Satyam scandal

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The Satyam Computer Services scandal was publicly announced on 7 January 2009,
when Chairman Ramalinga Raju confessed that Satyam's accounts had been falsified.
Contents
[hide]
1 Aftermath
2 New CEO and special advisors
3 Acquisition by Mahindra Group
4 Restatement of Results
5 See also
6 References
7 External links
[edit]Aftermath
Raju had appointed a task force to address the Maytas situation in the last few days before
revealing the news of the accounting fraud. After the scandal broke, the then-board
members elected Ram Mynampati to be Satyam's interim CEO. Mynampati's statement on
Satyam's website said:
"We are obviously shocked by the contents of the letter. The senior leaders of Satyam
stand united in their commitment to customers, associates, suppliers and all shareholders.
We have gathered together at Hyderabad to strategize the way forward in light of this
startling revelation."
On 10 January 2009, the Company Law Board decided to bar the current board of Satyam
from functioning and appoint 10 nominal directors. "The current board has failed to do what
they are supposed to do. The credibility of the IT industry should not be allowed to suffer."
said Corporate Affairs Minister Prem Chand Gupta. Chartered accountants regulator ICAI
issued show-cause notice to Satyam's auditor PricewaterhouseCoopers (PwC) on the
accounts fudging. "We have asked PwC to reply within 21 days," ICAI President Ved Jain
said.
On the same day, the Crime Investigation Department (CID) team picked up Vadlamani
Srinivas, Satyam's then-CFO, for questioning. He was arrested later and kept in judicial
custody
[1]
.
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.
Analysts in India have termed the Satyam scandal India's own Enron scandal.
[2]
. Some
social commentators see it more as a part of a broader problem relating to India's caste-
based, family-owned corporate environment
[3]
.
Immediately following the news, Merrill Lynch (now a part of Bank of America) and State
Farm Insurance terminated its engagement with the company. Also, Credit
Suisse suspended its coverage of Satyam.
[citation needed]
. It was also reported that Satyam's
auditing firm PricewaterhouseCoopers will be scrutinized for complicity in this scandal.
SEBI, the stock market regulator, also said that, if found guilty, its license to work in India
may be revoked.
[4][5][6][7][8]
Satyam was the 2008 winner of the coveted Golden Peacock
Award for Corporate Governance under Risk Management and Compliance Issues,
[9]
which
was stripped from them in the aftermath of the scandal.
[10]
The New York Stock
Exchange has halted trading in Satyam stock as of 7 January 2009.
[11]
India's National
Stock Exchange has announced that it will remove Satyam from its S&P CNX Nifty 50-
share index on 12 January.
[12]
The founder of Satyam was arrested two days after he
admitted to falsifying the firm's accounts. Ramalinga Raju is charged with several offences,
including criminal conspiracy, breach of trust, and forgery.
Satyam's shares fell to 11.50 rupees on 10 January 2009, their lowest level since March
1998, compared to a high of 544 rupees in 2008
[13]
. In New York Stock Exchange Satyam
shares peaked in 2008 at US$ 29.10; by March 2009 they were trading around US $1.80.
The Indian Government has stated that it may provide temporary direct or indirect liquidity
support to the company. However, whether employment will continue at pre-crisis levels,
particularly for new recruits, is questionable
[14]
.
On 14 January 2009, Price Waterhouse, the Indian division of PricewaterhouseCoopers,
announced that its reliance on potentially false information provided by the management of
Satyam may have rendered its audit reports "inaccurate and unreliable"
[15]
.
On 22 January 2009, CID told in court that the actual number of employees is only 40,000
and not 53,000 as reported earlier and that Mr. Raju had been allegedly withdrawing INR
20 crore rupees every month for paying these 13,000 non-existent employees
[16]
.
[edit]New CEO and special advisors
On 5 February 2009, the six-member board appointed by the Government of India named
A. S. Murthy as the new CEO of the firm with immediate effect. Murthy, an electrical
engineer, has been with Satyam since January 1994 and was heading the Global Delivery
Section before being appointed as CEO of the company. The two-day-long board meeting
also appointed Homi Khusrokhan (formerly with Tata Chemicals) and Partho Datta,
a Chartered Accountant as special advisors
[17][18]
.
[edit]Acquisition by Mahindra Group
On 13th April 2009, via a formal public auction process, a 46% stake in Satyam was
purchased by Mahindra & Mahindra owned company Tech Mahindra, as part of its
diversification strategy. Effective July 2009, Satyam rebranded its services under the new
Mahindra management as "Mahindra Satyam" with a new corporate website
www.MahindraSatyam.com.
C.P Gurnani is the current CEO.
[edit]Restatement of Results
As a result of the scandal, under the directions of the new Mahindra management team,
Satyam Computer Services restated its financial results for the period 2002 to 2008. These
restated results were published in September 2009.
[edit]See also
Corruption in India
[edit]


Satyam Chief Admits Huge Fraud

Adeel Halim/Bloomberg News
Ramalinga Raju, chairman of Satyam Computer Services, resigned Wednesday after disclosing he had systematically
falsified accounts of the giant outsourcing company.
