India January 7, 2009, 9:15AM EST text size: TT

India's Madoff? Satyam Scandal Rocks

Outsourcing Industry
The info tech outsourcer shocks investors with a letter
outlining balance-sheet misdeeds. Rival firms may benefit
if customers still trust them
On the morning of Jan. 7, Ramalingam Raju, the chairman of troubled Indian IT outsourcing
company Satyam Computer Services (SAY), sent a startling letter to his board and the
Securities & Exchange Board of India. Raju acknowledged his culpability in hiding news that
he had inflated the amount of cash on the balance sheet of India's fourth-largest IT company
by nearly $1 billion, incurred a liability of $253 million on funds arranged by him personally,
and overstated Satyam's September 2008 quarterly revenues by 76% and profits by 97%.
After submitting his resignation, Raju ended his letter by apologizing for his inability to close
what began as a "marginal gap between operating profits and the one reflected in the books of
accounts" but grew unmanageable. "I am now prepared to subject myself to the laws of the
land and face the consequences thereof," he wrote.

The letter shocked and angered corporate India, which has looked to IT executives as role
models for a new breed of Indian entrepreneur. The benchmark Sensex stock index dropped
7.3% and Satyam shares fell nearly 78% on the day as investors fled in droves. Goldman
Sachs (GS) suspended its recommendations on Satyam "because there is not currently a
sufficient basis for determining an investment rating or price target for this company,"
Goldman analysts Julio Quinteros Jr. and Vincent Lin told investors. Earnings per share,
warned JPMorgan (JPM) analysts in a report, "may be 70%-80% lower than reported numbers
and consensus estimates for '09-'10." Satyam had become "India's Enron," said CLSA India
analyst Bhavtosh Vajpayee, calling the case "an accounting fraud beyond imagination [and]
an embarrassing and shocking episode in Indian corporate governance."

As executives at other Indian outsourcing companies nervously assess what impact the
scandal will have on them, many industry observers now argue that the Satyam case will
damage India's reputation as a reliable provider of IT services. Because of the Satyam
scandal, they say, Indian rivals will come under greater scrutiny by regulators, investors, and
customers. "The bubble is going to burst in terms of trust," says a fund manager in Hong
Kong who has followed Satyam closely. Doubts about the reliability of Indian outsourcers are
especially important, since customers often allow the Indian companies access to sensitive
systems. "This industry doesn't just make widgets," the manager explains. "It's an intimate
relationship." Certainly, says Gartner (IT) analyst Diptarup Chakraborti, "there will be caution
in the short term, skepticism, and questioning." After all, "no one wants to do business with a
known fraudster."

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Investors Want Answers

Industry executives are desperately trying to contain the fallout. "The decline in governance
and institutions represents a serious challenge to India," says Rajeev Chandrashekhar,
president of the Federation of Indian Chambers of Commerce and Industry. Wipro
Technologies (WIT) Chief Financial Officer Suresh Senapaty, went on TV to say that
Satyam's actions should not infect the entire Indian IT industry. And Mohandas Pai, head of
human resources at Infosys (INFY) and the company's former chief financial officer, argued
Satyam's behavior is atypical. "We wish the regulators will investigate and punish the guilty,"
he says. "But this is not representative of our industry." John McCarthy, vice-president of
Forrester Research, allays some fears. "I look at Satyam as an isolated case, and don't think
the developments would have any impact upon India's No. 1 position as an offshore location."

Still, investors and clients are going to want answers. For instance, they're demanding to
know how Satyam's auditor, PricewaterhouseCoopers, endorsed the company's accounts.
"Auditors' complicity in what seems to be a multiyear misstatement of financials will also be
explored," said CLSA's Vajpayee in his Jan. 7 report. Already, India's Registrar of Companies
had begun a probe into a failed acquisition last month by Satyam of companies run by Raju's
two sons. Now the country's securities regulator will add its weight by investigating the PwC
audit. PwC issued a statement saying it was examining the issue.

Raju's confession is the latest in a rocky ride for Satyam, its shareholders, and its stakeholders
over the past year. The company's clients include multinationals such as Nestlé, General
Motors (GM), and General Electric (GE). But in September, the World Bank banned Satyam
from doing any of its work after it found Satyam employees had hacked into its system and
gained access to sensitive information. It also did not renew their five-year contract. Satyam
denied any wrongdoing. Then came a fresh blow on Dec. 16, when Raju announced the
company would spend $1.6 billion to buy two infrastructure companies run by this sons, only
to reverse the decision a few hours later under shareholder pressure. Satyam ADRs lost 50%
of their value overnight. December also brought news of pending litigation by a former client,
online mobile-payments service Upaid Systems, which filed a case of intellectual fraud and
forgery against Satyam in 2007; a Texas court is scheduled to conduct a hearing on the case
Jan. 7.

