ethical company that is dedicated to taking care of its employees will be rewarded with employees being equally dedicated in taking care of the organization. The ethical climate matter to the employees. Ethical organization create an environment that is trustworthy, making employees willing to rely, take decisions and act on the decisions and actions of the co-employees. In such a work environment, employees can expect to be treated with respect and consideration for their colleagues and superior.

2. Investors Loyalty – Investors are concerned about ethics, social responsibility and reputation of the company in which they invest. Investors are becoming more and more aware that an ethical climate provides a foundation for efficiency, productivity and profits. Relationship with any stakeholders, including investors based on dependability, trust and commitment results in sustained loyalty.

3. Customer Satisfaction – Customer Satisfaction is a vital factor in successful business strategy. Repeat purchase/orders and enduring relationship of mutual respect is essential for the success of the company. The name of the company should evoke tryst and respect among customers for enduring success. This is achieved by a company that adopts ethical practices. When a company because of its belief in high ethics is perceived as such, any crisis or mishaps along the way is tolerated by the customers as a minor aberration. Such companies are also guided by their ethics to survive a critical situation.

Legislative Provisions & Judicial Approach towards Company/Corporation & Corporate Frauds

Criminal Liability of Corporation
It is very difficult to define corporate criminal liability in the present day scenario, because it covers wide range of offences. But for understanding its purpose, it can be defined as an illegal act or commission, punishable by criminal sanction committed by an individual or group of individuals in the course of their occupation. It can be even defined as socially injurious acts committed in course of occupations by people who are managing the affairs of the company to further their business interest.

Jurisprudence of Criminal Liability of Corporation In India

Just as India is seeking to battle the scourge of corruption in its governance, it is being hit by a spate of large-scale corporate corruption scandals, which have brought into sharp focus the role of India’s corporate sector in the problem of corruption in India. In this context, to fix liability for corruption and bribery offences, it becomes relevant to examine criminal liability, not just of individual directors or agents of a corporation, but also of the company itself. The basic rule of criminal liability revolves around the basic Latin maxim actus non facit reum, nisi mens sit rea. It means that to make one liable it must be shown that act or omission has been done which was forbidden by law and has been done with guilty mind. The Indian Penal Code, 1860 which, although not exhaustive, is the general substantive criminal legislation of the land. It applies to all persons having a certain territorial connection with India. Instances of Criminal liability of Corporations can be found in Sections. 45, 63, 68, 70(5), 203, etc of the Indian Companies Act wherein only the officials of the company are held liable and not the company itself; it is also reflected through the Takeover Code. The various sections of the IPC that direct compulsory imprisonment does not take a corporate into account since such a sanction cannot work against the corporation.

These are the major statutes in their respective field that are devoid of necessary legal aspects. On the other hand, law has also developed to an extent with regard to certain other statutes and their respective penal provisions wherein a fine has been imposed on the corporations when they are found to be guilty. Some such examples are:
· Section 141 of the Negotiable Instruments Act, 1862
· Section 7, Essential Commodities Act
· Section 276-B of the Income Tax Act

Under statutory provisions of the Indian law, the liability prescribed, at least for economic or strict liability offences committed by a company is threefold, as per the express provisions of the statutes .Firstly, the person who was in charge of and was responsible to the company for the conduct of its business is held liable, unless he can prove that the offence was committed without his knowledge or despite his exercising due diligence to prevent the offence. Secondly, if it is proved that an offence under such statutes has been committed “with the consent or connivance of”, or is “attributable to” neglect on the part of a director, manager, secretary or “other officer” of the company, such individual shall also be held liable. Lastly, the company of course, is held liable, irrespective whether any individual is pinned with liability too. The law on corporate criminal liability is however, not confined to the general criminal law in the penal code but it is, in fact, scattered over a plethora of statutes with specific provisions for the same.

