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NCRD’S STERLING INSTITUTE OF MANAGEMENT STUDIES
CASE STUDY ON
RAJESH D. RAHANGDALE (B-79)
PROF. NAVNEET BAVEJA DATE: 20-03-2012
RAJESH D. RAHANGDALE
The Satyam Computer Services scandal was publicly announced on 7 January 2009,
when Chairman Ramalinga Raju confessed that Satyam's accounts had been falsified. Ramalingam Raju along with 2 other accused of the scandal, had been granted bail from Supreme court on 4 November 2011 as the investigation agency CBI failed to file the charge sheet even after more than 33 months of Raju been arrested. Raju had appointed a task force to address the Maytas situation in the last few days before revealing the news of the accounting fraud. After the scandal broke, the thenboard members elected Ram Mynampati to be Satyam's interim CEO. Mynampati's statement on Satyam's website said: "We are obviously shocked by the contents of the letter. The senior leaders of Satyam stand united in their commitment to customers, associates, suppliers and all shareholders. We have gathered together at Hyderabad to strategize the way forward in light of this startling revelation." On 10 January 2009, the Company Law Board decided to bar the current board of Satyam from functioning and appoint 10 nominal directors. "The current board has failed to do what they are supposed to do. The credibility of the IT industry should not be allowed to
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suffer." said Corporate Affairs Minister Prem Chand Gupta. Chartered accountants regulator ICAI issued show-cause notice to Satyam's
auditor PricewaterhouseCoopers (PwC) on the accounts fudging. "We have asked PwC to reply within 21 days," ICAI President Ved Jain said. On the same day, the Crime Investigation Department (CID) team picked up Vadlamani Srinivas, Satyam's then-CFO, for questioning. He was arrested later and kept in judicial custody. On 11 January 2009, the government nominated noted banker Deepak Parekh, former NASSCOM chief Kiran Karnik and former Satyam's board. Analysts in India have termed the Satyam scandal India's own Enron scandal. Some social commentators see it more as a part of a broader problem relating to India's castebased, family-owned corporate environment. Immediately following the news, Merrill Lynch (now a part of Bank of America) and State Farm Insurance terminated its engagement with the company. Also, Credit Suisse suspended its coverage of Satyam. It was also reported that Satyam's auditing firm PricewaterhouseCoopers will be scrutinized for complicity in this scandal. SEBI, the stock market regulator, also said that, if found guilty, its license to work in India may be revoked. Satyam was the 2008 winner of the coveted Golden Peacock Award for Corporate Governance under Risk Management and Compliance Issues, which was stripped from them in the aftermath of the scandal. The New York Stock Exchange has halted trading in Satyam stock as of 7 January 2009. India's National Stock Exchange has announced that it will remove Satyam from its S&P CNX Nifty 50-share index on 12 January. The founder of Satyam was arrested two days after he admitted to falsifying the firm's accounts. Ramalinga Raju is charged with several offences, including criminal conspiracy, breach of trust, and forgery. SEBI member C Achuthan to
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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. 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". On 22 January 2009, CID told in court that the actual number of employees is only 40,000 and not 53,000 as reported earlier and that Mr. Raju had been allegedly withdrawing INR 20crore rupees every month for paying these 13,000 non-existent employees.
Acquisition by Mahindra Group
On 13 April 2009, via a formal public auction process, a 46% stake in Satyam was purchased by Mahindra & Mahindra owned company Tech Mahindra, as part of its diversification strategy. Effective July 2009, Satyam rebranded its services under the new Mahindra management as "Mahindra Satyam" with a new corporate website www.MahindraSatyam.com. C.P Gurnani is the current CEO.
Restatement of results
As a result of the scandal, under the directions of the new Mahindra management team, Satyam Computer Services restated its financial results for the period 2002 to 2008. These restated results were published in September 2009.
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The Inside Story
The Serious Fraud Investigation Office will probe also Maytas infrastructure as part of the Satyam financial scam probe. Corporate affairs minister P C Gupta said on Monday evening that initial investigations suggest a clear nexus between Satyam, Maytas properties and Maytas infrastructure earlier, the Andhra High Court dismissed Ramalinga Raju's revision petition against his police custody. But SEBI still did not get to question Raju on Monday as a court order on the body's petition to question him was postponed till January 22. Meanwhile the CID is questioning the Raju brothers and former Satyam CFO Vadlamani Srinivas. They are also looking into their e-mails and phone records over the last one month. Meanwhile, Andhra chief minister Y S R Reddy reiterated his government did not flout any rule in awarding the Hyderabad metro rail project to Maytas. But how deep and how wide is the rot inside India's fourth largest software company? Sources tell CNN-IBN the company is facing serious money crunch, and needs Rs 1,110 crore to tide over the crisis and Rs 500 crore to pay the January salary to employees. Meanwhile a search is also on for a new CEO for the embattled IT firm. Network-18 learns that the board is looking at a 10-day time period to pick someone to head the company. Over 40 applications have come in so far. There is now also a question mark on the number of employees Satyam has. It is reported that Satyam has 53,000 employees.
