The Curious Case of Satyam Computers: the story behind Indias biggest corporate scandal.

Srijoy Das

Archer & Angel *

On Thursday, April 9 2015, the Central Bureau of Investigation (CBI)-appointed Special Court1 overseeing the Satyam Computers
(Satyam) trial in Hyderabad brought the six-year long case to a close. It convicted all ten accused in the multi-billion rupee fraud
case on charges of criminal conspiracy and cheating, with each of the accused bearing independent fines and seven years rigorous
imprisonment. Additional fines were also levied on each of the accused on the basis of the other criminal charges filed against them.

The case, which began in 2009, is being heralded as Indias biggest corporate fraud till date. The following timeline traces the major
events in the cases history starting with its inexplicable beginning: Satyam Chairman, B. Ramalinga Rajus letter of confession.

The Confession

The content of the letter2

On January 7 2009, Raju, the Chairman and Founder of Satyam, Indias fourth-largest IT services firm at the time, wrote a letter
acknowledging his role in an accounting fraud to the tune of 71.36 billion (approx. US$1.1 billion). He admitted to having
manipulated Satyams accounts and records by inflating revenue and profits over a period of several years to show non-existent cash
reserves, while also understating the liability at 12.3 billion and overstating the debtors position of 4.9 billion (as against the
26.51 billion reflected in the books). He indicated that what had begun as a marginal gap between real and reflected profits had
morphed into a mammoth cover-up over time, expanding as the companys operations did. Satyams borrowings over the last two
years (approx. 12.3 billion, as per Rajus letter) - raised by pledging promoter shares and offering various assurances- secured to
maintain operations, were left off the books.

He stated that several attempts to plug the fictitious assets with real ones had failed, citing the December 2008 failed acquisition of
Maytas Infrastructure and Maytas Properties (both controlled by Satyam, and owned by Rajus sons) as one such example. The
proposed acquisition was approved by Satyams board, which included some independent directors, and was announced after the close
of business on December 16, 2008. Fiercely opposed by foreign investors - who were quick to make their displeasure- the deal was
aborted by Satyam the following day.

Raju asserted that neither he nor the Managing Director, his brother, had pocketed any funds from the company, moreover exculpating
the companys board members (past and present) of knowledge of the companys financial straits. The letter addressed to the
Securities and Exchange Board of India (SEBI) and the companys shareholders, stated that Raju was tendering his resignation as
Chairman of Satyam, and was prepared to subject [him]self to the laws of the land and face the consequences thereof.

Following this admission, Satyams already plummeting stock prices took a phenomenal dive on the Bombay Stock Exchange, falling
from 179.10 on January 6, 2009 to 39.95 the following day, dropping even further to 23.85 on January 93. Raju later retracted the
sensational confession in coordination with a defense plea of not guilty during the criminal trial.

The Catalyst

1
The CBI is Indias main criminal investigative agency. Among others, it investigates and prosecutes large-scale cases of fraud, cheating and embezzlement by
companies. A special trial court was constituted for the exclusive trial of this case in order to expedite the process, given the sheer enormity of the Satyam corporate
fraud.
2
Full text of Raju's confession letter
3
NDTV Profit: Satyam BSE Share Price Movement Dec 2008-2009
More than six years later, Rajus confession, which triggered the arrest of eight Satyam officials and two partners at Price Waterhouse
Coopers ('PwC), still remains shrouded in mystery. It has been attributed to fears of having been exposed by different whistleblowers.
One theory suggests that, following the aborted Maytas acquisition deal - allegedly meant to superficially account for the gaping hole
in Satyams accounts, and consequently pay-off when Maytas various land assets bore fruit-, Raju attempted damage control by
engaging DSP-Merrill Lynch (DSP-ML) to secure a buyer for Satyam: a process that would require DSP-ML to carry out due
diligence, inevitably revealing the accounting inconsistencies. It is alleged that DSP-ML alerted SEBI of the inconsistencies revealed
by the due diligence report, on January 6, prompting Raju to confess4. The Serious Fraud Investigation Office (SFIO)5 report on the
matter points to an alternative whistleblower as the catalyst, suggesting that an email (from a whistleblower under the alias of Jose
Abraham) to Krishna G. Palepu, one of the independent directors, stating that Satyam did not have any liquid assets (which could be
verified by the banks), quickly circulated amongst the other board members, duly being forwarded to Raju and one of his accomplices.
The SFIO indicates that discussion of this issue between Raju, his CFO, and the Vice-President for finance, G.Ramakrishna between
25 December 2008 and January 7, 2009, additionally cements this theory. The precise catalyst behind Rajus letter, however, has not
been definitively identified till date, and remains a bit of a mystery.