Mens rea is an essential element for majority, if not all, of offenses that would entail imprisonment or other penalty for its violation. Zee Tele films Ltd. v. Sahara India Co. Corp. Ltd., the court dismissed a complaint filed against Zee under Section 500 of the IPC. The complaint alleged that Zee had telecasted a program based on falsehood and thereby defamed Sahara India. The court held that mens rea was one of the essential elements of the offense of criminal defamation and that a company could not have the requisite mens rea. Recently, the Supreme Court of India, through a landmark judgment Iridium India Telecom Ltd v Motorola Incorporated & ors, has added a new dimension to the jurisprudence relating to corporate criminal liability in India with respect to offences requiring mens rea or criminal intent, holding that despite being a legal fiction, a company can be said to possess mens rea required to commit a crime. Further in India, Confusion prevails as to whether a company can be convicted for an offence where the punishment prescribed by the statute is imprisonment and fine. However after few cases, The 41st Law Commission gave a report suggesting amendment in the penal provisions and providing for substitution of imprisonment with fine in case of offender being a body corporate. But the authorities are, till date sitting on that report and no such changes have been made to the penal legislation.

In Standard Chartered Bank & Others. Vs. Directorate of Enforcement and Others appellant filed a writ petition before High Court Of Bombay challenging various notices issued under section 50 read with section 51 of Foreign Exchange Regulation Act, 1973 & contended that the appellant company was not liable to be prosecuted for an offence under section 56 of FERA Act, 1973, against the decision of High Court appellant filed a special leave before Supreme Court, contended that no criminal proceeding can be initiated against appellant company under section 56(1) of FERA Act, 1973 as the minimum punishment prescribed under section 6(1) (i) is imprisonment for a term which shall not be less than six months and with fine. The court held that the legislative intent should be considered and all penal provisions should be construed like all other statutes fairly to bring out the legislative intent expressed in the enactment. The courts have followed this judgment and have denied any blanket immunity to corporations from criminal liability. As Indian companies set to expand globally, with increasing cross-border transactions and foreign investments, there is a need for them to be aware of the extraterritorial reach of foreign anti-corruption legislations, and to implement adequate compliance measures. In light of the growing power corporations in India today it has become necessary to regulate the moral behavior of such corporations. As the influence of multinational corporation’s increases, questions relating to their accountability are also raised more frequently and hence accordingly law of Criminal liability of Corporations and such other has been evolved by both judicial interpretation and legislation.

Corporate Frauds/Crimes

Corporate frauds/crime is viewed as ‘illegal acts or omissions, punishable by the State under administrative, civil or criminal law, which are the result of deliberate decision making or culpable negligence within a legitimate formal organization.' Corporate crimes also refer to criminal practices by individuals that have the legal authority to speak for a corporation or company. These can include Presidents, managers, directors and chairmen, sales people, agents, or anyone within a company that has authority to act on behalf of the firm. Examples of corporate criminal behaviour in most jurisdictions include: antitrust violations, fraud, damage to the environment in violation of environmental legislation, exploitation of labour laws, and failure to maintain a fiduciary responsibility towards shareholders.

Activities undertaken by an individual or company that are done in a dishonest or illegal manner, and are designed to give an advantage to the perpetrating individual or company. Corporate fraud schemes go beyond the scope of an employee's stated position, and are marked by their complexity and economic impact on the business, other employees and outside parties.

Corporate fraud can be difficult to prevent and to catch. By creating effective policies, a system of checks and balances and physical security, a company may limit the extent to which fraud can take place. It is considered a white collar crime.

White Collar Crimes

Marshall Clinard and Richard Quinney divided white-collar crime into occupational crime and corporate crime. The first category is meant to include offenses committed by corporations and their officials for the benefit of the corporation. The most glaring example and common form of occupational crime is employee theft and vandalism. The second kind of crime is defined as that which is committed “in the course of activity in a legitimate occupation” and is meant to apply to offenses involving persons at all levels of the social structure. This bi-polar distinction may be helpful to some extent, but it is somewhat unstable; the category of occupational crime should be limited so that it does not also involve blue collar occupational crimes. However, it could be argued that the supposed differences between organizational and occupational crime are “distinctions without a difference.”

Ø The Satyam Scandal India’s Biggest Corporate Fraud

In one of the biggest frauds in India’s corporate history, B. Ramalinga Raju, founder and CEO of Satyam Computers, India’s fourth-largest IT services firm, announced on January 7 that his company had been falsifying its accounts for years, overstating revenues and inflating profits by $1 billion. Ironically, Satyam means “truth” in Sanskrit, but Raju’s admission — accompanied by his resignation — shows the company had been feeding investors, shareholders, clients and employees a steady diet of asatyam (or untruth), at least regarding its financial performance.

