INFO

2. The Flawless Public Facade
Satyam Computer Services Ltd was founded in 1987 in Hyderabad by brothers, Rama Raju and Ramalinga Raju (henceforth
Raju). The name in the ancient Indian language Sanskrit meant ‘Truth’. The firm began with 20 employees offering IT and
BPO services across various sectors.
The initial success of the company soon led to it getting listed and opting for an IPO in the BSE in 1991. Post this the
company soon got its first Fortune 500 client- Deere and Co. This further allowed the business to grow rapidly into
becoming one of the top players in the market.
Satyam soon became the fourth largest IT software exporter in the industry after TCS, Wipro, and Infosys.
At the peak of its success, Satyam employed more than 50,000 employees and operated in 60+ countries. Satyam was
now seen as the prime example of an Indian Success story. Its financials too were perfect. The firm was worth $1billion in
2003. Satyam soon went on to cross the $2billion mark in 2008.
During this period the company had a CAGR of 40%, operating profits averaging 21% with a 300% increase in its stock
price. Satyam was now an example to other companies as well. It was showered with accolades from MZ Consult for
being a ‘leader in Indian Corporate Governance and Accountability, the ‘Golden Peacock Award’ for Corporate
Accountability in 2008.
Mr Raju too was revered in the industry for his business acumen and was awarded the Ernest and Young Entrepreneur of
the Year Award in 2008.
Late in 2008, the board of Satyam decided to takeover Maytas a real estate company owned by Mr Raju. This did not sit
well with the shareholders which led to the decision being reversed in 12 hours, impacting the stock price. On December
23rd the World Bank barred Satyam from doing business with any of the banks’ direct contacts for a period of 8 years.

3. • Satyam Scam Case Study: What was behind the Curtains?
As the investors were still coping up with the failed acquisition of
Maytas and the allegations by the World Bank on January 7th, 2009 the
markets received the resignation by Mr Raju and along with it a
confession that he had manipulated accounts of Rs. 7000 crores.
Investors and clients all around the World were left shocked. This just
couldn’t be happening!
In order to understand the scam, we would have to go back to 1999.
Mr Raju had begun inflating the quarterly profits in order to meet the
analyst expectations. For eg the results announced on October 17,
2009, overstated quarterly revenues by 75% and profits by 97%. Raju
had done this along with the company’s global head for internal audit.

4. What did he do ?
• Mr Raju used his personal computer to create a number of bank statements in
order to inflate the balance sheet with cash that simply did not exist. The
company’s global head for internal audit created fake customer identities and
fake invoices in order to inflate the revenue.
• This, in turn, would allow the company easy access to loans and the impression of
its success led to an increase in the share price. Also, the cash that the company
had raised from the markets in the US never even made it to the balance sheets.
But this was not sufficient for Raju, he went on to create records for fake
employees and would withdraw salaries on their behalf
• The increased share price drove Raju to get rid of as many shares as possible and
maintain just enough to be a part of the company. This allowed Raju to make
profits from their sales at high prices. He also withdrew $3 million every month as
salaries on behalf of employees that did not exist.

5. But where did all this money go?
• Although Raju had set up a great IT company, he was also interested in the
real estate business. The real estate business in the early 2000s was
booming in Hyderabad. It was also rumoured that Raju knew the
plan(route) for a metro that was to be built in Hyderabad.
• The foundation of the metro plans was laid in the year 2003. Raju soon
diverted all the money into real estate with hopes to make a good profit
once the metro was functional. He also set up a real estate company called
Maytas
• But unfortunately, just like every other sector the real estate sector too was
hit badly during the recession of 2008. By then almost a decade of
manipulation of the financial statements had led to the hugely overstated
assets and underreported liabilities. Nearly $1.04billion in bank loans and
cash that the books showed was nonexistent. The gap was simply too big to
fill!

6. After Math
• By now whistleblowing attempts were also starting to arise. Company director
Krishna Palepu received anonymous emails from the alias Joseph Abraham. The
mail exposed the fraud. Palepu forwarded it to another director and to S.
Gopalkrishnan a partner at PwC – their auditor.
• Gopalkrishnan assured Palepu that there were no truths in the mail and a
presentation would be held before the audit committee in order to assure him on
29th December. The date was later revised to 10th January 2009.
• Despite this Raju had a last resort. The plan included a takeover of Maytas by
Satyam which would bridge the gap that had accumulated over the years. The
new financials would justify that the cash had been used to purchase Maytas. But
this plan was foiled after shareholder opposition.
• This forced Raju to put himself at the mercy of the law. Raju later mentioned It
was like riding a tiger, not knowing how to get off without being eaten.

