Satyam Computers services limited

Satyam Computers services limited was a consulting and an Information Technology (IT)
services company founded by Mr. Ramalingam Raju in 1988. It was India’s fourth largest
company in India’s IT industry, offering a variety of IT services to many types of businesses.
Its’ networks spanned from 46 countries, across 6 continents and employing over 20,000 IT
professionals. On 7th January 2009, Satyam scandal was publicly announced & Mr.
Ramalingam confessed and notified SEBI of having falsified the account.

Raju confessed that Satyam’s balance sheet of 30 September 2008 contained:

• Inflated figures for cash and bank balances of Rs 5,040 crores (US$ 1.04 billion) [as
against Rs 5,361 crores (US$ 1.1 billion) reflected in the books].
• An accrued interest of Rs. 376 crores (US$ 77.46 million) which was non-existent.
• An understated liability of Rs. 1,230 crores (US$ 253.38 million) on account of funds
which were arranged by himself.
• An overstated debtors’ position of Rs. 490 crores (US$ 100.94 million) [as against Rs.
2,651 crores (US$ 546.11 million) in the books].

The letter by B Ramalinga Raju where he confessed of inflating his company’s revenues
contained the following statements:

“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. It has attained unmanageable
proportions as the size of company operations grew significantly [annualised revenue run rate
of Rs 11,276 crores (US$ 2.32 billion) in the September quarter of 2008 and official reserves
of Rs 8,392 crores (US$ 1.73 billion)]. As the promoters held a small percentage of equity, the
concern was that poor performance would result in a takeover, thereby exposing the gap. The
aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones.
It was like riding a tiger, not knowing how to get off without being eaten.”

The Scandal:

The scandal all came to light with a successful effort on the part of investor’s to prevent an
attempt by the minority shareholding promoters to use the firm’s cash reserves to buy two
companies owned by them i.e. Maytas Properties and Maytas Infra. As a result, this aborted
an attempt of expansion on Satyam’s part, which in turn led to a collapse in price of
company’s stock following with a shocking confession by Raju, The truth was its’ promoters
had decided to inflate the revenue and profit figures of Satyam thereby manipulating their
balance sheet consisting non-existent assets, cash reserves and liabilities.

The probable reasons: Deriving high stock values would allow the promoters to enjoy
benefits allowing them to buy real wealth outside the company and thereby giving them
opportunity to derive money to acquire large stakes in other firms on another hand. There
could be the reason as to why Raju’s family build its shareholding and shed it when
required.After the scandal, on 10 January 2009, the Company Law Board decided to bar the
current board of Satyam from functioning and appoint 10 nominal directors. On 5th February
2009, the six-member board appointed by the Government of India named A. S. Murthy as
the new CEO of the firm with immediate effect. The board consisted of:

1) Banker Deepak Parekh.

2) IT expert Kiran Karnik.
3) Former SEBI member C Achuthan S Balakrishnan of Life Insurance Corporation.
4) Tarun Das, chief mentor of the Confederation of Indian Industry and
5) T N Manoharan, former President of the Institute of Chartered Accountants of India.

The Corporate Governance, has never ever, since the Satyam Episode, become such a
household word. A confessional letter of 7th January 2009 from Mr. Ramalinga Raju, founder

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Chairman of Satyam, divulged the accounting scam of the order of US $ 1.6 billion, and shook
the whole country with tremors felt throughout the globe. Mr. Ramalinga Raju can be credited
as the only corporate fraudster to have admitted his misdemeanors – fudging of accounts,
inflated revenues, non-existing profits, and the fraudulent bank deposits and audaciously
sustaining it for seven long years. The Mr. Ramalinga Raju’s misdeeds, unfortunately had
given negative publicity of India Inc so far a positive story. The fraud has undermined the trust
in the government, companies, and markets alike. In India, nobody had ever imagined
anything to go wrong at Satyam, one of India’s best known IT companies, which ironically had
received the Golden Peacock Award for Corporate Governance in 2008.