Raju’s departure was followed by the resignation of Srinivas Vadlamani, Satyam’s chief financial officer, and the appointment of Ram Mynampati as the interim CEO. In a press conference held in Hyderabad on January 8, Mynampati told reporters that the company’s cash position was “not encouraging” and that “our only aim at this time is to ensure that the business continues.” A day later, media reports noted that Raju and his brother Rama (also a Satyam co-founder) had been arrested — and the government of India disbanded Satyam’s board. Though control of the company will pass into the hands of a new board, the government stopped short of a bailout — it has not offered Satyam any funds. Meanwhile, a team of auditors from the Securities and Exchange Board of India (SEBI), which regulates Indian public companies, has begun an investigation into the fraud. Since Satyam’s stocks or American Depository Receipts (ADRs) are listed on the Bombay Stock Exchange as well as the New York Stock Exchange, international regulators could swing into action if they believe U.S. laws have been broken. At least two U.S. law firms have filed class-action lawsuits against Satyam, but given the company’s precarious finances, it is unclear how much money investors will be able to recover.

According to experts from Wharton and elsewhere, the Satyam debacle will have an enormous impact on India’s business scene over the coming months. The possible disappearance of a top IT services and outsourcing giant will reshape India’s IT landscape. Satyam could possibly be sold — in fact, it had engaged Merrill Lynch to explore “strategic options,” but the investment bank has withdrawn following the disclosure about the fraud. It is widely believed that rivals such as HCL, Wipro and TCS could cherry pick the best clients and employees, effectively hollowing out Satyam. Another possible impact could be on the trend of outsourcing to India, since India’s IT firms handle sensitive financial information for some of the world’s largest enterprises. The most significant questions, however, will be asked about corporate governance in India, and whether other companies could follow Satyam’s Raju in revealing skeletons in their own closets.

· The Satyam scandal: How India’s biggest corporate fraud unfolded

The verdict is finally out on India’s biggest corporate fraud.

A special court under India’s Central Bureau of Investigation (CBI) on April 10 held the founders and former officials of outsourcing firm, Satyam Computer Services, guilty in an accounting scam worth Rs 7,000 crore ($1.1 billion). B Ramalinga Raju, the company’s former chairman, has been sentenced to seven years in jail.

The case, which is also called the Enron of India, dates back to 2009. Six years ago, Raju wrote a letter to the Securities and Exchange Board of India (SEBI) and his company’s shareholders, admitting that he had manipulated the company’s earnings, and fooled investors. Nearly $1 billion—or 94% of the cash—on the books was fictitious.

In an immediate reaction to the confession, investors lost as much as Rs 14, 000 crore ($2.2 billion) as Satyam’s shares tanked.

Raju explained his reasons for inflating earning in the letter thus: “As the promoters held a small percentage of equity, the concern was that poor performance would result in a takeover, thereby exposing the gap.”

“What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years,” Raju said in the letter. “It has attained unmanageable proportions as the size of the company operations grew significantly.”

Raju was once the poster boy of India’s IT revolution—rubbing shoulders with top CEOs and politicians across the world, including Bill Clinton.

Here’s a timeline of what went wrong at Satyam.

1987: Thirty three-year-old Raju establishes Satyam Computer with his brother and a brother-in-law in Hyderabad.

1991: The company is listed on the Bombay Stock Exchange, where its initial public offering is oversubscribed by as much as 17 times.

1993: Satyam Computer signs a deal with US-based Dun & Bradstreet to set up Dun & Bradstreet Satyam Software. Satyam holds 24% stake in the venture, while Dun & Bradstreet holds the remaining. In 1996, Satyam sells its stake to Dun & Bradstreet, ahead of a restructuring, and the new company is called Cognizant Technologies.

1999: Satyam Info way, a subsidiary of Satyam Computer, becomes the first Indian information and communication technology company to be listed on Nasdaq, and Satyam expands footprint to 30 countries.

2006: Satyam’s revenues cross $1 billion. Raju becomes the chairman of industry body, The National Association of Software and Services Companies.

2007: Raju is named Ernst & Young Entrepreneur of the Year. The company bags contract to be the official IT services provider of the FIFA World Cups in 2010 and 2014.

