Satyam Saga
Confession – January 7th , 2009
Background
 It was set up as Private Limited Company by Ramalingam Raju
in 1987 which was later in 1991 recognized as public limited
company.
 One of the major providers of IT service in India which
provides Software development service , embedded service ,
engineering service , system integration , ERP solution ,
Enterprise Application Integration , Customer relationship , ecommerce and consulting.
 First company listed on NYSE, EURONEXT and NSE
 First Indian company to list its American Depositories Shares
Achievement & Awards
Year
• Description
2000
•World Economic Forum identifies Satyam as one of the hundred
leading pioneering technology company
•HRD awards Ramalinga Raju as “ The IT Man of the Year “
2002
•Top choice by SAP Support by GIGA research group
2003
•Facilitated with Lotus Award
•Outsourcing contract awarded by World Bank
2004
•Ranked amongst top 10 best employers by CNBC
Contd..
2005
2007
2008
• Ranked amongst top 13 best managed
company by Forbes
• Largest global development centre outside
India being operations
• Ranked number one in ITO global
processing consulting vendor
• Raju wins the Ernst & Young Entrepreneur of
the year
• First company listed on NYSE and NSE
• First Indian company to list its American
Depositories Shares
Fall of Satyam
Three Phases of the
Scam
First Phase :1999-2001
Ascent of Indian IT sector on Y2K
phenomenon
Second Phase :2001-2005
Maintaining Growth
Third Phase :2007
The Debacle
Why Confession ?
 Recession drained the liquidity to run the show
 Out standings were piling up
 Unmanageable gap between actual and book profit
 “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 a
take-over, thereby exposing the gap. It was like riding a tiger, not knowing how to
get off without being eaten”.
Who are the responsible parties?
Indian
Bankers
Ramalingam
Raju
Board of
Directors
Auditors
Fabricated Income Statements
‘Creative Account Practice’
• Details of cash balances with Scheduled banks are not there in the
Annual report
• Question raised by Equity analyst Kawaljeet Saluja -$500 mn cash parked
in current account
Fake FD receipts
The
money
has
already
vanished
Take
fake FD
receipts
Repeat the
procedure
At the end
show the
original FD
receipts
Park the
Money
in other
Bank
Tell to
Banks FD
receipt is
Lost
Ask for
Duplicate
Receipts
Use the
Duplicate to
Withdraw
money
Chairman Raju’s role
 Inflated billing to customers
 Non-existent cash & bank balances $ 1 bn
 Overstated Debtors $ 100 million
 Operating margin shown high at 24% in Q2 (Sept 2008) as against 3% real
profit margin
 Such manipulation done in earlier years( 6 yrs-$ 1.2 Bn)
 Increased costs to justify higher level of operations.
 Actual employee strength was 40000 but shown at 53000.
 Attempt to merge Son’s Company ‘Maytas’ with huge land Bank to bridge the
gap failed
Role of Director
 Satyam's Board of Directors consisted of nine members including Krishna Palepu
Harvard Professor and corporate governance expert, Rammohan Rao, the Dean of
the Indian School of Business, and Vinod Dham, co-inventor of the Pentium
Processor.
 Satyam revealed that it did not have a financial expert on the board during 2008.
 The Board of Directors were not independent.
 The Board first came under fire on December 16, 2008 when it approved Satyam's
purchase of real estate companies in which Mr. Raju owned a large stake.
 Furthermore, the Board should have caught some of the same red flags.
Role of Auditors
 Global auditing firm Price Waterhouse Coopers ("PWC") audited Satyam's
books from June 2000 for nearly 9 years and did not uncover the fraud, whereas
Merrill Lynch discovered the fraud as part of its due diligence in merely 10 days
 PWC signed Satyam's financial statements and was responsible for the
numbers under Indian law. One particularly troubling item concerned the $1.04
billion that Satyam claimed to have on its balance sheet non interest bearing
securities.
 It appears that the auditors did not independently verify with the banks in which
Satyam claimed to have deposits.
 The fraud went on for a number of years and involved both the manipulation of
balance sheets and income statements. Whenever Satyam needed more income
to meet analyst estimates, it simply created fictitious sources and it did so
numerous times without the auditors ever discovering the fraud.
Role of Bankers
 The company's bankers -- and it has a whole bunch of them, considering it is a huge
company -- too have been shown in poor light.
 Satyam's books showed cash to the tune of over Rs 5,300 crore (Rs 53 billion) in its
banks.
 Satyam's banks -- ICICI Bank, HDFC Bank, Bank of Baroda, etc -- were supposed to
provide bank statements on a quarterly basis and bank certificates on basis of which
auditors go ahead and signed the balance sheet.
Maytas Infra Ltd
Maytas Properties Ltd
 An infrastructural development,
construction and project
management company
 A property development company
 Founded on May 6 , 1988 by
Ramalinga Raju ‘s kins
 Run by Teja Raju ,son of
Ramalinga Raju
 Raju’s hold 36.64 per cent while
institutional holding is 10.92 per
cent
 Satyam planned to acquire 51 per
cent stake for $0.3 billion
 Founded in 2005 by Ramalinga
Raju ‘s kins
 Raju’s family owns 35% of Maytas
properties
 Satyam planned to acquire 100 per
cent stake for $1.3 billion
 In 2008 , Satyam proposed to acquire Maytas Infrastructure Ltd and
Maytas Properties founded by family relations of company founder
Raju for $1.6 billion
 Intention was to bail out Satyam by covering up the irregularities in
the books of accounts such as inflated cash balance etc
 This was met with strong opposition from independent directors and
shareholders and ultimately proposal was withdrawn
 It was a major blow to Satyam ’s credibility as it was unethical and
violated corporate governance laws
Consequences of confession
 Investors- Panicked as Stock plummeted & Class action suits filed in US
 Employees- stranded in many ways- morally, financially, legally and socially
 Customers- shocked and worried about the project continuity, confidentiality and
cost over run
 Bankers - concerned about recovery of financial and non-financial exposure and
recalled facilities
 Government- worried about image of the Nation & IT Sector affecting faith to
invest or to do business
Anchoring the downfall
Government
ICAI
Tech Mahindra
• Board
Restructuring
• SFIO investigation
• Delliote & KPMG
• Action against
PWC
• S Gopalakrishnan
and V S Prabhakar
Gupta ban for life
• Rs1757 crore
-> 31% stake
• Turnaround of
the company
Recommendations : Auditor
Appointment and remuneration of auditors should be
done by stock exchanges.
Involvement of Forensic auditors
Implementation of Investigative audit techniques
Audit must be conducted in accordance with
AAS(Auditing and Assurance Standard)
Rotation of auditors with limited tenure
Recommendations: Management
 Independent director must be chosen from a pool of qualified
professionals
 The tenure of Independent director must be finite
 360 degree feedback system should be used
 Market driven compensation guidelines should be disclosed
Recommendations: Regulators
▶ Clear guidelines should be given for admission of
watchdogs
▶ Special investigation should be undertaken of top 100
hundred companies and some other select companies to
examine their balance sheets.
▶ Amending laws and regulations for improved corporate
governance.
T
E
A
M
M
E
M
B
E
R
S
Avinash Kumar
Kanchan
Nishit Kumar
Wg. Cdr. R. K. Vashisht
Siddhant Goyal
Shalabh Gupta
Shivans Gupta
Surabhi Sehgal
Vijendra Pandey