Made By :-
Cambridge School Noida (2010)
What Business Demands
• Black Faces of Indian IT
• Satyam : Dec-2008 to Jan-2009
• Understanding The Scam
• Satyam – maytaS
• Maytas - A Hole in the Ship
• Satyam – Corporate Non – Governance
• Role of Independent Directors
• Satyam & Investment Decision
• Satyam Fiasco
• Satyam & PWC
• Who Guards the Guardians?
Satyam was established in 1987.
4th fastest growing IT company in India.
9 % market share
Revenue $2.1 billion
It is the first company of India listed in three International
Exchanges i.e. NYSE, DOW and EURONEXT
Major Satyam Clients
Before Accounting Scandal Of 2009
In 2008, Satyam attempted to acquire (Maytas Infrastructure and
Maytas Properties) founded by family relations of company founder
Ramalinga Raju for $1.6 billion, despite concerns raised by
independent board directors. Both companies are owned by Raju's
sons. This eventually led to a review of the deal by the government,
a veiled criticism by the vice president of India and Satyam's clients
re-evaluating their relationship with the company. Satyam's
investors lost about INR 3,400 crore in the related panic selling. The
USD $1.6 billion (INR 8,000 crore) acquisition was met with
skepticism as Satyam's shares fell 55% on the New York Stock
Exchange. Three members of the board of directors resigned on 29
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
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. The settlement requires Upaid to give Mahindra Satyam a
worldwide royalty-free license on its patents, and provides for the
dismissal of all pending actions including the litigation between the
companies pending in the U.S. court.
Black Faces of Indian IT
Byrraju Ramalinga Raju is the biggest fraudster in the Indian
software industry, but he is not the first.
Dinesh Dalmia, Vice-Chairman, DSQ Software, has been in jail
for two years.
Pentamedia company promoter V Chandrasekaran was found
to be in cahoots with tainted broker Ketan Parekh in rigging up
Understanding The Scam !
The Balance Sheet as of September 30, 2008 Showed :-
Inflated (non-existent)cash and bank balances of Rs.5,040 crore (as
against Rs.5312 crore reflected in the books)
An accrued interest of Rs.376 crore which is non existent
An understanding liability of Rs.1,230 crore on account of funds arranged
by BR Raju
An over stated debtors position of Rs.490 crore (as against Rs. 2651 crore
reflected in the books)
For the second quarter Satyam reported a revenue of Rs.2,700 crore and
operating margin of Rs. 649 crore (24% of revenues).
As against the actual revenues of Rs.2,112 crore and an actual operating
margin of Rs.61crore (3% of Revenues).
This has resulted in artificial, cash & bank balances going up by Rs. 588
crore in Q2 alone.
Satyam - maytaS
It is not a mere coincidence that maytaS is Satyam spelt in reverse way .As
spelled out in Raju’s letter it was an effort to cover-up Satyam Fiasco.
Raju wanted to acquire Maytas in order to cover up the scam he was
cooking, but failed miserably. After all isn’t Maytas a part of his family
business? The answer lies in Maytas’s burgeoning growth in last 6-8 years.
Maytas is a 2 decade old company. However it has been doing remarkably
well for last 6-7 years. Projects worth billions are riding on them. Now
talking about in appropriation of
Satyam’s money. Raju showed a inflated gross margin in the period of July-
December by almost 600 crores. meaning swollen records by over 1000
crores in a year. So it would take him about 5 or maximum 6 years to show
an accumulated wealth of over 5000 crores (as stated in the records-
Satyam’s supposed cash reserve).
Thus, it comes out from here, that Raju must be syphoning the money from
Satyam to Maytas since last 6 years. And now he wanted to buy it so that he
can cover up Unfortunately, it didn't happen.
Maytas - The Hole in the Ship
• It all started on 16.12.2008, when Ramalinga Raju thought, buying an
infrastructure firm made sense!
• He, then, nailed a hole in a sinking ship Satyam was.
• It is a common affair in Indian Inc to make such pointless investments to divide
the dividends by manipulating profit margins.
• But the scale of this scam needs to take a deeper look in the fiasco Satyam
• Satyam’s Maytas bid dragged media in to it.
• Satyam intended to buy entire stakes in Maytas Properties for $1.3 Billion and
51% stakes in Maytas Infra for another $300 Million.
• Raju and his immediate family members own up to 35% stakes in Maytas.
• The deal was to be financed from “surplus” cash.
• Investors and the Fund managers were shocked that the bidding process was
carried without informing them.
• Raju said that the deal was in complete interest of the investors and informing
them was “unnecessary”.
• On following days, Satyam’s share prices started falling reflecting share holders
• Satyam’s share prices nosedived in U.S.A. after the bid was announced.
• The interrogation by investors forced Raju to reconsider his decision, which he
pulled off within hours.
• World Bank, one of Satyam’s esteemed customers banned it from providing
service for next 8 years.
