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SATYAM SCAM

UNIVERSITY OF THE PUNJAB

TOPIC: SATYAM SCAM

SUBJECT: ACCOUNTING

SECTION: A

DATE: 14-9-2020

SUBMITTED TO: SIR WAQAR RANDHAWA

SUBMITTED BY: IQRA BATOOL (BS-IAS-04-R-F18)

AYESHA SHAFIQ (BS-IAS-11-R-F18)

KASHAF AMJAD (BS-IAS-20-R-F18)

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SATYAM SCAM

Incident:

In 1987, Ramalinga Raju started the business of Satyam computer company with his
brother in law, which was an Indian information technology (IT) services, company based
in Hyderabad; India, offering software development, system maintenance, packaged
software integration and engineering design services. Before the business of Satyam
computers, Ramalinga Raju was doing the business of cotton mills. In 1991-1992 Satyam
computers company was listed on BSE. In 2000, by World Economic Forum, it was included
in those 100 companies which were most pioneer in technology. Then in 2001, it was listed
on NEW YORK STOCK EXCHANGE(NYSE). It was the India’s fastest growing company
and because of it’s reputation and working, it achieved many awards. In 2007, it was the 1 st
Asian company which included in 125 companies for learning who got the opportunity to
feature in training magazine’s list. But because of boom in the real estate, Raju’s attention
was diverted to real estate. In Hyderabad, the real estate was also on boom. Then Raju
decided to purchase land properties in Hyderabad and many other countries.

IN 1988, Raju started working in MAYTAS INFREASTRUCTURES and then in

MAYTAS PROPERTIES. The land properties, which he purchased were on the name of his
family members, MAYTAS INFRASTRUCTURE and MAYTAS PROPERTIES. Raju
needed more money to buy properties, so he manipulated the financial statements of Satyam
computers. For example, if company earned the profit of 60 crore, Raju showed the fake
profit of 600 crore in the financial statement instead of 60 crore. All he wanted to show the
world was that Satyam is growing very fast. Because of the continues growth and strong
financial statements, the share price of Satyam computers increased. Raju and his brother B
Rama Raju started selling their share at high price. Then he again started purchasing land
properties. The people who used to work in the Raju’s company, became the director of
Raju’s other companies, by the will of Raju, and the land properties which he purchased later
were on the name of these directors.

Raju had the inside information of Hyderabad metro plan. He started to purchase the
land near the metro track with the thought that after the completion of metro track, the value
of these properties which he purchased near the metro track will be increased. Raju thought
that the profit which he earned from the real estate, will add to the Satyam computers, and
will easily fill the gap of the fake financial statement and the actual financial statement. To
show the sales, he started to print the fake sales invoices and because of it, he covered up the
amount of sale. But the tension arose, how to cover up the amount of profit, which he earned
from the sale. Then he showed the fake bank statements, which means that the profit he
earned from the sales, were in bank account.

For many years, he did the same job to show the fake amount of sales, profits and
bank statement to the company. He attracted the investors and company by showing his fake
financial growth. Because of it, Satyam promotors sold their share price at high rate. 1n 1999,
Satyam’s promotors shareholding was at 24% and at the end of 2008, it was only 2%. Raju
was given many awards like Ernst and young entrepreneur of the year services award 1999,
Dataquest IT man of the year award 2000, Asia business leader award 2002, E&Y
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Entrepreneur of the year 2007 (revoked after the scam) and golden peacock award for
corporate governance 2008.

The company used it to buy property. As the operation of Satyam Company was
rising, the gap between actual and fake figures was also increasing. This gap resulted into a
huge amount. In 2008, Recession period occurred. As a result of recession, the real estate
market was slowed down. By selling the property at good price, Raju’s plan to fill the gap
between actual and fake figures was failed. To fill that gap by any means, Raju made new
plan.

According to it, Satyam Computer will purchase the 100% stake of Maytas Properties
and 51% stake of Maytas Infrastructures. Maytas Infrastructures and Maytas Properties were
both the businesses of Raju’s family. The opposite of word Satyam was MAYTAS. The main
objective of deal was to fill the gap of money acquired by purchasing Maytas Companies. In
reality, Company did not do any cash transaction because Maytas Companies were also the
part of Raju’s family business. In 16 Dec 2008, Satyam Board of Director approved this plan.
Raju sanctioned it without asking the permission of Shareholders. Satyam Investors did not
agree for this deal especially Institutional Investors. It caused a great down fall in stock of
Satyam. Even US Investor of Satyam filed lawsuit against the company. In New York Stock
Exchange, 50% stock of Satyam Company fell down. As a result of depression, Satyam
decided to cancel the plan to acquire Maytas Infrastructures and Matyas Properties. After
failure, Independent Directors of Satyam resigned. This was the last option for Raju to fill the
gap. On 7 Jan2009, Raju confessed that company manipulated its financial statements for
many years.