Tip of the Iceberg

In India, the Raju family's non-IT activities had already been viewed with some suspicion, in
particular a free emergency ambulance service Raju began in Hyderabad, where Satyam is
based. Last year, public-interest activists filed a petition challenging the lack of transparency
and arbitrariness in the award of ambulance-services contracts in 12 Indian states—all of
which had been awarded to Raju's operation. In November the Supreme Court of India
questioned the contracts and demanded an explanation, which could result in the contracts
being canceled.

With Satyam's management focused elsewhere, business suffered. Clients complained about
lack of attention, and many professional managers began to leave.

Angry Satyam investors' reaction to the botched acquisition led to talk of Satyam being a
takeover target. A deal might have been interesting since, as Gartner's Chakraborti says,
Satyam had been undergoing a "crisis of confidence, rather than a crisis of revenues." Before

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the shocking confession today from Raju, there was a long list of reported suitors for Satyam.
They included HCL Technologies, Wipro, IBM (IBM), Hewlett-Packard (HPQ), Larsen &
Toubro Infotech, Cognizant (CTSH), Cap Gemini (CAPP.PA), and even private equity
players KKR and TPG. By Jan. 6, the Indian press added a new one—Tech Mahindra, a Pune-
based software-services company focused on the telecom industry in which British Telecom
(BT.L) has a 31% stake. Although most companies denied the rumors, on Jan. 6 an executive
of a rival company told BusinessWeek that Satyam's value should be between $2.6 billion and
$3 billion.

Competition Will Jump In

Now, just a day later, Satyam's value has plummeted. Tech Mahindra made a public statement
that it would not be interested in acquiring Satyam "in the current environment." CLSA India
valued the company, minus its debt, at $600 million. "What happens to Satyam now?" asked
Mumbai-based research firm First Global in a note on Jan. 7. "With Satyam's operations
failing to generate the required amount of cash, we believe that it will be impossible for the
company to continue its operations." Satyam clients are likely to shift to other companies,
First Global predicted, as Satyam's stock price continues to fall.

That leaves Ram Mynampati, the Satyam president whom Raju has appointed as interim chief
executive, the difficult task of boosting morale. In a letter to Satyam's 53,000 employees,
Mynampati reminded them that Satyam had top-notch clients and was acknowledged as one
of the three best employers in India by both Hewitt (HEW) and Mercer (MERC), the
international human resources firms. But "this quarter will be tumultuous for us," he said.
"Rumors will abound and it would be fair to assume that competition will try and leverage it
to their advantage."

The competition sure is trying. Already, Satyam customers are getting calls from other Indian
IT providers offering their services. And life could get tough for Satyam's thousands of
engineers and employees. Despite their valuable skills, IT companies are hiring fresh college
grads over the more expensive, experienced hands. Still, with the IT business already
suffering from the global downturn, a large competitor out of the way could mean more deals
for Satyam's rivals—if they can overcome new doubts about the reliability of the country's IT
industry.

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Satyam scandal
From Wikipedia, the free encyclopedia

The Satyam Computer Services scandal was publicly announced on 7 January 2009, when
Chairman Ramalinga Raju confessed that Satyam's accounts had been falsified.

Details
On 7 January 2009, company Chairman Ramalinga Raju resigned after notifying board
members and the Securities and Exchange Board of India (SEBI) that Satyam's accounts had
been falsified [1][2][3].

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

 inflated figures for cash and bank balances of Rs 5,040 crore (US$ 1.07 billion) as against
Rs 5,361 crore (US$ 1.14 billion) crore reflected in the books.
 an accrued interest of Rs. 376 crore (US$ 80.09 million) which was non-existent.
 an understated liability of Rs. 1,230 crore (US$ 261.99 million) on account of funds was
arranged by himself.
 an overstated debtors' position of Rs. 490 crore (US$ 104.37 million) (as against Rs. 2,651
crore (US$ 564.66 million) in the books).