This episode has led to debates in India, about some of inadequacies in the corporate
governance norms. Questions have been raised about the performance/ effectiveness of
board of directors, roles of auditors, the impact of regulations, disclosures, etc. However, the
silver lining to this whole episode was the proactive role played first time ever in India by the
shareholder activists in opposing the unanimously approved board’s resolution of December
16, 2008, in acquiring a property of companies (Matyas Properties and Maytas Infra) owned
by the son of Mr. Ramalinga Raju, which led to revelation of frauds being committed by
promoter behind the scene. If a large company like Satyam could do it for years, what’s the
guarantee more are not doing it? It is therefore, important that the Satyam fraud needs to
investigated and sentence the fraudsters swiftly and harshly to increase 'deterrent aspects’.

The frauds of such magnitudes provide a good opportunity for introspection. These times also
expose the shortcomings and vulnerabilities of the system. Conflicts always have hidden
solutions. There are lessons to be learnt from Satyam’s nemesis too. It is one such great
opportunity to reassess some of the existing framework on corporate governance, systems for
better enforcements of regulations; effective roles and duties of directors, executives,
regulators; ethics in businesses and empowerment of minority shareholders.

OVERVIEW OF INDIAN CORPORATE GOVERNANCE

India’s corporate governance codes are on par with the best in the world, the importance of
continuing to assess it against international best practice, to suit to the Indian ethos & culture
with utmost sincerity and keenness in enforcement has been highlighted by the recent fraud
at Satyam.

The Indian corporate would appreciate the fact that the corporate governance in India has not
been forced upon them by the government, but it was a voluntary and path-breaking initiative
from the Indian industries association - Confederation of Indian Industry (CII). It was
necessitated, for the fact that India Inc was to move forward and globalize itself towards
international standards in terms of disclosure of information by the corporate sector and,
through all of this, to develop a high level of public confidence in business and industry in the
process of building large global conglomerates. CII had vigorously lobbied and pressurized
the government of India for its implementation.

Corporate governance initiatives in India began in 1998 with the “Desirable Code of
Corporate Governance” – a voluntary code published by the CII, and the first formal
regulatory framework for listed companies specifically for corporate governance, established
by the SEBI, widely known as Clause 49 of the Listing Agreement – Aimed at improving
corporate governance in the country. The latter was implemented in February 2000, following
the recommendations of the Kumarmangalam Birla Committee Report.

Legal reforms has been ongoing, with SEBI in 2003 revised the Clause 49, as per the
recommendations put forward by the committee and public comments received.
Subsequently, the SEBI received a number of feedbacks/ representations, which were
deliberated once again by the Narayana Murthy Committee and post discussion, SEBI
directed further amendment to the Clause 49 in October, 2004. The amendment to Clause 49
of the Listing Agreement has been the topic of elaborate deliberations and discussions in the
Indian corporate scene. The difficulties in achieving compliance prompted many apex
chambers of commerce to appeal for an extension of the extended deadline of 31 December
2005, without success. The ease with which SEBI introduced mandatory corporate

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governance standards in India is unparallel.

The Companies Act, 1956 was undoubtedly a significant landmark in the development of
Company Law in India. It consisted of 658 sections and fourteen schedules. The Act was
enacted with the object of amending and consolidating the law relating to Companies and
certain other associations. The main object of the Act was to provide protection to investors,
creditors and public at large and at the same time leaving management free to utilize its
resources and energies for the optimum output. However, the working of the Companies Act
brought to light several lacunae and defects in its provisions. Therefore, the Act was amended
from time to time. But despite extensive changes the principal Act still suffers from certain
serious defects. Moreover, after liberalization, the increasing number of options and avenues
for international business, trade and capital flows had necessitated modernization of the
regulatory structure for the corporate sector in a comprehensive manner.