The Aftermath

Arrests

Following Rajus letter, the Andhra Pradesh Crime Investigation Department (CID) swung into force, arresting him, B. Rama Raju
(his brother and former Satyams Managing Director), and Vadlamani Srinivas (CFO, Satyam) allegedly on the basis of a complaint
filed by an investor who had incurred huge financial losses due to the alleged fraud; later, also arresting S.Gopalakrishnan and Talluri
Srinivas (partners at the statutory auditors, PwC); G. Ramakrishna (former VP Finance, Satyam); B. Suryanaryana Raju (Rajus
brother); and former employees, D. Venkatapathi Raju, Ch. Srisailam, and chief internal auditor, V.S.P. Gupta.

Government Rescue Efforts

The Government, meanwhile, took the unprecedented step of attempting to save the company. Although a complete bailout was not on
the cards for Satyam, the Ministry of Corporate Affairs nonetheless achieved effective damage control. A few days after Rajus
confession, the Ministry dissolved the Satyam board, and installed a three-member board tasked with identifying a buyer for Satyam,
featuring luminaries, Deepak Parekh, Kiran Karnik and C. Achutan, in its place: subsequently expanding this board, appointing three
more directors, T.Manoharan, Tarun Das and S Balakrishna. The interim board took some key steps, such as engaging new legal
counsel, auditors, and a CEO. Satyam continued to fulfil its obligations under the aegis of an interim Chairman, and following an
open-bid auction in April 2009, Tech Mahindra emerged with the winning bid (58/share). Tech Mahindra and Satyam merged under
the rebranded identity of Mahindra Satyam in June 2009. The Governments efforts to save Satyam were thus both significant
(without precedent in India), and successful.

CBI Investigation: charges

The CID investigation was subsequently taken over by the Central Bureau of Investigation (CBI) in February 2009. The government
instructed the SFIO to launch an investigation as well; SEBI, and the Enforcement Directorate (ED)6 subsequently also launched
independent probes into the scam. The CBI espoused a multidisciplinary investigation team -comprising of CBI officers, auditors,
bankers, forensic experts and income tax officials amongst others- and filed three chargesheets on April 7 2009, November 24 2009

4
Datta, Devangshu, Ramalinga Raju And The Incredible Story of Indias Greatest White Collar Crime. The Huffington Post. 9 Apr.2015. Satyam: India's Greatest
White Collar Crime
55
The Serious Fraud Investigation Office (SFIO) is a multi-disciplinary organization under the Ministry of Corporate Affairs consisting of experts in accounting,
forensic auditing, law, information technology, capital markets, etc, for the purpose of detecting and prosecuting, or recommending for prosecution white collar crimes
and frauds.
6
The Enforcement Directorate (ED), investigates contraventions of provisions under the Foreign Exchange Management Act 1999. The ED also investigates offences
of money laundering under the Prevention of Money laundering Act 2002, and subsequently attaches, and confiscates properties if it is determined that these were
purchased with the proceeds of a crime derived from a Schedule Offence under the Act.
and January 7 2010, respectively. The first two dealt with charges pertaining to account falsification, and the third related to violation
of Income Tax rules. All three were later clubbed into one charge sheet. The charges on which the ten appeared before the CBI Special
court in the trial, which began in November 2011, are listed below.

