INTRODUCTION

• The three phases of the Satyam scam are

1. For nearly three years since 1999, the firm rode on the Y2K phenomenon, which saw India’s
software industry get huge orders and earn good profits.
2. The second phase began in 2001 when falsification of accounts started then to keep Satyam’s share
price high. The company had gone public in 1992. This phase continued till 2004, which was when
things started going wrong.
3. The third and final phase started sometime in mid-2007 and continued till Raju’s confession on 7
January this year. During this period, the company showed huge cash balances and fixed deposits in
several banks of international repute.

It was, however, actually starved of funds and the promoters were

desperate to raise money to keep the company afloat.
 SATYAM COMPUTERS LIMITED: TIMELINE
Founded by Mr. Ramalinga Raju & Mr. B. Rama Raju on 24th June,1987

Fourth largest IT Outsourcing Company of India

Converted from a private limited company to public company in 1991 and started
issuing shares to public in 1992

Satyam entered a joint venture with US company (Dun and Bradstreet) in 1993

Setup the first foreign office in US in 1996 followed by another one in Japan
The first Indian company to receive ITAA certification for Y2K solutions in 1997

In 1999 Satyam was listed in NASDAQ

Satyam has a long term contract with global bodies and corporation such as World
Bank, Microsoft, Yahoo etc.

Listed on New York Stock Exchange in 2001

By the year 2008, revenue crossed $2 Billion

 GOVERNANCE SYSTEM AT SATYAM

• Satyam had relatively small promoter holding for a traditional family run in India, The promoters
ownership share had steadily decline over years( refer exibit 2).
• Foreign institutional investors had the maximum holding, varying between 40 and 50%.
• Other Important groups of investors included public, banks and financial institutions as well as mutual
funds.

With a relatively high level of ownership in the hands of domestic and foreign institutional investors it was
important to satyam had a good corporate board to gain legitimacy amongst its different stakeholders.
• Five independent and four internal members on its board.
• Chairman: Ramalinga Raju
• Internal Directors:Ram Mynampati & Krisshna Palepu
• Audit & Compensation Committee : 4 Members each (All independent directors)
• Audit Committee met 8 times in a year and compensation committee 3 times.
 DRIVING FORCES OF CORPORATE GOVERNANCE AT SATYAM

Associate Delight

Investor Delight

Customer Delight

Pursuit of Excellence

Company’s Goal: To find creative and productive ways of delighting its stakeholders
 AWARDS WON BY SATYAM COMPUTERS LTD.

• Golden Peacock Global Award for excellence in corporate governance in 2008.

• UK Trade & Investment India (UKTI) Business Award for corporate social responsibility.
• SAP Pinnacle Award 2008 under "Service – Ecosystem Expansion (Growth)" category, awarded by SAP.
• Best IR Website in the Asia Pacific & Africa region for providing complete, accurate and timely investor relations
information awarded by MZ consult.
• Partner Innovation Award for Anti-Money Laundering (AML) solution.
• Satyam's internal audit team was awarded the recognition of commitment (RoC) award from The Institute of
Internal Auditors, USA.
• AND MANY MORE AWARDS………..

A look at their awards shows that the achievements for which they were awarded, later
turned out to be the crimes for which they were criticized.
•
 FINANCIAL HEALTH

• Before the scam unfolded, Satyam’s balance sheet showed signs of a healthy
company. In 8 years, from 2001 to 2008, it’s turnover increased from Rs 14.12
billion to Rs 84.73 billion.
• Profit margin increased from 10% to 20%. Growth rate was between 24% to 26%.
• Robust profile of Customers: Top 100 customers accounted 85% of revenue.
Number of Customers Annual Run Rate
2 > 100 million $
50 > 10 million $
230 > 1 million $

• Satyam was the first Indian company to post it’s audited results for 2007/08
financial year in accordance with International Financial Reporting Standards
(IFRS).
UNFOLDING THE CRISIS
 FACTS OF C ASE
• Date: 16 December 2008
• Act:
1. Satyam board approves 51% stake acquisition of Maytas Infra
for $1.3 billion
2. Approves 100% stake in Maytas Properties for $300 million
• Ethical Issue:
1. Both companies promoted by Satyam’s Chairman Ramalinga Raju sons
2. Immediate family and friends owned 36% stake in Manytas Infra and 35% in Maytas
Properties
• Justification offered:
1. Real estate a sunrise industry in India
2. Sluggish growth of IT business in US and Europe which were key markets
 INVESTOR REACTION: NEGATIVE

