about the corporate governance in satyam
TRANSCRIPT
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ABOUT THE CORPORATE GOVERNANCE IN SATYAM
The Satyam episode has sparked a big debate on whether India possesses
adequate laws and guidelines forcorporate 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). Says Monish Chatrath, national markets
leader, Grant Thornton: Companies in India must have the flexibility to ascertain
those aspects which are practical to comply with and others where they can
provide suitable and logical explanations for non compliance. This will enable
them demonstrate their true intend to comply, where practical, and make totransparent disclosures in other cases.
Chatrath also feels there is a need for a clear distinction between corporate
governance norms for publicly listed entities and for other forms ofbusinesses
involving a relatively limited set of stakeholders. According to him, market
capitalisation, size and complexity of a business are other parameters which may
be used to distinguish between various governance requirements.
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, believe industry
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experts, is to come out of the mindset that only well known personalities can be
nominated as independent directors.
The entire process through which independent directors are identified,
nominated and recruited needs a careful introspection. The visibility and market
perception or relationships with the promoters should not be the only criteria
while choosing independent directors,
Satyam fraud is symptomatic of the Economy of shock and surprise that we live
in. These frauds have beenintegral part of corporate history. The disclosures
show that our radars have become stronger and societys tolerance of corporatemisdemeanours has reached its limits. Meltdown is a punishment inflicted by
investors on greedy hedge fund managers and private equity manipulators. The
heads of five top investment banks who were active participants in the Wall
Street Ponzi scheme called credit default swaps lost $2.2 billion of their personal
wealth in 2008. The world would never have known about the fraud had a few
shareholder activists not been persistent in opposing the unanimously approved
resolution of 16 December 2008 acquiring the property company owned by the
son of the promoter at an extortionate price.
This was stated by Dr Madhav Mehra, the President of the World Council for
Corporate Governance, UK at the 19th World Congress on Leadership in the
Economy of Surprise, Wrenching Change and Contradiction concluded recently
in Mumbai.
Dr Mehra added , Satyam gives India opportunity to lead the world by better
enforcement of Clause 49 through proper selection, training , evaluation and
monitoring of directors. The main problem of the Indian boards is their sameness.
Same directors find seats on all the boards. That encourages cozy relationship.
We need to encourage dissent, diversity, difference, dialogue and disclosure. To
make it happen we dont need more laws but more training both of directors and
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investors." Dr Mehra lamented "the institution of independent directors is a myth
world over for two reasons: they depend on CEO for their remuneration. The
dependence has only increased with phenomenal rise in their remunerations. It is
difficult for people to understand something when their salary depends on not not
understanding it. Secondly as per a survey conducted by the WCFCG, the
average time spent by independent directors inboard meetings in a year is 14
hours. Better training will ensure that independents engage themselves in
committee work such as audit committee, risk management committee,
nomination committee and remuneration committee."
"Good news is that Satyam fraud has raised the bar on corporate governance.
For the first time corporate governance has become a household world. Marketshave punished companies with poor corporate governance. The fraud exposes
involvement of big names such as Price Water house Coopers. This shows
inadequacy of even draconian legislations like Sarbanes Oxley Act to curb
frauds. The fraud also exposed stock market's worst disease - the insider
trading.Respectable financial institutions profited by offloading Satyam shares
just before Rajus confessions. Satyam has done more to raise the corporate
consciousness than Sarbanes Oxley Act. nsider trading is a worldwide
phenomenon and has been reported by many regulators with little enforcement.
Linda Chapman Thompsen, Enforcement Director of Securities and Exchange
Commission of US, warned last year that insider trading in Wall Street had
become worse than during Ivan Boesky's time. The tippers and tip pees have
been in senior positions of trust and confidence". Warnings made little difference
because western governments themselves play hostage to the big financiers and
are scared of regulating them lest they move their assets to lightly regulated
territories.Wall Street has seen worst destruction of shareholder values since the
depression of 1929.India's intense reaction to Satyam crisis may be a defining
moment to curb this corporate greed, added Dr Mehra.
India's Enron
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Scandal hits Indias flagship industry
SATYAM means truth in Sanskrit, an ancient Indian language. On January 7th
Satyam Computer Services, one of the countrys biggest software and services
companies, revealed some alarming truths about Indian capitalism, even in its
spiffiest industry. The companys founder and chairman, B. Ramalinga Raju,
confessed to a $1.47 billion fraud on its balance sheet, which he and his brother,
Satyams managing director, had disguised from the companys board, senior
managers and auditors for several years. It was like riding a tiger, not knowing
how to get off without being eaten,.
The tiger carried Mr Raju deep into the woods. Quarter after quarter, he inflated
Satyams profits, even as operations expanded and costs grew. The company,
which is listed on both the New York Stock Exchange (NYSE) and the Bombay
Stock Exchange, now claims to have 53,000 employees, and customers in 66
countries, including 185 companies in the Fortune 500. In its books for the third
quarter it reported 50.4 billion rupees ($1.03 billion) of cash and 3.76 billion of
earned interest that do not in fact exist. It also understated its liabilities by 12.3
billion rupees and overstated the money it is owed by 4.9 billion.
The ride took a final turn on December 16th, when Mr Raju tried to buy two firms
owned by his family, Maytas Properties and Maytas Infra, for $1.6 billion.
