THE SATYAM SCANDAL

BUSINESS ETHICS AND GOVERNANCE

INTRODUCTION

Company Profile

Set up in the year 1987 by B.Ramalinga Raju.

India’s 4th biggest software company.

On 26th August, 1991 it was converted into a Public Limited Company and went for PUBLIC ISSUE in 1992.

BSE IPO oversubscribed 17 times when made public.

It is listed in BSE, NSE, NYSE(New York stock exchange) and Euronext (Paris, and Amsterdam).

The company employs 53,000 IT professionals across development centers in 6 continents.

It serves over 654 global companies, 185 of which are Fortune 500 corporations.  

Company Profile

B. Ramalinga RajuFounder & Chairman, Satyam

Computers Ltd.

B. Rama RajuPromoter & CEO, Satyam

Computers Ltd.

What is CSR?

CSR also known as corporate citizenship, is a form of corporate self-regulation integrated into a business model.

Ideally, CSR policy functions as a built-in, self-regulating mechanism allowing business to monitor and ensure its adherence to law, ethical standards, and international norms.

Business would embrace responsibility for the impact of their activities on its various stakeholders.

CSR at Satyam

Byrraju Foundation, a non governmental organisation dedicated to social transformation in rural areas.

Satyam won the Asian Corporate Social Responsibilty Award under poverty alleviation category through the GramIT project ( a rural BPO program) – an initiative by Byrraju Foundation.

CSR at Satyam

EMRI (Emergency Management and Research Institute)

EMRI is an initiative of byrraju foundation which was initiated in August 2005

 The only professional Emergency Service Provider in India today.

 It handles medical, police and fire emergencies through the 1-0-8 emergency service.

 

Corporate Governance

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed.

Corporate Governance Of Satyam Vision Statement “ To leverage information, knowledge and

technology to enhance human endeavor”

Core values of Satyam:

I. Belief in PeopleII. EntrepreneurshipIII. Customer OrientationIV. Pursuit of Excellence...

Controversies

Maytas acquisitionWorld BankUpaid lawsuitAccounting scandal of 2009

World Bank Fiasco

The 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. 

Upaid Lawsuit

UK 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.

Maytas Takeover Controversy

Maytas Infrastructure

Raju’s hold 36.64 per cent while institutional holding is 10.92 per cent

The company had raised Rs 327.45 crore through IPO.

It had a turnover of Rs 1,660 crore and net profit of Rs 100 crore in the last financial year

Satyam planned to acquire 51 per cent stake for Rs 1, 440 crore or $0.3 billion

Mr. Teja Raju(VC)

Maytas Properties

Raju’s family owns 35% of Maytas properties

Founded in 2005, it has a land bank of 6,800 acres

B. Rama Raju Jr. (VC)

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(To prevent the occurrence) 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.

Accounting Scam

Satyam faced is the biggest fraud in India's corporate history.

The company management, mainly disgraced chairman B Ramalinga Raju, kept everyone in the dark for a decade.

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

Why on 7th Jan 2009?

• DSP Merrill Lynch informed SEBI about Material irregularities in Accounts on

6th Jan

• Minutes of Meeting of 16th December,2008 were not submitted to RoC-(This created some doubts)

• Hearing of Upaid- satyam case on 8th Jan at the US court

The guilty

The promoters

Since the promoters, in this case, held only about 8 percent shares, their idea to push through the Maytas acquisition deal was defeated by an angry lot of shareholders.

Directors and independent directors

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.

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

The decision of acquisition was, however, reversed 12 hours later after investors dumped Satyam's stock and threatened action against the management.

Satyam’s auditors So what were the auditing company,Pricewater

houseCoopers, doing? PwC has written a letter to the BOD of Satyam

that its audit may be rendered "inaccurate and unreliable" due to the disclosures made by Satyam's (ex) Chairman..

Is it real? How could Auditors miss the gaping hole when –

Auditors do bank reconciliation to check whether the money has indeed come or not.

