Detailed Analysis of SATYAM SCANDAL (with notes & Statistics)

1. SATYAM ANALYSIS
Presented by
Jayesh Alwani
S Gautam & Associates

2. CONTENTS
• MANAGEMENT
• ABOUT SATYAM
• DISASTROUS REVELATION
• PEOPLE BEHIND THIS SCAM
• STORY BEHIND THE SCAM – FORGERY
• INDICATIONS OF FRAUD
• MAYTAS ACQUISITION
• 7th January 2009
• MINUTES AFTER REVELATION
• INVESTIGATION: CRIMINAL AND CIVIL CHARGES
• AUDITORS

3. MANAGEMENT
B. Ramalinga Raju
Founder & Chairman,
Satyam Computers Ltd.

4. ABOUT SATYAM
• Satyam was Established in 1987 with 20 employees
• Date of Incorporation, 24th June 1987
• It converted into Public Ltd co. in August 1991
• 4th Fastest growing IT Company in india
• 9% Market Share
• 40,000 Employees
• Revenue $ 2.1 Billion
• A Total of 650+ Clients With 185 of the top fortune 500
Companies

5. COMPANY’S PROFILE
• Satyam Computer Services Limited (Mahindra Satyam) is an
information technology (IT) services provider
• The Company operates in two business segments: IT Services
and Business process outsourcing (BPO)
• The Company offers a range of information technology (IT)
services, including
• IT enabled services
• Application development and maintenance
• Consulting and enterprise business solutions
• Extended engineering solutions
• Infrastructure management services.

6. HISTORY OF SATYAM
Year Particulars
1987 B Ramalinga Raju along with his brother B. Rama Raju founds
Satyam with 20 employees
1991 Satyam goes public. IPO oversubscribed by 17 times
1993 Awarded ISO 9001 Certification
1999 Ernst & Young Entrepreneur of the Year Services Award
2003 Satyam starts providing IT services to the World Bank
2007 Ernst & Young Entrepreneur of the Year 2007 (revoked after
the fraud was confessed)
2008 Golden Peacock Award for Corporate Governance 2008
(revoked after the fraud was confessed)
Sept -
2008
Satyam with 53000 employees, a presence in 65 countries
partnering with 690 global customers including 185 Fortune
500 companies

7. DISASTEROUS REVELATION
• The Black Day : 7th January 2009
• Accounting Fraud of Over 7800 crore rupees
• From past 7 Years accounting books were cooked :
• Profits were inflated
• Understated liability and overstated Debt
• Accrued Interest
• The gap in the balancesheet are due to the inflated
profits

8. PEOPLE BEHIND THIS SCAM
• Ramalinga Raju : Satyam Former Chairman
• B Rama Raju : Brother of Ramalinga Raju
(Former Managing Director)
• V Srinivas : Ex-Chief Financial officer
• S Gopalkrishnan : Price Waterhouse Auditor
• Talluri Srinivas : Price Waterhouse Auditor

9. STORY BEHIND THE SCAM - FORGERY
• Forged invoices to show collection of revenue from abroad
• Forged bank statement
• Forged FIXED DEPOSIT receipts
• The assets and liabilities are altered Q2Q to reflect rising
income and rig share price.
• This would require matching of revenue with staff strength
and salary cost. Would also require forging of TDS
certificates for income from FDs.
Siphoned money was use to acquire land, property, for
running Maytas Infra and Maytas properties.

10. INDICATIONS OF FRAUD
• There were some indications of a fraud running even at
least five years back.
• Many people who had worked or were invited to work for
Satyam left in a short period of time.
• According to industry sources, a very senior consulting
head was once offered a job as a CEO at one of the Satyam's
subsidiaries. But the executive refused to join as he was not
even being allowed to see the balance sheet of that
subsidiary along with Satyam.
Continued….

11. Continued...
• In another instance, a very senior executive in a finance
role quit just within two months of joining Satyam
• The executive is now working with a Mumbai based IT
company Said, 'for competitive purposes when I used to
analyze their balance sheet, large amount of money in
current account did not make any sense. Perhaps it was
being siphoned off to other businesses.
• He had many a times asked Mr Raju to spend the excess
cash assets to spend for attractive buyouts for the BPO, like
Infosys and Wipro were doing, but it all fell on deaf ears.
Continued…

12. Continued...
• Similarly, in another instance a Kotak analyst had inquired
in October, 2007 from Satyam CFO about the rationale
behind keeping $500 million in current account, which
draws no interest.
• He too had got a similar response.
• Things peaked in August of 2008, when many top level
officials of Satyam started resigning, rumoured to be on
confrontation with Raju's vision for the company.
• For instance, the entire top team of Satyam BPO had
resigned by October 2008
Continued…

13. MAYTAS ACQUISITION
• On December 16, 2008, around 6:30 pm, two hours post
closing of the markets, Satyam Chairman Raju announced a
buyout of 100% stake in Maytas Properties and 51% in
Maytas Infra
• The total outflow for both the acquisitions was a whopping
$1.6 billion comprising of $1.3 billion for the 100% stake
in Maytas Properties and $300 million for a 51% stake in
Maytas Infra.
Continued…

14. Continued...
• The buyout was met with severely negative reactions from
the investors and shareholders
• The market had reacted strongly to the deal. Satyam's
American Depository Receipts (ADR), listed on the New
York Stock Exchange (NYSE), fell by over 50 per cent from
$12.50 to $5.70. The company reported loss of over $2
billion in 60 minutes.
• The deal dealt a blow to Satyam's 210,000 shareholders, as
a majority of them felt that the deal was unethical and
aimed to bail out firms owned by Ramalinga Raju's sons.