7. Satyam Scam Case Study: How Raju was able to get
away with the Scandal?
• The answer to this lies in the miserable failure of PriceWaterhouseCoopers(PwC)
their auditor. PwC was the external auditors to the company and it was their duty
to examine the financial records and ensure that they are accurate. It is surprising
how they did not notice 7561 fake bills after auditing Satyam for almost 9 years.
• There were multiple red flags that the auditors could have caught upon. Firstly a
simple check with the banks would have revealed that the bills were not valid and
the cash balances were overstated. Secondly, any company with that big of cash
reserves as Satyam would at least invest them in an interest yielding account.
• But that was not the case here. Despite these obvious signs, PwC seemed to be
looking the other way. Suspicion towards PwC was later increased when it was
found out that they were paid twice the fees for their services.
• PwC was not able to detect the fraud for almost 9 years but Merrill Lynch
discovered the fraud as part of their due diligence in merely 10 days.

8. The Aftermath of Satyam Scam Exposure
• Two days after the confession was made Raju was arrested and charged
with criminal conspiracy, breach of trust, and forgery. The shares fell to
Rs.11.50 on that day compared to heights of Rs.544 in 2008. The CBI raided
the house of the youngest Raju sibling where 112 sales deeds to different
land purchases were found. The CBI also found 13,000 fake employee
records created in Satyam and claimed that the scam amounted to over Rs.
7000 crores.
• PwC initially claimed that their failure to catch the fraud was due to the
reliance placed by them on information provided by the management. PwC
was found guilty and its license was temporarily revoked for 2 years.
Investors too became vary of other companies audited by PwC. This
resulted in the share prices of these companies falling by 5-15%. The news
of the scam led to the Sensex falling by 7.3%

10. Other Scams in India
• A Study of biggest scams that shook Indian Stock Market: The stock market in
India has created a lot of wealth for many common and ace investors in India.
There is no doubt in saying that the Indian stock market has yielded enormous
returns to loyal market investors in the last few decades.
• However, there were also times, when the market witnessed extreme
malpractices carried out by a few wicked minds. Many people with foul intentions
applied brainstorming techniques to manipulate the Indian stock market prices.
• In simple words, a scam is referred to as the process of obtaining money from
someone by deceiving him/her. The majority of the securities market scams that
took place in India eventually led to a lot of financial distress to retail investors.
They adversely affected the normal functioning of the markets and degraded the
trust of lakhs of investors in the Indian share market.

11. Harshad Mehta Scam
• Harshad Mehta Scam is probably the most popular stock market scam in India.
During the early 1990s, Harshad Mehta, a stockbroker, started facilitating
transactions of ready-forward deals among the Indian banks, acting as an
intermediary. In this process, he used to raise funds from the banks and
subsequently illegally invest the same in the stocks listed in the Bombay Stock
Exchange to inflate the stock prices artificially.
• Because of this malpractice, the Sensex moved upwards at a fast pace and
reached 4,500 points in no time. The retail investors started feeling tempted
seeing the sudden rise of the market. A huge number of investors started
investing their money in the stock market to make quick money.
• During the period from April 1991 to May 1992, it is estimated that around five
thousand crore rupees were diverted by Harshad Mehta from the Indian banking
sector to the Bombay stock exchange. After the fraud was revealed, the Indian
stock market crashed consequently. And as guessed, Harshad was not in a
position to repay crores of money to the Indian banks.

12. NIRAV MODI
• India’s biggest-ever banking scam shook the very core of the financial sector in India and at the
helm of this fiasco, sat none other than the diamond mogul billionaire, Nirav Modi and his
cronies. The magnitude of the scam was a staggering Rs.11,400 crores (about 1.8 billion dollars)
and it mainly took place at a single branch in Mumbai of the Punjab National Bank (PNB), the
second-biggest public sector lender in India.
• Nirav Modi’s company
• In 1999, Nirav Modi founded the Firestar Diamond International Company specialising mainly in
high-end jewellery. Further, in 2014 ‘NIRAV MODI’ the brand was born with its first store opening
in New Delhi, India. In 2015, Nirav Modi opened stores in Mumbai, Madison Avenue – New York,
and Hong Kong. His company is claimed to have made more than $2 Billion in sales. He also has
other companies in the name of Solar Exports, Stellar Diamonds, and Diamond R US.
• Nirav Modi’s net worth
• Before the PNB Scam hit the headlines in 2018, Nirav Modi was estimated to have a net worth of
$1.7 billion. Post the fiasco becoming public, his net worth dropped like an inevitable avalanche
and Forbes too removed his name from their list of billionaires.