2008: Satyam’s revenues cross $2 billion. In December, the company decides to buy out Maytas Infra—owned by Raju’s sons—for $1.6 billion. The deal falls through after investors and board members object, and in a span of four days, four directors of the company quit. (Maytas is Satyam spelt backwards.)

January 2009: Satyam is barred from doing business with the World Bank for eight years. The World Bank alleges that Satyam was involved in data thefts and staff bribery. Shares fall to record low in four years. Satyam employees receive a letter from Raju admitting to the fraud, following which he resigns as chairman.

Raju and his younger brother B Rama Raju are arrested by police, while the Indian government steps in and disbands Satyam board.

June 2009: Tech Mahindra, owned by the Mahindra Group, and Satyam merge to form India’s fifth largest IT exports company. The merged entity is called Mahindra Satyam.

November 2011: Raju gets bail from India’s Supreme Court after the CBI fails to file charge-sheet.

October 2013: India’s enforcement directorate files a charge-sheet against Raju and 212 others under money-laundering charges.

July 2014: India’s market regulator SEBI bars Raju from the capital markets for 14 years, and also seeks Rs 1,849 crore as fine.

April 2015: The special CBI court holds Raju and nine other officials guilty of cheating. Among those held guilty are two former partners at PwC. “We are disappointed with this verdict given by the court of the Additional Chief Metropolitan Magistrate at Hyderabad,” accounting firm PwC said in a statement.

Raju, who also has to pay a fine of about $800,000 (Rs5 crore), has served 32 months in prison so far.

The 2G Scam

Mobile and allied networks work on specific frequencies allotted to each operator in a band of frequencies known as a spectrum. . Any particular mobile network will operate only on the frequencies it’s been allotted. The Government is responsible for such allocation. One such allocation in the 2G network spectrum took place in India in the year 2008 under the ‘able tutelage’ of the then Telecom Minister A. Raja, which today we all identify as the 2G spectrum scam. The scam is so magnanimous that today, the TIME magazine lists it as the 2ndWorst Abuse of Power right next to the Water Gate Scam of the United States. There are certain pertinent facts about it which exactly show as to what the scam actually is all about.

One thing to be noted is that the loss of Rs. 1.76 Lakh Crore we hear, is the revenue that the Government “would have” generated had it done proper auction of the spectrum frequencies rather than it being a ‘loss’ in literal terms. Nevertheless, the exchequer is 1.76 lakh croreless than what it should have been.

The first fallacy that came to light in the procedure of auction was the fact that the frequencies were allotted in the year 2008 at prices supposed to be in the year 2001. In 2001, the customer base of mobile phone companies was a mere 4 million, where in 2008, it grew to a staggering 350 million. It can be easily concluded that the basic loss that has been incurred has been through this faulty and fraudulent auction. Taking example of two companies, one Unitech and the other Swan Telecom. They were allotted frequencies at a paltry (yes, that’s what this amount of money was) Rs. 1661 crore and Rs 1537 Crores respectively. And after this, these companies sold off their 60% and 45 % shares at staggering Rs. 6200 Crores and Rs 4200 Crores.

This was only the first nail in the coffin. The number of deliberate inconsistencies that have been played into this matter are alarmingly appalling. Next is the open way in which these companies (there are a total of nine in number) were unduly favoured. The Government has been following system of auction based on ‘first come, first serve’ policy ever since 1994 in the process of allocation of resources this has been recently affirmed by the Supreme Court through its Advisory Jurisdiction (Special Reference No.1 of 2012, 27th September 2012). This was blatantly violated. There was a cut-off date till which the interested companies could apply for licenses citing their particulars and other requisites. This date was preponed arbitrarily and the website of the Department of Telecommunications (DoT) stated that those who applied between the time 15:30hrs till 16:30hrs would be given the licenses. So the companies like Unitech and Swan, who allegedly had a tip-off regarding the same amendment to the procedure, kept their documents ready in line, and eventually got the licenses.

Both Unitech and Swan Telecommunications are companies without any prior experience and of these, Swan could not even fulfil the eligibility criteria. But still, both were preferred.

The first question that comes to mind is as to what gratification did the then Telecommunications Minister A. Raja get, and how?