15. Continued...
• Within 24 hours, Satyam made a U-turn.
• Mrs. Raju said:
"We have been surprised by the market reaction to
this decision even though we were quite positive about the
merits of the acquisition.“
"However, in deference to the views expressed by
many investors, we have decided to call off these
acquisitions,"
• Mrs. Raju had lost Rs 3,400 crore in the day as share prices
of Satyam plummeted.

16. APPOINTMENT OF DSP MERRILL LYNCH
• Investment bank DSP Merrill Lynch, which was appointed
by Satyam to look for a partner or buyer for the company,
ultimately blew the whistle and terminated its engagement
with the company soon after it found financial
irregularities
• On Tuesday, January 6, DSPML is reported to have met Sebi
officials and told them about large scale accounting
irregularities. It told the regulator that it was
uncomfortable in handling the mandate.
• It also submitted a letter to Sebi on the same

17. 7th January 2009
• When DSP Merrill Lynch concluded it could not find a merger
partner as legally required, it would have to report WHY to SEBI,
Raju realized the game was up. The confessional fax followed.
• The night of January 6, was one of the most discomforting nights
for Raju and his family.
• As day broke, at 9.45 am, before the opening of the markets, a
letter was faxed to Sebi Chairman, the board of Satyam, BSE and
NSE.
• In the letter Raju, admitted about an inflated (non-existent) cash
and bank balance of Rs 5,040 crore, an over stated debtor
position of Rs 490 crore and a fake liability of Rs 1,230 crore.

18. Fabricated balance sheet of Satyam: as of
September 30, 2008.
Items (Rs. In crore) Actual Reported Difference
Cash and Bank Balances 321 5361 5040
Accrued Interest on Bank
Fixed Deposits Nil 376.5 376
Understated Liability 1230 None 1230
Overstated Debtors 2161 2651 490
Total Nil Nil 7136
Revenues (Q2 FY 2009) 2112 2700 588
Operating Profits 61 649 588

19. MINUTES AFTER REVELATION
• Biggest single day fall for a stock
in stock market
• 175 RS/- (Jan 6th)
Satyam
Shares
• BSE sensex fell by 7.25%
• NYSE fell by 192.40 points i.e
6.18%
Stock
Market
• 11464 Crore 1607 Crore
Companies
Worth
77%
Satyam’s shares fell to 11.50 rupees on January 10, 2009, their lowest
level since March 1998, compared to a high of 544 rupees in 2008.

21. INVESTIGATION: CRIMINAL AND CIVIL
CHARGES
• According to a charge sheet filed by the Central Bureau of
Investigation in a court in Hyderabad,
The deception played out over at least Seven years,
involved dual accounting books,
• More than 7,500 forged invoices,
• Dozens of fake bank statements,
• Thousands of unnecessary employees and
• Auditors who received fees several times the market rate
• There were also several civil charges filed in the US against
Satyam by the holders of its ADRs.

22. AUDITORS
• TWO INDIAN AUDITORS have been barred from practising
as accountants
• Pulavarthi Siva Prasad
• Chintapatla Ravindernath
• They were both fined Indian rupees INR500,000 (£6,154),
the maximum amount payable under ICAI's founding
legislation
• Four other chartered accountants face disciplinary
hearings over the Satyam scandal.
• PwC auditors - Talluri Srinivas and Subramani Gopalakrishnan
• Satyam's ex-CFO Vadlamani Srinivas and
• Former Satyam internal audit chief VS Prabhakara Gupta

23. The Auditors Role and Factors
Contributing to Fraud
• Global auditing firm, PricewaterhouseCoopers (PwC),
audited Satyam’s books from June 2000 until the discov-ery
of the fraud in 2009.
• One particularly troubling item concerned the $1.04 billion
that Satyam claimed to have on its balance sheet in “non-interest-
bearing” deposits.
• It appears that the auditors did not independently verify
with the banks in which Satyam claimed to have deposits
• Suspiciously, Satyam also paid PwC twice what other firms
would charge for the audit

24. • PwC audited the company for nearly 9 years and did
not uncover the fraud, whereas DSP Merrill Lynch
discovered the fraud as part of its due diligence in
merely 10 days
• Missing these “red-flags” implied either that the
auditors were grossly inept or in collusion with the
company in committing the fraud.
Continued…
Continued...

25. POST SCANDAL
To stabilize the sinking
satyam computers, the
government nominated
banker Deepak parekh,
IT expert Kiran karnik
and former SEBI member
C Achutan to the
company's board.
KIRAN KARNIK
FORMER PRESIDENT OF
NASSCOM

26. ACQUISITION BY MAHINDRA GROUP
• Several companies bid on Satyam on April 13, 2009. The
winning bidder, Tech Mahindra, bought Satyam for $1.13 per
share
• 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“
• After a delay due to tax issues Tech Mahindra announced its
merger with Mahindra Satyam on 21 March 2012, after the
board of two companies gave the approval. The companies are
merged legally on 25 June 2013

27. RECOMMENDATIONS FOR CHANGES IN
REGULATORY
• Pledges disclosure –
SEBI made it compulsory for the companies to
disclose the amount of promoter’s share that are
pledged
• The auditor rotation debate –
Rotation of audit partners every five years.
• The appointment of the CFO is to be approved by the
Audit Committee
• Interim disclosure of balance sheets (audited figures
of major heads) on a half-yearly basis.

28. THANK YOU