Governance Failure at Satyam-

Case Study

Group 3:
Ananthakrishnan
Arun Vetrivel
Balasubramaniam
Kamalakannan
Suresh Kumar
 Summary

Satyam surprised corporate world by making a fraud for 50 billion INR where
Satyam has been publicized for good corporate governances

Satyam has made corporate world to a situation on having good having

corporate governance beyond national and international awards for excellences
in corporate governance

Scandal is about fake accounting such as gap in balance sheet, fake deposits in
bank, understated liability and overstated debtors position

Even though three audit levels placed, company accounts had been made fake

PwC withdrawn from external auditing; Members involved in fraud were charged
and arrested ; Tech Mahindra took over Satyam - INR58 /share ; paid INR17.57
billion for 31% stake
 Background
Revenue: US$ 2 billion in 2008

51,000 of multicultural employees

31 global solutions center to cater 654 customers where one-third is covering

Fortune Global and US 500 companies

Listed in NYSE in USA, Euronext in Amsterdam, BSE, and NSE in India

Earned reputations from clients, employees, and society through several

national and international awards; One such award is one of the top ten most
regarded companies in India
 Governance
Satyams philosophy on corporate governance is Driven for its core values on
Associate Delight, Investor Delight, Customer Delight, and the Pursuit of
Excellence

Five independent and four internal members on the board

Independent directors on Audit committee and compensation committees

Audit committee met eight times in the year before scandal; Compensation
committee met three times in the year before scandal

61% of shareholding is owned by non-promoters, and 8.74% by promoter in

2008

Apart from expected growth of US $2.7 billion in 2008/09, Earning-Per-Share is

expected to be between INR29.54 and INR30.04 (2% growth rate)
Crisis
Gap in balance sheet due to inflated profits over last few years (actual profit
margin was ~3%)

Balance sheet (as of Sep 2008):

Inflated cash and bank balance of 5040 crore

Accrued interest of 376 crore (non-existent)

understated liability and over-stated debtors position

Artificial bank balance up by 588 crores in 2008 Q2

Action from Raju, CEO:

Looking for merger with Merrill Lynch (BoA)
Stepped down from CEO saying that: It was liking riding a tiger, not knowing how to
get off without being eaten
 Audit Levels & Fraud
Three levels Internal Audit (CFO); External Audit (PwC); Board (Independent
members)

Audit fees was tripled to INR 430 million during period 2003 to 2008 (which is
far below compared to peer group in IT industry)

Fake fixed deposit - grew from INR 33.2 million in 98/99 to 33.2 billion in 07/08

Investments in real estates made

Family had 327 companies registered but registered in stock markets and hence
its not required to follow standard governance practices

Satyams board approved the acquisition of Maytas Infra, where investors

reacted negatively

Satyam offered bribe in Dec 2008 to World Bank for having favorable contracts

Dilution of shared from 8.65 percent to 5.13 percent through the sold out of
IL&FS trust
 Charges made
Contradiction in Rajus statement on 3% net profit compared to 20% to 25%
profits seen among competitors; Charge is hard to believe no intention to make
private gains in this case of huge fraud

Raju and his brother were arrested; Law suits were made in India and USA

GoI break up the broad of Satyam

PwC audit head in India resigned, and two partners signed Satyams balance
sheet were suspended and prisoned

Measures taken to make company survive

SEBI was allowing to sell 51% stake through bidding where investors with more
than US$ 150M in net assets were invited
Twos steps in bidding acquiring equity of 31% ; public offer of 20%
Tech Mahindra won the bid (INR 58 per share)