All ten were accused of criminal conspiracy and cheating, under the Indian Penal Code (IPC). Suryanarayana Raju and V.S.P
Gupta were only charged with the above, while additional independent charges were levied against the others:

Chairman and founder, Ramalinga Raju, and his brother, Rama Raju, the former MD of Satyam were also charged with
criminal breach of trust by a merchant or agent, forgery of valuable security, forgery, forgery for cheating, and falsification of
records. Ramalinga Raju was additionally charged with causing the disappearance of evidence with respect to the IPC.
Vadlamani Srinivas (former CFO, Satyam), G. Venkatapati Raju, Senior Manager in the Finance Department at Satyam, and
Ch. Srisailam, Asst. Manager Finance at Satyam, were charged with forgery of valuable security, forgery for cheating, and
falsification of records, with respect to the IPC. Vadlamani Srinivas was also charged with criminal breach of trust.
S. Gopalakrishnan and Talluri Srinivas, former partners at PwC, and G.Ramakrishna, former VP of Finance at Satyam, were
charged with impersonation, criminal breach of trust, forgery of valuable security, forgery for cheating, and falsification of
records with respect to the IPC. G.Ramakrishna was also charged with causing the disappearance of evidence.

CBI Investigation: trial

The CBI trial saw a profusion of documentary evidence: 3 CBI charge sheets running in 650 pages, 3,137 supporting documents
comprising 170,000 pages, and 226 witnesses7

The prosecutions case, in brief8:

Contrary to Rajus confessional claim of having defrauded the company and its shareholders of 71.36 billion, the CBI alleged
the actual amount to be approx. 140 billion in market-to-market losses.
The accused had falsified the companys balance sheets, promoting a picture of company-wide health, defrauding investors and
shareholders, who were encouraged to invest as a result. They had done so by:

- manipulating internal management software, such as the Invoice Management System. They abused the provision for Emergency
Invoicing to generate 7561 hidden invoices (in association with 205 fake project IDs) worth 51.17 billion. Thus, faking, or
inflating the sales figures to depict higher revenues and profits;
- falsely projecting a greatly inflated growth of 25% per quarter; projecting a current account balance of 18.41 billion as against
1.28 billion.
- forging fixed deposit receipts (FDRs) to show 33.19 billion in FDRs as against the actual 110 million worth;
- falsifying the balance sheet to show a non-existent accrued interest on FDRs as 3.75billion versus the actual accrued interest of
0.7 million; in conjunction with this, showing inflated Tax Deducted at Source on accrued interest payments therein violating
the Income Tax Act.;
- inflating the debtor position of 4.90 billion;
- suppressing liabilities and availing of unauthorized loans and advances to the tune of 12.3 billion each;

It was alleged that Raju and his fellow promoters had inflated the balance sheets in order to engage in insider trading activities,
later offloading their shares to make enormous profits. The mechanism employed was as follows:

- In 1996-1997, bonus shares were issued to the promoters, who then sold a portion of their shares via transfer to 17 family
members, and close associates within the company. The recipients disposed of them, selling them on the market through five

7
Press Release. Central Bureau of Investigation. 9 April 2015. CBI Satyam Verdict - Press Release
8
This summary is based primarily on the main CBI chargesheet in this case, and the Press Release of April 9, 2015.
- investment companies established by Raju and his associates. The sales proceeds were deposited in these 17 accounts, and later
transferred to the promoters.

- The promoters also sold their shares directly via these investment companies as well in 2000-2001, later dividing the proceeds
amongst Rajus family members. They continued to do so for enormous profits thanks to the doctored balance sheets, while other
investors held onto their shares, believing the company to be in excellent health.

