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A report on the


Nikhil Sinha Division- B PRN-11020841090

You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time-Abraham Lincoln.

RISE OF A GLOBAL MAJOR Without any background in IT but a strong belief that the 'spirit of entrepreneurship' is transferable across any field of endeavour, Raju founded Satyam Computer Services on 24 June 1987. From 1987 till the damning revelation on 7 January 2008, the fairy tale, the saga continued along side the Indian IT growth story - complete with bagging the First Fortune 500 client, Deere & Co in 1991, listing on BSE, an IPO oversubscribed 17 times, later a NYSE listing, global accolades and awards. CHINKS IN THE ARMOUR But there were some indications of a fraud running even at least five years back. Many people who had worked or were invited to work for Satyam left in a short period of time. According to industry sources, a very senior consulting head was once offered a job as a CEO at one of the Satyam's subsidiaries. But the executive refused to join as he was not even being allowed to see the balance sheet of that subsidiary along with Satyam. Similarly, in another instance a Kotak analyst had inquired in October, last year from Satyam CFO about the rationale behind keeping $500 million in current account from Satyam, which draws no interest. ETtoo had got a similar response in September, last year. A a senior executive who quit Satyam BPO who said that he had many a times asked Mr Raju to spend the excess cash assets to spend for attractive buyouts for the BPO, like Infosys and Wipro were doing, but it all fell on deaf ears. Obviously Raju went from strength-to-strength revealing terrific quarter-on-quarter performance, often beating street expectations without anyone catching on to any wrongdoing. AND FINALLY, THE FALL Things peaked in August of 2008, when many top level officials of Satyam started resigning, rumoured to be on confrontation with Raju's vision for the company. For instance, the entire top team of Satyam BPO had resigned by October. Satyam executive management team also started getting rickety, with the resignations of top level officials like Shailesh Shah, head of strategy. Inside sources say that many team members had confrontations with Mr Raju on missing attractive buyout propositions despite huge cash in hand. It was only later, that those individuals realised that the cash never existed. On December 16, 2008, around 6:30 pm, two hours post closing of the markets, then Satyam Chairman Raju announced a buyout of 100% stake in Maytas Properties and 51% in Maytas Infra, thus effectively making Satyam, a core real estate company from a core IT company overnight. The total outflow for both the

acquisitions was a whopping $1.6 billion comprising of $1.3 billion for the 100% stake in Maytas Properties and $300 million for a 51% stake in Maytas Infra. The buyout was met with severely negative reactions from the investors and shareholders, with many threatening to sell off entire stake in the company. This prompted a huge list of prospective buyers as share price of Satyam suddenly dropped. It's ADR on NYSE fell almost 54% the same day. Within 24 hours, Satyam made a U-turn. He said, "We have been surprised by the market reaction. In deference to the views expressed by many investors, we have decided to call off these acquisitions." The Rajus had lost Rs 3,400 crore in the day as share prices of Satyam plummeted