HOW THEY DID IT? Investigators are now reportedly coming across evidence of insider trading by the promoters even before the scandal broke. The big take away from the Registrar of Companies report is that the top management of Satyam - the directors and senior officials - sold shares ahead of the Big Bang revelation by Raju. The reports say Satyam
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books have been overstated by Rs 5,000 to Rs 6,000 crore, leading to an inflated stock price that helped the top management make money.
WHO SOLD WHAT? Raju has claimed that no one else in the company was privy to the fudging of accounts. But exclusive information with CNN-IBN suggests insider trading. BSE figures show a number of senior people in the company, including Raju and CFO Vadlamani were reportedly selling Satyam's shares over the last 22 quarters. In June 2001, Raju had nearly 23 per cent shares. By December that year, his share was down to 22.4 per cent. In September 2002, it fell to 21.6 per cent which fell a year later to just over 19 per cent. In 2004, Raju's holding was 16 per cent which fell to 14 per cent in 2005, 11 per cent in 2006. In 2007 it was in single digit. By September 2008 Raju's share was just 8.27 per cent. BSE figure also show Vadlamani sold 92,538 shares while the then CEO Ram Mynampati sold 700,000 shares plus 2, 50,000 ADRs. Apart from these, other senior officials also reportedly sold large number of shares. Sources say they include one Kiran Cavale who reportedly sold 400,000 shares and 10,000 ADRs and one Rajan Nagarajan who reportedly sold 430,000 shares and 70,000 ADRs.
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You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time-Abraham Lincoln. Satyam chairman Ramalinga Raju managed to disprove the American president and has put some of the biggest fraudsters to shame by fooling the whole IT industry, stakeholders and employees. What unfolded in the last week has not only tarnished the squeaky clean image of the $60 billion Indian IT services industry but has thrown corporate governance and ethics literally out of the window, potentially impacting the whole industry, stakeholders, global customers and the careers of 53,000 employees of Satyam. What started as a failed acquisition bid of Raju family promoted two real estate companies Maytas Properties and Maytas Infra (Maytas is Satyam spelt backwards!) on December 16, took a new turn with Raju's admission of a Rs 7,000 crore fraud on 7 January and ended three days later, with Raju and his brother Rama surrendering to DGP Andhra Pradesh.
While the court cases may implicate several accountants, auditors and members of the top management, it has already rocked the foundations of corporate governance laws in India as also shaken up India Inc. RISE OF A GLOBAL MAJOR Back in the 1980s a young entrepreneur Ramalinga Raju started Satyam Spinning Mills. A keen observer of global markets, with a mind for new thinking, Raju read the growth potential of the information technology and the role India could play in it.
Without any background in IT but a strong belief that the 'spirit of entrepreneurship' is transferable across any field of endeavour Raju founded Satyam Computer Services on 24 June 1987. From 1987 till the damning revelation on 7 January 2008, the fairy tale, the saga continued alongside the Indian IT growth story - complete with bagging the First
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Fortune 500 client, Deere & Co in 1991, listing on BSE, an IPO oversubscribed 17 times, later a NYSE listing, global accolades and awards. The most prestigious being the now withdrawn, 'Golden Peacock Global Award for Excellence in Corporate Governance for 2008' from London based World Council For Corporate Governance, awarded as recently as 22 September 2008. And the company boasted contracts with such envious global customers like Microsoft, FIFA, GE, Nissan, Nestle, and Applied Materials and so on.
CHINKS IN THE ARMOUR But there were some indications of a fraud running even at least five years back. Many people who had worked or were invited to work for Satyam left in a short period of time. According to industry sources, a very senior consulting head was once offered a job as a CEO at one of the Satyam's subsidiaries. But the executive refused to join as he was not even being allowed to see the balance sheet of that subsidiary along with Satyam.
In another instance, a very senior executive in a finance role quit just within two months of joining Satyam. The executive is now working with a Mumbai based IT company.Says CFO of a top tier Indian IT company, "for competitive purposes when I used to analyse their balance sheet, large amount of money in current account did not make any sense. Perhaps it was being siphoned off to other businesses."
