Satyam Scam

Made By :-Jatin Garg

Cambridge School Noida (2010)

What Business Demands

Overview

• Introduction• Controversies• Black Faces of Indian IT• Satyam : Dec-2008 to Jan-2009• Understanding The Scam• Satyam – maytaS• Maytas - A Hole in the Ship• Satyam – Corporate Non – Governance• Role of Independent Directors• Satyam & Investment Decision• Satyam Fiasco• Satyam & PWC• Who Guards the Guardians?• Bibliography

Satyam was established in 1987.4th fastest growing IT company in India.9 % market share40,000 employeesRevenue $2.1 billion It is the first company of India listed in three International Exchanges i.e. NYSE, DOW and EURONEXT

Introduction

Major Satyam Clients

ControversiesBefore Accounting Scandal Of 2009

Maytas acquisitionIn 2008, Satyam attempted to acquire (Maytas Infrastructure and Maytas Properties) founded by family relations of company founder Ramalinga Raju for $1.6 billion, despite concerns raised by independent board directors. Both companies are owned by Raju's sons. This eventually led to a review of the deal by the government, a veiled criticism by the vice president of India and Satyam's clients re-evaluating their relationship with the company. Satyam's investors lost about INR 3,400 crore in the related panic selling. The USD $1.6 billion (INR 8,000 crore) acquisition was met with skepticism as Satyam's shares fell 55% on the New York Stock Exchange. Three members of the board of directors resigned on 29 December 2008.

World BankThe World Bank had banned Satyam from doing business with it for 8 years due to inappropriate payments to the World Bank's staff. The World Bank accused Satyam of giving improper benefits to its (the Bank's) staff and of failing to maintain documentation to support fees charged for its subcontractors. However, it clarified that Satyam was not involved in incidences of data theft or malicious attacks that had been made on the Bank's information systems.

Unpaid lawsuitUK mobile payments company Upaid Systems is suing Satyam for over 1 billion US dollars on complaints of fraud, forgery and breach of contract. on 9-December-2009 Satyam has settled the lawsuit with UPAID for $70MM, of which $45MM is payable upon regulatory approval, and the remaining $25MM is payable a year after the initial payment. The settlement requires Upaid to give Mahindra Satyam a worldwide royalty-free license on its patents, and provides for the dismissal of all pending actions including the litigation between the companies pending in the U.S. court.

Black Faces of Indian IT

Dinesh Dalmia(DSQ Software)

V Chandrashekharan(Pentamedia group)

Ramalinga Raju(Satyam)

Byrraju Ramalinga Raju is the biggest fraudster in the Indian software industry, but he is not the first.

Dinesh Dalmia, Vice-Chairman, DSQ Software, has been in jail for two years.

Pentamedia company promoter V Chandrasekaran was found to be in cahoots with tainted broker Ketan Parekh in rigging up share prices.

Satyam : Dec-2008 to Jan-2009

Understanding The Scam !The Balance Sheet as of September 30, 2008 Showed :-

Inflated (non-existent)cash and bank balances of Rs.5,040 crore (as against Rs.5312 crore reflected in the books)

An accrued interest of Rs.376 crore which is non existent

An understanding liability of Rs.1,230 crore on account of funds arranged by BR Raju

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

For the second quarter Satyam reported a revenue of Rs.2,700 crore and operating margin of Rs. 649 crore (24% of revenues).

As against the actual revenues of Rs.2,112 crore and an actual operating margin of Rs.61crore (3% of Revenues).

This has resulted in artificial, cash & bank balances going up by Rs. 588 crore in Q2 alone.

Satyam - maytaSIt is not a mere coincidence that maytaS is Satyam spelt in reverse way .As spelled out in Raju’s letter it was an effort to cover-up Satyam Fiasco.