Satyams supine board approved the proposal but shareholders revolted. They
thought it was a brazen attempt to siphon cash out of Satyam, in which the Raju
family held a small stake, into firms the family held more tightly. In fact, it turns
out, it was Mr Rajus last desperate attempt to plug the hole in Satyams balance
sheet with Maytass assets.
The deal was swiftly aborted. In the aftermath, four non-executive directors quit,
hoping to salvage their own credibility, and Mr Rajus creditors came knocking.
They dumped most of the Satyam shares he had pledged as collateral for the
12.3 billion rupees in loans. The ride was over. The daunting task of rescuing
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Satyam falls to Ram Mynampati, its chief operating officer, who is now interim
chief executive.
The task of rehabilitating corporate India is equally daunting. It has long basked
in the reflected glory of its information-technology firms. Run by cerebral, clean-
living professionals, they employ Indias brightest youngsters and serve the
bluest of blue-chip companies. These digital ambassadors have lent corporate
India a certain mystique, says Sharmila Gopinath of the Asian Corporate
Governance Association (ACGA), based in Hong Kong. But that reputation rests
largely on the efforts of one or two companies, such as Infosys, which are
impeccably run. Investors delude themselves if they think standards in most
Indian technology firms, let alone the rest of its 9,000 listed companies, are closeto those set by Infosys.
The illusion persists because it is not easy to gauge corporate governance
objectively. ACGAs own 2007 ranking of corporate governance placed India third
out of 11 Asian countries, behind Hong Kong and Singapore, but far ahead of
China, in ninth place. Indias financial-reporting standards are high, its principal
regulator, the Securities and Exchange Board of India, is independent of the
government, and its business press is enthusiastic. But enforcement is weak,
loopholes large, and shareholder activism is lacklustre. There is virtually no
voting by poll at AGMs, ACGA notes, and meetings are often held in remote
locations.
The government has introduced a new companys bill, which would allow
shareholders to pursue class-action lawsuits, but it will probably lapse when
elections are called some time before May. Even if a new government passes the
legislation, Indias cumbersome courts tend to delay justice to the point of
denying it.
New laws may matter less than the spirit that animates them. Satyams
independent directors, for example, met the standards set by the NYSE. But they
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did not ask hard questions. Directors in India may sit on as many as 15 boards,
which leaves them little time to do their job properly.
But even an assertive board and reputed auditors will struggle to stop managers
who are determined to hide their dirty laundry from view. About half of the 30
companies in the Sensex, Indias benchmark stockmarket index, are run by
business families, most of who trace their roots back to the closed economy of
Indias past. They dont always understand the new rules, says Ms Gopinath.
Until investors stand up and say these practices are unacceptable, what reason
do companies have to change?
Satyam is Indias fourth largest technology company with 53,000 employees. It
has 49 offices around the world, including eight in the United States, and it
services many of the Fortune 500 companies. Raju admitted to cooking the
books, including a false cash balance of more than $1 billion. He faces arrest and
possibly jail time of seven to 10 years.
The Securities and Exchange Board of India tells ABC News that it has already
begun to investigate Satyams financial records.
Two American law firms -- Izard Nobel LLP and Vianale & Vianale LLP -- have
filed class action lawsuits against Satyam Computer on behalf of shareholders of
the software services firm's American Depository Receipts, according to NDTV.
Todays Times of India reported that amid mounting speculation over his
whereabouts, Satyam management has said that it has no idea where Raju is.
The newspaper suggested the chairman had fled to the United States, but Rajus
lawyer said the chairman is in Hyderabad.
Along with founding Satyam, Raju is known for his philanthropy and commitment
to helping Indias rural poor. He created Indias first emergency response system,
similar to that of 911 in the United States. He reportedly donated more than $50
million of his own money to create the program.
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The Hindustan Times reports that Rajasekhara Reddy, the chief minister in the
state of Andhra Pradesh where Satyam is based, wrote a letter to Prime Minister
Manmohan Singh. Reddy suggested a group of businessmen should manage the
company.
"Our major and immediate concern is about the fate of 53,000 employees of the
company. I have no doubt in my mind that the law will take its own course but as
majority of the clients or customers of Satyam are Fortune 500 companies, they
may be averse to do business with companies having fraudulent managements,"
Reddy said in his letter to the prime minister, according to the Hindustan Times.
The Securities and Exchange Board of India said that it is working with the
American Securities and Exchange Commission to investigate the company.
The founding promoter of Satyam Computer Services Limited, Ramalinga Raju,
resigned as the companys chairman on Wednesday, putting out a confessional
statement admitting that roughly 1.5 billion US dollars (or the equivalent of 70
billion Indian rupees) of the firms past funds were "non-existent"
What has shocked analysts is that the money, that is now supposed to be
fictitious, had been recorded in Satyams balance sheets and books of account
that had been audited by the internationally reputed firm of auditors,
PriceWaterhouseCoopers.
Raju, who is politically influential, disclosed details of the fraud in a resignation
letter to the companys board of directors forwarded to stock exchange
authorities as well as the regulator of the countrys capital markets, the Securities
and Exchange Board of India (SEBI).
Of the revenue reported as of Sep.30, 2008, the letter said, almost 1.03 billion
dollars, or 95 percent, never existed.
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SEBIs chairman C.B. Bhave described the financial wrongdoing in Satyam as an
event of "horrifying magnitude".
The scam has dominated the India media and what is ironical is that the Indian
word "Satyam" translates as "truth".
