Satyam Fiasco

SATYAM
Set up in the year 1987 to provide services in IT sector Indias 4th biggest software company in India It is listed in BSE, NSE, NYSE and Euronext (Amsterdam). BSE IPO oversubscribed 17 times when made public in 1991 The company employs 53,000 IT professionals across development centers in 6 continents
First IT Company in the World Certified under ISO9001:2000 Ranked Among Indias Top 10 Best Employers, 2004 and 2003 Top 13 Best-Managed Companies in India Winner, Corporate Citizen I award for Corporate Social Responsibility SAP Pinnacle Award 2008 Satyam Wins golden peacock award for excellence in Corporate Governance on Global level for 2nd time United Kingdom Trade and Investment India Business Award for Corporate Social Responsibility

> Chairman and founder Satyam Computers Services Limited > MBA from Ohio University > IT man of the year award by Data Quest in 2002 > Winner of Ernst & Young entrepreneur of the year award in 2007
B. Ramalinga Raju Founder & Chairman, Satyam Computers Ltd.

B. Rama Raju Promoter & CEO, Satyam Computers Ltd.

> He became the Managing Director and Chief Executive Officer in 1991 > Mr. Rama Raju holds a Master of Economics degree from Loyola College, Chennai and a MBA degree from Loredo State University, Texas > Before 1997, he was with Maytas Infra Limited as one of its Directors

Satyam Clients
A total of 650 Clients (185 of the top fortune 500 Companies)

Satyam Board Structure

B.Rama Raju Promoter & CEO

Other Independent Directors

B.Ramalinga Raju Promoter & Chairman

Ram Mynampati Whole time Executive Director

Srinivas Vadlamani Chief Financial Officer

Dr. M. Srinivasan

Prof. Krishna G Palepu

Mr. Vinod K Dham

Prof. M Rammohan Rao

Mr. T R Prasad

Prof. V S Raju

Dr. Reddys Laboratories

Sasken Communication/ Hellsoft /Montalvo Systems and Newpath

ISB Dean/ Bharat electronics

Former CabinetSecretary /GMR Infra/ GVK Taj

Satyam Share holding Pattern

Institutional & NonInstitutional Shareholders
LIC L&T Lazard Aberdeen Fidelity ICICI Prudential Citigroup JP Morgan 4.34% 4% 13.16%

Total Market capitalization of Rs. 15,262 Cr (As on Dec 16, 2008 )

Maytas Infrastructure
The Rajus hold 36.64 per cent while institutional holding is 10.92 per cent The company had raised Rs 327.45 crore through IPO. It had a turnover of Rs 1,660 crore and net profit of Rs 100 crore in the last financial year Satyam planned to acquire 51 per cent stake for Rs 1,440 crore or $0.3 billion
Mr. Teja Raju(VC)

Maytas Properties
B. Rama Raju Jr. (VC)

Rajus family owns 35% of Maytas properties Founded in 2005, it has a land bank of 6,800 acres It has clearances for three IT SEZs based on 148 acres An undisclosed stake is held by Infinite India Investment Management, a realty fund jointly promoted by JM Financial and US-based SRM Investments, which invested Rs 600 crore in February

So, How did it all began?

21 April 2008 22 Sep 2008

26 Jan 2009

2006

Satyam revenues cross $1 Billion

Satyam becomes first Indian company to publish IFRS audited financials

Satyam receives the Golden Peacock Award for excellence in Corporate Governance from World council

16 Dec 2008

17 Dec 2008

26 Jan 2009

Satyam gets board approval for controlling stake in Maytas Infrastructure and Maytas properties as fully owned subsidiary for $1.6B (Rs. 8000 Cr.)