Raju claimed in the same letter that neither he nor the managing director had benefited
financially from the inflated revenues. He claimed that none of the board members had any
knowledge of the situation in which the company was placed.[4][5]

He stated that

"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 crore (US$ 2.4 billion) in the September quarter of 2008 and official reserves of
Rs 8,392 crore (US$ 1.79 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.***”

Aftermath
Raju had appointed a task force to address the Maytas situation in the last few days before
revealing the news of the accounting fraud. After the scandal broke, the then-board members
elected Ram Mynampati to be Satyam's interim CEO. Mynampati's statement on Satyam's
website said:

"We are obviously shocked by the contents of the letter. The senior leaders of Satyam stand
united in their commitment to customers, associates, suppliers and all shareholders. We have

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gathered together at Hyderabad to strategize the way forward in light of this startling
revelation."

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[6].

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.[7]. Some social
commentators see it more as a part of a broader problem relating to India's caste-based,
family-owned corporate environment (http://kafila.org/2009/02/13/the-caste-of-a-scam-a-
thousand-satyams-in-the-making/).

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.[8][9][10][11][12] Satyam was the 2008 winner of the coveted Golden Peacock Award for
Corporate Governance under Risk Management and Compliance Issues,[13] which was
stripped from them in the aftermath of the scandal.[14] The New York Stock Exchange has
halted trading in Satyam stock as of 7 January 2009.[15] India's National Stock Exchange has
announced that it will remove Satyam from its S&P CNX Nifty 50-share index on 12
January.[16] 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[17]. 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 [18].

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"[19].

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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 [20].

Roots
Prof. Sapovadia, in his study, shows that in spite of there being a strong corporate governance
framework and strong legislation in India, top management sometimes violates governance
norms either to favour family members or because of jealousy among siblings. He finds that
there is a lack of regulatory supervision and inefficiency in prosecuting violators. He
investigates in detail the recent governance failure at India's 4th largest IT firm, Satyam
Computers Services Limited, and considers possible reasons underlying such large failures of
oversight. [21]

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 [22][23].

References
1. ^ Satyam Chairman Fraud Confession - SlideShare
2. ^ Satyam_Computer_Services_Ltd_070109.pdf (Facsimile of Resignation) filed with
bseindia.com
3. ^ The Hindu Business Line : Text of Mr Ramalinga Raju’s statement - Wednesday, 7 January
2009
4. ^ Satyam Chairman Resigns After Falsifying Accounts (Update5) - By Harichandan Arakali ( 7
January 2009 12:03 EST) - Bloomberg.com: Worldwide
5. ^ "Letter from Raju to SEBI and Stock Exchange accepting the fraud". Economic times. 01-07-
2009. http://economictimes.indiatimes.com/photo.cms?msid=3946287. Retrieved 2009-01-
07.
6. ^ Satyam ex-CFO Vadlamani Srinivas sent to judicial custody till Jan 23
7. ^ Satyam scandal could be 'India's Enron' - World business- msnbc.com (updated 11:42 a.m.
ET Jan. 7, 2009)
8. ^ Satyam scandal rattles confidence in accounting Big Four
9. ^ ICAI to seek explanation from Satyam’s auditor PwC
10. ^ Satyam auditor says examining chairman's statement
11. ^ What happens to PWC, The Auditor For Satyam?
12. ^ Satyam: Auditors' body to pull up PwC ICAI to seek explanation from Satyam’s auditor PwC
13. ^ Grand Jury meeting of GOLDEN PEACOCK AWARDS 2008 - 8th September 2008, New Delhi
Announcement of results
14. ^ Satyam stripped off Golden Peacock Global Awards - Software-Infotech-The Economic
Times (8 Jan 2009, 0118 hrs IST, PTI)
15. ^ NYSE halts trading in Satyam stock - (Wednesday, 7 January 2009, 23:02) Sify.com
16. ^ Satyam Computer Services Ltd (SAY.N) Key Developments (Stocks) Reuters.com

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 17. ^ Indian IT scandal boss arrested - 9 January 2009 - Business - BBC NEWS
18. ^ Ready to bail out Satyam, if required: Govt
19. ^ Price Waterhouse says its Satyam audits relied on company information, could be
wrong[dead link] - 14 January 2009 - Associated Press
20. ^ Satyam fudged FDs, has 40,000 employees: Public prosecutor
21. ^ [1]
22. ^ Satyam Names Murty as CEO to Replace Arrested Founder - (05 February 2009, 1813 hrs
IST) Satyam Names Murty as CEO to Replace Arrested Founder
23. ^ A S Murty appointed as Satyam CEO - (05 February 2009, 1816 hrs IST) A S Murty appointed
as Satyam CEO

C.P Gurnani is the new chairman of SATYAM replacing A.S Murty