Similarly, in another instance a Kotak analyst had inquired in October, last year from Satyam CFO about the rationale behind keeping $500 million in current account from Satyam, which draws no interest. ET too had got a similar response in September, last year. A senior executive who quit Satyam BPO who said that he had many a times asked Mr. Raju to spend the excess cash assets to spend for attractive buyouts for the BPO, like Infosys and Wipro were doing, but it all fell on deaf ears.
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Obviously Raju went from strength-to-strength revealing terrific quarter-on-quarter performance, often beating street expectations without anyone catching on to any wrongdoing.
THE FINAL FALL Things peaked in August of 2008, when many top level officials of Satyam started resigning, rumoured to be on confrontation with Raju's vision for the company. For instance, the entire top team of Satyam BPO had resigned by October. Satyam executive management team also started getting rickety, with the resignations of top level officials like Shailesh Shah, head of strategy. Inside sources say that many team members had confrontations with Mr. Raju on missing attractive buyout propositions despite huge cash in hand. It was only later, that those individuals realized that the cash never existed. On December 16, 2008, around 6:30 pm, two hours post closing of the markets, then Satyam Chairman Raju announced a buyout of 100% stake in Maytas Properties and 51% in Maytas Infra, thus effectively making Satyam, a core real estate company from a core IT company overnight. The total outflow for both the acquisitions was a whopping $1.6 billion comprising of $1.3 billion for the 100% stake in Maytas Properties and $300 million for a 51% stake in Maytas Infra.
The buyout was met with severely negative reactions from the investors and shareholders, with many threatening to sell off entire stake in the company. This prompted a huge list of prospective buyers as share price of Satyam suddenly dropped. It's ADR on NYSE fell almost 54% the same day. Within 24 hours, Satyam made a Uturn. He said, "We have been surprised by the market reaction. In deference to the views expressed by many investors, we have decided to call off these acquisitions." The Raju’s had lost Rs 3,400 crore in the day as share prices of Satyam plummeted.
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The gameplan behind the takeover of Maytas was to fill the gap of cash reflected in the books but actually non-existent, by taking over his own company, with his sons running the show. Board members Prof. Krishna G Palepu, non-executive director and Vinod K Dham, nonexecutive & independent director, Prof. Mendu Rammohan Rao, non-executive & independent director resigned from the Satyam board following the adverse public reactions to Raju's decision. The board members alleged that important facts were concealed from the board and thus they were misguided. Next came the confrontation, with the World Bank. On December 23, Satyam was barred from bagging or bidding for contracts with the World Bank for eight years for providing Bank staff with "improper benefits". The shares fell almost 14% to its lowest in four years.
Ramalinga Raju then spent his Christmas countering the allegations by World Bank. The company asked World Bank to immediately withdraw those statements and apologise to Satyam, which obviously the Bank never did. Meanwhile, Raju's share in the company fell from 8% to 5% making it an attractive bid target.
HOW THE LID WAS BLOWN? Post the Maytas fiasco, DSP Merill Lynch was appointed to look into Satyam's books and possibly find it a suitor and soothe the shareholder outcry. On Tuesday, January 6, DSPML is reported to have met Sebi officials and told them about large scale accounting irregularities. It told the regulator that it was uncomfortable in handling the mandate.
It also submitted a letter to Sebi on the same. The night of January 6, was one of the most discomforting nights for Raju and his family. As day broke, at 9.45 am, before the opening of the markets, a letter was faxed to Sebi Chairman, the board of Satyam, BSE
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and NSE. Rest is history. In the letter Raju, admitted about an inflated (non-existent) cash and bank balance of Rs 5,040 crore, an over stated debtor position of Rs 490 crore (as against Rs 2651 reflected in the books) and a fake liability of Rs 1,230 crore.
Nasscom went into an immediate damage control due to the disclosures made by its past Chairman. Nasscom President Som Mittal said: "This is a stand-alone case of failure. We expressed shock at the disclosures made by Mr. Ramalinga Raju."
Satyam was originally started as Satyam Constructions. In 1987, Ramalinga Raju with his bother in-law DVS Raju founded Satyam Constructions. It was perhaps here that he inherited the construction and real industry balance sheet skills. Perhaps it’s Mr. Raju's real estate genes that he tried to impregnate inside an IT setup that back fired.
GOVERNMENT ACTS Concerned about the fate of its 53,000 employees spread across 55 countries, the government took stern steps. PC Gupta, the Minister for Company Affairs, announced sacking of the board and appointment of new directors, to be announced over the next few days. The former Satyam chairman and his brother have been booked for non-bailable under the Indian Penal Code, which could put them behind bars for years. And by superseding the board, the government has sought to ensure business continuity and that documents are not tampered with. SEBI committee on corporate governance chairman and Infosys chief mentor NR Narayana Murthy says he is shocked and painfully dismayed.