In 2004, the Indian Government took up a comprehensive review of the Companies Act,
1956. The aim was to strengthen compliance norms and to provide a governance structure for
unlisted firms. The new Companies Bill has been based on best international practices and
fosters entrepreneurship. As a result the Union Cabinet on 29th August 2008 gave its
approval for introduction of the Companies Bill, 2008 in the Parliament to replace the
Companies Act, 1956, the existing statute for regulation of companies in the country and
considered to be in need of comprehensive revision in view of the changing economic and
commercial environment nationally as well as internationally. The bill had lapsed with the
dissolution of the house in December 2008 and it has now been re-introduced on 3rd August,
2009. The Companies Bill seeks to enable the corporate sector in India to operate in a
regulatory environment of best international practices. The provisions of Companies Bill are
broadly considered to be suitable for addressing various contemporary issues relating to
corporate governance, including those recently noticed during the investigation into the affairs
of erstwhile Satyam.The bill has now been re-christened as Companies Bill 2009, and will be
forwarded to a Parliamentary Standing Committee for recommendations.

Case Study Analysis : Roles of Consultants

In the global dynamic economy, consulting services sometimes are extremely necessary due
to the skills and knowledge they offer. Consultants have in-depth knowledge of certain areas,
yet they also have broad knowledge as their consulting experience is accumulated.
Therefore, for any organization, to hire consultants is to empower with additional skills,
intelligent advice, and even outsider perspective. Nevertheless, there are disadvantages
associated with hiring consultants. The top disadvantage is consultant service fee. This paper
focuses on analyzing different cases, in which consultants led organizations into disasters,
and cases in which consultants have helped organizations achieve huge benefits. We
compare and contrast these cases and evaluate the strengths and weaknesses of consultants
that led a case to failure or success. To overcome these challenges, we present some
evaluating factors for the clients to consider the type and the benefits of hiring consultants.

We have discussed four important case studies highlighting two different roles of consultants
– consultants as doctors and consultants as Engineers. The first case study is about the
famous PricewaterhouseCoopers and Satyam Corporations scandal, where in PwC was
involved in some fraudulent activities. PWC either could not identify the mismatched number
on Satyam’s balance sheets or purposely ignored it. The second case is similar to first one
where KPMG conducted an auditing fraud for its client Countrywide by getting involved in
changing the companies’ accounts and tax sheets. These consultant roles are doctors which
assist a company on regular basis with some domain knowledge expertise. The third and
fourth case study talks about technology consulting. Deloitte and Los Angeles Unified School
District had a big legal battle over a big settlement which Deloitte had to pay LAUSD for failing
in their technical project. Deloitte miserably failed to implement a SAP system for an
academic pay roll system, a classic example of failed collaboration efforts. The last case is
Accenture feud with Centrica, where Accenture failed in their effort to create a billing system
for Centrica. Due to Accenture’s lack of responsibility when the defect showed up, it ended up
in a nasty legal feud. Eventually, Accenture ended up paying a huge settlement. From all
these cases, we talk about some insights that we learnt from each case study.

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Furthermore, we also have also discussed some case studies which show the role of
consultants in implementing solutions which benefited the companies in some way or the
other. The cases that we have discussed are Google and Conyer Dill & Perman case which
shows how Conyer Dill & Pearman, a legal advising firm, helped Google cut its tax-rate from
35% to 2.4% using the ‘Double Irish’ and ‘Dutch Sandwich’ strategy. Second case study is
Helsana Versicherungen AG and Accenture Consulting that shows how Accenture helped
Helsana, a health care industry, implemented a data warehouse that was compliant with other
existing technologies used in the company. Also, this system improved the company’s overall
productivity as the executives and sales staff used this system to predict certain factors
affecting the business. Finally we discuss Booze Allen Hamilton and Defense Information
System Agency (DISA) case which shows how Booze Allen Hamilton has worked through the
implementing solutions for DISA in developing Digital Video Broadcast satellite which helps
war fighters to send video and data transmissions using satellite resources.

Based on the seven case studies discussed above, in the next section we form a discussion
that suggests the factors that client must keep in mind before hiring a consultant. The factors
discussed are:
1. Subject matter expertise
2. Portfolio
3. Trust
4. Detail oriented
5. Leadership and collaboration
6. Client relations
7. Think ahead

We conclude by saying that consultants play vital roles in the growth of companies. As
demonstrated above, companies have gained huge profits and benefits from hiring
consultants, since they provide specialized knowledge and expertise. Consultants also bring
innovative ways to look at the problems, for example: the Google Double Sandwich. Yet, it is
not always the promise that consultants bring good things for any organizations. We suggest
that any organization evaluate the seven proposed factors before hiring consultants. The
seven proposed factors serve to reduce risks that an organization faces when hiring the
consultants.

