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Satyam_What Business Demands!!

Satyam_What Business Demands!!

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Published by Kaushambi

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Published by: Kaushambi on Aug 22, 2009
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05/11/2014

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FinCoP,TheFinanceClub of Praxis
SATYAM FIASCO
 
Pankaj Agarwal -
President
 Mohit Almal 
– 
 
Secretary
 Vineet Sekhani 
 –
Treasurer
 Kaushambi Ghosh-
Core Committee Member
 Sumant Samantaray -
Core Committee Member
 
 
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FinCoP Discussion on:
 Satyam Fiasco
 
Introduction to the company:
Ramalinga Raju initiated a company in the year 1987 which grew from a small IT service providerwith a small number of employees to become the fourth largest IT Company in the country witharound 40000 employees. The magnitude of its operations grew at a huge rate to cross revenue levelof $ 2 bn. Magnitude of its operations can be validated as follows:
 
It had grown a huge number of clients which was 690, including 185 Fortune 500firms as of September 30, 2008.
The Backdrop of the case:
The Fourth largest software exporter of the country generated huge revenues which crossed $2 bnin 2005. Maytas Infrastructure and Maytas Property are two real estate companies owned by
Ramalinga Raju’s two sons. Raju siphoned off funds to these companies
and as a result of which hekept on window dressing the books of Satyam. What started as a marginal gap between the actualprofit and the one reflected in the books attained unmanageable proportions with increase in themagnitude of operations. This was because the Company had to carry additional resources andassets to justify higher level of operations
 –
thereby significantly increasing the costs. Raju took a lotof steps to bridge the gap but to no avail. As a last chance to bridge the gap Raju proposed theacquisition of Maytas Infra and Maytas Properties by Satyam for $1.6 bn. The break up was asfollows:
 
Maytas Properties(100% stake) - $1.3 billion
 
Maytas Infra (51% stake) - $ 300 millionThe shareholders and the directors stepped back from this decision and as a result of which the planwas aborted. After abortion of the plan Raju resigned from his post as a chairman after admitting the
fraud being committed by him. All these incidents had negative impact on the company’s image. The
affects are as follows:
 
Shareholders lost confidence in the company and a huge number of them sold off their stakein the company. The share price of the company went as low as Rs. 11.5.
 
4 out of 6 independent directors resigned.
 
 
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Corporate governance
not exercised in “true spirit” 
 
Raju owned 25% stake in the company in the year 2005 which dropped to 8.5% in 2008. Even afterbeing a minor shareholder he went ahead with the plan of acquisition without notifying the othershareholders and even the directors. According to him
“it was not required as per regulations”.
According to the provisions of law a company cannot go ahead with an acquisition of any othercompany at a price more than 60% of its own paid up share capital. But the agreed price of $1.6 bnwas way over the limit.This shows a gap in compliance to the corporate governance rules.
Reasons why the shareholders stepped back:
a.
 
Reason given by the company to go ahead with the acquisition was to “de
-
risk” its businessmodel. But to diversify at a time when Satyam’s rivals are hoarding
cash to weather a globalslowdown seemed dubious to them.b.
 
Margins of Maytas Infra and Properties revealed that the margins of the combined entitywould have reduced after the deal.The letter of Ramalinga Raju to the board of directors and SEBI on the day of resignation revealedthe following:
 
Inflated ( non- existent) cash and bank balance of Rs. 5040 crores
 
Accrued Interest of Rs. 376 crores
 –
non- existent
 
Understated Liability of Rs. 1230 crores on account of funds arranged by Raju
 
Overstated Debtors position of Rs. 490 crores
 
For September ’08 a revenue of Rs. 2700 crores and an operating margin of Rs. 649 cror
es(24% of revenues) was shown as against actual revenue of Rs. 2112 crores and operatingmargin of Rs. 61 crores (3% of revenues). This resulted in artificial cash and bank balancesgoing up by Rs. 588 crores in Q2 alone.
 
13000 out of 53000 employees were fakeSome facts about Maytas:
 
Maytas Infrastructure’s total loans stood at Rs. 934 crores in FY ‘08
 
 
Both the companies were highly valued

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