Sasmira’s Institute of Management Studies and Research

SECURITY ANALYSIS AND PORTFOLIO

MANAGEMENT

Guided by: Dr. Priyanka Sharma

Assignment I

Group members

Shubham Bawkar-09
Priyanka Gupta-38
 BACKGROUND HISTORY OF SATYAM

Satyam computer services ltd was incorporated by the two brothers, B Raman Raju and b Ramalinga
Raju, as a private limited company for providing software development and consultancy services to
large corporation in 1987.

In 1997, it was selected by the world economic forum as one of India’s most remarkable and rapidly
growing entrepreneurial companies.

In 2005, was ranked 3rd in corporate governance survey by global institutional investors.

As of 2009, Satyam
 Was the 4th fastest growing it company in India
 Had 9% market share
 Had 53000 employees
 Revenue of $2.1 billion
 First Indian company to be listed on three international exchanges: NYSE, DOW,
EURONEXT .
 HOW THE SCAM UNRAVELLED

 On January 7, 2009 Ramalingam Raju disclosed in a letter to the board of directors that he had been
manipulating the company’s accounting members for years which are estimated to range from 2003-
08.

 Mr. Raju claimed that he overstated assets on Satyam’s balance sheet by $1.47 billion. Nearly $1.04
billion in bank loan and cash that the company claimed to own was nonexistence. Satyam also
underreported its liabilities.

 This was done to make it appear to be a far bigger enterprise than it actually was. They also sewed up
deals with fictitious clients and introduced over 7000fake invoices to record sales that simply didn’t
exist. Profits to were padded up to show healthy margins.

 Satyam was reporting sales of over 5200crore in 2008-09, when it was in reality making about 4100
crores. Its operating profit margin were shown at 24% when they were actually at 3%and its handsome
profits on paper covered up for real -life losses.
 DETAILS OF THE SCAM

The Balance Sheet and Profit and Loss Account as of September 30, 2008 showed:

• Inflated (non-existent) bank and cash balance of Rs. 5040 crores (as against Rs. 5312 crores as shown in the
books)
• A non-existent accrued interest of Rs. 376 crores
• An understated liability of Rs. 1230 crore on account of funds arranged by BR Raju
Debtors position of Rs 490 crore is overstated (as against Rs 2,651 reflected in the books)
• Revenue of Rs 2,700 crore and an operating margin of Rs 649 crore (24% of revenues) as against the actual
revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore (3% of revenues).
• Staff overstated by 13,000.

THE TIMELINE LEADING UPTO THE SCAM

• Dec 16: Satyam announces the $1.6bn acquisition of two companies Matyas Infra and Matyas
• Dec 17: Mr. Raju says Satyam is considering a share buyback in a move to regain investors' confidence after
its stock plunged.
Dec 24: The World Bank bars Satyam from doing business with it for 8 years
Dec 25: Mangalam Srinivasan, an independent director at Satyam, resigns
• Dec 27: Satyam appoints Merrill Lynch to review "strategic options to enhance shareholder value"
• Dec 29: Three more directors quit the company as the independence of the board members is questioned
• Jan 3: Satyam says its founder's stake fell by a third to 5.13%
• Jan 6: Raju's stake fell further to 3.6%
• Jan 7: Mr. Raju resigns after he admits falsifying Satyam books.
 AFTER EFFECTS OF THE CONFESSION

SHARE PRICE AND MARKETS

Satyam Shares: Lost 77 % to end at Rs 40.25 from Rs. 175
• BS: Closed at 9586.88, sharply down 749.05 points or 7.25%
• Nifty: Ended at 2920.40, down 192.40 points or 6.18%
• BSE Midcap and BSE Small cap also affected

RE-APPOINTMENT OF BOARD OF DIRECTORS

• The Company Law Board decided to bar the current board of Satyam from functioning and appoint 10
nominal directors.
• Among 6 new board of directors appointed were: noted banker Deepak Parekh, former NASSCOM chief
Kiran Karnik and former SEBI member C Cauthen
 INVESTIGATION AND PUNISHMENT

• The Serious Fraud Investigation Office (SFIO), a multi- disciplinary investigating arm of the Ministry of
Corporate Affairs: 6 months imprisonment with a fine of Rs. 10 Lakh; challenged in court CB Investigations:
Final verdict pending, result on April 9 2015