Case Study Analysis : LESSONS FROM SATYAM EPISODE

The Satyam board on December 16, 2008, had unanimously approved a proposal to acquire
100 percent of closely held Maytas Properties for Rs 6,240 crore ($ 1.3 billion) and 51 percent
of Maytas Infra for Rs 1440 crore ($300 million). The latter acquisition was proposed to be
done in two stages: first, Satyam would acquire 31 percent from the promoters at Rs 475 a
share, and in the second, it would buy another 20 percent from the market through an open
offer at Rs 525. The two acquisitions would have totals expenditures of Rs 7680 crore ($1.6
million).

The immediate reaction of institutional shareholders and investment analyst, as soon as the
information become public the next day, was that it was daylight robbery and the promoters
were siphoning money out of Satyam. They further vehemently reacted and said that they
would to go to any length to prevent this from happening. Mr. Ramalinga Raju was left with no
option to abandon the plan at the first place, but also had to put in his papers, confessing
cooking of the books for several years, on 7th January 2009, sending shockwave all
throughout the corporate board. However, the silver lining to this whole episode was the
ascendancy of the Shareholders Activism, one of the first times ever in India. But for the
proactive role played by the shareholders and the institutional investors, the nefarious
activities committed clandestinely by promoters would not have seen the light of the day.

In the Indian context, it is well known that the many of the companies are controlled by the
families and would like these to be handed over to their sons and daughters. The promoters
may pursue interests that are not necessarily desirable from the point of view of the
commercial success of the company. The promoters are all powerful making even the

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academically well qualified Independent Directors, as in the case of Satyam having people
like; Vinod K Dham, Mendu Rammohan Rao, Krishna G Palepu, Mangalam Srinivasan…,
appear dwarfs and not of independence. This has brought to attention once again the role of
the independent directors.

As a consequence of the fallout, all the independent directors resigned one after another.
These included Mangalam Srinivasan, Vinod K Dham, Krishna G Palepu, T R Prasad, Prof. V
S Raju and M Rammohan Rao.

It is one thing to have elaborate codes, but quite another for companies to follow them in letter
and spirit. Yet another is the question of enforcement if companies do not adhere to the
standards. Weakness of enforcement in India is a real issue. The unraveling of these events
at Satyam has once again put spotlight on some of the corporate governance practices and
has exposed the following weaknesses:

1. Lax Regulatory systems

2. The imperious and Machiavellians promoters/ CEOs and their unbridled greed
3. Connivance and collusion of Auditors and poor auditing practices
4. Timid and acquiescent independent directors
5. Shareholders activism and Empowerment of minority shareholders
6. Empowerment of Whistle blowers

We ought to refrain from taking quick-fix regulatory measures. It would be worthwhile to

search for holistic solutions to these issues; which are relevant in the Indian context. The
choice of changes in the regulatory frame work should be compatible with the country’s own
values and legal system. The system adopted should be agile enough to fore warn the early
signals of a brewing crisis and take corrective measures. The system should encourage
“proactiveness” rather than be a "reactionary", otherwise status will not change. With the
present day state of art computer technologies, this is not impossible.

One must, however, understand that no matter how strong a regulatory system is, it cannot
always prevent frauds. Despite the enormous increase of disclosures and stringent risk
management systems in US post the Sarbanes Oxley Act, inability of the system to read the
early sign of impending recent Subprime crisis, Madoff's Ponzi scheme, and willingness to
take corrective action is one such example. Moreover, strong measures often lead to
expensive regulations and defiance. There are limits to legislations as a lot depends on the
integrity and ethical values of various corporate players such as directors, promoters,
executives and shareholders. The key lies in management decisions and its commitment to
establish and follow rigorous governance systems. The implementation must be in the letter
and spirit, and one should recognize the responsibility of the company towards its
stakeholders.