Satyam backs out of Maytas deal citing investors protest

Major Clients of Satyam express dissatisfaction. Contracts worth $200 million up for grabs
Satyam shares plunge 55 percent in NYSE. BSE share plunges over 30%

Board meeting to be held on Dec 29 for proposed buyback of shares

19 Dec

20 23 Dec Dec

206Jan 2009

British mobile solution provider Upaid files a law suit against Satyam in a district Court in the US over Maytas deal in Texas. May face $1 Billion in penalties Centre refers Satyam deal to Registrar of Companies (RoC)

World Bank bans Satyam for 8 years due to inappropriate payments to staff and inability to provide information sought on invoices

26 28 29 Dec Dec Dec

26 Jan 2009

1st independent director Dr. Mangalam Srinivasan resigns from Satyam board
Satyam objects to world bank statements, asks to apologies or face legal action

Board meet initially scheduled for 29th postponed to 10th January Board announces exploring option for buyback of shares to restore investor confidence

3 more Independent Directors resigned. Mendu Rammohan Rao, Krishna G Palepu and Vinod K Dham

Satyam asks DSP to review board structure

Rumors in market about strategic takeover by IBM, Accenture

Promoters disclose that their entire holding in Satyam pledged with institutional lenders since 2006

IL&FS sells 44.1 lakh pledged shares of Satyam promoters in 1 day. Promoters equity reduced from 8.6% to aprrox 7%

30 02 03 Dec Jan Jan

26 Jan 2009

Post cancellation of deal, Maytas looks for raising $500 million through sale of equities and properties

IL&FS sells further 44.27 Lakh pledged shares taking the tally to 1.5 crore pledged shares Satyam-Upaid case hearing over the Maytas deal in Texas court on January 8.

Satyam board confirms promoters stake to be around 5%. Further 3.2% still pledged.

05 06 Jan Jan

26 Jan 2009

Promoters stake in the company downs to 4.5% SEBI considers proposal to make it mandatory for promoters and majority share holders to disclosed pledged shares to stock exchange

Total pledged shares sold by IL&FS reaches 2.5 Cr. in last 13 days. Promoters stake down to 3.6%. Still a further 1.7% are pledged

Tech Mahindra (Revenues 3766 Cr.) offers to merge with Satyam (Revenues 8473 Cr.)

The Night Before 7th Jan Merill Lynch discovers serious irregularities in books of accounts and approaches regulator SEBI for further course of action and its inability to investigate further. DSP submits report to SEBI and Satyam management late night.

07 Jan

26 Jan 2009

09:45 A.M. Satyam Chairman Ramalinga Raju writes the following letter to the company board

Satyam BSE scrip falls 78%

DSP snaps ties with satyam.

Ram Mynampati takes over as interim CEO according to Rajus letter Auditing firm PWC under scanner Govt. instructs RoC to review report

Hunt for Raju brothers begin. Amid speculation over his whereabouts, Raju is believed to have left for the United States in connection with a court case. Satyam stripped of Golden Peacock award

NSE removes Satyam from its benchmark index Nifty. It was replaced by Reliance Capital with effect from January 12. It was also be removed from various other indices like CNX 100, S&P CNX 500,CNX IT and the CNX Services sector index

08 09 Jan Jan

10 Jan

26 Jan 2009

PwC in major trouble. Stocks of PwC clients take a major beating at the BSE and NSE CFO Valdamani Srinivas, who is the financial custodian of the company resigns

BSE to replace Satyam Computer with Sun Pharmaceutical in its benchmark index Sensex with effect from January 12.

Former CFO Valdamani Srinivas remanded to judicial custody

Raju brothers arrested by the police on charges of criminal conspiracy, cheating, forgery, misappropriation of funds and criminal breach of trust.

PwC shot back at Satyam, saying in a media statement that the auditing was based on the audit evidence provided by Satyam and in was accordance with applicable standards.

Market Capitalization of satyam falls to Rs. 1,607 Cr from Rs.15,262 Cr. on Dec 16 in 19 trading sessions.

13 14 15 16 Jan Jan Jan Jan

26 Jan 2009

Government hands satyam case to SFIO

23 year old employee of satyam commits suicide in Chennai

Maytas stocks hit the lower circuit for 7th consecutive trading session

The newly appointed 3 member board appoints auditing firm KPMG and Delloitte to assist it in cleaning the mess in the scam tainted companys accounts

The government expanded the threemember Satyam board to six to include S Balakrishnan of Life Insurance Corporation, Tarun Das, chief mentor of the Confederation of Indian Industry and T N Manoharan, former president of the Institute of Chartered Accountants of India

Satyam Decade at a Glance

Why on 7th Jan 2009?

