satyam scam

byAnusha,

Sumanth,Ravindra,

Rambabu,Murali

BUSINESS ETHICS AND GOVERNANCE

Satyam scandal

DOWN MEMORY LANE @ Satyam• 1987 : Incorporated as Pvt. Ltd. Company• 1988-1992 : IPO• 1993-1996 : Satyam Technology Centre established • 1997-2000 : Presence in 30+ countries• 2001-2004 : Founded Satyam BPO• 2005-2008 : Acquisition of Bridge Strategy, CitiSoft, Knowledge

Dynamics, Nitor Solutions, S&V Management• 2009 : On 7th January, erstwhile chairman declared that the

company’s profit had been overstated for several years• 13th April 2009 : TECH MAHINDRA acquired majority stake in

Satyam• 21st June 2009 : New brand “MAHINDRA SATYAM” launched

It should be noted that Satyam was the 1st Indian company to be listed on 3 international stock exchanges i.e. NYSE, DOW and EURONEXT

Major Satyam Clients

WHAT WENT WRONG?• Inflated figures for cash and bank balances of INR 5,040 cr.

(as against INR 5,361 crore reflected in the books).

• Operating Profit were artificially boosted from the actual 61 cr. to 649 cr.

• Satyam also showed an interest earning of Rs. 376 cr. that was fictitious.

• An over stated debtors position of Rs. 490 crore (as against Rs. 2651 reflected in the books)

Slippery Slope to Disaster• December’08 brought news of pending litigation by a former client,

online mobile-payments service Upaid Systems which filed a case of intellectual fraud and forgery against Satyam in 2008

• World Bank banned Satyam from doing any of its work after it found Satyam employees had hacked into its system and gained access to sensitive information. It also did not renew their five-year contract

• On Dec. 16, when Raju announced the company would spend $1.6 billion to buy Maytas only to reverse the decision a few hours later under shareholder pressure. Satyam ADRs lost 50% of their value overnight

Satyam’s secret back office – Maytas

• It is not a mere co-incidence that Maytas is Satyam spelt in reverse way. It was an effort to cover up Satyam fiasco.

• Maytas is actually run by Satyam Family. It includes Maytas Properties & Maytas Infra Ltd.

• Maytas was a 2 decade old company. It had been doing remarkably well in the past 6-7 years and projects worth billions were riding upon them.

RAJU’S PROPOSAL FOR MAYTAS

• It all began on 16-12-2008, when Raju thought, buying an infrastructure firm made sense!

• Satyam to buy Maytas Properties for $ 1.3 billion and 51% stake in Maytas Infra for $ 300 million

• Deal to be financed by Satyam’s “surplus” cash.

• Raju said that the deal was in complete interest of the investors and informing them was “unnecessary”

WHAT WAS THE REALITY?

• Raju and family own up to 35% stake in Maytas

• Raju had shown a swollen gross margin in the period of July-December by almost 600 crores (meaning, swollen records of 1000 crores in a year). So it would take him about 5-6 years to show an accumulated wealth of over 5000 crores (Satyam’s supposed cash reserve)

• Raju was siphoning the money from Satyam to Maytas since last 6 years. With Satyam in deep cash crunch, Raju wanted to buy Maytas to cover up Satyam’s inflated cash

• Raju’s last attempt to fill the fictitious assets with the real ones failed and he nailed a hole in the sinking ship ‘Satyam’

Reaction of Investors• The shareholders realised that the buyout was not profitable for them.

Satyam using the reserve cash to purchase Maytas Infra and Maytas Properties was a big risk.

Result of Investor’s Reaction• It results that part of investors succeeded to thwart an

attempt by the minority-shareholding promoters to use the firm’s cash reserves to buy out two companies owned by them — Maytas Properties and Maytas Infra.

• That aborted attempt at expansion precipitated a collapse in the price of the company’s stock and a shocking confession of financial manipulation and fraud from its chairman, B. Ramalinga Raju.

The promoters decided to inflate the revenue and profit figures of Satyam. In the event, the company had a huge hole in its balance sheet, consisting of non-existent assets and cash reserves that have been recorded and liabilities that are unrecorded.

The Scam…On 7 January 2009, company’s previous Chairman Ramalinga

Raju resigned after notifying board members and the Securities and Exchange Board of India (SEBI) that Satyam's accounts had been falsified.