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THE WAY FORWARD With the government now taking over things it will be reassuring for Satyam customers, employees and stakeholders. These are assurance now of business continuity and this could eventually help the beleaguered company find a buyer. In fact, things look bright for a government assisted transaction like a Bear Stearns type of rescue where JP Morgan bought (assisted by the US government) the beleaguered investment bank for as low as $10 a share. Alternately, post a thorough due diligence by government and auditors, Satyam could be broken up into pieces (BPO business, verticals, service lines et al) and sold to several buyers, like energy giant Enron was. "With the government taking over the board, we are advising our clients to stay put as the cost and time of transition is very large at the moment," says Avinash Vasishtha, CEO of Tholons. There are three options before the government. According to Tholons, the best option is to stabilize Satyam and merge it with an indemnity against any financial liability with a bigger IT company. However, even as the government would prefer a quick end to the current turmoil, there could be delays due to the sheer magnitude of the mess. Whichever way things go, experts agree that Satyam may not exist as a standalone entity for very long. With government support it will be easier, to begin with get cash to manage the operations of the cash starved company, reassure global clients and stakeholders and eventually find a buyer.
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Introduction Satyam Computer Services Ltd was founded in 1987 by B.Ramalinga Raju. The company offers information technology (IT) services spanning various sectors, and is listed on the New York Stock Exchange and Euronext.Satyam's network covers 67 countries across six continents. The company employs 40,000 IT professionals across development centers in India, the United States, the United Kingdom, the United Arab Emirates, Canada, Hungary, Singapore, Malaysia, China, Japan, Egypt and Australia. It serves over 654 global companies, 185 of which are Fortune 500 corporations. Satyam has strategic technology and marketing alliances with over 50 companies. Apart from Hyderabad, it has development centers in India at Bangalore, Chennai, Pune, Mumbai, Nagpur, Delhi, Kolkata, Bhubaneswar, and Visakhapatnam. "The truth is as old as the hills" opined Mahatma Gandhi, christened the Father of the Nation by Indians. So a company named "Satyam" (Truth, in Sanskrit) inspired trust. The IT boom in India, was fuelled by young, middle-class, and educated, budding Indian entrepreneurs and Western firms anxious to outsource to take advantage of high-skill, low-wage worker. This trend created a new breed of businessmen for the 21st century and generated many fortunes literally overnight. The global corporate community was flabbergasted and scandalized when the Chairman of Satyam, Mr. Ramalinga Raju resigned on 7th January, 2009 and confessed that he had manipulated the accounts by $1.47-billion. On 7th Jan 2009 morning, we tune into CNBC TV 18 and the host Udhayan Mukherjee was there commenting on the up move of Satyam and said it may be capped at around Rs.180 / 190 levels. Capped it did and started moving southwards to a bottomless pit. Why? Because, the Chairman of Satyam, Ramalinga Raju decided to make a confession of sorts as he was unable to keep his conscience quite for very long. We don‘t know how long he was trying to keep his conscience shut before he decided to listen to conscience. But, in his confession letter, he has told several quarters he was repeatedly fudging the books to overstate profits and assets. We went through his confessions in detail. We were discussing with few friends of mine. Also my friends were aghast that the auditors of the company did not detect this fraud earlier. The auditors of Satyam are not a small name, they are a reputed name and one of the Big Four (the way things are unfolding, that list may soon become Big Zero). The fraud was committed not once. The confession only reveals about the peak level of the fraud. It was being perpetrated on a continuous basis over many quarters or several years. If the Company needed growth in revenues and profits, they got it; the desired profit was just few book entries away. They most likely made these entries during the last week of the reporting period so that the invented profits filled the blanks perfectly for analyst purposes. We were discussing to find answer about the liability of Raju as the promoter and the director of Satyam. As Satyam was floated by Raju and was headed the Board‘s of Member. Liability of Auditor is also one of the important issues to be determined. Pricewaterhouse Coopers has been the statutory auditor for Satyam Computer services for last six years. Auditor‘s involvement is crystal clear. Satyam had paid twice the amount of what was charged by other Audit Firms. The issues discussed in the paper that : What will be the liability of Raju as the Promoter and the Director ? ;Whether Independent Directors are really Independent of the management when it comes to taking decisions on behalf of the Shareholders ; Whether shareholders have a locus standi to file a lawsuit against Pricewaterhouse Coopers? If so then what will be the extent of liability of Pricewaterhouse Coopers? The fundamental objective of our research is to find out the role of Raju in Satyam scam. Secondly the extent of involvent of the independent Directors and the Auditors. The Researcher has analyzed the Company Law provisions with respect to above mentioned material facts. The Scope is confined only to Company Law in India and further to the Satyam fraud. The paper argues that the independent directors discharge their roles independently or are influenced in discharging their functions and do they owe any responsibility towards shareholders like other directors. The shareholders have a locus
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standi to file a lawsuit against Pricewaterhouse Coopers(Auditor). The whole work is divided into three chapters. Chapter 1 deals about the role, power, function and liability of the Director. Chapter 2 provides the Role, power, function and liability of the Independent Director. While Chapter 3 analyses legal implication on Auditor and their duty of care.