A most alarming aspect of the episode was that Raju acknowledged that his
companys financial records had been fudged and manipulated for the "last
several years".
"It was like riding a tiger, not knowing how to get off without being eaten," wrote
the disgraced Raju in his letter.
While there were rumours that Raju had fled India, his lawyer has said he is in
Hyderabad, the capital of the southern Indian state of Andhra Pradesh, where the
Satyam is headquartered.
On Wednesday, Rajus announcement had knocked the companys stock down a
crippling 78 percent and sent the sensitive index of the stock exchange at
Mumbai, Indias financial capital, plummeting by a substantial 7.3 percent. The
share price came down further on Friday.
This scandal came barely a week after the government in New Delhi announced
an economic stimulus package to revive the markets that have been adversely
impacted by the ongoing worldwide recession.
Until recently, Satyam used to be Indias fourth-largest IT company, specialising
in developing computer software and business process outsourcing.
Satyam's stock is listed on the New York Stock Exchange, it had business
operations in 66 countries and counted 185 companies in the Fortune 500 list as
its clients and customers.
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"Its a wake-up call for the Indian corporate sector," said Ashok Kumar
Bhattacharaya, national managing editor of Business Standard newspaper in an
exclusive interview to IPS. "Companies have to stick to the rule-book," he added.
Investors, along with Indian government agencies, are now demanding answers
to why the value of their stock came down by more than 1.9 billion dollars in one
day on account of a scandal that is being described as "Indias Enron" in
reference to the U.S. energy company that filed for bankruptcy in 2001, leaving
5,000 people jobless and eliminating one billion dollars in employee retirement
funds.
Many of Satyams 53,000 employees are expecting unemployment as the
dimensions of the scandal unfold, investors withdraw and it is discovered how the
companys coffers are almost empty. The 1.5 billion dollar fraud outweighs the
companys entire salary bill for the last year of a little over one billion dollars.
The downfall of Raju, a 54-year old software industry veteran, began nearly one
month ago when Satyam attempted to acquire two companies controlled by his
sons -- Maytas (Satyam spelled backwards) Properties and Maytas Infra -- for
1.6 billion dollars in order to compensate for the holes in his books of account.
The deal was abandoned 12 hours after it was announced when investors
objected, claiming it was an irresponsible misuse of funds and an instance of
nepotism.
The Maytas deals acted as a red flag for international investors, with a host of
companies like Unpaid Systems of Britain accusing Satyam of fraud, forgery and
breach of contract.
Shortly thereafter, on Dec. 23, the World Bank barred Satyam from offering its
computer services for eight years citing a potential trail of corruption -- data theft
and bribery -- that led to Raju.
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The last straw perhaps came on Tuesday when an Indian associate of Merrill
Lynch terminated an agreement on grounds of "material accounting
irregularities".
Satyams worth estimated at seven billion dollars, barely six months ago, is now
worth less thatn 330 million dollars.
In an IPS interview, Arun Kumar, professor of economics at New Delhis
prestigious Jawaharlal Nehru University, said the so-called "independent"
directors on the Satyam board were not truly independent and added that
auditors often acted in collusion with corrupt company managers.
"Im not at all surprised that the auditors played along with the top management
of this company and allowed executives to cook books of account," said Kumar
who has authored a book on Indias illegal -- or "black" -- economy.
"The government is not looking to take over the companies. The corporate world
must respond to this," Kamal Nath, Indias industry and commerce minister was
quoted as saying. "The government should only look at the regulatory part of it,"
he added.
The government has stepped in to investigate all important directors and
employees associated with Satyam who could be involved in the fraud. All those
found guilty could face up to ten years in prison. The auditing licences of the
partners of PricewaterhouseCoopers could also be revoked.
"The system has to be strong, but individuals make the system. The rules were in
place but individuals broke these rules and threatened the system, says
Bhattacharya.
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Though Rajus resignation letter attempts to accept personal responsibility for
themisdemeanours, there is a view that many others were involved and complicit.
Kumar said it was "near-impossibile that those close to the inner workings of
Satyam were completely unaware of what was going on".
Whereas some argue that the Satyam scandal will not have a long-term negative
impact on the working of Indias reputed information technology (IT) industry,
others say it could negatively impact Indias booming IT services which chalked
up overall sales worth 52 billion dollars in 2007-2008.
Anand Mahindra, vice chairman and managing director of M&M, a leading
commercial vehicles manufacturing company, went on record stating: "This
development has resulted in incalculable and unjustifiable damage to Brand India
and Brand IT in particular". He added that the "whole of Indian industry should
not be tarred with the same brush".
But other corporate managers see positive fallouts to the Satyam episode. After
what happened there is bound to better self-regulation among Indian IT
companies, said Puneet Kumar, a top manager at WIPRO, a globally respected,
Bangalore-based IT company.
Satyam was an aberration, Puneet Kumar said. The fact is that the IT industry
thrives on good reputation and every major in the business lays great emphasis
on maintaining global standards of corporate governance.
The $1.6 billion Maytas acquisition deal pushed through by Satyam has raised
questions on the company's corporate governance norms.
Even though the deal was cancelled after shareholders protested, but the IT
giant's image has been tarnished.
In September 2008, Satyam Computer Services had bagged the Golden
Peacock Global Award for excellence in corporate governance.
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But there's definitely nothing award-worthy in December.