- In 2006 a private company, M/S SRSR Holdings was floated by one of Rajus brother along with other relatives. All the
promoters shares were subsequently transferred to this company. 327 other companies were established to convert the wrongful
gains into lucrative real estate investments. SRSR Holdings pledged the shares and availed of loans on behalf of these companie,
raising loans to the tune of 17.44 billion in all, over a period of time. Many of these companies could not repay their loans,
resulting in their lenders selling off the collateral securities: the promoters shares. In the interim, however, vast amounts of
money in the form of these loans for pledged shares were rotated amongst these 327 companies. 37 of these even loaned Satyam
money to the tune of 14.25 billion; Satyam repaid 1.946 billion to 15 of the 37 companies, leaving it with an outstanding
liability of 12.3 billion, which was left off the books.

- It was alleged that the accused PwC partners, engaged in the early years of the scam (2000-2001), actively connived with the
other accused, deliberately failing to acknowledge the huge variation in figures in the companys balance sheets, and FDRs held
by the company, as against the companys actual bank balances, amongst other deliberate derogations of their official duties as
auditors, for which they were handsomely paid (almost three times what other IT services companies with larger turnovers were
paying their auditors).

CBI Investigation: trial verdict

The verdict in the CBI trial, announced on April 9, 2015 vindicated the prosecutions case. The accused were convicted on all the
charges. The Raju brothers were found to have perpetrated the fraud for over a decade before its discovery. The accused employees
were said to have actively assisted them in this fraud, while the statutory auditors Gopalakrishnan, Srinivas, and the internal auditor,
Gupta had knowingly failed to alert the authorities, later actively conniving with the Rajus to suppress the fraud. The other Raju
brother was convicted of facilitating the offload of promoter shares during the fraud period, and for circulating the proceeds of the
crime.

All ten were sentenced to seven years rigorous imprisonment, with the Raju brothers, Ramalinga and Rama, additionally facing a fine
of approx. 52.4 million. The remaining 8 accused were each fined between 2.6 million to 3.1 million, in addition to the seven-year
prison sentence. The Raju brothers, who have already served about 30 months in prison, will only have to serve the remainder of the
seven-year sentence. The penalties meted out to the accused pale in comparison to the magnitude of the fraud carried out.

The Other Investigations and Trials

Unfortunately for Satyam, other regulatory and investigative authorities such as SEBI, the SFIO and the ED, also launched
independent investigations following Rajus 2009 confession letter, separate from the CBI probe.

The SEBI investigation

Market regulator SEBI issued an order in July 2014 following its investigation, banning the accused from any securities-related
activity for 14 years, additionally slapping a fine approx. 30 billion(including interest) on the accused. The order was subsequently
stayed by a court in November 2014, pending the outcome of the CBI trial.

In conjunction with the CBI prosecution, SEBI also filed two criminal complaints: the first, in connection with unfair trade practices,
cited 8 accused persons, while the second, relating to violations of insider trading regulations at Satyam, cited 14 persons and entities.
Both violations are punishable under the SEBI Act, carrying a maximum punishment of 10 years imprisonment. The Raju brothers
appeared before the Court of the Special Judge for Economic Offences in Hyderabad on 22 December 2014 to face trial for these
charges, but the hearing has since been postponed to later in 2015.

The SFIO investigation

The SFIO was directed by the Government to launch a probe into various corporate aspects of the fraud on January 13 2009, and
subsequently published a 14,000-page report on the matter, having investigated the money trail and other aspects within the country.
The report alleged that Satyam had committed nearly 30 violations, mostly under the Companies Act 1956. The SFIO, under the aegis
of the Ministry of Corporate Affairs in consultation with the Solicitor-General, later initiated prosecution of the accused (the Raju
brothers and their accomplices, along with other directors) in December 2009. They filed seven cases in regard of company law
violations. The Special Economic Offences Wing Court at Nampally in December 2014 convicted the accused on six of the seven
charges. Raju and his brother were sentenced to six months imprisonment, and 0.5 million each for two of the cases (1 million each)
overall: the judge directed that the jail sentences in all the cases would run concurrently. The paltry six month sentence was the
longest imprisonment term provided for under the Companies Act. Former directors, including Ram Mynampati and Vadlmani
Srinivas, amongst other top executives were fined 1 million each. Significantly, independent directors were fined as well. The
Harvard Business School Professor, and erstwhile Satyam independent director, Krishna G. Palepu was fined 26.6 million, while
other independent directors, like Vinod Dham were fined 20,000. In imposing fines on independent directors, the court indicated that
their duties were not to be taken lightly. Going forth, however, it is likely that Raju and the others will appeal the courts verdict.