• Stiff resistance by investors

• Share prices fell by 30%
• 55% decline in Satyam’s ADR
• Doubted corporate governance practices of organisation
• December 23, 2008: Satyam banned by World bank for 8 years from doing business with itself
Charges: Bribery to get lucrative offers.
 CONSEQUENCES

• December 26:
Mangalam Srinivasan, independent director since 1991 resignes, takes moral
responsibility for not opposing acquisition

• December 29:
• Infrastructure leasing and Financial services Trust sells 4.41 million satyam shares at
Rs. 139.83
• Raju and family’s stake diluted to 5.13%(dec) from 8.65% (sept)
 MORE DRAMA COMING UP

• Anonymous email

FINANCIAL IRREGLARITIES AND FRAUD AT SATYAM

Regards,
Anonymous Board member
 RESIGNATIONS

Independent Directors:
1. Rammohan Rao: Head of board
Independent director since 1991: meeting that approved the
acquisition
Mangalam Srinivasan
2. Krishna Palepu
3.Vinod Dham

CEO:
Ramlinga Raju
 RAJU’S CONFESSION
Cheated on False Figures Facts
Inflated Cash and bank balance 5341 crores 5040 Crores
Accurued interest 376 crores Nil
Overstated debtors position 2651 crores 490 crores
September Q2 revenue 2700 crore 2112 crore
September Q2 operating margin 649 crore (24% of revenue) 61 crores(3% of revenue)

• Falsified the financial statements to the tune of Rs.71.36 billion, including Rs.50.46 billion in non-existing cash and
bank balance
• Profits as low as 3%
• Financial gaps in actual profits and stated profits was known to senior officials like CFO, COO
 “IT WAS LIKE RIDING A TIGER, NOT KNOWING HOW TO GET
OFF WITHOUT BEING EATEN”

• Forced to overstate profits to maintain share price level to avoid a hostile takeover.

• Never profited from the high market prices of Satyam shares as he never sold them

• Only pledged them with family and others to raise loans to bridge the gap between fake and real assets.

• Own ownership stake declined from 20.74% in 2003 to 8.74% in 2008 to meet Satyam’s cash commitments

• Maytas deal was an attempt to avoid hostile takeover

• Forgive me, I resign: RAJU

 INDIAN PENAL CODE SECTIONS CHARGED

The case against the accused was registered under the following sections of the CENTRAL
GOVERNMENT ACT :

• 120-B (criminal conspiracy)

• 409 (criminal breach of trust)
• 420 (cheating)
• 467 and 468 (forgery)
• 471 (using forged document as genuine)
• 477-A (falsification of accounts)
 AND THEY PAY!!!
• .
 CONVICTIONS AND CONSEQUENCES

• RAJU ARRESTED!! RAMA ARRESTED!! 7 years jail

• Satyam shares fell to Rs.39.95 from Rs.544 which was a 52 week high
• DSP Merrill Lynch terminated engagement with Satyam
• SEBI begins investigations into fraud
• Government of India disbands Satyam board and appoints interim CEO
• During the probe, the Serious Fraud Investigation Office (SFIO) found the auditors and PW guilty while also pointing out
that the independent directors were mute spectators while the fudging played out
 CBI’S INCISIVE FINDINGS ON SATYAM FRAUD

It revealed that Ramalinga Raju’s claims in his letter to SEBI were different from the findings
. garnered by investing agency

The CBI had termed Satyam case as one of the biggest corporate frauds in independent India,
having international ramifications.

It was a complicated case involving digital evidences, computer techniques, audit procedures
accounting standards, revenue records source codes and computer network log etc

The scam involves a much bigger amount, close to Rs 9600 crore, than what was disclosed
by the IT company’s founder Ramalinga Raju.

Further investigations threw light on the role played by the governance mechanisms such as
Board, Internal / External Auditors

The annual financial statements of the company with inflated revenue were published for several
years and this lead to higher price of the scrip in the market.
ANATOMY OF FRAUD
The agency has retrieved over 7,000 fake invoices and forged documents showing fixed deposits and bank
balances and their evaluation shows that the size of the scam is over Rs9,600 crore, much more than the
Rs7,800 crore disclosed by Raju on 7 January.

The accused relied heavily on technology to generate nearly 7,000 fake invoices to the tune of Rs4,500 crore
and fed the same into Satyam’s books.
.

The accused forged documents and created fake fixed deposit receipts to the tune of Rs3,300 crore

It was found that SATYAM closed the 2007/08 financial year with a debt of INR 2.36bn even though they had
enormous amount of INR 44.62bn lying unused in the accounts.
CONTINUES…….
The FDRs were shown by the accused as available deposits by the company & the accused had also allegedly
manipulated the bank guarantees to show the balance in bank accounts as Rs1,800 crore.