Their audacious $1.6-billion acquisition of Maytas Properties and Maytas Infra
Ltd has been lambasted from all fronts.
In fact, leading brokerage CLSA considers it as one of the worst corporate
governance events in India.
Everyone is asking how has a promoter with less than 10 per cent stake made a
call on a huge deal, without approval of those holding the remaining 90 per cent?
But Chairman of Satyam Computers Ramalinga Raju is convinced his moves
were right.
"The manner in which we have gone about valuations, we have followed
meticulous process," says Ramalinga Raju.
Corporate governance is about transparency and raising the trust and confidence
of stakeholders in the way the company is run. But the biggest foreign
shareholder in Satyam believes Raju was way off mark in Maytas case.
"We need to be very clear that as investors we will not tolerate a change inprincipal activity without consultation. When you are changing the principal
activity in such a dramatic fashion minority shareholders should be consulted and
given a say," says Adrian Lim, Aberdeen Asset Management, Singapore.
Experts feel that its shocking for a major software player like Satyam to spend all
that cash in an area of business where it has zero experience. Hinting at
promoter unaccountability, they indicate, that if completed, the deal would surely
set a bad precedent.
"Imagine if this deal had gone through, maybe 50 per cent of the smaller
companies would have done the same saying that overnight, there can be no
better way of taking away cash from the company. But, lets say Satyam was a
more reputed case and they deliberated and have withdrawn it, but what was the
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precedent we were setting if this deal was allowed to go through," asks Madhu
Kela, Head of Equities at Reliance Mutual Fund.
Without doubt, the reputation that Satyam has built over the last decade has
been effectively tarnished overnight. And the deal being called off brings to the
spotlight, the importance of good corporate governance practices in the
functioning of successful companies.
THOUGH UNDER pressure from Mutual Funds and minority stakeholders,
Indias fourth largest software company Satyam Computer has finally called off
the decision to purchase 51 per cent stake in Maytas Infrastructure and 100 per
cent stake in Maytas properties but it has raised serious issues which otherwise
was not seen in Indian Inc. Issues of corporate governance arises due to this
failed attempt of the deal is most serious.
Corporate governance, the word which is probably least understood by retail
investors and which is fine read by top brasses of companies has made its
importance felt less than a decade back when big iconic names like Enron
Corporation and World Com were enmeshed in the history as their top
management has grossly ignored the concept of corporate governance. In simpleterm corporate governance is about promoting corporate fairness, transparency
and accountability. Corporate governance makes the whole structure of the
company more accountable towards each stakeholder, whether it is majority or
minority. Practice of corporate governance is to make the proper disclosure to
the stakeholders about each strategic decision so that stakeholders and market
can reward the good decisions and punish the bad decisions. So in fact if any
company is following the proper corporate governance practices it works as
correcting mechanism for the company in case of wrong decisions and helps the
company to take corrective life saving action within time.
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So how can the attempt of CEO of Satyam computer, Ramalinga Raju, to
purchase the twin company Maytas infra and Maytas properties be regarded as
an attempt to made mockery of the principles of corporate governance?
First of all, the decision was not announced taking into confidence all the
stakeholders of the company. Secondly, the twin Maytas companies are being
the companies run by the family members of Ramalinga Raju only and it was told
that his two sons are major interested party in the twin companies. Thirdly, the
deal would have made the cash reach company Satyam into a debt ridden
company as its entire holding of $1.3 billion cash would have gone to Maytas
Properties (where promoters were 100 per cent holding) and in Maytas
Infrastructures. Fourthly, Ramalinga Raju was holding only 8.5 per cent stake ofSatyam computer so how can he take decisions of transferring its cash to a
company owned by his son without asking the rest of the 91.5 per cent stake
holders? Fifthly, in the name of diversification from software to entirely new area
of reality why has a relatively new company Maytas been chosen when several
other big players are still there? Sixthly, is it really time to go for shopping in a
sector where the economic slowdown is at its severest form?
If you leave the bad performance due to recession, since every industry is
suffering out of which, the failed deal of Satyam-Maytas is the story of how
anybody having a stake of just over 8.5 per cent stake can ignore the interest of
fragmented share holders who account for 91.5 per cent.
So where is the fairness when you are not wanting to bring the resolution in the
EGM as you know that it can not get passed in the EGM and announcing the
decision almost unilaterally on the ground that you are a majority (8. 5 per cent)
stake holder?
So where is the transparency when your action suggests that you are trying to
make a company sitting on cash into a debt ridden company ignoring the interest
of rest of stakeholders?
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And where is accountability when you are not scared of shareholders and dare
to overlook the interest of minority stake holders who actually are majority
shareholders?
In short, the entire episode of attempt to purchase of Maytas by Satyam was
nothing but making mockery of the concept of corporate governance in India, the
very definition of which i.e. fairness, transparency and accountability has failed
here.
Inside Ramalinga Raju's mind
Why did B. Ramalinga Raju do it? No, we are not talking about why and how he
fooled all of us for seven years by presenting blatantly false financials of his
company, Satyam Computer Services. We are more concerned about the timing
of his sensational confession. What really makes a fraudster listen to his
conscience? Or did he do it under duress because of pressure from his family
members, friends and professional colleagues? Did he just wake up on 7
January and decide that he wanted to become the honest gentleman that he was
way back in the 1980s? Or is there a more sinister reason to explain the
revelations?