The question is not yet answered as clearly and convincingly, but of what is known, he has been said to have received a kickback, or bribe, in simple words, of Rs. 214 Crores. Now here comes the role of Ms.Kanimozhi. She’s not in any telecom business, but owns around 80% of stake in the channel Kalaignar TV, which inturn was used by Raja and his associates to route the money that he was to obtain.

The entire conspiracy behind this scam, is only partly unfolded. A. Raja might just be a pawn in the army of the lead conspirators. The myriad of millions that have been lost as a result cannot be said to benefit only Raja. It is obvious that there are many more beneficiaries to this, though they will remain under the veil, as they did during all other scams we have ever known, be it Bofors or the Tatra Truck scam.

Tatra Scam

Tatra deal was signed around the same time as Bofors. Although Bofors scam was unearthed within a few years, the Tatra defence scam continued to loot India for around 15 years until an honest Chief of Staff of Indian army, General V K Singh raised it and tried to stop the loot. Top officials of BEML Limited, a Bangalore-based company, and the defence ministry have siphoned off at least Rs750 crore in bribes and commissions over the past 15 years in the purchase of components for Tatra trucks, backbone of the army’s artillery and transportation wings.

· People Involved in Tatra Scam
- Rajiv Gandhi
- Ravi Rishi of the Vectra Group
- VRS Natrajan, BEML Chief
- Lt. Gen. Tejinder Singh
- Sonia Gandhi
- AK Antony

While Rajiv Gandhi and VRS Natarajan is suspected of active involvement, Sonia Gandhi and Antony is accused of trying to keep the scam under wraps and taking no action to stop the scam even after brought to their notice.


The deal opting for Tatra trucks was signed in 1986 when Rajiv Gandhi was prime minister as well as defence minister. Businessman Ravi Rishi who got the deal to purchase the high-technology Tatra trucks was believed to be a close friend of Gandhi. Surprisingly another scam of same time the Bofors scam had Ottrovio Quottrocchi who was a close friend of Sonia Gandhi, Rajiv Gandhi's wife

The Indian Army uses Tatra all-terrain vehicles to mount guided missile launchers and haul heavy artillery. It also uses these vehicles to transport personnel, supplies, tanks, ammunition, bailey bridges, and the like. Flouting defence ministry guidelines, BEML, formerly Bharat Earth Movers Limited, a Rs3,500 crore company in which the government of India is the majority shareholder, has been buying components for the 6x6 and 8x8 trucks from a middleman in London.

The defence procurement guidelines clearly say all purchases should be made only from the original equipment manufacturer (OEM). But DNA’s investigations show that BEML, nodal production agency for the family of Tatra trucks, has been dealing with Tatra Sipox (UK) Ltd, which is neither the OEM nor a subsidiary of the OEM.

This racket has been in operation since 1997. A former employee who held a senior position in BEML said that so far the company has completed transactions worth Rs5,000 crore with Tatra Sipox (UK) Limited, purported British subsidiary of Tatra Sipox as (Slovakia), with at least Rs750 Crore having been paid as kickbacks to BEML and defence ministry officials.

Senior advocate KS Periyaswamy, a shareholder of BEML, who sought the intervention of the president and a CBI probe into the Tatra deals, said: “At least 15% of the money sanctioned for the purchase of Tatra trucks is siphoned off as commission. Everyone from top to bottom gets their share. In my capacity as shareholder, I had highlighted this issue in the 2002 annual general meeting, but it wasn’t taken up.”

The deal worked so well for the officials involved that BEML signed another 10-year agreement with Tatra Sipox (UK) in 2003, four years before the first agreement ended, to increase the scope of the relationship. Since BEML doesn’t have the know-how to manufacture these trucks even 14 years after the deal was first struck, it sources components from Tatra Sipox (UK) and uses them for assembling the trucks.

Attempts to cover-up Scam in 2009

Defence minister AK Antony was formally apprised of the Tatra trucks scam as early as 2009 but he turned a blind eye. This assumes significance because Antony recently told Parliament that he didn’t act when army chief General VK Singh told him he was offered a Rs14 crore bribe to clear the purchase of a tranche of substandard Tatra trucks because he didn’t get a ‘written complaint’.

If a ‘written complaint’ is what it takes to act, why didn’t Antony or his ministry react when Ghulam Nabi Azad, a senior Congress party colleague and then health minister, wrote to him on behalf of Sonia Gandhi requesting “necessary action” in the Tatra matter? DNA has a copy of Azad’s letter dated October 5, 2009.