The ED investigation

The Enforcement Directorate launched its own investigation into the matter, under the Prevention of Money Laundering Act 2002
(PLMA 2002), and filed a chargesheet against Raju and 216 others (including his kin), and 166 firms in October 2013. The ED
alleged that the accused had engaged in inter-connected transfers of wrongful gains due to sale of inflated shares and bonus shares
artificially creating distance between the criminal proceeds and the initial beneficiaries. They also alleged that the 327 companies
floated by Raju and his relatives were used to layer the proceeds of the crimes, investing in several movable and immovable
properties in their names and the names of these front companies. The ED has attached 350 immovable properties and five movable
properties valued at 10.75 billion, having taken possession of most.

In 2012, the ED also sought to add Mahindra Satyam to the list of the accused, serving them with attachment orders freezing 8.22
billion worth of Mahindra Satyam fixed deposits, along with provisional orders in respect of additional deposits held with other banks.
The ED alleged that Mahindra Satyam had implicated itself in the money laundering case, by possessing the proceeds of a crime and
projecting them as untainted. Mahindra Satyam, which had methodically dealt with many of Satyams liabilities (chiefly from foreign
suits), since the take-over, argued that they were victims of the fraud the white knights in this scenario and thus could not be
prosecuted under the PLMA 2002. A single judge bench quashed the EDs appeal to bring proceedings against the company in
December 2014. The ED has since appealed this decision before the Hyderabad High Court. Mahindra Satyam in turn questioned the
validity of the EDs prosecutorial action, stating that Mahindra Satyam could not be a party to the proceedings given that the company
did not exist at the time of the misconduct. A two-judge bench of the High Court has, however, admitted the EDs appeal. They issued
an interim order on 1 April 2015, directing Mahindra Satyam to appear before the ED and participate in the process of framing the
charges. The bench did, however, also instruct the trial court to examine whether there was sufficient evidence available against
Mahindra Satyam for the framing of charges, notwithstanding the December 2014 single-judge decision. In the meantime, the appeal
has been adjourned for further hearing after 20 April 2015, when the special court is expected to frame charges.

The rest of the ED investigation is ongoing, as the money trail both within the country and abroad is still being excavated.

Foreign lawsuits

Foreign investors were keen to sue for losses as well. Mahindra Satyam bore the cost of these suits, reaching an out-of-court
settlement of $125 million in February 2011 in a class-action suit in the US, also settling the case with the US Securities and Exchange
Commission for $10 million in April 2011. They have also borne the costs in law suits launched by other foreign investment funds,
like Aberdeen Global, and 22 others for $68 million.

Corporate fraud in a post-Satyam world

The case has highlighted a number of important questions regarding regulatory slackness. Tighter regulations and vigilant oversight of
regulatory compliance are imperative. The SEBI requirement in respect of independent directors in a listed company, for instance, was
only superficially adhered to in the Satyam case. All the independent directors were allotted a significant number of stock options (at
the strike price of 2/share) along with a handsome commission (approx. 1.2 million on average). 9 Given this, it could be argued that
such directors could not have carried out the objective decision-making required independent directorship: potentially explaining why
the Maytas acquisition deal so unrelated in substance to the IT services sector, was passed by the board in December 2008. Failure of
the auditing process; private sector corruption; the role and efficacy of independent directors; and the lack of enforced corporate
governance standards are now significant concerns in the aftermath of Satyam.