Raju wanted to acquire Maytas in order to cover up the scam he was cooking, but failed miserably. After all isn’t Maytas a part of his family business? The answer lies in Maytas’s burgeoning growth in last 6-8 years. Maytas is a 2 decade old company. However it has been doing remarkably well for last 6-7 years. Projects worth billions are riding on them. Now talking about in appropriation of Satyam’s money. Raju showed a inflated gross margin in the period of July-December by almost 600 crores. meaning swollen records by over 1000 crores in a year. So it would take him about 5 or maximum 6 years to show an accumulated wealth of over 5000 crores (as stated in the records- Satyam’s supposed cash reserve). Thus, it comes out from here, that Raju must be syphoning the money from Satyam to Maytas since last 6 years. And now he wanted to buy it so that he can cover up Unfortunately, it didn't happen.

Maytas - The Hole in the Ship

• It all started on 16.12.2008, when Ramalinga Raju thought, buying an infrastructure firm made sense!

• He, then, nailed a hole in a sinking ship Satyam was.  • It is a common affair in Indian Inc to make such pointless investments to

divide the dividends by manipulating profit margins. • But the scale of this scam needs to take a deeper look in the fiasco Satyam

created.• Satyam’s Maytas bid dragged media in to it. • Satyam intended to buy entire stakes in Maytas Properties for $1.3 Billion and

51% stakes in Maytas Infra for another $300 Million. • Raju and his immediate family members own up to 35% stakes in Maytas. • The deal was to be financed from “surplus” cash. • Investors and the Fund managers were shocked that the bidding process was

carried without informing them.  • Raju said that the deal was in complete interest of the investors and informing

them was “unnecessary”. • On following days, Satyam’s share prices started falling reflecting share

holders disbelief.• Satyam’s share prices nosedived in U.S.A. after the bid was announced. • The interrogation by investors forced Raju to reconsider his decision, which he

pulled off within hours. • World Bank, one of Satyam’s esteemed customers banned it from providing

service for next 8 years.

• Satyam’s image in front of its customers, investors, and more importantly, the entire nation got dented.

• Share prices tumbled even further by about 16%. The aborted buy-out deal and the ban indicated that something seriously went wrong at the board level.

• Valuation of Maytas turned out to be fraudulent. • All of the four Firms, including Merry Lynch and JP Morgan denied

having done any Valuation. • The move sparked row between the institutional investors from across

the world and Sataym’s board members, • Ultimately lawsuits followed valuation and now judicial custody of

Ramaling Raju and his brother. • One of company’s two independent directors T.R. Prasad defended the

decision of buy-out believing it to be increasing share value,• Another director Mr. Shrinivasan quit before it was too late. • Vinod Dham (fouder of Pentium) was also one of the non-executive

directors of Satyam who later resigned in the wake of controversy. • Two days after the controversial deal, Indian government ordered

separate probe in to the matter .• On 7th January, Ramalinga Raju wrote a letter to all the board members

and SEBI, informing them about inflated cash, faked profit margins and accounting malpractices .

Corporate Non - Governance

• India did need a blow-out on a scale like Satyam to bring home the painful reality of the generally rotten state of corporate governance and the vicious promoter-politician nexus endemic across different sectors of the economy.

• It would be naive to believe in the comments by select industry leaders and select politicians that the Satyam case is one-off and that the entire Indian IT sector (or for that matter, the entire Indian business fraternity) cannot be tarred by the same paintbrush.

• Satyam most certainly is not a only one-off high profile situation that India has been forced to face. It is not the first one in the last 25 years, and will certainly not be the last of the high profile ones in the next few years.

• To start with, we must accept that Satyam is our problem and we are expected to find the solution ourselves.

• It may be easy to blame Price Waterhouse, that they did not perform their duties as auditors correctly. We must accept that there would be many very large audit firms, who may also be routinely turning a blind eye to the shenanigans of various promoters.

• We hope, that now, & perhaps finally, the regulatory systems and bodies responsible for ensuring compliance will start to function as they should have done before the Satyam blowout.

