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SatYam Case Study

SatYam Case Study

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Published by: rockers_86 on Mar 08, 2010
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Project title :
Case study on “satyam computers” (the mega corporate fraud)

Name - rohit s shinde Roll no - 46 Class - fybmm

Case :
Satyam Computer Services Ltd It is a consulting and information technology services company based in Hyderabad, India .It was found in 1987 by B.Ramalinga Raju.The company offers information technology (IT) services spanning various sectors, and is listed on the New York Stock Exchange and Euronext.It is considered as an icon among the IT companies and at one point had over a billion dollar revenue. Satyam's network covers 67 countries across six continents.The company employs 40,000 IT professionals across development centers in India, the United States, the United Kingdom, the UAE, Canada, Hungary, Singapore, Malaysia, China, Japan, Egypt and Australia.It serves over 654 global companies, 185 of which are Fortune 500 corporations. Satyam has strategic technology and marketing alliances with over 50 companies. Apart from Hyderabad, it has development centers in India at Bangalore, Chennai, Pune, Mumbai, Nagpur, Delhi, Kolkata, Bhubaneswar, and Visakhapatnam. Satyam Computers had on December 16, 2008, announced that it will acquire two group firms - Maytas properties and Maytas Infra. The BOD of Satyam had approved the founder’s proposal to buy 51 per cent stake in Maytas Infrastructure and 100 % in Maytas Properties. The total outflow for both the acquisitions was expected to

be US$ 1.6 billion comprising of US$ 1.3 billion for the 100% stake in Maytas Properties and US$ 0.3 billion for the 51% stake in Maytas Infra. This is the move that sparked a row over alleged violation of corporate governance laws.This deal was not profitable for investors .So after this announcement they started to raise their voices against the deal. The company has huge land banks and the prices have dropped down in the real estate significantly.

Analysis :
"The truth is as old as the hills" opined Mahatma Gandhi, So a company named "Satyam" (Truth, in Sanskrit) inspired trust, Satyam Computer’s is a multinational company established in 1987 by B.Ramlinga Raju in Hyderabad, India. Company offered information technology (IT) services spanning various sectors all over the world & was very well known in Stock Exchange with an increasing price of the shares of company.

Satyam network covered around 67 countries across six continents with 40,000 IT Professionals working in India, US, UK, UAE, Canada, Hungary, Singapore, Malaysia, China, Japan, Egypt and Australia. It even serves 654 global companies. Within no time, business was booming. Andhra Pradesh, of which Hyderabad is the capital, has one of the largest pools of skilled manpower in India. Satyam would prove a doughty competitor to its rivals, pricing its services so aggressively that some thought it was prepared to go with minimum profits in order to gain customers. And it expanded aggressively overseas. When he opened his Sydney office a few years ago, he occupied premises vacated by a top global IT firm. In China, provincial leaders vied to invite Satyam to set up operations in their areas. But once Mr Raju sold shares to the Indian public in 1992 and later, went for a New York listing in 2001, pressure grew on him to improve the company's performance. Ever competitive, he was also in a rush to catch the market leaders, Tata Consultancy Services, Infosys Technologies and Wipro. Raju was obsessed with getting past the billion-dollar sales mark. When he got there, he wanted to post US$2 billion. Satyam posted US$2.1 billion (S$3.1 billion) sales in the year to March 31; 2008.With the ever-rising pressure to perform, Satyam began doctoring the books to show bigger profits by manipulating the balance sheet, a process that began several years back. For Satyam, the recent developments are a direct leftover of the past. In fact, the story is about a decade old. In late 1999, IndiaWorld — a largely unknown internet firm — was acquired by Satyam group company,