There are several conspiracy theories to explain the origins of the letter that Raju
wrote to the Satyam board, admitting his guilt. But we will try and separate the
grain from the chaff. He did it for the 'larger good' of everyone he knew, including
himself. In retrospect, it may turn out to be a master stroke. Thanks to his 7
January letter, Raju has possibly saved Satyam, the group firms managed by his
sons, friends and colleagues, and the politicians who helped him in the past. In
an ironical twist to the tale, he may have saved himself from a long term behind
the bars.
The fact is that Satyam as a company was about to collapse under its own
financial weight. With a 3% margin, as Raju claimed, almost non-existent cash
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balances, with no hope of a new pipeline after Raju had pledged most of his
personal shares with institutions, which sold them off, huge liabilities and
receivables, and highly inflated revenues and profits, the company didn't have
the money even to pay salaries in January 2009. Kiran Karnik, one of the six
government-appointed directors on Satyam's board, has publicly said that the
company needs nearly Rs 2,000 crore cash over the next three months.
In fact, this is the reason why the failed merger with group firms, Maytas
Infrastructure and Maytas Properties, for Rs 8,000 crore was critical for Raju's
survival. In one stroke, it would have cleaned up Satyam's balance sheet. The
deal, which was opposed by institutional shareholders as the two Maytas firms
were controlled by Raju's sons and, therefore, smacked of conflict of interest,would have infused new assets and also ensured new revenue and profit
streams. For example, Maytas Properties possesses a land bank of 6,800 acres,
with the ability to construct 245 million sq ft of built-up space.
At the Satyam's board meeting on 16 December 2008 to discuss the merger,
Ram Mynampati, a former director, disclosed that there was little future in
infotech as accelerated growth was difficult in the current scenario, prices and
margins were under pressure, and there was discomfort about anti-outsourcing
voices emanating from the US, especially from the new President Barack
Obama. Therefore, entry in construction and infrastructure seemed like an ideal
de-risking strategy. If things had gone according to plan, Raju could have easily
jumped off the Satyam tiger without being 'eaten up'.
When this strategy didn't work, Raju had no option. The only way to save Satyam
was to come out in the open, confess to his crimes and hope that the
government would act swiftly to save the future of Satyam's 53,000 employees
as well as restrict the possible negative impact on the Indian IT story. This is
exactly what happened. The future of Satyam, its employees and Indian IT seem
much safer today. When we spoke to a few employees, they sounded a bit
reticent, but confident. All of them said they were "optimistic that things would be
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back to normal soon". Raju's sons were obviously angry. The father had
practically destroyed their future. By not being able to go through with the
merger, he had made sure that the Satyam scandal would become public
knowledge. It could force several state governments, including that of Andhra
Pradesh, to cancel the high-profile infrastructure contracts bagged by Maytas
Infrastructure and Maytas Properties. At present, the two entities are working on
projects worth Rs 30,000 crore, including the prestigious Hyderabad metro rail.
Satyam's truth had the potential to severely tarnish the sons' image. And it did.
However, the sons' anger could have weighed heavily on a desperate Raju,
forcing him to reveal everything.
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There's
another angle
to the familydrama. Maybe
there was a
feeling that if
Raju went
down taking all
The Satyam Saga
1987 Company established
199
IPO over-subscribed by 17 times;
company gets its first Fortune 500customer in John Deere & Co.
1993
Awarded ISO 9001 certification. Signs
joint venture with GE, another Fortune
500 company.
1999
Satyam Infoway (Sify) becomes the first
Indian Internet firm listed on the
Nasdaq.
2000
Company merged with Satyam
Enterprise Solutions (SES) in a way
that benefits Srini Raju of SES.
2001Satyam Computer Services listed on
the NYSE (SAY).
1999-
2001
Its stock was one of the 10 that Ketan
Parekh was rigging.
2002
The Dept of Co Affairs seeks
clarification on alleged violation of the
Companies Act.
2004
Acquires Citisoft and Knowledge
Dynamics. Features in the Forbes Top
Asian Companies.
2005
UK-based IT firm Upaid files case
against Satyam for alleged fraud and
forgery.
2006
Company says 'Revenue exceeds
US$1 b'. Gets award from Institute of
Internal Auditors, US.
2008
Announces acquisition of Maytas Prop
and Maytas Infra. Deal shelved after
outcry.
2009
Raju confesses to Rs 7,000-crore
fraud; arrested. Satyam boardreconstituted.
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the blame, there wouldn't be too much of an impact on the sons' businesses. It is
probable that the nonexistent cash balances that Raju is talking about were
monies that were siphoned out of Satyam to finance his sons' projects. It is
possible that a part of the cash balances has gone into the personal accounts of
family members. Or it could have been partially used to bribe officials in lieu of
government projects awarded to the Maytas companies.
Now, consider what was going on in the minds of Raju's close colleagues before
the founder's letter. They were scared. If Satyam went down, so would they. For
no one would believe that Raju carried out this fraud for so long without the
senior managers being aware of it. In return for their undying loyalty, they
demanded Raju's head. He had to tell the truth and take the blame himself. Thistoo seems to be panning out the right way as until now only the former CFO,
Srinivas Vadlamani, has been arrested by government sleuths, who seem more
worried about finding the extent of the damage.
As Raju got sucked into a financial tornado that he had created in the first place,
he had to take care of the politicians, who had helped him throughout his
entrepreneurial career. Yet again, it seemed like a perfect solution for Raju to
confess after wiping out the tell-tale marks that could have pointed at a nexus
between Satyam and the state's political leaders.