THE FALL The gameplan behind the takeover of Maytas was to fill the gap of cash reflected in the books but actually non-existent, by taking over his own company, with his sons running the show. It back-fired. Board members Prof. Krishna G Palepu, non-executive director and Vinod K Dham, non-executive & independent director, Prof. Mendu Rammohan Rao, non-executive & independent director resigned from the Satyam board following the adverse public reactions to Raju's decision. The board members alleged that important facts were concealed from the board and thus they were misguided. Next came the confrontation, with the World Bank. On December 23, Satyam was barred from bagging or bidding for contracts with the World Bank for eight years for providing Bank staff with "improper benefits". The shares fell almost 14% to its lowest in four years. Ramalinga Raju then spent his Christmas countering the allegations by World Bank. The company asked World Bank to immediately withdraw those statements and apologise to Satyam, which obviously the Bank never did. Meanwhile, Raju's share in the company fell from 8% to 5% making it an attractive bid target. HOW THE LID WAS BLOWN? Post the Maytas fiasco, DSP Merill Lynch was appointed to look into Satyam's books and possibly find it a suitor and soothe the shareholder outcry. On Tuesday, January 6, DSPML is reported to have met Sebi officials and told them about large scale accounting irregularities. It told the regulator that it was uncomfortable in handling the mandate. It also submitted a letter to Sebi on the same. The night of January 6, was one of the most discomforting nights for Raju and his family. As day broke, at 9.45 am, before the opening of the markets, a letter was faxed to Sebi Chairman, the board of Satyam, BSE and NSE. Rest is history. In the letter Raju, admitted about an inflated (non-existent) cash and bank balance of Rs 5,040 crore, an over stated debtor position of Rs 490 crore (as against Rs 2651 reflected in the books) and a fake liability of Rs 1,230 crore. Nasscom went into an immediate damage control due to the disclosures made by its past Chairman. Nasscom President Som Mittal said: "This is a stand-alone case of failure. We expressed shock at the disclosures made by Mr Ramalinga Raju." Satyam was originally started as Satyam Constructions. In 1987, Ramalinga Raju with his botherin-law DVS Raju, founded Satyam Constructions. It was perhaps here that he inherited

the construction and real industry balance sheet skills. Perhaps its Mr Raju's real estate genes that he tried to impregnate inside an IT setup that back fired.

GOVERNMENT ACTS Concerned about the fate of its 53,000 employees spread across 55 countries, the government took stern steps. PC Gupta, the Minister for Company Affairs, announced sacking of the board and appointment of new directors, to be announced over the next few days. The former Satyam chairman and his brother have been booked for non-bailable under the Indian Penal Code, which could put them behind bars for years. And by superseding the board, the government has sought to ensure business continuity and that documents are not tampered with. SEBI committee on corporate governance chairman and Infosys chief mentor NR Narayana Murthy says he is shocked and painfully dismayed. Acquisition by Mahindra Group On 13th April 2009, via a formal public auction process, a 46% stake in Satyam was purchased by Mahindra & Mahindra owned company Tech Mahindra, as part of its diversification strategy. Effective July 2009, Satyam rebranded its services under the new Mahindra management as "Mahindra Satyam" with a new corporate website C.P Gurnani is the current CEO.

---Satyam chairman Ramalinga Raju managed to disprove the American president and has put some of the biggest fraudsters to shame by fooling the whole IT industry, stakeholders and employees. What unfolded in the last week has not only tarnished the squeaky clean image of the $60 billion Indian IT services industry but has thrown corporate governance and ethics literally out of the window, potentially impacting the whole industry, stakeholders, global customers and the careers of 53,000 employees of Satyam

What started as a failed acquisition bid of Raju family promoted two real estate companies Maytas Properties and Maytas Infra (Maytas is Satyam spelt backwards!) on December 16, took a new turn with Raju's admission of a Rs 7,000 crore fraud on 7 January and ended three days later, with Raju and his brother Rama surrendering to DGP Andhra Pradesh. While the court cases may implicate several accountants, auditors and members of the top management, it has already rocked the foundations of corporate governance laws in India as also shaken up India Inc.