Role of Independent Directors

• The role of independent directors is now under close scrutiny. This has happened due to one of the less reported nexus between the Indian promoters, senior bureaucrats especially those from IAS, and senior bankers especially those from large PSUs. Retired civil servants are used as glorified liaison officers.

• Hopefully, the boards, in future, will be composed more on the basis of business-specific relevant competence rather than the retirement-eve titles.

• Independent directors of Satyam Computers, who agreed to the company's proposal of buying out two promoter-related companies, failed to be independent in 'spirit',

• The Satyam board, including its five independent directors had approved the founder's proposal to buy 51 per cent stake in Maytas Infrastructure and all of Maytas Properties, owned by the family members of Satyam Chairman B Ramalinga Raju.

• Independent directors need to be more active and directors need to maintain their independent spirit." Corporate governance should be a "principle-based" system rather than being "rule-based,"

• In instances of larger issue of change in the entire business focus of the company, the Independent Director should take the decision to the shareholders before approving.

• Independent directors need to be vigilant in protecting minority interest and be `brave' enough to take adequate steps. "It is cumulative responsibility of the independent directors to protect the interest of shareholders and strategy of the organisation.

Investment Decision

• The role of Satyam's independent directors is termed as `unpardonable‘. Acting against the interest of larger shareholders especially when the promoters themselves owned a little more than 8 per cent stake in the company and institutional investors owned more than 45 per cent.

• As do the independent directors on the boards. One can hardly ask for more qualified people than Vinod Dham and Krishna Palepu. But the fact that they voted in favour of the Satyam-Maytas proposal is shocking. What's the point in having independent directors if they can't guide the management on critical issues?

• Investors were furious about the way Satyam founders undertook the move to invest in a promoter-related company and wanted to know why the management failed to obtain prior consent of shareholders before deciding to invest, which amounted to change of `object clause' of the company.

• "Enforcement is important. It is no use making more and more rules and laws if you are not willing to enforce it, laws in India are quite strong."

• The investors' activism after Satyam's decision is appreciative.• In the case of Satyam's decision to acquire Maytas firms, Ramalinga Raju said

the combined entity would deliver greater shareholder value. • But the correct perception was that it will benefit Maytas promoters at the cost of

Satyam's shareholders. This was reflected in the heavy beating Satyam's stock received after the announcement of the deal.

• Defending the decision, one of the company's executive said, "Satyam, as a company, was built over the years." However, it is common knowledge that it takes years to build a reputation of a company, which can be eroded overnight with one wrong move.

Satyam Fiasco

• It‘ was audacious, preposterous, outrageous and shocking event, the Satyam Computer-Maytas deal. That a promoter, with less than 9 per cent stake in his company, would have the nerve to try and transfer $1.6 billion of cash to two completely unrelated businesses owned by his sons is unthinkable. And to pass that off as a 'wonderful' opportunity! Satyam. Chairman Ramalinga Raju says he didn't anticipate investors' reactions and was surprised.

• In the past institutional investors in this country haven't really spoken up against corporate misbehaviour. Even Sterlite's attempt, in September this year, to transfer the high-quality aluminum business and merchant power to Malco, in return for the low-quality, high cost, copper Konkola mines, again without so much as a by-your-leave, didn't anger shareholders.

• In that instance too, the promoters were enriching themselves, at the cost of minority shareholders, but no mutual fund really said so. There have been numerous other instances, admittedly of smaller consequence, that should have provoked mutual funds to ask questions.

• Now, the same institutional shareholders have found their tongues. This time, their stake is big - just over 50 per cent. Also, they realise how vulnerable and helpless they are because, had Ramalinga Raju wanted, he could have pushed through the deal. And no one could have stopped him, because the board had voted unanimously.

• Institutional investors have their own vested interests. It's well-known that there are back-to-back arrangements between mutual funds and corporations: Funds buy into the firm's stock in return for investments in their income schemes. Instances of stock being dumped just before the bad news is out or shares being snapped up before the good news is flashed aren't always 'coincidental.