As of now, the media is speculating that former Andhra Pradesh chief minister N.
Chandrababu Naidu of the Telugu Desam Party helped Raju wriggle out of
income-tax cases earlier this decade. It is also being rumoured that the current
Chief Minister, Y.S.R. Reddy of the Congress, helped Raju's sons bag the
prestigious infrastructure projects in the state. Interestingly, both Reddy and
Naidu are accusing each other of helping the Raju family.
More political skeletons are likely to tumble out of Raju's cupboards, but they are
likely to be mere limbs because the crucial evidence may have been carefully
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hidden, or simply made to vanish. Just like the thousands of crores of rupees in
Satyam's bank accounts over the past seven years.
That leaves us with Raju. He had to chalk out his own survival too. After such a
massive scam, possibly the biggest in the history of corporate India, he could
languish in jail for the rest of his life. However, by admitting to cooking up the
accounts, he may successfully divert attention from a far more serious crime
siphoning off money from a public company. Some lawyers feel that his
confession may get him some form of immunity. And he may be let off with minor
penalties. Section 24(B) of the Sebi Act states that if a person has made "full and
true disclosure of the alleged violation", he can be granted immunity from
prosecution for some of the offences.
We hope this doesn't happen in this case. Raju's conviction has to act as a
deterrent to other optimistic and over-confident owners, who may think that they
too can get away with such frauds. Or else, India Inc. will witness the birth of
more Rajus who, as detailed out in a recent study by Wharton School, would
believe that their firms were experiencing "only a bad quarter or patch of bad
luck" and that it was "in the interest of everyone involved to cover up the
problem". But when things don't improve, the promoter is forced to continue his
"fraudulent behaviour and he has to do more" in the subsequent quarters.
Therefore, it is imperative for the government to financially reboot India Inc.
the text of the letter Raju wrote to the Satyam board:
"It is with deep regret and tremendous burden that I am carrying on my
conscience, that I would like to bring the following facts to your notice:
1. The Balance Sheet carries as of September 30, 2008,
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a) Inflated (non-existent) cash and bank balances of Rs 5,040 crore (as against
Rs 5,361 crore reflected in the books);
b) An accrued interest of Rs 376 crore, which is non-existent
c) An understated liability of Rs 1,230 crore on account of funds arranged by me;
d) An overstated debtors' position of Rs 490 crore (as against Rs 2,651 reflected
in the books);
2. For the September quarter(Q2) we reported a revenue of Rs 2,700 crore and
an operating margin of Rs 649 crore(24 per cent of revenue) as against the
actual revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore(3 per cent of revenues). This has resulted in artificial cash and bank balances
going up by Rs 588 crore in Q2 alone.
The gap in the balance sheet has arisen purely on account of inflated profits over
several years (limited only to Satyam standalone, books of subsidiaries reflecting
true performance).
What started as a marginal gap between actual operating profit and the onereflected in the books of accounts continued to grow over the years.
It has attained unmanageable proportions as the size of the company operations
grew significantly (annualised revenue run rate of Rs 11,276 crore in the
September quarter, 2008, and official reserves of Rs 8,392 crore).
The differential in the real profits and the one reflected in the books was further
accentuated by the fact that the company had to carry additional resources andassets to justify a higher level of operations thereby significantly increasing the
costs.
Every attempt made to eliminate the gap failed. As the promoters held a small
percentage of equity, the concern was that poor performance would result in the
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takeover, thereby exposing the gap. It was like riding a tiger, not knowing how to
get off without being eaten.
The aborted Maytas acquisition deal was the last attempt to fill the fictitious
assets with real ones. Maytas' investors were convinced that this is a good
divestment opportunity and a strategic fit.
One Satyam's problem was solved, it was hoped that Maytas' payments can be
delayed. But that was not to be. What followed in the last several days is
common knowledge.
I would like the board to know:
1. That neither myself, nor the Managing Director (including our spouses) sold
any shares in the last eight years - excepting for a small proportion declared and
sold for philanthropic purposes.
2. That in the last two years a net amount of Rs 1,230 crore was arranged to
Satyam (not reflected in the books of Satyam) to keep the operations going by
resorting to pledging all the promoter shares and raising funds from known
sources by giving all kinds of assurances (statement enclosed only to the
members of the board).
Significant dividend payments, acquisitions, capital expenditure to provide for
growth did not help matters. Every attempt was made to keep the wheel moving
and to ensure prompt payment of salaries to the associates. The last straw was
the selling of most of the pledged shares by the lenders on account of margin
triggers.
3. That neither me nor the managing director took even one rupee/dollar from the
company and have not benefited in financial terms on account of the inflated
results.
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4. None of the board members, past or present, had any knowledge of the
situation in which the company is placed.
Even business leaders and senior executives in the company, such as, Ram
Mynampati, Subu D, T R Anand, Keshab Panda, Virender Agarwal, A S Murthy,
Hari T, S V Krishnan, Vijay Prasad, Manish Mehta, Murli V, Shriram Papani,
Kiran Kavale, Joe Lagioia, Ravindra Penumetsa, Jayaraman and Prabhakar
Gupta are unaware of the real situation as against the books of accounts. None
of my or managing directors' immediate or extended family members has any
idea about these issues.