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CONCLUSION AND RECOMMENDATION
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The Satyam episode has sparked a big debate on whether India possesses adequate laws and guidelines for corporate governance. Risk managers say that while India has no dearth of such provisions in various enactments, the real issue emanates from the ability to follow these provisions in spirit and the means to monitor and enforce the same. The law makers in India, they believe, need to ascertain the merits of encouraging a principle-based approach (like in the case of the combined code in the UK) to compliance - where the nature, size and complexities of a business govern compliance and disclosures - instead of a standard rules based approach for universal compliance (like in the US). The Satyam fiasco has called into review the Corporate Governance in India. The problem in India relates to the fact that we have been adopting Corporate Governance rather than formulating our own. The watchdog of investors SEBI was instituted as a body under SEBI ACT, 1992. Thus it has been only 16 years since a watchdog for the investors has been incorporated. In the past 16 years this is the first major scam which has affected Corporate Governance in India and the concept of India Inc. as a whole. In India, guidelines for corporate governance are provided in clause 49 of the listing agreement and also in various sections of the Companies Act. Industry experts hold view that once appointed, the performance and contributions of these directors should be monitored and evaluated objectively with peer reviews serving as a means of such evaluations. The Satyam scandal has, ironically, uncovered the second most populated country in the world, of having a problem with numbers in terms of finding the requisite number of directors who can exercise their independence while influencing decisions of the board. The challenge for India Inc, is to come out of the mindset that only well known personalities can be nominated as independent directors. The role of Independent Directors has again been brought under preview however there is still a conflict between SEBI and Company Bill, 2008 as to the percentage of Independent Directors on the board. The shareholders of a company place very high reliance on the auditor‘s report, which apparently shows the true and fair view of the accounts of a company. The auditors should perform their duties with utmost care and vigilance to ensure that there are no illegal or improper transactions. But still, Satyam has happened. The role of the UICAI and MCA should now not Just be confined to punishing Satyam‘s auditors, but they should also re-examine the present system to strengthen and intensify internal audit system. Some of such remedial steps, which may be taken, are as follows: 1). Appointment and remuneration of auditors should not be left to the companies they audit, as the fees can easily influence the auditor‘s report. A better option would be to pool in money and hand it over to the stock exchanges that can appoint auditors. This will make the auditors answerable to the bourses and not corporate executives; 2). Forensic auditors should be used to unearth evidence of wrongdoing, which needs a combined team of people from the police or the CBI, lawyers and audit professionals with an adversarial approach; 3). Other than forensic audits, even investigative audit techniques could be applied wherever major weaknesses in internal controls or their implementation are found. An investigator does not accept a stated fact as correct unless it is substantiated; 4). The professional firms should introduce partners‘ audit review and partner-rotation programs. This will also ensure healthy participation on the part of the partners; and
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5). The auditors should also ensure that the audit is conducted in accordance with the Auditing and Assurance Standards (AAS), which are is benchmark on which the quality of audit performance can be measured, and any material departure should be disclosed. AAS-4 talks about the Auditor‘s responsibility in considering fraud in audit of financial statement. Besides these, steps should be taken to ensure that the auditors are fulfilling their general duties of getting third party evidence, identifying and assessing the risk of material misstatement in financial statement due to fraud, contacting major customers/suppliers etc. These steps will bring in light fraud but won‘t stop them. Strong laws have never deterred criminals. But if there is a comprehensive paperwork to support it, over a period of time, it can be detected by common sense approach instead of mechanical. Meanwhile many feel that if the two pending bills in Parliament related to company affairs- The Companies Bill 2008 and Limited Liability Partners Act were passed earlier, stringent action could have been taken against corporate fraudsters and protect the interest of shareholders.
RAJESH D. RAHANGDALE
RAJESH D. RAHANGDALE