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Governance Disaster At SatyamGOVERNANCE DISASTER AT SATYAM1In Indian culture, there is a tendency to be deferential to age...
Governance Disaster At Satyamthe best corporate governance practices by the Investor Relations Global Rankings (IRGR)for 2...
Governance Disaster At Satyam                                       Satyam’s Downfall8SATYAM BACKGROUNDSatyam Computers Li...
Governance Disaster At SatyamLtd., Satyam Enterprise Solutions Pvt. Ltd. and Satyam InfowayPvt. Ltd. and opening ITschools...
Governance Disaster At SatyamSatyam believes that sound Corporate Governance practices provide an important framework toas...
Governance Disaster At Satyamauditor since 2000. During the five-year period from 2003-2008, PwC’s audit fee tripled toINR...
Governance Disaster At Satyamaccounts.20 This amount was neither distributed among shareholders in the form of dividends,n...
Governance Disaster At Satyam                                                      Exhibit 1                              ...
Governance Disaster At Satyamlast several years (limited only to Satyam standalone, books of subsidiaries reflecting truep...
Governance Disaster At Satyamaccount of margin triggers.3)   That neither me, nor the Managing Director took even one rupe...
Governance Disaster At Satyamconfident they will stand by the company in this hour of crisis. In light of the above, Iferv...
Governance Disaster At Satyam                 Exhibit-2              SHAREHOLDINGSunny Goyal                              ...
Governance Disaster At Satyam                                              Exhibit-3                                      ...
Governance Disaster At Satyam              Exhibit-4Sunny Goyal                                                 14
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Satyam Scam case

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  1. 1. Governance Disaster At SatyamGOVERNANCE DISASTER AT SATYAM1In Indian culture, there is a tendency to be deferential to age and authority; we have to get ourpeople to rise above that. We see that in other Asian locations where seniority and age areimportant. Japan is a place where you keep bowing. If you are a senior person, you almosthave to apologise if you disagree. That’s not a very conducive atmosphere for an auditprocess. You have to have robust discussions and may have to take positions contrary to whatthe client thinks. It’s not that it’s not there, but business and people culture in India isdifferent, say, from the United States.2 Gautam Banerjee, Chairman, PricewaterhouseCoopers IndiaOn 7th January, 2009, by B.RamlingaRaju, chairman of Satyam Computer Services Ltd.,wrote a letter to the company board in which he took responsibility for fraud of about 50billion INR (see Exhibit 1).This fraud took corporate sector into surprise, not because of itssize but due to Satyam had been a pioneer organization of corporate governance. Satyam wonthe Golden Peacock Global Award for Excellence in Corporate Governance given by theWorld Council for Corporate Governance in 2008. Satyam also won the Golden PeacockNational Award for Excellence in Corporate Governance in 2002, and was rated as having1 Sunny Goyal wrote this case study solely to provide material for class discussion. This case has been writtenon the basis of published sources only.2 Pradipta Mukherjee and IshitaAyan Dutt, “It is difficult to pick up management-perpetrated fraud,” BusinessStandard, March 17, 2010, p. 2. www.business-standard.comSunny Goyal 1
  2. 2. Governance Disaster At Satyamthe best corporate governance practices by the Investor Relations Global Rankings (IRGR)for 2006 and 2007.Satyam was listed on the New York Stock Exchange (―NYSE‖) in 2001 and on EuronextAmsterdam in 2008.3 It boasted a large number of clients, including many Fortune 500companies.4 The founder of Satyam Computer Services, B. RamalingaRaju (―Raju‖), was ahighly regarded entrepreneur and an eminent fixture at prestigious corporate events in India.5In 2007, he was honoured with the Ernst & Young Entrepreneur of the Year award, yet amere two years later, on 7 January 2009, Raju made the calamitous confession that he hadfalsified accounts on a grand scale over a long period of time. His shocking announcementsparked a big debate over whether India possessed adequate guidelines for corporategovernance.6 How did Raju commit a fraud of such magnitude? How could a successfulcompany, twice awarded the Golden Peacock award for corporate governance excellencecollapse in such a manner?73 Fontanella-Khan, J. (7 January 2009) “Business Hero Who Crashed and Burned”, Financial Times.4 Mukherjee, A. (19 January 2009) “The Truth Serum Trails”, Outlook.5 Fontanella-Khan, J. (7 January 2009) “Business Hero Who Crashed and Burned”, Financial Times.6 Dhall, A. (11 January 2009) “Corporate Governance Comes Under Lens”, Economic Times.7 Awarded by the UK-based World Council for Corporate Governance. See: Mint (8 January 2009) “CorporateExcellence Award to be Taken Away”Sunny Goyal 2