The CBI alleged that the accused had forged bank documents showing the existence of the cash balance in
five banks including ICICI Bank, HSBC, Citibank and BNP Paribas but the banks clarified that they do not
have any cash balance in the name of the firm.

The CBI also probed the rotation of funds and role of front companies used in rotation of funds & it was
found that the accused had floated more than 320 companies and nearly 60 companies had same addresses.

Raju’s claim that SATYAM earned only 3% net profits was hard to believe given that competitors made 20-
25% net profits during the same years.
Auditors in on Satyam fraud: CBI
 During the five year period from 2003-2008 , PwC’s audit fee tripled to INR 430mn which was about twice
as high compared to other leading IT companies-Wipro (INR 280mn), Infosys (INR153mn), TCS
(INR277mn).

 Given the relatively higher fees, it was suspected that the external auditors allowed various financial
irregularities such as Improper verification of cash and bank balances.

 In the case of Satyam, CBI added, the auditors preferred to rely upon hard copies supplied by the key accused.

 In the Satyam case, CBI said, the auditors “relied upon forged bank confirmation letters supplied by the other
accused while conducting the statutory audit“ and also failed to verify the company’s current account balances
online.

 The “blatant deviations” adopted by the auditors auditing Satyam accounts, CBI added, showed their
“underlying conspiracy” with the other key accused in the accounting fraud.

 Price Waterhouse auditors “intentionally” failed to apply certain audit standards to Satyam Computer Services
Ltd, enabling the firm’s founder B.Ramalinga Raju and others to perpetrate India’s largest accounting fraud.
 AFTERMATH OF THE CRISIS
• On 10 January 2009, the Company Law Board decided to bar the current board of Satyam from
functioning and appoint 10 nominal directors.

• Chartered accountants regulator ICAI issued show-cause notice to Satyam's auditor

PricewaterhouseCoopers (PwC) on the accounts fudging.

• 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.

• Immediately following the news, Merrill Lynch (now a part of Bank of America) and State Farm
Insurance terminated its engagement with the company.

• 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".
• 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.

• In New York Stock Exchange Satyam shares peaked in 2008 at US$29.10; by

March 2009 they were trading around US$1.80.

• Fraud resulted in a decline of more than 78% of Satyam’s market cap.

• In February,2008 SEBI passed the sale of 51% stake of Satyam through a global
bidding process.

• Tech Mahindra, a M&M group company won the bid for Satyam by paying INR
17.57 billion for a 31% stake in the company.
 AFTER SATYAM FIASCO-WHAT CHANGED

• The Satyam scandal of 2009 gave Indian corporate stakeholders a cataclysmic jolt.
• The Confederation of Indian Industries set up a task force to suggest reforms and the National
Association of Software and Services Companies established a corporate governance and ethics
committee headed by Narayana Murthy.
• The report of the latter addressed reforms relating to audit committees, shareholder rights, and
whistle-blower policy. SEBI’s committee on disclosure and accounting standards issued a
discussion paper in 2009 to deliberate on
(i) the voluntary adoption of international financial reporting standards
(ii) the appointment of chief financial officers by audit committees based on qualifications,
experience, and background
(iii) the rotation of auditors every five years so that familiarity does not lead to corporate
malpractice and mismanagement.
• In 2010, SEBI amended the Listing Agreement to include the provision dealing with the
appointment of a chief financial officer but it did not insist on the compulsory rotation of
auditors.
• In 2009, the Ministry of Corporate Affairs also released a set of voluntary guidelines for
corporate governance.
i. Dealing with the independence of directors.
ii. The roles and responsibilities of audit committees & the boards of companies, whistle-blower
policies.
iii. The separation of the offices of the chairman and the CEO to ensure independence and a
system of checks and balances, and various other provisions relating to directors such as their
tenures, remuneration, evaluation, the issuance of a formal letter of appointment.
iv. Placing limits on the number of companies in which an individual can be a director
 EMERGENCE OF COMPANIES LAW 2013

• India’s 2013 company law incorporated many provisions and reforms suggested by the various committees and
organisations during the past decade.

• It clearly established the responsibility and accountability of independent directors and auditors. It provided for the
compulsory rotation of auditors and audit firms.

• In fact, it even prescribed a statutory cooling off period of five years following one term as an auditor.

• Under the Companies Act, 2013 (“the Act”), an auditor cannot perform non-audit services for the company and its
holding and subsidiary companies.

• This provision seeks to ensure that there is no conflict of interest, which is likely to arise if an auditor performs
several diverse functions for the same company such as accounting and investment consultancy services.

• Auditors also have the duty to report fraudulent acts noticed by them during the performance of their duties