• Satyam’s image in front of its customers, investors, and more importantly,
the entire nation got dented.
• Share prices tumbled even further by about 16%. The aborted buy-out deal
and the ban indicated that something seriously went wrong at the board
• Valuation of Maytas turned out to be fraudulent.
• All of the four Firms, including Merry Lynch and JP Morgan denied having
done any Valuation.
• The move sparked row between the institutional investors from across the
world and Sataym’s board members,
• Ultimately lawsuits followed valuation and now judicial custody of
Ramaling Raju and his brother.
• One of company’s two independent directors T.R. Prasad defended the
decision of buy-out believing it to be increasing share value,
• Another director Mr. Shrinivasan quit before it was too late.
• Vinod Dham (fouder of Pentium) was also one of the non-executive
directors of Satyam who later resigned in the wake of controversy.
• Two days after the controversial deal, Indian government ordered
separate probe in to the matter .
• On 7th January, Ramalinga Raju wrote a letter to all the board members
and SEBI, informing them about inflated cash, faked profit margins and
accounting malpractices .
Corporate Non - Governance
• India did need a blow-out on a scale like Satyam to bring home the painful
reality of the generally rotten state of corporate governance and the
vicious promoter-politician nexus endemic across different sectors of the
• It would be naive to believe in the comments by select industry leaders
and select politicians that the Satyam case is one-off and that the entire
Indian IT sector (or for that matter, the entire Indian business fraternity)
cannot be tarred by the same paintbrush.
• Satyam most certainly is not a only one-off high profile situation that India
has been forced to face. It is not the first one in the last 25 years, and will
certainly not be the last of the high profile ones in the next few years.
• To start with, we must accept that Satyam is our problem and we are
expected to find the solution ourselves.
• It may be easy to blame Price Waterhouse, that they did not perform their
duties as auditors correctly. We must accept that there would be many
very large audit firms, who may also be routinely turning a blind eye to the
shenanigans of various promoters.
• We hope, that now, & perhaps finally, the regulatory systems and bodies
responsible for ensuring compliance will start to function as they should
have done before the Satyam blowout.
Role of Independent Directors
• The role of independent directors is now under close scrutiny. This has
happened due to one of the less reported nexus between the Indian promoters,
senior bureaucrats especially those from IAS, and senior bankers especially
those from large PSUs. Retired civil servants are used as glorified liaison
• Hopefully, the boards, in future, will be composed more on the basis of
business-specific relevant competence rather than the retirement-eve titles.
• Independent directors of Satyam Computers, who agreed to the company's
proposal of buying out two promoter-related companies, failed to be
independent in 'spirit',
• 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
• Independent directors need to be more active and directors need to maintain
their independent spirit." Corporate governance should be a "principle-based"
system rather than being "rule-based,"
• In instances of larger issue of change in the entire business focus of the
company, the Independent Director should take the decision to the
shareholders before approving.
• Independent directors need to be vigilant in protecting minority interest and be
`brave' enough to take adequate steps. "It is cumulative responsibility of the
independent directors to protect the interest of shareholders and strategy of
• The role of Satyam's independent directors is termed as `unpardonable‘. Acting
against the interest of larger shareholders especially when the promoters
themselves owned a little more than 8 per cent stake in the company and institutional
investors owned more than 45 per cent.
• As do the independent directors on the boards. One can hardly ask for more
qualified people than Vinod Dham and Krishna Palepu. But the fact that they voted in
favour of the Satyam-Maytas proposal is shocking. What's the point in having
independent directors if they can't guide the management on critical issues?
• Investors were furious about the way Satyam founders undertook the move to invest
in a promoter-related company and wanted to know why the management failed to
obtain prior consent of shareholders before deciding to invest, which amounted to
change of `object clause' of the company.
• "Enforcement is important. It is no use making more and more rules and laws if you
are not willing to enforce it, laws in India are quite strong."
• The investors' activism after Satyam's decision is appreciative.
• In the case of Satyam's decision to acquire Maytas firms, Ramalinga Raju said the
combined entity would deliver greater shareholder value.
• But the correct perception was that it will benefit Maytas promoters at the cost of
Satyam's shareholders. This was reflected in the heavy beating Satyam's stock
received after the announcement of the deal.
• Defending the decision, one of the company's executive said, "Satyam, as a
company, was built over the years." However, it is common knowledge that it takes
years to build a reputation of a company, which can be eroded overnight with one
• It‘ was audacious, preposterous, outrageous and shocking event, the
Satyam Computer-Maytas deal. That a promoter, with less than 9 per
cent stake in his company, would have the nerve to try and transfer $1.6
billion of cash to two completely unrelated businesses owned by his
sons is unthinkable. And to pass that off as a 'wonderful' opportunity!
Satyam. Chairman Ramalinga Raju says he didn't anticipate investors'
reactions and was surprised.