  3. 3. Governance Disaster At Satyam Satyam’s Downfall8SATYAM BACKGROUNDSatyam Computers Limited (Satyam) was India’s fourth-largest software development andinformation technology (IT) consulting company based on 2008 figures.9 A private limitedcompany started by two brothers- B. Rama Raju and B. RamalingaRaju- in 1987. Satyam wentfrom private limited company to a public limited company in August 1991, by issuing shares tothe public in 1992. The money raised from share market was used for software technology parkconstruction and a 100% export-oriented unit. Satyam come up with its first global assignmentvia joint venture with the U.S Company Dun and Bradstreet. In 1996, Satyam built its firstforeign office in the U.S.A, followed by Japan. It comes up with several other businesspartnerships in several countries like Australia, Canada, and European countries too. Satyam dohave its four subsidiaries they are – Satyam Spark Solution, Satyam Renaissance Consulting8 Figure adapted from Raza Khan, A. (8 January 2009) “Fall from Grace”, Mint, thhttp://epaper.livemint.com/ArticleImage.aspx?article=08_01_2009_024_003&kword=a (accessed 27February, 2009)9 Prowess database, Centre for Monitoring of Indian Economy.Sunny Goyal 3
  4. 4. Governance Disaster At SatyamLtd., Satyam Enterprise Solutions Pvt. Ltd. and Satyam InfowayPvt. Ltd. and opening ITschools The Indian Institutes of InformationTechnology (IIIT). In 1997, Satyam became thefirst Indian company to receive Information Technology Association of America (ITAA)certification for Y2K solutions.10Along with its growth, Satyam won several national and international awards. In 2000, Satyamwon the national Human Resource Development (HRD) Award for its outstanding HRDefforts. Dataquest, a leading IT magazine, named Raju as IT Man of the Year for 2000. HongKong-based Far Eastern Economic Review ranked Satyam as one of the 10 well-regardedcompanies in India, based on a survey conducted in 2000. Satyam also won the Frost &Sullivan market engineering award for competitive strategy in 2001, and the application serviceprovider category IBM Lotus award for innovation in 2003. These awards and honours wereclear reflections of Satyam’s prestige and reputation amongst its clients, employees and societyin general.11GOVERNANCE AT SATYAMSatyam had a relatively small promoter holding for a traditional family-run firm in India (seeExhibit 2); in fact, the promoters’ ownership share had steadily declined over the years. Foreigninstitutional investors had the maximum holding. Other important groups of investors were theIndian public, banks and financial institutions as well as mutual funds.As of December 2008, Satyam had five independent and four internal members on its board(see Exhibit 3). RamalingaRaju and Rama Raju, the two founding brothers, were the onlyrelatives on the board. RamalingaRaju was the chairman of the board; the other two internaldirectors included Ram Mynampati, an internal employee, and Krishna Palepu, a HarvardBusiness School professor who was listed as an internal director because he also worked as aconsultant for Satyam. The audit and compensation committees had four members each whowere all independent directors.10 http://content.icicidirect.com/Research/HistoryCompany.asp?icicicode=SATCOM, accessed on January 7,2009.11 http://content.icicidirect.com/Research/HistoryCompany.asp?icicicode=SATCOM, accessed on January 7,2009.Sunny Goyal 4