DSP Merrill Lynch informed SEBI about Material irregularities in Accounts on 6th Jan Minutes of Meeting of 16th December,2008 were not submitted to RoC-(This created some doubts) Hearing of Upaid- satyam case on 8th Jan at the US court

Raju ban gaya conmanHow?

Proposing High risk Maytas acquisition Overvaluing the proposed acquisition Promoter pledging their holdings
holding) (decrease in

Refusing to resign

Fudging Income statement

Maytas Acquisition
Valuation of Maytas duo was done at $1.6 bn as against actual $ 225 mn Violation of Section 372A of the Companies act
Rs.1,281.8 Cr

Rs.7,920 Cr

Fabricated Income Statements

Creative Account Practice

Details of cash balances with Scheduled banks are not there in the Annual report Question raised by Equity analyst Kawaljeet Saluja -$500 mn cash parked in current account

5,040 + 376 + 470 (Rs. Cr)

Rs. 1,230 Cr

Rs. 7,136 Cr
Fraud Amount

Understated Liabilities Overstated cash balances, Income receivables

Why and How How ????

Investment in Real estate (Land Banks)

To keep EPS high

Sold his stake at inflated price

(Made Rs.2,065 cr from shares)

Share Pledging
Stake decreased from 21.6% to 3.6% Money raised through 4 Front run Co. by offloading pledged shares (under investigation)
Amount (In Rs. Cr)
Harangi Agro

Narayandri Greenfields
Amravati Greenlands Amount (In Rs. Cr)

Bangar Agro
0 50 100 150 200

Fake FD receipts and Employee Nos.??

Take FD receipt
The money has already vanished Tell to Banks FD receipt is Lost

At the end show the original FD receipts Park the Money in other Bank

Repeat the procedure

Ask for Duplicate Receipts

Use the Duplicate to Withdraw money

Satyam-Maytas Nexus Contd..

Cash raised & siphoned off funds used to buy several thousands of acres of land across AP through several benami accounts Helped Maytas in getting major contracts Question raised by E.Shreedharan regarding Hyderabad Metro Project being allocated to Maytas Infra.

Some Comments
If the first fraud is for Rs100, the next time add another zero. It (accounting fraud) grows exponentially Anil Roy, Grant Thornton India It was like riding a tiger, not knowing how to get off without being eaten- Raju Ramalinga while admitting the fraud On Wikipedia, for the first time, India has been put on to the list of largest corporate scandals in the world, all thanks to Satyam a blogger

STOCK CHARTING

Comparison Satyam and Maytas share prices

Valuation of Shares

The Inside News

Satyam's CFO Srinivas Wadlamani has sold around 8,00,000 shares & even Satyam's interim CEO, Maynampati has sold 4,00,000 shares in past 6 months above Rs 300 per share. Satyams top 40 officials collectively sold shares worth more than Rs 300 crores in the past 6 months

SEBI Investigation
Regulation 7 of the SEBI (Prohibition of Fraudulent Unfair Trade Practices relating to the Securities Markets) Regulations, 2003 Sub-regulation (1) of Regulation 5 of the SEBI (Prohibition of Insider Trading) Regulations, 1992 Sub-regulation (1) of Regulation 29 of the SEBI (Merchant Bankers) Regulations, 1992 Regulation 38 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. Section 24(Contravening provisions of the Act or any rules or regulations) - Imprisonment up to 10 years and/or fine of up to Rs 25 crore

THE SATYAM FIASCO

THE LEGAL ANGLE..

COMPANIES ACT , 1956

SECTION 209:

Inspection of books of account, etc., of companies

SECTION 388 B: Reference to Tribunal of cases against managerial personnel.