• But now it's time institutional shareholders got together to show promoters that they simply cannot get away with this kind of behaviour. In India it only needs a 10 per cent stake to call an EGM. The shareholders need to fight this one out. If they let Satyam off the hook, Indian promoters will continue to believe they can get away with anything. As it is, most managements in India have scant regard for even the basics of corporate governance or respect for minority shareholders.

• Managements should be asked to take shareholders into confidence for any unrelated diversification, with the definition of 'unrelated' clearly spelt out.

Price waterhouse Coopers

• “It is hard to believe that he (Raju) was the lone perpetrator all along. In any company, the CFO (chief financial officer) and financial committee members would have full access to balance sheet details,”.

• Satyam has a presence in 66 countries and is listed on the New York Stock Exchange (NYSE).“A company filing returns in the US according to (its) Security Exchange Commission (SEC) guidelines could not have done this without the cognizance of key executives,”

• “It’s impossible to go by the claim that none of the board members had any clue about the inconsistencies in Satyam’s balance sheet; if the fraud went on for ’several years’, it won’t be wrong to rule out that most of them, if not all, had some idea about the happenings.”

• Fingers are also being pointed at the possibility of the auditors Price Waterhouse Coopers (PWC) being hand in glove with the conspirators in the multi-crores scam. It is highly unlikely auditors did not have any idea about the scam brewing for so many years.

• Auditors will have to be scrutinised. PWC can only be unaware of the loose balance sheet if Raju forged and doctored documents to support fraudulent claims.

• Credibility of audit firms has come into question as the amount was too big for any audit firm not to notice. If the audit firm claims that they didn’t know about then their capabilities would come under the scanner,

• The audits were conducted by Price Waterhouse Cooper in accordance with applicable auditing standards and were supported by appropriate audit evidence," the firm said in a statement.

• As per Satyam's accounts, vetted by Price Waterhouse, auditors were paid Rs 3.73 crore during 2007-08 as against Rs 3.67 crore in the previous fiscal.

• The auditor's report, signed on April 21, 2008, by Price Waterhouse partner Srinivas Talluri, said: "... We have neither come across any instance of fraud on or by the company (Satyam), noticed or reported during the year, nor we have been informed of such case by the management."

• The auditor's report also said: "These (Satyam's) financial statements are the responsibilities of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

• "We conducted our audit in accordance with the auditing standards generally accepted in India. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material mis-statments," it said.

• While Raju in his statement to the board and SEBI had disclosed that he was quitting because of the failure in bridging the gap between fictitious and real assets, the auditors' report said that the company was maintaining proper records, showing full particulars, including quantitative details and situations of fixed assets.

• Unprecedented changes in the accounting profession and professional services in general mean the current approach to safeguarding shareholder interests as well as the other stakeholders of the modern publicly traded global enterprise is no longer efficient nor effective.

Who Guards the Guardians?

• Satyam had been hunting for a buyer for a while. These same reports cited Tech Mahindra and HCL as possible suitors. HT learnt that these companies raised serious questions about the authenticity of Satyam’s books and sought clarifications. This may have forced Raju’s hands.

• Merrill Lynch was hired to advise on alternatives to a recent failed acquisition of a firm called Maytas. But, they may have known what's up. And resigned the engagement, prior to the Raju’s stunning disclosure.

• In the Satyam affair, where was the billion of missing cash, and why didn’t the auditors catch the discrepancy? Satyam was audited by a Big Four firm – PwC. However, if fraud is involved in the Satyam affair, there may be an argument that the audit firm was defrauded as well.

• There is complicity, incompetence or both with either the auditors or their customers or both. Inadequate procedures over confirmation indicates that, the auditors missed something really big.“

• Price Waterhouse gave wrong PAN to Satyam, as it turns out, PWC gave Their Bangalore PAN Number to Satyam instead of New Delhi. PWC Hyderabad falls in New Delhi jurisdiction.

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