  5. 5. Governance Disaster At SatyamSatyam believes that sound Corporate Governance practices provide an important framework toassist the Board in fulfilling its responsibilities. The Board of directors is elected byshareholders with a responsibility to set strategic objectives to the management and to ensurethat the long term interests of all stakeholders are served by adhering to and enforcing theprinciples of sound Corporate Governance. Thus, the management is responsible to establishand implement policies, procedures and systems to enhance long-term value of the Companyand delight all its stakeholders (Associates, Investors, Customers and Society).12INVESTIGATIONSThe Central Bureau of Investigation (CBI) was asked to initiate an investigation into thefinancial scam at Satyam. According to the CBI, the amount of influenced profit was more than₹ 96 billion. Other findings were also different from what Raju stated in his letter. The biggestpuzzle for the shareholders, investigators and the general public was how Raju could havehidden the evidence of fake assets from various regulators such as the income tax authorities,SEBI and the Reserve Bank of India for seven years. Further, what was the role played bygovernance mechanisms such as the board and internal/external auditors, whose main job wasto make sure that firms did not indulge in such irregularities? Raju’s claim that Satyam wasearning only three per cent net profits were hard to believe given that other competitors made20-25 per cent net profits during the same years. Such a massive case of fraud without intentionto make private gains was difficult to believe.According to a CBI charge sheet dated April 7, 2009, Raju and his family had a total of 327companies registered in their names, with family members often being directors in thesecompanies.15 Since these firms were not registered in the stock markets, they were not requiredto follow standard governance practices or to publicize the details of their business dealings. Itwas surprising how these and other facts could be hidden from the multiple layers of audit thata firm goes through. There were typically three levels of auditing that occurred in anycompany. Firstly, an internal audit by the team headed by the CFO. This was followed by anexternal audit, which was performed by PricewaterhouseCoopers (PwC) in Satyam’s case.Finally, the board had the audit committee, headed by an independent board member. InSatyam’s case, there was a failure at all the three levels. Satyam contracted PwC as its statutory12 Satyam Annual report 2007.Sunny Goyal 5
  6. 6. Governance Disaster At Satyamauditor since 2000. During the five-year period from 2003-2008, PwC’s audit fee tripled toINR430 million. The audit fee that Satyam paid was about twice as much as what its peers inthe IT industry paid to their auditors; for example, three other leading IT companies in India —Wipro, Infosys and Tata Consultancy Services — paid INR280 million, INR153 million andINR277 million, respectively.16 All these companies were listed in domestic and foreign stockexchanges and had to comply with international accounting regulations similar to Satyam. Theauditors from PwC issued a brief statement:The audits were conducted by Price Waterhouse in accordance with applicable auditingstandards and were supported by appropriate audit evidence. Given our obligations for clientconfidentiality, it is not possible for us to comment upon the alleged irregularities. PriceWaterhouse will fully meet its obligations to cooperate with the regulators and others.Given the relatively higher fees that Satyam paid to PwC, it was suspected that the externalauditors allowed various accounting irregularities such as improper verification of cash andbank balances.18 Cash audit is one of the easiest forms of audit, as auditors only need to have awritten confirmation from the bank that so much money exists. If the bank does not verify thecash, then an auditor cannot give an opinion of true and fair view. Initially, Satyam’s bankersdeclined to comment on the company’s accounts, citing client confidentiality. Later, however,the bankers were also pulled into the investigation to verify the huge amount of money shownas bank balance in the financial statements.Raju admitted that Satyam’s fixed deposits, which supposedly grew from INR, 33.2 million in1998/99 to a massive INR33.20 billion in 2007/08, were all fake. The auditors were supposedto have an independent bank confirmation of such things in the form of a bank statement.Under Indian law, banks had to deduct tax at source for any interest income that exceededUS$200 per year: this money had to be paid directly to the government. Such a large amount ofmoney could only be hidden by creating fake documents, which should have been checked byrelevant authorities at different levels.There were other indications of potential financial irregularities at Satyam that were ignored bythe internal and external auditors; for example, Satyam closed the 2007/08 financial year with adebt of INR2.36 billion, even after having an enormous INR44.62 billion lying unused in itsSunny Goyal 6