The Satyam Computer Services scandal was publicly announced on 7 January 2009, when Chairman Ramalinga Raju confessed that Satyam's accounts had been falsified. On 10 January 2009, the Company Law Board decided to bar the current board of Satyam from functioning and appoint 10 nominal directors. "The current board has failed to do what they are supposed to do. The credibility of the IT industry should not be allowed to suffer." said Corporate Affairs Minister Prem Chand Gupta. Chartered accountants regulator ICAI issued show-cause notice to Satyam's auditor PricewaterhouseCoopers (PwC) on the accounts fudging. "We have asked PwC to reply within 21 days," ICAI President Ved Jain said. On the same day, the Crime Investigation Department (CID) team picked up Vadlamani Srinivas, Satyam's then-CFO, for questioning. He was arrested later and kept in judicial custody[1]. On 11 January 2009, the government nominated noted banker Deepak Parekh, former NASSCOM chief Kiran Karnik and former SEBI member C Achuthan to Satyam's board. Analysts in India have termed the Satyam scandal India's own Enron scandal.[2]. Some social commentators see it more as a part of a broader problem relating to India's caste-based, family-owned corporate environment [3]. Immediately following the news, Merrill Lynch (now a part of Bank of America) and State Farm Insurance terminated its engagement with the company. Also, Credit Suisse suspended its coverage of Satyam.[citation needed]. It was also reported that Satyam's auditing firm PricewaterhouseCoopers will be scrutinized for complicity in this scandal. SEBI, the stock market regulator, also said that, if found guilty, its license to work in India may be revoked.[4][5][6][7][8] Satyam was the 2008 winner of the coveted Golden Peacock Award for Corporate Governance under Risk Management and Compliance Issues,[9] which was stripped from them in the aftermath of the scandal.[10] The New York Stock Exchange has halted trading in Satyam stock as of 7 January 2009.[11] India's National Stock Exchange has announced that it will remove Satyam from its S&P CNX Nifty 50-share index on 12 January.[12] The founder of Satyam was arrested two days after he admitted to falsifying the firm's accounts. Ramalinga Raju is charged with several offences, including criminal conspiracy, breach of trust, and forgery. Satyam's shares fell to 11.50 rupees on 10 January 2009, their lowest level since March 1998, compared to a high of 544 rupees in 2008[13]. In New York Stock Exchange Satyam shares peaked in 2008 at US$ 29.10; by March 2009 they were trading around US $1.80. The Indian Government has stated that it may provide temporary direct or indirect liquidity support to the company. However, whether employment will continue at pre-crisis levels, particularly for new recruits, is questionable [14]. On 14 January 2009, Price Waterhouse, the Indian division of PricewaterhouseCoopers, announced that its reliance on potentially false information provided by the management of Satyam may have rendered its audit reports "inaccurate and unreliable"[15]. On 22 January 2009, CID told in court that the actual number of employees is only 40,000 and not 53,000 as reported earlier and that Mr. Raju had been allegedly withdrawing INR 20 crore rupees every month for paying these 13,000 non-existent employees [16].

New CEO and special advisors On 5 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. Murthy, an electrical engineer, has been with Satyam since January 1994 and was heading the Global Delivery Section before being appointed as CEO of the company. The two-day-long board meeting also appointed Homi Khusrokhan (formerly with Tata Chemicals) and Partho Datta, a Chartered Accountant as special advisors Acquisition by Mahindra Group On 13th April 2009, via a formal public auction process, a 46% stake in Satyam was purchased by Mahindra & Mahindra owned company Tech Mahindra, as part of its diversification strategy. Effective July 2009, Satyam rebranded its services under the new Mahindra management as "Mahindra Satyam" with a new corporate website C.P Gurnani is the current CEO. [edit] Restatement of Results As a result of the scandal, under the directions of the new Mahindra management team, Satyam Computer Services restated its financial results for the period 2002 to 2008. These restated results were published in September 2009.

In Q2, our revenue grew on the back of a 4-per cent volume growth and rupee depreciation against the US dollar We believe these factors will also enhance annual margin performance I would like to emphasise that Satyam is leaving no stone unturned in our efforts to create a sound foundation for our future. Note to investors from B. Ramalinga Raju, Founder & Chairman, Satyam Computer Services, when declaring the companys results for the quarter ended September 2008

The balance sheet carries as of September 30, 2008 inflated (non-existent) cash and bank balances The gap in the balance sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone) Note from B. Ramalinga Raju to the Board of Directors of Satyam dated January 7, 2009