SECTION 388C:
Interim order by Tribunal. SECTION 408:

Appointment a completely new board or appointment of additional directors

once approved by the Company Law Board (CLB)

SECURITIES CONTRACT REGULATION ACT

Non-compliance with the listing agreement invites sanctions under the

Securities Contracts (Regulation) Act (SCRA) which include imprisonment

and fines. The SCRA independently imposes an obligation to maintain books of accounts or records as per the terms of the listing agreement. Violation of these terms may lead to a penalty of Rs 1 lakh for each day of violation or Rs 1 crore whichever is lesser. The SCRA also provides that if a company fails to comply with the listing

conditions or commits a breach thereof, it shall be liable to a penalty up to

Rs 25 crore.

INDIAN PENAL CODE

SECTION 120 B :

Punishment of criminal conspiracy

SECTION 409 :

Criminal breach of trust by public servant, or by banker, merchant or agent

SECTION 420:

Cheating and dishonestly inducing delivery of property

SECTION 468:

Forgery for purpose of cheating

SECTION 471:

Using as genuine a forged document or electronic record

Criminal Prosecution
Failure to comply with Adjudication Officers orders attracts penalty of: Imprisonment of at least one month, and upto ten years; or Fine of upto another Rs. 25 crores; or Both New concept of private prosecution in the SCRA

Sessions Court alone may try offences

Role of Auditor
According to law there should be an external and an internal auditor(can be outsourced) Job is to check whether processes are being followed and are accurate and adequate One of the key audit test is to validate firms cash and bank balances(what was PwC doing)

 Dec 05 - RBI bars PwC from bank audits after it found that the firm under-provided for non-performing assets of Global Trust Bank Mar 06 - Out of court settlement with shareholders of Internet Company E-district Mar 07 - Raid by Russian Ministry in criminal cases related to oil firm OAO Yukos July 07 - Paid $225 million to shareholders of Tyco international after proved guilty of accounting fraud July 08 - Facing a probe at Scottish Mineral water subsidiary for inability to spot $90 m fraud

And Now the Satyam

Fiasco

In the trap..PwC
One of the big four Auditors world wide ( Revenues of $28 Bn) Arthur Andersen(child of PwC) & Enron -Year 2001-02 Evading Income tax & Service tax in at least two cases of tax evasion. Imp thing to note that How could PwC have no clue of inflation of Balance sheet to 5,040 crores since yrs and DSP ML realizing it in less than 2 weeks

Wary Investors exit PwC Clients

Investors brought shares of other companies in the same sector Out of 100 clients of PwC, most companies share fell by 5-15%. Risk of Reputation The ICAI & RBI stand on this

Whats next.
CA ministry dissolved the Satyam Board and announced new members 3 more members-chief mentor of CII Tarun Das, ex-president of ICAI T N Manoharan and S Balkrishna Mainak of LIC
What after that: Board says No to financial Bailout package

Lazard sold its 5.3 % stake

KPMG and Deloitte appointed as auditors but will be working through Indian subsidiaries

Deepak Parekh Former HDFC Chairmam

Kiran karnik Former NASSCOM Chairmam

C Achutan Former SEBI Member

Other Options for the Government

Satyam to be broken up into pieces BPO, Verticals, Service Lines Stabilize Satyam and merge with bigger IT firm ( as L & T hike in its stake) The new team may fight back to retain the existing clients and once everything settled may emerge again

In the News..

Bidders For Satyam

iGATE, Tech Mahindra and Essar Group have already evinced interest in buying parts of Satyam.

 Satyam's new board of directors, which met here to select the highest bidder, chose Tech Mahindra following its bid of Rs 1,757 crore ($351.4 million) for 31 per cent stake in the scamtainted IT giant. Tech Mahindra offered Rs 58 for each Satyam share. Outbidding the engineering giant L&T, Tech Mahindra on Monday emerged the highest bidder for Satyam Computer and may have to shell out up to Rs 2,900 cr for acquiring a 51 per cent stake. Tech Mahindra offered Rs 58 for every Rs 10 share while L&T's bid price stood at Rs 45.90. The highest bidder is required to bring in Rs 1,756 cr for 31 per cent.

Thankyou