FINANCIAL MANAGEMENT

Assignment about Agency Problem

CIA-3A

Submitted to:
Prof. Rajani Ramdas

Submitted by:
Abin Som - 2028121
Eepsitha - 2028156
Gowthami - 2028158
                                                     Introduction
Satyam
Satyam Computer Services Ltd (Satyam) was started by the two brothers, B Rama Raju
and B Ramalinga Raju, as a private limited company on June 24 1987. In the beginning, it just
had 20 employees for providing software development and consultancy services to large
corporations, and the company got converted into public by 1991. During the year 1996, the
company promoted four subsidiaries, including Satyam Enterprise Solutions Pvt. Ltd, Satyam
Renaissance Consulting Ltd, and Satyam Infoway Pvt. Ltd. Satyam Infoway is a wholly-owned
subsidiary of Satyam Computer Services Ltd, was the first Indian Internet company listed on
NASDAQ.
In 2001, Satyam became the world's first ISO company to be certified by BVQI. In 2003,
Satyam started providing IT services to the World Bank and signed up a long-term contract with
the bank. In 2005, Satyam was ranked 3rd in the Corporate Governance Survey by Global
Institutional Investors. But short-lived all this fame and growth as the company discovered a
significant setback.

Maytas
Maytas is read backwards "SATYAM", it was founded by B. Ramalinga Raju, MAYTAS
also includes Maytas Properties and Maytas Infra Limited.Maytas Infra is infrastructure
development, construction and project management company. Many agencies, including the state
Crime Investigation Department, examined Maytas after Raju Committed serious financial
mistakes at Satyam Computer. Allegations showed that funds from Satyam were diverted at a
large amount. In August 2009, Raju was the promoter of the company, and in august 2013 it was
named as IL&FS.

                                                   Literature Review

The primary plan of Satyam is to acquire a 51% stake in Maytas Infrastructure Limited
for $300 million. The Satyam board, along with the inclusion of its five independent directors
have approved the founder's primary proposal to buy the stake in Maytas Infrastructure and all of
Maytas Properties, which were bought by family members of Satyam's Chairman, Ramalinga
Raju, as the wholly-owned subsidiary for $1.6 billion on December 16, 2008. The directors went
a step ahead with the Management's decision without shareholder approval. The decision of
acquisition was, however, reversed after twelve hours. Investors sold the Satyam's stock and
threatened action against the regime.[ CITATION Mad12 \l 1033 ]

The pattern of the shareholders,

Satyam Shareholder pattern: General Public – 8.75% Indian promoters – 8.75%, Investors –
61.22%, Institutional Investors – 61.22%, Other Investors – 21.29%. Raju family or the Indian
promoters hold only a minority of the stock. FII and mutual funds have the majority of the stock.
Their approval is very critical for this deal. 
Maytas Infrastructure Shareholder pattern: Institutional investors- 11.72%, Indian Promoters
– 36.64%, Other Investors – 28.43%, General Public – 23.2%. Indian promoters hold the
majority, which makes it easy for acquisition.[ CITATION Sat14 \l 1033 ]
 Because of the company's lack of competences with the different stakeholders, Satyam's
corporate governance dilemma emerged. Of special interest are: differentiating the position of
the board of directors and Management; the division of positions of the CEO and the chairman;
the selection of the board of directors and the reimbursement of executive board members; and
security of shareholders and their executives." In the end, the shareholders felt cheated and lost.
Besides the inability to pay advance taxes to the state, questions were undoubtedly raised about
the honesty of Management. These challenges together pose questions of financial stability for
Satyam. [ CITATION Sat20 \l 1033 ]

Satyam's books were audited from June 2000 until the scam was uncovered in 2009 by
the Multinational Auditing Group, PricewaterhouseCoopers (PwC). One especially alarming
problem was Satyam's $1.04 billion in non-interest-bearing deposits on its budget. The auditors
seem not to have independently tested the banks Satyam reported to have deposits. In addition,
for a number of years, the Satyam scam persisted, affecting both balance sheets and income
statement abuse. Satyam only generated fictitious sources if more revenue was needed to reach
analysts' expectations and did so several times, without auditors ever detecting fraud. None,
including skilled investors with extensive knowledge and templates at their hands, noticed the
malfeasance by independent Board members of Satyam, the institutional investor group, SEBI,
retail investors and the external auditor.

Victims of the problem

The Employees of Satyam underwent many problems, sleepless nights and anxieties
because they were not paid salaries, the cancellations of many projects and lost employment
opportunities outside too. Clients of the company have lost their trust and discarded their projects
and shifted to partner with their competitors. The major clients including Cisco, Telstra, word
bank also cancelled their contracts with Satyam, and even consumers lost their trust in the
company. Banks were worried about financial and non-financial recoveries from the company.
The Government of India was worried about its reputation and image of the nation. Adding on,
the IT-sector also affected trust to invest or do business in the country. It is affecting faith to
invest, or to do business in the county. Later on, April 16, 2009, Tech Mahindra purchased 51%
of Satyam and saved the company from a complete collapse. 

                                               Recommendations and Conclusion

The 2009 Satyam scandal in India revealed the negative potential of an unsuccessfully run
business head. Some of the things which we can learn from the issue are:
1.  Study all inaccuracies: The Satyam fraud scheme began very small and gradually
became a white elephant of 276 million dollars in the room. In reality, many fraud
schemes initially start small; the suspect assumes that there wouldn't be any significant
difference here and there and is less likely to be identified. This sends a warning to
several businesses that it is worth checking whether the accounts do not align or if
anything looks inaccurate. Dividing roles between a team of persons enables the
identification of anomalies or misappropriated assets.
2. Reputations ruined: Fraud not only looks bad for an enterprise; it looks terrible for an
entire sector and one region. "The greatest corporate memory scandal of India is affecting
 potential foreign investment into Asia's third-largest economy and is casting a shadow on
growth in its once-thriving outsourcing market. The news has flipped Indian stock
markets, with the Bombay key benchmark index down 7.3% and the Indian rupee
dropping. Now Indian rivals are being more closely watched by regulators, investors, and
consumers, owing to the Satyam controversy.
3. Strengthen Corporate Governance: The case of Satyam is another example of how
powerful CG is required. When hiring managers and senior managers, all public
corporations must be vigilant. Those are the people who set the business stage: it is likely
to drip down where there is greed at the top. Separate CEO and chief operating officer
positions as well. The separation of tasks also tends to eliminate circumstances such as
the Satyam had.

References

https://economictimes.indiatimes.com/news/company/corporate-trends/how-satyam-and-
maytas-followed-different-trajectories-after-being-acquired-in-
2009/articleshow/66102018.cms
https://en.wikipedia.org/wiki/Maytas
https://www.business-standard.com/article/companies/satyam-scam-hits-maytas-firms-
115040801044_1.html
https://www.researchgate.net/publication/271134027_India's_Satyam_Accounting_Scandal
_How_the_Story_Unfolded
https://rakesh-jhunjhunwala.in/satyam-admits-fraud/
https://trak.in/tags/business/2008/12/16/satyam-acquires-maytas-infra-and-maytas-
properties-all-in-the-family/
https://rakesh-jhunjhunwala.in/satyam-admits-fraud/