Having put these facts before you, I leave it to the wisdom of the board to take
the matters forward. However, I am also taking the liberty to recommend the
following steps:
1. A task force has been formed in the last few days to address the situation
arising out of the failed Maytas acquisition attempt.
This consists of some of the most accomplished leaders of Satyam: Subu D, T.R.
Anand, Keshab Panda and Virendra Agarwal, representing business functions,
and A S Murthy, Hari T and Murali V representing support functions.
I suggest that Ram Mynampati be made the chairman of this Task Force to
immediately address some of the operational matters on hand. Ram can also act
as an interim CEO reporting to the board.
2. Merrill Lynch can be entrusted with the task of quickly exploring some merger
opportunities.
3. You may have a 'restatement of accounts' prepared by the auditors in light of
the facts that I have placed before you.
I have promoted and have been associated with Satyam for well over 20 years
now. I have seen it grow from few people to 53,000 people, with 185 Fortune 500
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companies as customers and operations in 66 countries. Satyam has established
an excellent leadership and competency base at all levels.
I sincerely apologise to all Satyamites and stakeholders, who have made Satyam
a special organisation, for the current situation. I am confident they will stand by
the company in this hour of crisis.
In light of the above, I fervently appeal to the board to hold together to take some
important steps. TR Prasad is well placed to mobilise a support from the
government at this crucial time.
With the hope that members of the Task Force and the financial advisor, Merrill
Lynch (now Bank of America), will stand by the company at this crucial hour, I am
marking copies of the statement to them as well.
Under the circumstances, I am tendering the resignation as the chairman of
Satyam and shall continue in this position only till such time the current board is
expanded. My continuance is just to ensure enhancement of the board over the
next several days or as early as possible.
A day before the curtain went up on the Satyam tragedyrewind to the board
proposing two acquisitions of real estate and infrastructure firms promoted by the
Raju family another hushed board meeting with a not-too-dissimilar agenda
sailed through peacefully on the outskirts of Delhi. A 10-member board of a
textiles major assembled at the companys headquarters to approve the
acquisition of two businesses of a group company. The board duly approved the
deal. Unlike in the case of the Satyam-Maytas proposal, the news didnt hit the
headlines nor did marketmen publicly vent their ire. That may be because not
many foreign or institutional investors hold shares of these companies; also this
transaction is small beer compared to Satyams $1.6-billion buyout proposal. Yet,
the market made its displeasure clear, hammering the stock for days after the
deal was announced. The uncomfortable questions asked on Dalal Street: One,
why was the company writing out a cheque running into hundreds of crores to
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buy a group venture whose market cap is less than half the offer price? Two, why
was it paying so much for two businesses of a loss making company?
The promoters defend the deal as they see synergies with the acquired
businesses. They may be right, but investors werent quite convinced. That may
be because theyre not confident that the proceeds will be used to generate value
for shareholders. In fact, they may not even be clear where that money is going.
Cut to Hyderabad, where the auditors of a technology company made a
qualification on an investment in a loss-making subsidiary on the companys
2007-08 accounts. The auditors felt that the diminution in the value of
investments was not taken into account while computing the net profit or loss forfiscal 2008. This company had some years ago made an investment in a wholly-
owned unlisted subsidiary in the US. The Indian parent company has yet to get
any returns in its investment as the US subsidiary has been continuously making
losses. The milliondollar question: Did the promoters expect any return on this
investment, in the first place?
Whilst nobodys accusing these two companies of hanky-panky, fact is that the
antennae of marketmen quickly go up when promoters invest huge sums of
money from a company in either familyowned businesses or unrelated
businesses. Many such firms are unlisted and outside the territory of India.
There is also no statutory obligation for them to disclose details, says an auditor
on condition of anonymity.
At a time when investigations are under way into whether Satyam has gone
broke because its promoters siphoned money out of the company, the spotlight
has turned squarely on India Inc. Is Satyam an exception, or the norm, in
corporate India? And are external auditors keeping a tight check on the
numbers? Its the promoters who call the shots... period, says a Partner at a Big
Four auditing firm.
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Over the years, promoters have manufactured innovative ways to siphon off
funds raised from bank borrowings or the public or the companys profits and
reserves (see How Funds Are Siphoned). That may not be true for all Indian
corporates, but the practice is quite rampant in mid-sized companies, believes a
Senior Director of a rating agency. A banker adds that the boom period of the last
4-5 years was exploited by many companies to swindle funds. In fact, the most
commonly used route to siphon off money was by inflating project costs, adds the
banker on condition of anonymity. The project cost is generally inflated by 20-30
per cent by conniving with vendors or suppliers of plant and machineries to take
the money out from the company.
Mid-sized companies often exploit the working capital route by inflating stock intrade bills and receivables to take money out from the company. The big boys
use sophisticated methods like routing funds to subsidiaries or group companies
or companies of relatives as capital or loans and advances. Similarly, there are
many instances of companies buying a business at an unreasonable valuation or
investing in the equity capital of large unlisted companies. These investments or
the returns never come back to the parent company, say experts.
That no financial scandals came to light during the years when India was shining
is an inaccurate barometer of the integrity of Indian promoters. After all, such
scams more often than not occur when the tide is rising and taking all boats
along with it. Its only when the tide goes out, to paraphrase Warren Buffett, that
fraud and fraudsters get exposed. Raju will agree.