If it wasnt a gigantic fraud, it would have been a colossal farce. But when nearly $2 billion of wealth that belonged to 3 lakh shareholders is eroded in a week; when the jobs of 53,000 employees are on the line; when shareholders net worth drops from a positive Rs 8,529 crore to a negative Rs 278 crore; when a company opens itself to multi-million dollar lawsuits; when a companys founders are thrown in jail; and when its very survival is questioned, you wonder: What was Raju thinking; since when and whywas he thinking this way; and how did he do it? Over the next few pages, BT attempts to unravel this massive fraud, which involves one business family, company auditors and, inevitably, an ensemble of politicians. At first blush, Rajus statement to the board in which he confesses to inflating profits appears a dignified 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 companys 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. The founder of Satyam has been pledging the companys shares for some time now, which has been largely responsible for the promoters holding shrinking from a chunky 26 per cent in 2001 to 3.6 per cent around the first week of January (lenders began to sell when share prices fell and Raju couldnt pay up). And what was Raju doing with those borrowed funds? Ostensibly buying large tracts of land, most of it in Andhra Pradesh. Where did the money go? Raju claims that Satyam inflated profits for many years...

By inflating cash and bank balances of Rs 5,040 crore (as against Rs 5,361 crore reflected in the books) Accrued interest of Rs 376 crore is non-existent Liability of Rs 1,230 crore is understated on account of funds arranged by "me"

Debtors position of Rs 490 crore is overstated (as against Rs 2,651 reflected in the books) but if this Rs 7,000-odd crore did not exist

How were the salaries of 53,000 employees being paid with a business that ostensibly survived on just a 3 per cent operating margin? Were there more employees on the bench (than revealed)?

Was Raju inflating profits to boost Satyam's valuation, and borrowing money by pledging its shares? ...but if the money did exist...

Did the Rajus use Satyam funds to build a land bank of over 6,000 acres via a web of unlisted companies? What happened to the funds raised? There was an ADR issue in 2001, via which Satyam raised Rs 753 crore and on March 31, 2002, Satyam became an almost zero-debt company with Rs 431 crore unutilised amount of ADR proceeds

Thats a con of giant proportions, indeed. But it still pales in comparison to another more sinister likelihoodof the promoters sucking Satyams profits and using it to fund their orgy of land purchases, via an endless string of companies. The Rajus

liked land more than they loved code. In recent years, the Rajus have amassed a land bank of an estimated 7,000 acres. A number of companies, including the Maytas twins, were floated for this purpose. The memorandum of association of just one such company, Bangar Agro-Farms, has this as one amongst its many main objects to be pursued: To carry on in India or elsewhere, the business to deal in acquisition and development of agriculture lands, other lands, properties Cash was king for Satyam If Satyam was fudging profits, where were the funds for all-cash acquisitions coming from? April 2005 Acquired UK-based Citisoft Plc, a business consulting firm, with operations in investment management. Funding: $38 million paid in tranches July 2005 Acquired Singaporebased Knowledge Dynamics, a consulting solutions provider. Funding: All-cash deal of $3.3 million October 2007 Acquires a 100 per cent stake in Nitor Global Solutions, a UK-based infrastructure management services and consultancy group. Funding: $5.5 million in all-cash deal January 2008 Acquires Bridge Strategy Group, a Chicago-based management consulting firm, with revenues of $17 million. Funding: $35 million in all-cash purchase April 2008 Acquires construction equipment maker Caterpillar Inc.s market research and customer analytics operations and Belgium-based S&V Management Consultants, a supply-chain management firm. Funding: $95.5 million for both the deals, all-cash purchase

The more the merrier List of companies in which B. Nandini Raju (wife of B. Ramalinga Raju) is a Director: Name: B. Nandini Raju Directorships:

Alakananda Agro-farms Anuradha Bio-Tech Anuradha Greenlands Ayurda Greenlands Bharani Agro Brahmaputra Greenlands BRNR Agro BRNR Holdings Continental Thermits Dhanista Farms Dronagiri Agro-farms Mahanadi Bio-Tech Medravati Agro-Farms Parbati Agro-Farms Penganga Agro-Farms

Such intentions run across several of the Raju companies, where either his family members or those close or related to him have either interests or are directors. In fact, Satyam was the only IT company where promoters had an interest in real estatean interest that kept increasing even as their stake in the IT services major kept reducing! Till 2001-02, Andhra ranked among the states in which real estate was the cheapest. As land prices started rising because of the state governments reformist pitch, the Rajus sniffed a bounty. Perhaps the patriarch saw an opportunity to create business for his two sons, who despite being well-educated, werent too keen on taking over the IT business.

