FASA Group Assignment

Group 5(Group E)

Sohil Bankar GMP19-18

Mahibalan Balavijayan – GMP19-09

Shriteja Salunkepatil – GMP19-17

Evaluating the statements made by the chairman of Satyam Computer in his

resignation

Unveiled in 2009, the Satyam Computers scandal was one of India’s biggest corporate
scams. Mr. Ramalinga Raju, the CEO of the company, admitted to willful manipulation of
the Satyam accounts to inflate key performance metrics like revenue and profits by billions
of Dollars

After having failed to acquire Maytas Infra, a company with which the CEO of Satyam
Computers Mr. Ramalinga Raju had direct familial connections with, a Pandora’s Box was
opened for the world of corporate governance of India. In a letter addressed to the Board of
Directors, Mr. Raju admitted to have perpetrated a fraud with the financial reports of the
company.

A clear conflict of interest, Mr. Raju wanted to acquire Maytas so that he can “attempt to fill
the fictitious assets with real ones” to cover up the gap in the balance sheet” (EX-99.2
Resignation Letter, n.d.) as he had disclosed that he has understated the liability of the
company by Rs. 1,230 Crore against the funds he had arranged by himself. Moreover, he
had overstated the Debtors position of Rs. 490 crores against the Rs. 2651 reflected in the
books. He further states that the cash and bank balance was the company was overstated by
Rs. 5040 crores, all of which were non-existent, along with non-existent accrued interest of
376 crores.

In his admission of guilt, Mr. Raju states that he was the sole culprit in the scandal, and that
no other board member knew about what was going on internally, the irregular reporting
was done entirely by him. However, this raises serious questions about the effectiveness of
the governance structure at Satyam, which had won the Golden Peacock Award for
worldwide corporate governance excellence in 2008, just three months before the scandal
had unfolded. This is a case that starkly highlights failure in corporate governance and
internal control measures. Such an extensive fraud was undetected for several years raises
questions about the balances and checks within an internal audit structure of such a large
organization.

The letter mentions that while initially the discrepancies were minor, they spiraled over
time. Mr. Raju states “What started as a marginal gap between actual operating profit and
the one reflected in the books continued to grow over the years” and that “It was like riding
a tiger, not knowing how to get off without being eaten” (EX-99.2 Resignation Letter, n.d.)

After having suggested possible corrective measures the board could take, Mr. Raju also
states that he had to ‘resort’ to such demeanor because he had the best interest of his
shareholders and mainly his employees at heart. In a supposed-to-be emotional appeal, he
mentions that he had not liquidated “a single rupee throughout the last 8 years” (EX-99.2
Resignation Letter, n.d.)

The direct aftermath of the admission of guilt was a 78% decline in Satyam’s market
capitalization. Along with the government having to intervene with the procedure of selling-
off the company in a way which protected the shareholders and the large number of
employees that Satyam had, there were deeper implications for the world of finance and
governance due to the scandal:

1) Loss of confidence: That such a large corporation, with such high presence was engaging
in fraudulent activities eroded consumer and investor trust.

2) Transparency and accountability concerns: The incident stresses the need for a stringent
control mechanism to prevent such events occurring in the future.

3) Questions over an Auditor report: The role of PwC, one of the big 4 auditor, came into
scrutiny as a scandal of this scale shouldn’t have been missed, especially after having
charged a premium to offer auditing services.

Although this was a matter of grave distress and took the world by shock, the motivation for
the founder to carry out such a strenuous operation is still unclear. As claimed by Ramalinga
Raju in his resignation letter that neither himself or the managing director including their
spouses have sold any shares other than a minor proportion for philanthropic purposes, this
has been vetted later by several regulatory bodies post the declaration and verified that the
statements made by Ramalinga Raju were indeed true.

According to the statements in the letter, Mr. Raju was heavily relying on the aborted
Matyas acquisition deal to fill the fictitious assets. This would have been another stepping
stone in masking Satyam’s deteriorating financial health and injecting more funds into
Satyam. This would also boost the already golden market perception about the company.
However, if Mr. Raju would have taken a decision to stop inflating profits after the Matias
deal can be debated but seems highly unlikely.

Overall, Mr. Raju's reliance on the Matias acquisition deal reflects a combination of efforts
to address Satyam's financial challenges, manipulate market perceptions, and further his
personal interests, all while attempting to conceal the fraudulent activities that ultimately led
to the downfall of the company.

Relating With ILFS

Big goals had been set by IL&FS, a well-known infrastructure financier in India. By
providing finance and building services, they sought to serve as a one-stop shop for
infrastructure needs. Although their story started out optimistic, it eventually turned into a
warning against debt and its effects.

Financial strain resulted from both excessive borrowing and a mismatch between short-term
loans and long-term objectives. Unexpected difficulties like delays and cost rises made their
hold even more tenuous. As it was bound to happen, IL&FS's loan defaults set off a chain
reaction. This affected wide range of organisations, including mutual funds, banks, and
private investors. A blurry picture was presented by abandoned projects and financial losses.
The government stepped in, installing new officials and starting the intricate debt settlement
procedure that is still in place today. The significance is highlighted by the IL&FS crisis.
The significance of good financial management and the interdependence of the financial
system are highlighted by the IL&FS crisis. It also emphasises how important it is for big
infrastructure projects to have meticulous planning and risk assessment.

The Satyam case is a classic case of accounting fraud. While the main cause of the ILFS
crisis was financial mismanagement that resulted in a liquidity problem. Comparisons
between the Satyam scam and the IL&FS crisis of 2018 highlight the shortcomings in Indian
corporate governance. Despite the differences in the problems, both highlighted the
importance of strict regulation, openness, and moral business conduct.

A liquidity problem at the large financial company IL&FS lack of transparency. It raised
questions about the general financial stability of India's infrastructure sector because it
exposed more financial issues than were previously disclosed. Like Satyam, the problems at
IL&FS highlighted the need for improved oversight and prompt financial reporting. The
government stepped in, assumed command, and started the process of restructuring.

The interdependence of financial institutions and the possible effects of a key participant
failing were brought to light by both crises. This led to an evaluation of risk management
procedures. It also increased the need for increased vigilance. There was a drive for
regulatory changes to improve corporate governance standards in reaction to both
occurrences. Similar to the Satyam affair, the IL&FS disaster also raised awareness of the
value of moral behaviour, accountability, and openness in India's economic environment.
These occurrences have emphasised the necessity of strict regulatory measures, efficient
oversight, and an integrity-driven culture in order to preserve investor trust and guarantee
the stability of India's corporate and financial sectors. Right now, the main goal is to
maintain investor confidence and guarantee stability by establishing a reliable and well-
regulated business environment.

References:

EX-99.2 Resignation letter. (n.d.). Retrieved February 27, 2024, from

https://www.sec.gov/Archives/edgar/data/1106056/000114554909000025/u00107ex

v99w2.htm