http://rajeev2004.blogspot.in/2008/12/what-happened-at-satyam.

html

BANGALORE, India - The head of Indian outsourcing firm Satyam Computer Services resigned on Wednesday, disclosing that profits had been falsely inflated for years. Satyam's shares plunged almost 80 percent. India's biggest corporate scandal in memory threatened future foreign investment flows into Asia's third-largest economy and cast a cloud over growth in its once-booming outsourcing sector. Bombay's main benchmark index tumbled 7.3 percent and the Indian rupee fell. Ramalinga Raju, founder and chairman of India's fourth-largest software services exporter, said in a statement that Satyam's profits had been massively inflated over recent years but no other board member was aware of the financial irregularities. "If a company's chairman himself says they built fictitious assets, who do you believe here? This has put a question mark on the entire corporate governance system in India," said R.K. Gupta, managing director at Taurus Asset Management in New Delhi. Raju, who founded Satyam more than two decades ago and who took it public in 1991, said about $1 billion, or 94 percent of the cash on the company's books, was fictitious. The 54-year-old Satyam chairman came under close scrutiny last month after the company's botched attempt to buy two construction firms partly owned by its founders. Raju said on Wednesday that was a final attempt to resolve the problem of the fictitious assets. "It was like riding a tiger, not knowing how to get off without being eaten," Raju said in his letter, adding he was prepared to face up to the legal consequences. Satyam said its managing director and co-founder B. Rama Raju, Raju's brother, had also resigned. It did not give any reason for the resignation. The company's difficulties multiplied when the World Bank, a major customer, barred Satyam from new business, citing "improper benefits" given to World Bank officials. "In a bull market people forgot about it (corporate governance)," said Singaporebased Ashish Goyal, chief investment officer at Prudential Asset Management. "In a bear market chickens are coming home to roost, so it gets highlighted at a time like this." Just three months ago, Satyam received an award from a group of Indian directors for excellence in corporate governance.

By close of trade, Satyam's share value slumped to about $550 million from around $7 billion as recently as last June. New York-listed Satyam specializes in business software and back-office services for clients such as General Electric and Nestle. "I think there is no future for this stock. This case for India is similar to what happened to Enron in the U.S.," said Jigar Shah, senior vice-president at Kim Eng Securities. "It will not stop at Satyam. Many more companies will come into scrutiny like that. There is a strong possibility investments in India will be affected." The scandal set off a wave of condemnation from Indian market regulators and government officials, and prompted banker Merrill Lynch to terminate its engagement with Satyam. "It's going to impact the Indian outsourcing industry. Customers are going to be concerned about offshoring firms in India," said Sudin Apte, country head of Forrester in the western city of Pune. Satyam said it would go ahead with a planned board meeting on Saturday to consider a share buyback following a rash of broker downgrades even after its acquisitions were called off last month.

INTRODUCTION Till about two decades ago corporate governance was relatively an unknown subject. The subject came into prominence in the late 80s and early 90s when the corporate sector in many countries was surrounded with problems of questionable corporate policies or unethical practices. Junk Bond fiasco of USA and failure of Maxwell, BCCI and Polypeck in UK resulted in the beginning of codes and standards on corporate governance. The USA, UK and number of other developed countries reacted strongly to the corporate failures and codes & standards on corporate governance came to the centre stage. Enron debacle in 2001 and number of other scandals involving large US companies such as the Tyco, Quest, Global Crossings, the World.Com and the exposure of auditing lacunae, which led to the collapse of the Andersen, triggered the reform process and resulted in the passing of the Public Accounting Reform and Investor Protection Act of 2002 known as SarbanesOxley (SOX) Act, 2002 in USA. BACKGROUND On 24th June 1987, Satyam Computer Services Ltd (Popularly known as Satyam) was incorporated by the two brothers, B Rama Raju and B Ramalinga Raju1, as a

private limited company with just 20 employees for providing software development and consultancy services to large corporations (the company got converted into public in 1991). During the year 1996, company promoted four subsidiaries including Satyam Renaissance Consulting Ltd, Satyam Enterprise Solutions Pvt. Ltd., and Satyam Infoway Pvt. Ltd. Satyam Computer Services Ltd in 1997 was selected by the Switzerland-based World Economic Forum and World Link Magazine as one of India's most remarkable and rapidly growing entrepreneurial companies. Satyam Infoway (Sify), a wholly owned subsidiary of Satyam Computer Services Ltd, was the first Indian Internet Company listed on NASDAQ. Mr. B. Ramalinga Raju, Chairman of Satyam, was awarded the IT Man of the Year 2000 Award by Dataquest. In 2001, Satyam became worlds first ISO 9001:2000 company to be certified by BVQI. In 2003, Satyam started providing IT services to World Bank and signed up a long term contract with it. IN 2005, Satyam was ranked 3rd in Corporate Governance Survey by Global Institutional Investors. DESIRED POLICY ACTIONS TO PREVENT ANOTHER SATYAM Some of the steps which could be taken to strengthen corporate governance are: have in all listed companies a code on ethics; independent regulatory body on the lines of the Public Company Accounting Oversight Board (PCAOB) of USA; rotation of external auditors in non-financial institutions; Reform Audit Education; split offices of chairman and CEO; encourage competent directors; abolish practice of nominating independent directors, exempt independent directors from vicarious liability; provide insurance cover to them; review the definition of independent director given in clause 49 of listing agreement; close supervision of rating agencies; superior Board practices, improve remuneration policy; legislative sanction to insider trading laws; introduce new audit standards; make audit committee strictly independent; prohibit political funding; install whistleblower system; introduce class action suit & compensation; make CSR compliance a 18 mandatory provision; have in place permanent PPP system, and enhance criminal and civil penalties.