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By HEATHER TIMMONS and BETTINA WASSENER
Published: January 7, 2009
NEW DELHI Satyam Computer Services, a leading Indian outsourcing company that
serves more than a third of the Fortune 500 companies, significantly inflated its earnings
and assets for years, the chairman and co-founder said Wednesday, roiling Indian stock
markets and throwing the industry into turmoil.
Related
Floyd Norris: A Corporate Hero Admits Fraud (January 7, 2009)
Company Statement (pdf)
Add to Portfolio
Satyam Computer Services Limited
Go to your Portfolio
The chairman, Ramalinga Raju, resigned after revealing that he had systematically falsified
accounts as the company expanded from a handful of employees into a back-office giant
with a work force of 53,000 and operations in 66 countries.
Mr. Raju said Wednesday that 50.4 billion rupees, or $1.04 billion, of the 53.6 billion rupees
in cash and bank loans the company listed as assets for its second quarter, which ended in
September, were nonexistent.
Revenue for the quarter was 20 percent lower than the 27 billion rupees reported, and the
companys operating margin was a fraction of what it declared, he said Wednesday in a
letter to directors that was distributed by the Bombay Stock Exchange.
Satyam serves as the back office for some of the largest banks, manufacturers, health care
and media companies in the world, handling everything from computer systems to customer
service. Clients have included General Electric, General Motors, Nestl and the United
States government. In some cases, Satyam is even responsible for clients finances and
accounting.
The revelations could cause a major shake-up in Indias enormous outsourcing industry,
analysts said, and may force many large companies to investigate and perhaps revamp their
back offices.
This development is going to have a major impact on Satyams business with its clients,
said analysts with Religare Hichens Harrison on Wednesday. In the short term we will see
lot of Satyams clients migrating to competition like Infosys, TCS and Wipro, they said.
Satyam is the fourth-largest outsourcing firm after the three named.
In the four-and-a-half page letter distributed by the Bombay stock exchange, Mr. Raju
described a small discrepancy that grew beyond his control. What started as a marginal gap
between actual operating profit and the one reflected in the books of accounts continued to
grow over the years. It has attained unmanageable proportions as the size of company
operations grew, he wrote. It was like riding a tiger, not knowing how to get off without
being eaten.
Mr. Raju said he had tried and failed to bridge the gap, including an effort in December to
buy two construction firms in which the companys founders held stakes. Speaking of a
deep regret and a tremendous burden, Mr. Raju said that neither he nor the co-founder
and managing director, B. Rama Raju, had taken one rupee/dollar from the company. He
said the board had no knowledge of the situation, nor did his or the managing directors
families.
The size and scope of the fraud raises questions about regulatory oversight in India and
beyond. In addition to India, Satyam has been listed on the New York Stock Exchangesince
2001, and on Euronext since January of 2008. The company has been audited by
PricewaterhouseCoopers since its listing on the New York Stock exchange.
Satyam has been under close scrutiny in recent months, after an October report that the
company had been banned from World Bank contracts for installing spy software on some
World Bank computers. Satyam denied the accusation but in December, the World Bank
confirmed without elaboration on the cause that Satyam had been banned. Also in
December, Satyams investors revolted after the company proposed buying two firms with
ties to Mr. Rajus sons.
On Dec. 30, analysts with Forrester Research warned that corporations that rely on Satyam
might ultimately need to stop doing business with the company. Firms should take the
initial steps of reviewing the exit clauses in their current Satyam contracts, in case
management or direction of the company changed, Forrester said.
The scandal raised questions over accounting standards in India as a whole, as observers
asked whether similar problems might lie buried elsewhere. The risk premium for Indian
companies will rise in investors eyes, said Nilesh Jasani, India strategist at Credit Suisse.
R. K. Gupta, managing director at Taurus Asset Management in New Delhi, told Reuters: If
a companys chairman himself says they built fictitious assets, who do you believe here?
The fraud has put a question mark on the entire corporate governance system in India, he
said.
News of the scandal quickly compared with the collapse of Enron sent jitters through
the Indian stock market, and the benchmark Sensex index fell more than 5 percent. Shares
in Satyam fell more than 70 percent.
Just a few months ago, Mr. Raju was trying to persuade investors that the company was
sound. In October, he surprised analysts with better-than-expected results, saying he was
pleased that the company had achieved this in a challenging global macroeconomic
environment, and amidst the volatile currency scenario that became reality.
But by late December, it seems he had little support from the board or investors, and four of
the companys directors resigned in recent weeks. Satyam recently retained Merrill Lynch
for strategic advice, a move that is generally a precursor to a sale.
Mr. Raju said in his statement that he sincerely apologized to shareholders and employees
and asked them to stand by the company. I am now prepared to subject myself to the laws
of the land and face consequences thereof, he said.
Heather Timmons reported from New Delhi and Bettina Wassener from Hong Kong.