You have to understand that in a state like Andhra Pradesh, which used to have vast tracts of agricultural land, local people are bound to have a fascination for owning land, says a former investment banker, who has worked closely with the Satyam founders. What clearly did Raju in was the drop in share prices and in real estate, in tandem. Result? He had to buy more shares to avoid losing the earlier ones; by the end he lost most of them. Rajus only hope lay in getting the asset-laden Maytas firms merged into Satyam. Ironically, when investors rubbished Rajus proposal to merge these firms, they felt that he was attempting to strip Satyam off its cash (of $1.6 billion). Little did they know that he was trying to reconcile Satyams fictitious assets with real ones. Raju admits as much in his confession letter. But what he doesnt say is whether Satyams balance sheet is threadbare because it was run ragged to build the real estate assets in the first place. Thats the Rs 7,000-crore question investigators will have to answer. The US lawsuits With two class action suits already filed against him in the US, and many more in the offing, Raju is in for the long haul. Rajus confession has repercussions across financial markets on two different continents. Legal eagles in the US are having a field day advertising their services for aggrieved shareholders seeking class action against Satyam Computers erstwhile Chairman and Founder. According to Kenneth J. Vianale, Partner, Vianale & Vianale, a US-based law firm representing a Satyam Computers shareholder, by March 9 (which

will mark 60 days of the filing of the suit), the Manhattan federal court will receive motions for appointment of lead plaintiff and lead counsel. The lead plaintiff, appointed by the court, will be a shareholder or group of shareholders with the largest financial loss in the stock, points out Vianale. Thereafter, the plaintiffs will likely amend their complaint and may add parties, like the auditor, if the evidence permits. Then the defendants (company) will respond to the complaint. If the complaint fails to allege a fraud, then the court could dismiss the case. If the case is not dismissed, the parties will engage in discovery: plaintiffs will seek documents from the company and take depositions of witnesses. Then we move toward trial. In the US, theres a right to a jury trial, adds Vianale. He further points out that the conduct of the directors B. Ramalinga Raju and erstwhile CEO B. Rama Rajuwill be judged under the Indian law. The directors may be liable under US laws if they signed company documents filed with the US SEC that they knew (or were reckless in not knowing) contained materially false financial information. Vianale steers clear of predicting the future of the auditors, PricewaterhouseCoopers, in the suit. The new board of directors to the Satyam board wont be dragged to court. The new directors would not be accountable unless they participated in the misconduct and we have no evidence that they did, informs Robert Izard, Partner, Izard Nobel, another USbased law firm that has been retained by some shareholders to ascertain the facts of the case and will soon be filing a suit against Satyams former Chairman and CEO. To that extent, they will be relying on publicly available information and company documents, with Raju probably giving a testimony through a sworn deposition in India given that hes incarcerated here, says Izard. That may have been Rajus final masterstroke, as he would have fancied his chances with the Indian legal system than with its US counterpart. Rachna Monga & Tejeesh N.S. Behl

Saving Satyam What has been done so far The government had, till the time of writing, appointed six directors (including Deepak Parekh, Kiran Karnik and Tarun Das) to the board of Satyam. The new board appointed new auditorsDeloitte and KPMGto look afresh at the numbers and restate the financial position of the company. This will help determine the exact position of Satyams liabilities and liquidity.

The new board launches a search to identify candidates for the positions of CEO and CFO to replace B. Ramalinga Raju and Srinivas Vadlamani, respectively. and what more needs to be done. The board needs to reach out to clients to re-establish the lost confidence and to ensure that clients and employees continue with Satyam. Steps to ensure that operations are insulated from liabilities and problems. Analysts suggest that the company could look at selling operations only (business, customers and employees) and not liabilities to some third party. The money received can be used to clear the liabilites, settle the dues to suppliers and all outstandings and litigations.