Satyam Infoway, for an eye-popping Rs 500 crore. The consternation that accompanied this deal was not hard to comprehend. IndiaWorld had a topline of just Rs 1 crore and a net profit of an insignificant Rs 25 lakh. At Rs 500 crore, Satyam Infoway, later renamed Sify, was paying this astronomical sum not just for IndiaWorld but for a number of sites that came with it — among them were samachar.com, khel.com and khoj.com. The argument dished out was based on the potential of the internet business and the logic of eyeballs was driving this valuation story. One was not sure about the source of funds and how much money went back to Ramalinga Raju. A few months later in 2000, shareholders of Satyam were an irate lot. At the annual general meeting (AGM) of the company in Hyderabad in May 2000, shareholders accused Satyam of withholding facts and claimed they were defrauded. This was after the merger of three subsidiaries — Satyam Enterprise Solutions (SESL), Satyam Renaissance Consulting and Satyam Spark Solutions — with Satyam Computer Services. Post merger, 8 lakh shares of Satyam Computers were allotted to C Srinivasa Raju, who was then Satyam Computers’ executive director. Shareholders contended that SESL had made a rights issue of 12 lakh shares at par just before this merger. A third of this was bought by Satyam Computer while the remaining 8 lakh shares went Srinivasa Raju’s way after they were renounced. Once shareholders of SESL were given shares in Satyam Computers in a 1:1 proportion, Mr. Raju got 8 lakh shares at just Rs 10 each, when the shares were trading at a whopping Rs 1,600. The

management of Satyam Computers, however, maintained that things were above board, though shareholders thought otherwise. The seeds of accounting manipulation in Satyam were sown several quarters before Ramalinga Raju’s communiqué to the board on Wednesday, 7th Jan09. In 2002, the department of company affairs (DCA) was in receipt of a slew of complaints from Satyam’s shareholders that there were accounting irregularities in the company. Here, it was stated that Satyam’s directors invested unwisely in subsidiaries that were underperformers. This merely facilitated the process of tax evasion and employing methods such as writing off large amounts on depreciation. At first blush, Raju’s statement to the board (Raju’s letter to the board Appended as Annexure I) in which he confesses to inflating profits appears a act of contrition by a man who was willing to stand up and face the music for his transgressions. If Raju was dressing up the bottom line, it was only to boost the company’s valuation and ensure that it stayed in the big league of IT services. A higher valuation also enabled Raju to borrow more money against his shareholding

Queries :
1. Why Raju manipulated the Balance Sheet?
Ans. Mr Raju started doctoring the sheet simply to show superior performance and to be in competition with the market leaders.

His ever increasing pressure of performing made him manipulate his sheets.

2. Why Satyam announced that it will acquire Maytas properties and Maytas Infra? Ans. Company announced Acquisition of 51% stake in Maytas
Infra and 100% stake in Maytas Properties on 16th Dec 2008 to hide the irregularities in the accounts which were lasting from last few years.

3. What Management could do? Ans. A) Restore the Management of the compant & appoint
some reputed people as BOD. B) Try building confidence in clients to get back the lost projects C) It could also be merged with any other software company

4. How much was the actual fraud recorded? Ans. His sheets recorded the following :
2651.6 Cr Actual Debt was 2161; Over stated 490 Cr b) Cash & Bank Balance 5312.62 Cr Actual cash in bank was 321Cr
a) Sundry Debtors

Overstated 490 Cr CrCr

Inflated 5040 Cr

c) Interest on Fixed Deposit No Accrued Interest exist

376 Cr

No Interest 376 Cr
Liability 1230 Cr

d) Libility Mr Raju arranged Libility himself 1230 Cr

490 + 5040 + 376 + 1230

7136 Cr
5. If Satyam was fudging profits, where were the funds for all-cash acquisitions coming from? Ans. Sr.No Year Acquired Firm Profession Funding
(Amount in $) 1) Apr-05 UK based Citisoft PLC Business Consulting Firm 38Mn (Paid in tranches) 2) July-05 Singapore based Knowledge Dynamcis Consulting Solution Provider 3.3 Mn (All cash deal) 3) Oct-07 UK based Nikor Global Solutions Infrastructure based management services and consultancy group 5.5 Mn (All cash deal) 4) Jan-08 Chicago based Bridge Stratergy Group Management consulting firm 35.00 Mn (All cash deal) 5) Apr-08 Caterpiller Inc Market research and customer analytics

operations 95.5 Mn for both deals (all cash purchase) S& V Management Consultants Supply chain management frim

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