Some new statutory and regulatory changes, however, offer hope:

The Prevention of Corruption (Amendment) Bill 2013

The bill is primed for reintroduction in Parliament soon, and if approved will be a watershed moment in Indian law, in respect of
corporate criminal liability. The Bill proposes to criminalize bribery of a public official by a commercial organization, in exchange for
retaining or maintaining business. Where convicted of bribery, the agent acting for the company, its directors, and those in charge
(who are unable to prove lack of knowledge, or those who fail to take adequate anti-bribery compliance measures), will all be held
guilty liable to a fine and imprisonment. The head of the organization will also be held accountable: liable to a fine and
imprisonment from three to seven years.

The Companies Act 2013 (CA 2013)

CA 2013 has introduced a new fraud provision, stipulating penalties of imprisonment and fines for any person found guilty of fraud in
relation to company, or body corporate with the minimum fine set at the amount of money involved in the fraud. The recent verdict in
the SFIO Satyam trial, however, suggests that the penalties meted out in economic offences cases are persistently meagre. Restricted
by the Companies Acts six-month sentencing upper-limit, and given the judge directed the jail sentences in all six cases to run
concurrently, the Raju brothers appear to have come away with a rap on knuckles, despite the enormity of the fraud. It is hoped that
raising the minimum sentencing threshold, and strict enforcement of the new monetary penalty under CA 2013 will go some way to
ensuring that the punishment fits the crime.

CA 2013 also provides for enhanced corporate governance requirements. The Act expands upon the previously stipulated independent
director requirements. CA 2013 also has provisions for the establishment of an Audit Committee (comprised of a majority of
independent directors), to review the appointment of statutory auditors for the company, scrutiny of inter-corporate loans, and evaluate
the companys internal financial controls, amongst other duties.

As of October 2014, SEBI (in keeping with the new corporate governance provisions in the CA 2013) has prohibited the provision of
stock options to independent directors, also approving proposals regarding the implementation of a compulsory whistleblower
mechanism, along with an expansion of the audit committee, and a mandatory annual meeting of the independent directors, with
respect to all listed companies.

It is hoped that regulatory compliance with these measures will be strictly enforced in the future.

9
Satyam Balance Sheet for 2007-2008. Fernando, A.C. 'Satyam - anything but Satyam'.
The April 9 verdict is being heralded as a big victory against corporate fraud, which is so rarely prosecuted in India. The fact that
members of Indias erstwhile corporate elite have been successfully prosecuted and punished is thought to be a deterrent for future
corporate scams.

Yet many are calling this verdict a disappointment that provides only superficial closure, claiming the punishment meted out to the
accused is insufficient, given the nature and extent of the fraud carried out. Some of the provisions under which Raju and his
accomplices have been convicted, carry a maximum penalty of life imprisonment along with fines much heavier than the meagre
52.4 million imposed on the ringleader by the CBI Special court. Moreover, while US-based investors and the SEC have sought to
recuperate some of their losses via out-of-court settlements with Mahindra Satyam, Indian shareholders are yet to be compensated in
respect of their losses.

In the meantime, the April 9 verdict appears to have only hit the pause button on the Satyam story. Raju, and 7 of his accomplices
have since appealed the Special Courts verdict (including the conviction and the fine), under the Code of Criminal Procedure, before
the sessions court of Hyderabad. Given the multiple levels of appeals that still lie ahead, this process is likely to take a substantial
amount of time, and may not be definitively settled till it reaches the Supreme Court. Truth be told, the Satyam case is far from over.

DISCLAIMER: This report is intended as a general overview and discussion of the subjects dealt with. It is not intended, and should
not be used, as a substitute for taking legal advice in any specific situation. Archer & Angel will accept no responsibility for any
actions taken or not taken on the basis of this publication.

CONTACT: For additional information, please contact: Srijoy Das, Partner of Archer & Angel at sdas@archerangel.com. More
information about Archer & Angel can be found at www.archerangel.com