Here is a table that shown the major difference between actual and fake figures that
proved how Raju had been manipulating company Financial Statements for years. Similarly,
there is major difference between real and fake deposit too as shown below:

Financial statement Year 2008-09 (Q2)

Actual Inflated
Revenue 2112 2700
Profit 61 649
Cash and cash balance 321 5361
A/C Interest NIL 376.5
Liability 1230 0
Debtors 2161 2651

Raju confessed that there was 700 crore difference between actual and fake figures of
balance sheet. A lot of question arose on Independent Directors and Auditors of Satyam that
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how is it possible that they were unaware of what was going on in Company for many years.
Satyam Auditor was Price water house copper (PWC) and its duty was to check the reliability
and accuracy of the company. How is it possible that Auditor did not check the invoices or
bank statement while the Company had been manipulating their Financial Statements for
many years. Auditors are the representative of Shareholders. In this case, Auditors deceived
the Shareholders too. SEBI banned the PWC for 2 years. US Stock Markets (SEC) also fined
the PWC of 6 million dollars. Later on, It was discovered that Satyam used to pay double fees
to PWC than other IT industry companies.

In 9 January 2009, Raju and his brother B Rama Raju were arrested. After this scam,
government appointed new board members on Satyam and did preparation to save Satyam
from complete collapse. The plan of government was to sale the company as early as
possible. Finally Tech Mahindra bought Satyam. In April 2009, Tech Mahindra bought 51
percent stakes of Satyam and changed the company’s name to Mahindra Satyam. In June
2013, Mahindra Satyam merged with Tech Mahindra. According to CBI report, Raju used to
do money laundering and sent money in European countries first and then he used to reload
the money to India. From that money, Raju had bought many nameless companies.
Enforcement direct rate had put money laundering charges on Raju, his 166 companies and
other 47 people and expropriated the property of Raju and his family. SEBI had put insider
trading charges on Raju’s family and ordered to return profit of 1850 crore from insider
trading with 12 percent interest rate and banned them from dealing in security markets for 14
years. In 10th April 2015, special CBI court gave punishment of 7 years of prison to Raju, his
brother B Rama Raju, CFO (chief financial officer) Srinivas Vadlamani, two partners of
PWC and other 5 members and imposed 5.5 crore fine on Raju and his brother B Rama Raju.
Before this scam, Satyam was very famous. It was the fourth IT company of India. The stock
of Satyam was included in Nifty and Sensex. In 2 January 2009, stock of Satyam computer
was excluded from nifty and Sensex. In September 2008, world council for corporate
governance gave award of global peacock to Satyam and after 4 months, Satyam accounting
fraud came out. Few months before confessing this fraud, Raju had sold his Satyam shares
and when he confessed his fraud, share price of Satyam fell from 170 rupees to 6.5 rupees.
After this scam, because of reduction in Satyam share prices, investors of Satyam faced loss
of 14,162 crore. LIC who was institutional investor in Satyam faced loss of 950 crore.
Meaning of Satyam in Sanskrit is Truth but what Satyam promotors did had no truth at all.
Raju just wanted to make money and for this, he did crimes like accounting fraud, money
laundering and insider trading. Always remember when company promoter’s sale their
shares, it is your duty to check that why promoters are selling their shares.

Reasons Why This Particular Scandal Took Place:

As we discussed above, because of boom in the real state, he decided to purchase land
properties, where he wanted to build more companies. But because of deficit amount of his
capital, Satyam started manipulate the financial statement of the company and showed too
high profits in the business by corrupt practices while in reality Satyam was not doing so well
or was running in loss. All he wanted to show to the world that the Satyam is growing very
fast. In short, all he did(fraud) because of his greed and reputation.
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But his fraud could not go so long. Because of weak governance, the mechanism for
monitoring the actions, policies and decision made in Satyam was proven wrong. The World
Bank alleges that Satyam was involved in data thefts and staff bribery. He was blamed that he
used the funds of the investors for the family business. On the other hand, financial
irregularities were ignored by the internal and external auditor.

Characters Who Perpetrated This Particular Scam:

Ramalinga Raju: Satyam former chairman

B Rama Raju: Brother of Ramalinga Raju, Managing director

V Srinivas: Ex-chief financial officer

S Gopalakrishnan: Auditor

Talluri Srinivas: Auditor

The Effects of Satyam Scam on Economy And Industry Are As Follow:

Satyam scam of 2009 in India showed that Satyam company was runned in an
improper way because of which its drastic effects were seen on economy and different
people.

In case of stock market, on October 2008, 300 rupees was the share price before the
incident of Satyam scam but the price was reduced to 6.30 rupees after the incident. In case
of share holders when the market faced downfall, shareholders lost huge amount of 9374
crore. Most valuable investments were lost by shareholders. Almost 50,000 employees were
facing risk of losing their jobs. When employees Satyam faced problems in receiving their
salaries, cancellation of projects and outside job opportunities, they spent many sleepless
nights because of these difficulties. Employees were entangled legally and financially.
Drastic fall was seen in Indian economy when GDP fell to 0.4 percent. In case of bankers,
recovery of recalled facilities, financial and non-financial exposures were major concerns.
Satyam clients lost their trust in Satyam after Satyam scam and went to other competitors.
Global clients of Satyam ended their contracts with Satyam because they faced loss. These
clients were in tension about the cost over-run and continuity of project. World bank, Cisco
and Telstra were Satyam’s global clients. The whole reputation of Satyam was ruined in front
of industry and country because of the fraud as IT sector of India was affected deeply and
government of India was hassled about the country’s image.