  7. 7. Governance Disaster At Satyamaccounts.20 This amount was neither distributed among shareholders in the form of dividends,nor was it used to earn valuable interest, as is usually done; as such, the auditors could avoidresponsibility only if he or she could demonstrate that there was no gross negligence inconducting the audit. Following the unearthing of the scandal, PwC’s audit head in Indiaresigned, and the two partners who signed on Satyam’s balance sheet — S. Gopalakrishnan andSrinivasTalluri — were suspended and imprisoned.AFTERCRISISThe fraud causeddecline of more than 78 % Satyam’s market capitalization. The biggestchallenge for government-appointed board was to protect the interests of shareholders andemployees by making sure that the firm will survive. In February 2008, the market regulator(SEBI) gave a green signal for sale of a 51 per cent stake of Satyam through a global biddingprocess. Investors with more than US$150 million in net assets were invited to bid. The biddinginvolved two steps: in the first step, the successful bidder had to acquire equity sharesrepresenting 31 per cent of Satyam’s share capital; in the second phase, the bidding firm had tomake a public offer to buy a minimum of 20 per cent more.13 In case the bidding firm failed toacquire 51 per cent even after the close of the open offer, it would be eligible to subscribe toadditional equity shares.14 Tech Mahindra, a Mahindra and Mahindra group company, won thebid for Satyam at INR58 per share. It paid INR17.57 billion for a 31 per cent stake in Satyam.Tech Mahindra planned to run Satyam as an independent company with separate liabilities.15The Detail analysis of entire case can be seen in Exhibit 4.13 http://articles.economictimes.indiatimes.com/2009-02-14/news/27637126_1_sebi-order-takeover-norms-satyam-chairman-kiran-karnik14 http://blogs.siliconindia.com/lalchandbhamare/Tech_Mahindra_win_bid_to_take_over_satyam_computers-bid-YJ6930E712820554.html15 “Tech Mahindra completes 31 pc acquisition in Satyam,” IBN Live, May 6, 2009,http://ibnlive.in.com/news/tech-mahindra-completes-31-pc-acquisition-in-satyam/91897-7.html, accessed onMay 31, 2009.Sunny Goyal 7
  8. 8. Governance Disaster At Satyam Exhibit 1 LETTER BY SATYAM CEO January 7, 2009ToThe Board of DirectorsSatyam Computers Services Ltd.From B. Ramalinga RajuChairman, Satyam Computer Services Ltd.Dear Board Members,It is with deep regret and tremendous burden that I am carrying on my conscience, that Iwould like to bring the following facts to your notice:1) The balance sheet carries as of September 30, 2008a. Inflated (non-existent) cash and bank balances of Rs.165,040 crore17(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 thebooks).2) For the September quarter (Q2) we reported a revenue of Rs. 2,700 crore and anoperating 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. 61 Crore ( 3% of revenues). This hasresulted in artificial cash and bank balances going up by Rs. 588 Crores in Q2.The gap in the balance sheet has arisen purely on account of inflated profits over a period of16 Rs. is an abbreviated form of the Indian rupee (INR).17 One crore equals 100 million.Sunny Goyal 8
  9. 9. Governance Disaster At Satyamlast several years (limited only to Satyam standalone, books of subsidiaries reflecting trueperformance). What started as a marginal gap between actual operating profit and the onereflected in the books of accounts continued to grow over the years. It has attainedunmanageable proportions as the size of company operations grew significantly (annualizedrevenue run rate of Rs. 11,276 Crore in the September quarter, 2008 and official reserves ofRs. 8,392 Crore). The differential in the real profits and the one reflected in the books wasfurther accentuated by the fact that the company had to carry additional resources and assetsand justify higher level of operations — thereby significantly increasing the costs.Every attempt made to eliminate the gap failed. As the promoters held a small percentage ofequity, the concern was that poor performance would result in take-over thereby exposing thegap. 