They check bank statements and certificates.

So was this a total lapse in supervision or were the bank statements forged?

The bankers

If the auditors were conned, it means that either the bank statement and certificates were forged

Satyam's banks -- ICICI Bank, HDFC Bank, Bank of Baroda, etc

The SEBI

The SEBI had in December given a clean chit to Satyam in the probe on violation of corporate governance law.

Investment Bankers

Investment banker DSP Merrill Lynch was appointed by Satyam to look for a partner or buyer for the company.

DSP Merrill terminated its

engagement with the company soon after it found financial irregularities.

Merrill Lynch also sent the information and the reason for their termination of the contract to the Bombay Stock Exchange, SEBI and even the New York Stock Exchange.

The government

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.

Stakeholders affected

Stakeholders Model

SATYAM

Shareholders

Directors

Customers

Employees

Competitors

Public

Employees

It is nights and heartburns for the over 53,000 employees of Satyam Computers as they conjure up worst case scenarios like non-payment of salaries, project cancellations , layoffs and equally bleak prospects outside.

As the company's management tries to reassure shocked employees, jobs sites have got flooded from resumes of hundreds of Satyam employees.

Job consultants believed that in the current economic climate , Satyam employees might have to settle for lower salaries outside.

It is an employers' market.

Shareholders

An accounting fraud was the last thing investors in India would have imagined as a trigger for a reversal in investor sentiment.

This scam is likely to affect the image of Indian companies among foreign portfolio investors.

The share prices of Satyam saw a sharp fall after Raju’s confession. The share prices fell down from 190 to 30 (approximately) in a matter of a day.

Clients

Satyam Computers’ clients include General Electric, Nissan Motors and General Motors.

The debacle(sudden downfall) may force the clients to review their contracts and look at other offshore suppliers.

Australian telecom company Telstra, had already decided to split a new contract worth $200 million among three Indian vendors.

Another partner and customer of the company, Cisco Systems said that a proposed investment in Satyam Global Lifenet could be in jeopardy(risk of loss).

Public

The incident has hurt public perception of Corporate India and is likely to hurt shareholders' confidence in India Inc.

It resulted in incalculable and unjustifiable damage to Brand India and Brand IT in particular.

It is likely to dent the public credibility about the concepts of corporate governance in India

Directors

Satyam's CFO Srinivas Vadlamani – already arrested.

Many others after this scam were also arrested, mainly due to their own mistakes of not actively participating in the management of the organisation.

Competitors

The competitors were mainly benefited positively from this scam.

The Satyam Scam was also lesson to learn for the other organisations in the IT sector

NEW BOARD APPONTED..

On 11 January 2009, the government nominated noted banker Deepak Parekh, former NASSCOM chief Kiran Karnik and former SEBI member C Achuthan to Satyam's board.

The Takeover Of Satyam

Mahindra Satyam

Tech Mahindra paid Rs1757 Crorefor a 31% stake in the company, at Rs 58 per share.

Satyam Computer Services zoomed 15% to Rs 54.20 ahead of theannouncement of the highest bidder for the company on April 13, 2009.

In India this moment was full of praise for the manner and speed with which the reconstituted board of Satyam Computer Services found a strategic investor .

New policies

1.1 Compliance with Laws, Rules and Regulations.

2.1 Legal, Honest and Ethical Conduct.

2.4 Suspected Fraudulent behavior.

What Has India learnt?

One of the main factors that is prompting independent directors to sit up and take active interest is the fear of punitive action, like the one that Satyam’s independent directors faced after promoter Ramalinga Raju owned up to his fraud.  There has certainly been a bit of a change in the last few months in the way boards are functioning.

Audit committees are being more careful to ensure that the external auditors perform their role more diligently. We also find that the chairman of the board and members of the audit committee are being more careful and thorough in their questioning. Boards, too, are taking care to ensure that there are no slip-ups at their end.

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