Assignment

On Satyam Scam
PGDM VII A
2009-2011

Submitted To- Submitted By-

Prof Hari Parmeshwar Mahima Virmani
Faculty C.G.,JIMS R.N.23,PGDM
SATYAM SCAM

India has seen corporate scandals in the past, but never one of this magnitude. A software
company, touted as a success story, the 4th largest software company in India and one that
services around 1/3rd of the Fortune 500 companies, the events of the past one month have been
a total shock. They have called into question the entire range of issues related to ethics, corporate
governance, fiduciary responsibilities, professional auditing, and so on. There will be a lot more
soul-searching that will happen, a lot more inspection and suspicion of other companies, search
for more skeletons in the cupboard, and so on. What has Mr. Raju brought forward. Starting from
the surprise news about Satyam trying to buyout the realty companies, Maytas (run by Mr.
Raju’s sons), this is almost like a film story. The news about Satyam using its huge estimated
surplus of more than $1.2 billion to buy companies related to the promoter (especially when the
promoter held only 8% shareholding in the company) was a huge blow to all norms of corporate
governance and met with huge resistance. Seeing this resistance, the company decided to roll
back this proposal, but things would not stop from that point onward.

COMPANY’S PROFILE

Mahindra Satyam is a Brand identity of Satyam Computer Services Limited. Satyam

Computer Services Limited was founded in 1987 by B Ramalinga Raju. Mahindra Satyam is a
part of the USD 11.1-billion Mahindra Group which is one of the top 10 industrial firms based in
India. The company offers consulting and information technology (IT) services spanning various
sectors, and is listed on the New York Stock Exchange, the National Stock Exchange (India) and
Bombay Stock Exchange(India). In June 2009, the company unveiled its new brand identity
“Mahindra Satyam” subsequent to its takeover by the Mahindra Group’s IT arm, Tech Mahindra.
Mahindra Satyam has offices in 35 countries.

Fall From Grace

The Satyam Computer Services scandal was publicly announced on 7 January 2009, when
Chairman Ramalinga Raju confessed that Satyam's accounts had been falsified. B. Ramalinga
Raju (Raju), Founder and Chairman of India's fourth largest IT services company, Satyam
Computer Services Limited (Satyam), claimed that the company had been inflating the revenue
and profit figures for several years. He confessed to an accounting fraud that amounted to Rs.70
billion. In a letter addressed to the board of directors of the company, he declared that the Rs. 50
billion of cash balances reported by Satyam for the quarter ending September 30, 2008, did not
exist, that the revenues were Rs. 21.12 billion as against Rs. 27 billion reported earlier, and the
operating margins were only 3% as against the 24% declared by the company earlier. He wrote
that the gap arose due to the difference between actual profits and the profits reported, which
kept on growing over the years.
In his confession, Raju wrote, "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.

Raju was one of the pioneers in the Indian IT industry. He started Satyam with 20 employees in
1987, when the industry was still at a nascent stage. At that time, Satyam's main objective was to
provide software services to large companies based mainly in the US. Over the next two decades,
Satyam grew to become the fourth largest IT services company in India with operations in 63
countries and revenues of over US$ 2 billion for the year ending March 31, 2008.

Though the company had been declaring healthy profits and dividends year after year, it found
itself unable to maintain the pace of growth in revenues that it had achieved in the early 2000s.

Industry insiders were of the view that Satyam's growth was not matching up to that of the top
three companies in the Indian IT industry, namely, Tata Consultancy Services Limited (TCS),
Infosys Technologies Limited (Infosys), and Wipro Technologies (Wipro). At the same time,
analysts warned that if Satyam did not keep up its growth momentum, it could lose its coveted
position to multinational companies like IBM or Accenture that had ventured into India, or to
home-grown companies like HCL Technologies.

Analysts blamed the slowdown at Satyam on Raju shifting his focus to his family promoted real
estate businesses – Maytas Properties Pvt. Ltd (Maytas Properties) and Maytas Infrastructure
Limited (Maytas Infra). Raju faced severe criticism in mid-December 2008, when Satyam made
its intentions of acquiring the two Maytas companies public. The deal was called off within a
few hours due to the opposition from investors and the adverse reaction from the stock markets.
Satyam's problems continued and on January 07, 2009, Raju who till then, had been hailed as a
visionary, accepted responsibility for committing the biggest corporate fraud in India.

Raju's revelation shocked not only investors, employees, and clients of Satyam but also corporate
India as a whole. The repercussions of the fraud were felt not only by the Indian IT industry but
also by overseas investors who had invested heavily in the American Depository Receipts
(ADRs) issues of major Indian IT companies including Satyam.

India's image as a global outsourcing hub was also badly affected. The international media was
taken aback by Raju's shocking revelation. Commenting on Raju, Forbes, in its January 2009
issue wrote, "It was a horrifying turn for a man long considered one of India's self-made success
stories – and active philanthropists".
How This All Happened

On December 16, 2008, Raju announced that Satyam planned to use the cash reserves to acquire
two companies - Maytas Infra and Maytas Properties. Maytas Infra was a public, listed
infrastructure development company that had been operational for more than two decades.

Maytas Properties was involved in developing residential townships and urban infrastructure. For
the six months ended September 30, 2008, Maytas Infra reported revenues of Rs. 7.37 billion and
a net profit of Rs. 0.37 billion. 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.

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. Some social
commentators see it more as a part of a broader problem relating to India's caste-based, family-
owned corporate environment. 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. 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.
Satyam was the 2008 winner of the coveted Golden Peacock Award for Corporate Governance
under Risk Management and Compliance Issues, which was stripped from them in the aftermath
of the scandal. The New York Stock Exchange has halted trading in Satyam stock as of 7
January 2009. India's National Stock Exchange has announced that it will remove Satyam from
its S&P CNX Nifty 50-share index on 12 January. 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. 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.

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”.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.