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 withreal ones. Maytas’ investors were convinced that this is a good divestment opportunity and astrategic fit. Once Satyam’s problem was solved, it was hoped that Maytas’ payments canbe delayed. But that was not to be. What followed in the last several days is commonknowledge.I would like the Board to know:1) That neither myself, nor the Managing Director (including our spouses) sold anyshares in the last eight years - excepting for a small proportion declared and sold forphilanthropic purposes.2) That in the last two years a net amount of Rs. 1,230 Crore was arranged to Satyam (notreflected in the books of Satyam) to keep the operations going by resorting to pledging allthe promoter shares and raising funds from known sources by giving all kinds of assurances(Statement enclosed, only tothe members of the Board). Significant dividend payments,acquisitions, capital expenditure to provide for growth did not help these matters. Everyattempt was made to keep the wheel moving and to ensure prompt payment of salaries to theassociates. The last straw was the selling of most of the pledged share by the lenders onSunny Goyal 9
  10. 10. Governance Disaster At Satyamaccount of margin triggers.3) That neither me, nor the Managing Director took even one rupee/dollar from thecompany 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 situationin which the company is placed. Even business leaders and senior executives in thecompany, such as, Ram Mynampati, Subu D, T. R Anand, Keshab Panda, VirenderAgarwal, A.S, Murthy, Hari T, S.V.Krishnan, Vijay Prasad, Manish Mehta, Murali V.,Sriram Papani, Kiran Kavale, Joe Lagioia, Ravindra Penumetsa, Jayaraman and PrabhakarGupta were unaware of the real situation as against the books of accounts. None of my orManaging Director’s immediate or extended family members had any idea about these issues.Having put these facts before you, I leave it to the wisdom of the Board to take the mattersforward. 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 outof the failed Maytas acquisition attempt. This consists of some of the most accomplishedleaders of Satyam: Subu D., T. R. Anand, Keshab Panda, and A.S. Murthy, Hari T. andMurali V. representing support functions. I suggest that Ram Mynampati be made theChairman 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 mergeropportunities.3) You may have a ―restatement of accounts‖ prepared by the auditors in light of thefacts that I have placed before you.I have promoted and have been associated with Satyam for well over twenty years now. I haveseen it growing from few people to 53,000 people with 185 Fortune 500 companies ascustomers and operations in 66 countries. Satyam has established an excellentleadership and competency base at all levels. I sincerely apologize to all Satyamites andstakeholders who have made Satyam a special organization, for the current situation. I amSunny Goyal 10
  11. 11. Governance Disaster At Satyamconfident they will stand by the company in this hour of crisis. In light of the above, Ifervently appeal to the Board to hold together to take some important steps. Mr. T.R. Prasadis well placed to mobilize support from the government at this crucial time. With the hopethat members of the Task Force and the financial advisor, Merrill Lynch (now Bank ofAmerica) will stand by the company at this crucial hour, I am marking copies of thisstatement to them as well. Under the circumstances, I am tendering my resignation as the Chairman ofSatyam and shall continue in the position only till such time the current board isexpanded. My continuance is just to ensure enhancement of the board over the next severaldays or as early as possible.I am now prepared to subject myself to the laws of the land and face consequence thereof.(B. Ramalinga Raju)Copies marked to:1) Chairman SEBI2) Stock ExchangesSource: www.hindu.com/nic/satyam-chairman-statement.pdf, accessed on January 15, 2009.Sunny Goyal 11
  12. 12. Governance Disaster At Satyam Exhibit-2 SHAREHOLDINGSunny Goyal 12
  13. 13. Governance Disaster At Satyam Exhibit-3 Board CompositionSource: Prowess Database, Centre for monitoring Indian EconomySunny Goyal 13
  14. 14. Governance Disaster At Satyam Exhibit-4Sunny Goyal 14

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