• SEBI Investigations: Ongoing battle in the court; maximum punishment of 10 years

• Class-action Suits in the US: Settlement with lead plaintiffs of $125 million

• Against PWC: Class action lawsuit settled for $25.5 million and fined $6 million by SEC
 ACQUISITION BY MAHINDRA

• Anand Mahindra of Mahindra took over the company for Rs 2890 crore through a government mediated
auction and acquired a 51% stake in the company

• The shares were bought at $1.13 per share, less than a third of what the prices were before Raju's confession

• The Tech Mahindra merger was successfully completed on June 25, 2013 as it faced various issues from the
courts, the government and the legislation

WHY DID RAJU DESTROY HIS OWN COMPANY?

HOW DID IT START?

• BR Raju has claimed that the reasoning behind the concealment of the true financial position was to ensure
that takeovers are at bay and business runs smoothly.
• Ramalingam Raju wanted to establish firms for his sons in the real estate sector. So, he used the siphoned
off funds to acquire land holdings, estimated at around 7,000 acres, held by the Maytas firms
• He did this with many other companies which he had formed either in his own name or Rename like
Godavari Bio, Godavari Agro etc.

WHY ACQUIRE?
• Acquire 100% share in Maytas Properties and 51% share in Maytas Infra which were owned by
Ramalingam Raju's sons
• The Raju's already had 35% share in both the companies.
• The total valuation of these two acquisitions was $1.6 billion making the acquisition itself illegal as per the
Company's Act for no shareholder approval was taken
• An attempt to bridge the gap between the fictitious assets of Satyam with real assets of Maytas

WHY DID HE CONFESS?

• A whistle blower letter reached the BoD on 18th December. However, no action was taken. Later, Hemant
Kothari, Non-Executive Chairman of DSP, Merrill Lynch Ltd. forced him to confess with the threat of going
to SEBI
 HOW DID B.R RAJU FOOL THE WORLD
• Super User Login: The senior management allowed certain employees to have a super user login password
to access the company's billing system and create fake invoices for services not provided. Heads of business
its could not have done but should have noticed in the quarterly results
• False Revenues: After generating the fake invoices, these were entered into the company's financial
statements; thus boosting revenue and profits. In total 7,561 invoices worth Rs 5,117 crore were fake.
• Falsified Bank Statements: The senior management then ensured that these false invoices were shown as
cash receipts. This they did by forging statements.
• The applications used to accomplish these tasks were:
• Operational Real Time Management (OPTIMA) for creating and maintaining the fake projects
• Satyam Project Repository (SP) for creating project ids
• Project Bill Management System (PBMS) for generating bills
• Invoice Management System (IMS) for generating the fake invoices used to perpetrate the fraud
• Excel Porting was used for directly accessing company's account and hiding the fake invoices.

CORPORATE GOVERNANCE ISSUES AT SATYAM

• Small Holding of the Promoters: Conflict of interest and questionable control over a company who's leader
is apparently at the head of all actions
• Failure of Board of Directors: Famous and reputed, the Board of Directors failed to detect fraud; ignorant
decisions were taken
• Failure of Audit Committee: In spite of receiving a whistle blower's mail exposing the fraud, no action was
taken. Non-disclosure of the Pledging of Promoters' Shares: Practice followed in India led to stakeholders
being unaware of the depleting shareholding of promoters. Ethically questionable.
• Flaws in External Audits: No independent confirmation of cash
balances and debtors
 LESSON TO BE LEARN FROM SATYAM

Independent Directors
Separation of personal interests and interests of the stakeholders and the company. New reforms should
increase personal liability of board members and make it easier for stakeholders to sue them

Disclosure of Pledged Securities

A much-needed change, two weeks after Satyam's collapse, the SEBI made it mandatory for controlling
shareholders to disclose any share pledges

Increased Financial Accounting Disclosures

The SEBI also recently proposed requiring companies to disclose their balance sheet positions twice a year.
More robust market check.

• IFS (Adoption of International Standards):

Facilitate investor comparisons of financial performance across country lines and will increase confidence in
the accounting numbers against GAAP.

• External Evidence in Audit

Rules to be strengthened so as to ensure that the auditors rely on external evidence obtained by them
 CONCLUSION

More scandal like Satyam can be avoided if:

 If auditing firm is honest

 SEBI plays and active role
 Periodic review of legal compliance reports by independent directors