The defence ministry’s department of defence production replied on October 22, 2009, stating that the matter (Tatra trucks deal) is under investigation. “I would like to inform you that the matter is being examined in this ministry… the examination may take some time. As such, the minister [Azad] will be communicated after detailed examination of the case at appropriate level.” It has been over two years since and no formal investigation followed that initial response.

It started in August 2009, when Dr D Hanumanthappa, president of the Karnataka wing of All India Federation of SC/ST/Backward Class and Minority Employees Welfare Association, wrote to Congress president Sonia Gandhi stating that VRS Natarajan (BEML CMD) placed an order worth Rs6,000 crores for Tatra trucks from a UK agent and not from the Original Equipment Manufacturer (OEM) in violation of defence procurement guidelines.

The letter enclosed a detailed submission from Ashok SN, then assistant general manager of BEML’s ‘Trucks Division’, that clearly established how BEML, the nodal agency appointed by the government to procure trucks for the Indian army, violated defence procurement guidelines in the purchase of Tatra trucks. DNA has a copy of this submission.

“I met Sonia Gandhi and defence minister Antony personally to hand over the complaint and they told me that necessary action will be taken. However, until today, I have not received any response on what happened to my complaint,” said Dr Hanumanthappa.

Azad then forwarded the letter to the defence ministry on behalf of the Congress president. Azad later commented on the letter, he said did not recollect its contents or the context in which he had written it and wouldn’t be able to comment unless shown the letter. “I wrote several letters after that, also specifically mentioning about the Tatra truck scam, but these leaders did not respond,” said Dr Hanumanthappa.

Besides Antony, even law minister Veerappa Moily was apprised of the scam. Replying to a similar letter from Dr Hanumanthappa dated September 2, 2009, Moily said: “I am taking up the matter with the ministry concerned “. He also failed to do so.

Attempts to cover-up Scam in 2012

After defence minister ordered a comprehensive inquiry into the Tatra scam, the Congress went into a overdrive to limit the terms of reference of the investigation, especially to avoid unearthing the role of Rajiv Gandhi in the scam.

At the end it can be concluded that, the world has become a borderless global village. The spirit to implement internationally accepted norms of corporate governance standards found expression in private sector, public sector and the Government thinking. The framework for corporate governance is not only an important component affecting the long-term prosperity of companies, but it is critical in terms of National Governance.

It is also to be noted that, in making ethics work in an organization it is important that there is synergy between vision statement, mission statement, core values, general business principles and code of ethics. A commitment by corporate management to follow an ethical code of conduct confers a variety of benefits.

End Notes
# B. Durga Basu, Corporate Governance Framework, The Institute of Company Secretary of India, 1st Ed. (2003), p 1
# Ibid, at pp 1 – 2.
# Id, at pp 2 – 3
# (1905) 142 Fed. 247.
# Sec 9 of The Companies Act, 2013.
# Kailash Rai, "Principle of Company Law", p. 26 (3rd edn, 1985 )
# Dr. G.K. Kapoor, "Corporate Laws", p. 10(2007)
# "Business Ethics (Stanford Encyclopedia of Philosophy)". Plato.stanford.edu. 2008-04-16. Retrieved 2013-06-04.
# Smith, A (1776/ 1952) An Inquiry Into the Nature and Causes of the Wealth of Nations. Chicago, IL: University of Chicago Press, p. 55
# Supranote 3, at pp 25 – 26
# Analysis of corporate criminal liability in India- http:// lex-warrier.in/2014/02/ analysis corporate criminal liability India/accessed at 2:30 P.M. on 13/02/2015
# (2001) 1 CALLT 262 HC
# 2011 1 SCC 74
# http://www.investopedia.com/terms/c/corporate-fraud.asp
# http://knowledge.wharton.upenn.edu/article/scandal-at-satyam-truth-lies-and-corporate-governance/
# http://qz.com/379877/the-satyam-scandal-how-indias-biggest-corporate-fraud-unfolded/
# https://theconsiglieres.wordpress.com/2013/03/11/the-2g-scam-a-short-summary/
# http://www.ekakizunj.com/Tatra_defence_procurement_scam

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Posted by Surnder Kumar on June 17, 2016
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