• In the past institutional investors in this country haven't really spoken up
against corporate misbehaviour. Even Sterlite's attempt, in September
this year, to transfer the high-quality aluminum business and merchant
power to Malco, in return for the low-quality, high cost, copper Konkola
mines, again without so much as a by-your-leave, didn't anger
• In that instance too, the promoters were enriching themselves, at the
cost of minority shareholders, but no mutual fund really said so. There
have been numerous other instances, admittedly of smaller
consequence, that should have provoked mutual funds to ask questions.
• Now, the same institutional shareholders have found their tongues. This time, their
stake is big - just over 50 per cent. Also, they realise how vulnerable and helpless
they are because, had Ramalinga Raju wanted, he could have pushed through the
deal. And no one could have stopped him, because the board had voted
• Institutional investors have their own vested interests. It's well-known that there
are back-to-back arrangements between mutual funds and corporations: Funds
buy into the firm's stock in return for investments in their income schemes.
Instances of stock being dumped just before the bad news is out or shares being
snapped up before the good news is flashed aren't always 'coincidental.
• But now it's time institutional shareholders got together to show promoters that
they simply cannot get away with this kind of behaviour. In India it only needs a 10
per cent stake to call an EGM. The shareholders need to fight this one out. If they
let Satyam off the hook, Indian promoters will continue to believe they can get
away with anything. As it is, most managements in India have scant regard for
even the basics of corporate governance or respect for minority shareholders.
• Managements should be asked to take shareholders into confidence for any
unrelated diversification, with the definition of 'unrelated' clearly spelt out.
Price waterhouse Coopers
• “It is hard to believe that he (Raju) was the lone perpetrator all along. In any
company, the CFO (chief financial officer) and financial committee members
would have full access to balance sheet details,”.
• Satyam has a presence in 66 countries and is listed on the New York Stock
Exchange (NYSE).“A company filing returns in the US according to (its) Security
Exchange Commission (SEC) guidelines could not have done this without the
cognizance of key executives,”
• “It’s impossible to go by the claim that none of the board members had any clue
about the inconsistencies in Satyam’s balance sheet; if the fraud went on for
’several years’, it won’t be wrong to rule out that most of them, if not all, had
some idea about the happenings.”
• Fingers are also being pointed at the possibility of the auditors Price Waterhouse
Coopers (PWC) being hand in glove with the conspirators in the multi-crores
scam. It is highly unlikely auditors did not have any idea about the scam brewing
for so many years.
• Auditors will have to be scrutinised. PWC can only be unaware of the loose
balance sheet if Raju forged and doctored documents to support fraudulent
• Credibility of audit firms has come into question as the amount was too big for
any audit firm not to notice. If the audit firm claims that they didn’t know about
then their capabilities would come under the scanner,
• The audits were conducted by Price Waterhouse Cooper in accordance with
applicable auditing standards and were supported by appropriate audit
evidence," the firm said in a statement.
• As per Satyam's accounts, vetted by Price Waterhouse, auditors were paid Rs
3.73 crore during 2007-08 as against Rs 3.67 crore in the previous fiscal.
• The auditor's report, signed on April 21, 2008, by Price Waterhouse partner
Srinivas Talluri, said: "... We have neither come across any instance of fraud on
or by the company (Satyam), noticed or reported during the year, nor we have
been informed of such case by the management."
• The auditor's report also said: "These (Satyam's) financial statements are the
responsibilities of the company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
• "We conducted our audit in accordance with the auditing standards generally
accepted in India. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material mis-statments," it said.
• While Raju in his statement to the board and SEBI had disclosed that he was
quitting because of the failure in bridging the gap between fictitious and real
assets, the auditors' report said that the company was maintaining proper
records, showing full particulars, including quantitative details and situations of
• Unprecedented changes in the accounting profession and professional services
in general mean the current approach to safeguarding shareholder interests as
well as the other stakeholders of the modern publicly traded global enterprise is
no longer efficient nor effective.
Who Guards the Guardians?
• Satyam had been hunting for a buyer for a while. These same reports
cited Tech Mahindra and HCL as possible suitors. HT learnt that these
companies raised serious questions about the authenticity of Satyam’s
books and sought clarifications. This may have forced Raju’s hands.
• Merrill Lynch was hired to advise on alternatives to a recent failed
acquisition of a firm called Maytas. But, they may have known what's up.
And resigned the engagement, prior to the Raju’s stunning disclosure.
• In the Satyam affair, where was the billion of missing cash, and why didn’t
the auditors catch the discrepancy? Satyam was audited by a Big Four
firm – PwC. However, if fraud is involved in the Satyam affair, there may
be an argument that the audit firm was defrauded as well.
• There is complicity, incompetence or both with either the auditors or their
customers or both. Inadequate procedures over confirmation indicates
that, the auditors missed something really big.“
• Price Waterhouse gave wrong PAN to Satyam, as it turns out, PWC gave
Their Bangalore PAN Number to Satyam instead of New Delhi. PWC
Hyderabad falls in New Delhi jurisdiction.