Raju confessed that Satyam's balance sheet of 30 September 2008 contained:

1. Inflated figures for cash and bank balances of Rs 5,040 crores as against Rs 5,361 crore reflected in the books.

2. An accrued interest of Rs. 376 crore which was non-existent. 3. An understated liability of Rs. 1,230 crore on account of funds was

arranged by himself. 4. An overstated debtors' position of Rs. 490 crore (as against Rs. 2,651

crore in the books.

ACTUAL DEBT WAS 2161.OVERSTATED 490 CRORES.

ACTUAL CASH IN

BANK WAS 321 CRORES,

INFLATED 5040 CR.

NO ACCRUED INTEREST 376.34 CR.

UNDERSTATED LIABILITY 1230 Cr.

Which was ARRANGED BY MR.RAJU

5,040 + 376 + 490

(Rs. Cr)Rs.

1,230 Cr

Rs. 7,136

Cr

Actual scenario• Despite the shareholders not being taken into confidence, the directors went ahead with the management's decision.

• The government too is equally guilty in not having managed to save the shareholders, the employees and some clients of the company from losing heavily.

• Simple manipulation of revenues and earnings to show superior performance.

• Raising fictitious bills for services that were never rendered.

• To increase the Cash & bank balance correspondingly.

• Operating profits were artificially boosted from the actual Rs 61 crore to Rs 649 crore.

Its financial statements for years were totally false, cooked up and...

• Never had Rs 5064 crores (US$ 1.05 Billion) shown as cash for several years.

• Its liability was understated by $ 1.23 Billions.

• The Debtors were overstated by 400 million plus.

• The interest accrued and receivable by 376 Millions never existed. So when the case came in light following are the actions that has been taken:

• Nasscum sets up panel to avoid satyam like case in future- formed a corporate Governance & ethics committee, chaired by N.R.Narayana Murthy (chairman and chief mentor of Infosys.)

• 8 Year ban on satyam to be reviewed.

Corporate governance issues @ Satyam

Governance issue at Satyam arose because of non fulfillment of obligation of the company towards the various stakeholders. It proved a poor relationship with all the stakeholders.

• It is well known that a shareholder has a right to get information from the organization, such information could be with respect to the merger and acquisition. Shareholders expect transparent dealing in an organization. They even have right to get the financial reporting and records.

• In the case of satyam, the above obligations were never fulfilled. The acquisition of Maytas infrastructure and properties were announced without the consent of shareholders. They were even provided with false inflated financial reports. The shareholders were cheated.

• Employees were shown with a inflated figure. The excess of employees in the organization were kept under VIRTUAL POOL who received just 60% of their salaries and several were removed.The entire scam had its impact on management. Questions were raised over the credibility of management.

•Any organization has its obligation towards the Government by means of timely payment of taxes and abiding by the rules and laws framed up by the Government. As per the case with Satyam , the company did not pay advance tax for the financial year 2009. As per the rule, the advance taxis to be paid 4 times a year; such was not fulfilled by them.

• SCS was blacklisted by world Bank over charges of Bribery. It was declared ineligible for contracts to providing

1. Improper benefit to bank staff.2. Failing to maintain documentation to support fees.

Ethical Issues Involved

• Not following corporate governance norms.• Tampering the financial data.• Misleading the shareholders fund.• Putting self-interest at the expense of shareholder’s interests.

Recommendations to avoid tragedies like Satyam in the future.

• The Satyam fiasco, makes it imperative that corrective measures need to be taken at the earliest to stem the rot.

• Government needs to set up a Board of Audit, is empowered to conduct surprise audit or on complaints of whistle-blowers.

• The same auditor should not be allowed to continue for more than 3 years with a Company.

• Cross-directorships must be banned. • Incentives should be provided to Whistle-blowers.• Laws should be made more stringent.• The Department of Corporate Affairs should create a pool of independent

directors with high integrity and prescribe for them adequate remuneration.• The conviction rate in corporate frauds, currently under a pathetic 5 per

cent, must be improved.• The law and administration should come down heavily on breach of trust

and fraud.

Conclusion

• Satyam scam is unparalleled in the corporate history of India, and as some keen corporate observers point out, the world itself.

• The idea of a corporation, and the values and principles that should guide its governance have hardly been imbibed by promoters.

• An careless administration, ill-equipped regulatory system and terribly delayed justice delivery process only make things easier for the corporate crooks to make a killing.

• Corporate governance framework needs to be implemented in letter as well as spirit. The increasing rates of white collar crimes demands stiff penalties and punishment.

• Creating an awareness of the large consequences of small lies may help some to avoid this trap.

THANK YO

U