Hyderabad: Following is the text of the letter Raju wrote to the Satyam board:
"It is with deep regret and tremendous burden that I am carrying on my conscience, that I would like
to bring the following facts to your notice:
1. The Balance Sheet carries as of September 30, 2008,
a) Inflated (non-existent) cash and bank balances of Rs 5,040 crore (as against Rs 5,361 crore
reflected in the books);
b) An accrued interest of Rs 376 crore, which is non-existent
c) An understated liability of Rs 1,230 crore on account of funds arranged by me;
d) An overstated debtors' position of Rs 490 crore (as against Rs 2,651 reflected in the books);
2. For the September quarter(Q2) we reported a revenue of Rs 2,700 crore and an operating margin
of Rs 649 crore(24 per cent of revenue) as against the actual revenues of Rs 2,112 crore and an
actual operating margin of Rs 61 crore (3... per cent of revenues). This has resulted in artificial cash
and bank balances going up by Rs 588 crore in Q2 alone.
The gap in the balance sheet has arisen purely on account of inflated profits over several years
(limited only to Satyam standalone, books of subsidiaries reflecting true performance).
What started as a marginal gap between actual operating profit and the one reflected in the books of
accounts continued to grow over the years.
It has attained unmanageable proportions as the size of the company operations grew significantly
(annualised revenue run rate of Rs 11,276 crore in the September quarter, 2008, and official
reserves of Rs 8,392 crore).
The differential in the real profits and the one reflected in the books was further accentuated by the
fact that the company had to carry additional resources and assets to justify a higher level of
operations thereby significantly increasing the costs.
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 the takeover, thereby exposing the
gap. It was like riding a tiger, not knowing how to get off without being eaten.
The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones.
Maytas' investors were convinced that this is a good divestment opportunity and a strategic fit.
One Satyam's problem was solved, it was hoped that Maytas' payments can be delayed. But that
was not to be. What followed in the last several days is common knowledge.
I would like the board to know:
1. That neither myself, nor the Managing Director (including our spouses) sold any shares in the last
eight years - excepting for a small proportion declared and sold for philanthropic purposes.
2. That in the last two years a net amount...
of Rs 1,230 crore was arranged to Satyam (not reflected in the books of Satyam) to keep the
operations going by resorting to pledging all the promoter shares and raising funds from known
sources by giving all kinds of assurances (statement enclosed only to the members of the board).
Significant dividend payments, acquisitions, capital expenditure to provide for growth did not help
matters. Every attempt was made to keep the wheel moving and to ensure prompt payment of
salaries to the associates. The last straw was the selling of most of the pledged shares by the
lenders on account of margin triggers.
3. That neither me nor the managing director took even one rupee/dollar from the company and
have not benefited in financial terms on account of the inflated results.
4. None of the board members, past or present, had any knowledge of the situation in which the
company is placed.
Even business leaders...
nd senior executives in the company, such as, Ram Mynampati, Subu D, T R Anand, Keshab
Panda, Virender Agarwal, A S Murthy, Hari T, S V Krishnan, Vijay Prasad, Manish Mehta, Murli V,
Shriram Papani, Kiran Kavale, Joe Lagioia, Ravindra Penumetsa, Jayaraman and Prabhakar Gupta
are unaware of the real situation as against the books of accounts. None of my or managing
directors' immediate or extended family members has any idea about these issues.
Having put these facts before you, I leave it to the wisdom of the board to take the matters forward.
However, I am also taking the liberty to recommend the following steps:
1. A task force has been formed in the last few days to address the situation arising out of the failed
Maytas acquisition attempt.
This consists of some of the most accomplished leaders of Satyam: Subu D, T.R. Anand, Keshab
Panda and Virendra Agarwal, representing business functions,...
nd A S Murthy, Hari T and Murali V representing support functions.
I suggest that Ram Mynampati be made the chairman of this Task Force to immediately address
some of the operational matters on hand. Ram can also act as an interim CEO reporting to the
board.
2. Merrill Lynch can be entrusted with the task of quickly exploring some merger opportunities.
3. You may have a 'restatement of accounts' prepared by the auditors in light of the facts that I have
placed before you.
I have promoted and have been associated with Satyam for well over 20 years now. I have seen it
grow from few people to 53,000 people, with 185 Fortune 500 companies as customers and
operations in 66 countries. Satyam has established an excellent leadership and competency base at
all levels.
I sincerely apologise to all Satyamites and stakeholders, who have made Satyam a special
organisation, for the current...
situation. I am confident they will stand by the company in this hour of crisis.
In light of the above, I fervently appeal to the board to hold together to take some important steps.
TR Prasad is well placed to mobilise a support from the government at this crucial time.
With the hope that members of the Task Force and the financial advisor, Merrill Lynch (now Bank of
America), will stand by the company at this crucial hour, I am marking copies of the statement to
them as well.
Under the circumstances, I am tendering the resignation as the chairman of Satyam and shall
continue in this position only till such time the current board is expanded. My continuance is just to
ensure enhancement of the board over the next several days or as early as possible
thereof.
(B Ramalinga Raju)
Copies marked to:
1. Chairman SEBI
2. Stock Exchanges..