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How funds are siphoned
Bank funds route
Working Capital Funds Method:
Inflate stock in trade & receivables bills
Term Loan
Inflate the value of fixed assets
Project Loan
Inflate cost by conniving with suppliers and vendors
Issues debentures against assets
Revalue assets arbitrarily
Normal business route
Pump capital into subsidiaries & group companies
This may seem noble, but not when theres zero expectation of returns
Buy fixed assets like plant & machinery and other equipment
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Again, a perfectly sincere intention on the surface, but not when the value
of assets as well as bills is inflated
Loans & advances to relatives and related parties
Of course, there wont be any recourse to get it back
Inflate outsourcing, sales & distribution, consultancy & advisory
payments
Its a well-tested expenses route
Investment route
Buy a company or a business at an unreasonable valuation
Without doing an independent valuation, of course
Invest in equity/debentures of a large number of unlisted companies
These firms would be invariably connected to the promoters, directly or
indirectly
auditors and chartered accountants with a black brush
The Satyam fiasco has called into question the sanctity of its auditors. Although
its still early days to speculate whether Satyams auditors were party to the
fraud or merely failed to perform their duties, it is beyond doubt that the whole
incident threatens to paint the fraternity of auditors and chartered accountants
with a black brush.
On the issue, an ICAI council member, who declined to be named said: 'As
auditors, we definitely have a role to play. This incident gives the entire CA
fraternity a bad name. If we unravel any wrong doings on the part of the auditors,
the institute will initiate action against the concerned auditor.' KPMG head of
markets Pradip Kanakia said: 'Audit professionals globally were just about
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recovering from the scam in the US and Europe. Now, auditors role will be
questioned in India too. If negligence on the auditors part is proved, there will be
huge dent on the confidence on auditors in general. Although, PwC is our
competitor, this is not the time to rejoice.'
Mr Kanakia felt that given the magnitude and complexity of the fraud, role of
everybody concerned would be questioned. 'This needs deep investigation and it
would require months to unravel the whole story.' Mr AK Doshi, partner of Doshi,
Chatterjee, Bagri & Co, also observed that it was a collective failure of the
Satyam management, its board of directors, and senior executives, audit
committee and its internal and external auditors. 'This seems to be a one-off
incident and we need some more clarity to term this a systemic failure. So farwhat has come to the media glare may not be the whole story. This may have a
negative impact on the confidence on CAs in general,' said Mr Doshi.
Satyam is listed in the US and accordingly may face penal action by the US
Securities and Exchange Commission. 'Under Sarbanes-Oxley Act 2002 of the
US, the Satyam management and its auditors may face penalty as well as
criminal proceedings for wilful mis-representation of financial statement,' said
Arijit Chakraborty, vice president Inkwest Management Consultant, a business
advisory firm.
Another accountant said: 'Auditing as a profession may go down as a result of
the incident. But unlike the Enron case in the US, no nexus has yet been proven
between the auditors and Satyam. Also, auditors be in Big 4 or Big 20 get
very little time to go through the information provide by the company given the
pressure of quarterly audits. Having said that I must also say since cash was
involved in this case, there must have been some lapse on the part of the
auditors.
After all, auditors are required to go through reconciliation ofbank accounts and
obtain confirmation from bankers. They also need to check the fixed deposits.'
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In 1999, five accountants, working independently, tried to figure out if the Enron
lie could not have been caught before it blew up. The basic question before the
five accountants was: where did Enron hide its muck. They asked if there were
lessons to be learnt from the Enron saga that would improve disclosure.
Thus was born eXtensible Business Reporting Language or XBRL as it is called.
As the language for the electronic communication of business and financial data,
it is revolutionising business reporting around the world. The XML properties of
XBRL make the information machine-readable. The addition of business rules to
XML creates XBRL, creating an information set that is more easily deciphered.
XBRL greatly increases the speed of handling of financial data, reduces the
chance of error and permits automatic checking of information.
More than 100 countries have embraced XBRLthe list includes China, Korea,
Japan, the US and most recently, India.
At IRIS, our exercise to develop Indias first XBRL database of listed companies
threw up some startling findings. We were stunned that for several companies,
the financial statements for financial year 2008 lacked internal consistency in the
sense that the numbers reported in the schedules did not tally with the number inthe main financial statement. The variations ranged from as high as 40 per cent
in some elements in some companies to less than 1 per cent in others.
We also found a company that has been reporting the same cash flow statement
for three years running, word for word, number for number, decimal place for
decimal place.
It is still early days but the benefits are self-evident. The outgoing US SEC
Chairman Christopher Cox calls it the new Information Revolution. All companies
listed on US exchanges have two years to move to XBRL-based reporting, the
investment companies have until 2009 to do so and the rating agencies have
been asked to comply soon.
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India, a late adopter, is slowly but surely moving in the same direction, XBRL
implementation is happening at BSE, NSE, SEBI, RBI and MCA, with each of
them working to their own schedule. The Institute of Chartered Accountants of
India has taken the leadership to form an XBRL jurisdiction in India.
But could the adoption of XBRL have helped in the early detection of the Satyam
fraud? The answer is no. However, the use of XBRL can now help investigators
unravel the Satyam story quickly.
Also, the implementation of XBRL can help the board see the information tabled
before it with greater clarity, knowing fully well that if there is a footprint anywhere
that is out of place, it will be visible. With the implementation of XBRL, you cant
hide, the trail will show up somewhere on the radar.