The Cost of Corporate Greed: The Satyam Scandal

“It was like riding a tiger, not knowing how to get off without being eaten” were the words of Ramalinga
Raju, the man himself who was behind India’s biggest accounting scam “The Satyam Computer Scam”.
The scam involved India’s fourth-largest software exporter Company, Satyam Computers Services. It was
compared to the Enron Scandal of the United States, which was one of the largest corporate frauds in
history.

Satyam Computer Services was an Indian multinational Company, headquartered in Hyderabad, India. It
was founded in 1987 by B. Ramalinga Raju and his brother-in-law T. Srinivas. Being one of the largest IT
companies in India, it was listed on the Bombay Stock Exchange (BSE) in 1991 where the shares were
oversubscribed by 17 times, and New York Stock Exchange (NYSE) in 2001. From 2003 to 2008 the
company had an annual growth rate of 38%.The company was awarded many prestigious awards including
the Golden Peacock Award by Corporate Governance and Compliance on September 23rd, 2008. However,
in January 2009, the company was involved in a massive fraud when Chairman Ramalinga Raju admitted
to having overstated the company’s financials by ₹7,136 crores ($1.47 billion) by fabricating the
financials. The impact of the revelation was such that the company’s share collapsed by nearly 80 % in a
few weeks.

Now let us get into more detail about how and why a chairman of such a huge award-winning organization
committed the scam and what circumstances made him confess to doing it.

Misstatement of Financials
Though the scam was confessed in 2009 it was carried out by Raju for 5 years from 2003 to 2008.
Ramalinga Raju along with his brother B. Rama Raju fabricated the company’s financials by overstating
revenue and assets, inflating their debts, and reporting non-existent cash reserves. To support their claims
fake documents were used.

The financials of the company for three months ending September 30th, 2008 reported revenue of ₹2,700
crores with a profit of ₹ 649 crores whereas the actual revenue stood at ₹2,112 crores with a profit of
₹61 crores. A non-existent cash balance of ₹ 5,040 crores was introduced into the balance sheet using a
fake fixed deposit and current account. Fictitious entry of accrued interest of ₹376 crores was also
introduced. Raju understated liability of ₹1,230 crores and overstated debtors by ₹490 crores. Salaries
were also withdrawn in the name of 13,000 fake employees every month.

To boost sales revenue, Raju created fictitious clients for Satyam Computer Services. To record the sales
through these non-existing clients 7000 fake invoices were used. Since the fake clients could not make
real payments, the accused kept inflating the money due from them to show debt in the company’s books.
Once the sales were recorded there was a need to show profit arising from those sales, which led Raju to
create fake bank statements showing that money was kept in cash reserves in the bank. With the increase
in Satyam’s operation, the gap between fake and actual figures increased.

The success of the company and its strong financial statement attracted investors increasing share prices.
This provided an opportunity for Raju and other Satyam promoters to sell their shares at higher prices and
keep the remaining shares as collateral with the banks to get loans. The promoter’s shareholding which
stood at 24% in 1999 was reduced to 2% in 2008.
 Motive Behind Manipulation
The revelation of the scam raised questions as to where did all the money from the scam go. The truth
was that Raju had grown increasingly desperate and greedy for more wealth over time and had used
money made through the manipulation of accounts to acquire more and more properties.

When Raju saw the Real Estate market was booming in India in early 2000, he started buying properties.
When he confessed to his crime Raju had at least 9000 acres of land in cities like Hyderabad, Chennai,
Bengaluru, and Nagpur. He used Maytas Infra and Maytas Properties owned by him and his family to make
purchases. Moreover, almost 365 companies were created by him to do the same, and he named his
family members and friends as those company’s Directors. Even the workers who worked on his land for
bare minimum wages were made the Directors of these companies.

It was also revealed by Sreedharan, Delhi Metro Rail Corporation’s Chief that Maytas Infra Ltd. to whom
the Hyderabad Metro Rail Project was awarded, had access to the inside information of the project even
before it was conceptualized. This helped Raju to buy land around the metro route at a much lower price
to make a huge profit by selling at a price multiple times higher.

Whenever Raju found that he was short of funds to invest in real estate he would manipulate the financials
of Satyam and arrange the required funds.

Failure of Plan
Raju had planned to use the profit earned from real estate to fill in the gap in the financial statement.
However, his plan failed due to the recession of 2008, which impacted the Indian real estate market badly.
Raju in desperation made another plan. Now the plan was to sell 51% of Maytas Infra and 100% of Maytas
Properties to Satyam Computers for $1.6 billion. These companies will be purchased only on paper
without involving actual cash transactions and give an impression that the difference amount between
the fake and actual figure was used to make the purchase.

The plan was immediately approved by the Board of Directors of Satyam Computers on 16th December
2008 whose decisions were influenced by promoters of the company. To do so, a significant amount of
shares were allotted to Non-Executive Directors at just ₹ 2 per share and were paid huge commissions
during 2007- 2008. However, the decision was not favoured by the stakeholder, especially the institutional
investors who owned significant stock in the company as the purchase involved completely unrelated
business. Even a lawsuit was filed by a US investor against Satyam causing a fall in share price on NYSE.

The acquisition of Maytas violated the Companies Act 1956 under which shareholders’ approval was
required to buy another company having a value of 60% of its paid-up capital. This caused a fall in the
price of shares by 55%. The circumstances forced Raju to cancel the acquisition of Maytas and the
resignation of four independent directors of Satyam, creating more chaos.

Raju was left with no other option than to confess his crimes. He resigned from his position as Chairman
and released a letter of five pages confessing to a fraud of ₹ 7000 crores.
 Role of Auditors
As it’s known that a company’s financials are inspected by the auditors to ensure their accuracy and
legitimacy. But how did such a huge accounting fraud go unnoticed by the company’s auditor Price
Waterhouse Coopers (PwC). They were held responsible for being a blind eye to the company’s financial
statement.

According to Serious Fraud Investigation Office (SFIO) report, PwC instead of using an independent
mechanism used Satyam’s investigative tools to carry out the audit process. They did not even check the
invoices issued by the company nor paid any attention to the overstated debtors recorded in the
company’s book. They also failed to independently verify with the bank in which Satyam claimed to have
$1.04 billion in fixed deposits and completely relied on fake fixed deposit receipts and bank statements
provided by Satyam.

Moreover, the audit fee paid by Satyam to PwC was double of what the other firms in the same field paid
to their auditors and there had been an increase in fee by 5.7 times over a period of 4 years. This implied
either the auditors were incompetent or were involved in committing the fraud.

Aftermath
The confession of the scam by Raju came as a shock resulting in a massive sell-off of shares. Satyam
Computer’s share price dropped from ₹ 544 on BSE and $29.10 on NYSE in 2008 to the lowest of ₹ 11.50
and $1.80 respectively. The scam also had a huge impact on the reputation and credibility of many other
Indian Companies causing the share prices of roughly 100 companies to drop between 5% to 15%. The
stock market as a whole was down by more than 5%. It caused the investors to loose ₹ 14,162.25 crores
($2.2 billion) in the stock market.

On January 9, 2009, Ramalinga Raju and his brother B Rama Raju were arrested. The government removed
the existing board and appointed its own with ten Directors to save Satyam from collapsing. Satyam stocks
were also removed from the Sensex and Nifty Listing.

On June 2009 Satyam Computers was taken over by Tech Mahindra who bought 51% of the stake for ₹
2,889 crores at a bid of ₹ 58.50 per share and rebranded it as Mahindra Satyam. Four years later on June
2013, Mahindra Satyam merged with Tech Mahindra to be the fifth-largest IT Service Provider.

On 19th October 2013, the Enforcement Directorate filed a charge sheet naming Ramalinga Raju and 47
others for money laundering and seized Raju and his family’s properties. The following year SEBI charged
Raju and four others with insider trading and ordered them to return ₹ 1,848.93 crores of profit made
through trading with 12% interest. They were also barred from the securities market for 14 years.

Six years after the scam,

on April 9th, 2015, the court sentenced Ramalinga Raju, B Rama Raju, S. Gopalakrishnan and Srinivas Talluri
(auditors of PwC), Vadlamani Srinivas (CFO of Satyam), B. Suryanarayana Raju( Ramalinga Raju’s Brother),
G. Ramakrishna, D. Venkatpathi Raju, Ch. Srisailam (employees of Satyam), V.S. Prabhakar Gupta(Internal
Chief Auditor of Satyam) to 7 years of imprisonment. A fine of ₹ 5.5 crores each was imposed on Ramalinga
Raju and B Rama Raju and ₹ 25 lakhs and ₹ 33 lakhs each on the other accused.
On 10th January 2018, the Indian Capital Market Regulator banned PwC for 2 years from auditing listed
companies in India.

Many flaws in corporate governance practices were brought into focus by the scam which resulted in
changes in the Companies Act in 2013. The new act required companies to have at least one-third of the
Board as Independent Directors with a tenure of 5 years who will receive only fees and not stock options.
Even SEBI made it mandatory to change individual auditors every 5 years and audit firms every 10 years.

The Satyam scandal serves as a reminder of the importance of proper corporate governance and strict
business practices. It serves as a valuable lesson to the public that no matter how trusted a company may
seem, it is important to be aware of potential fraud and corruption and to always go through the
company’s book thoroughly before investing.