13. Scam in Detail…..
• The scam was led by Nirav Modi and his uncle Mehul Choksi in collusion with some of the bank officials of Punjab National
Bank. To comprehend the modus operandi of this grand greedy plan to defraud a leading public sector bank, it is necessary
to understand the term Letter of Undertaking (LoU) first for it was the unauthorised LoUs granted to Nirav Modi and
Company by corrupted PNB officials that helped Modi run away with thousands of crores of taxpayers hard-earned
money.
• So, LoU stands for Letter of Undertaking which is a form of bank guarantee. What this bank guarantee in the form of LoU
does is it allows the LoU receiver to raise money overseas by showing the LoU. The foreign banks (overseas branches of
Indian Banks) see the LoU and give credit/loan to the debtor and the bank giving the LoU stays as a guarantee that in case
the debtor fails to repay the debt, the bank will repay the same. When a person walks into a bank seeking an LoU, the
bank seeks collateral, usually in the form of a Fixed Deposit (FD) or property held in his name. Also, a credit limit is
sanctioned by the bank giving LoU. So, basically, LoUs gave cheap buyer’s credit for short term purposes.
• What happened in this scam is unauthorised Letters of Undertakings (LoUs) were given by corrupted PNB officials to Nirav
Modi and his firm. These LoUs were given without any collateral as security and any sanctioned credit limit. To make
matters worse, all these transactions were not added to the PNB’s Core Banking System (CBS) which is used for record-
keeping purposes. Also in some cases, a lower amount was quoted while making a corresponding entry. All these
unauthorised LoU related transactions were done by the corrupt officials using the SWIFT system, which is an elaborate
messaging network used by the banks and financial institutions internationally to accurately, quickly, and safely send and
receive financial information. The SWIFT system had no linkage with the bank’s record keeping core system, i.e.,CBS and
this gave Nirav Modi and his cronies the shadow area to operate with unauthorised LoUs. In other words, the SWIFT
bypassed the CBS of the bank. Since the overseas Indian bank branches trust their Indian counterparts, without
scrutinising the credit quality, they promptly issued loans (buyer’s credit) to Nirav Modi and his firms. Added to this,
though these LoUs were given for import-related payments, Nirav Modi and his cronies used them to clear previous loans
and for other purposes. These went on rampant and unchecked in the shadows for about seven years by Nirav Modi,
Mehul Choksi and their associates in collusion with corrupt PNB officials.

14. Dates Important events of the Nirav Modi scam
29th January, 2018
Punjab National Bank (PNB) complained to the police authorities that two of its staff members in collusion with Nirav Modi and Mehul Choksi had cheated the bank for about
two billion dollars.
5th February, 2018 The PNB informed SEBI that it had started its own internal inquiry into the scam and the CBI after convening a meeting, took over the inquiry process.
14th February, 2018
PNB declared a fraud of Rs. 11,400 crores of money and additionally, foreign branches of Indian overseas banks also declared that money was being credited to Nirav Modi
and his firms because of the unapproved ways of banking by PNB staff in the form of granting unsecured and unauthorised Letters of Undertakings (LoUs).
16th February, 2018
After the complaint was filed against Mehul Choksi, CBI investigated around 20 retailing stores of Choksi’s Gitanjali Group. PNB published a positive statement about hoping
for the recovery of loss within a period of six months. The credit exposure to the Nirav Modi fraud of different banks came forward from the risk exposure data. They are as
follows:Union Bank of India – $300 million (approx)State Bank of India – $212 million (approx)UCO Bank – $412 million (approx)Allahabad Bank – $367 million (approx)The
Reserve Bank of India announced the requirement of tight supervisory and regulatory actions.
17th February, 2018
CBI issued arrest warrants against the two corrupt employees of PNB and executives of Nirav Modi’s group who were integral to the scam. The Enforcement Directorate (ED)
seized diamonds, gold, and jewellery items from Nirav Modi’s home, shops and offices worth Rs.56.74 billion (approx).
20th February, 2018
The share prices of PNB tanked into a nosedive because of the immense fear and volatility induced by the scam and lost thousands of crores in market capitalization. The
then Finance Minister Late Arun Jaitley and RBI issued statements about the omission of linking of SWIFT with the CBS (Core Banking System).Diamond mogul Nirav Modi and
his lawyers vehemently denied any crimes or offences. But, ED after investigation found that Nirav Modi and Mehul Choksi had laundered the funds illegally through nearly
100 shell companies. Three more officers of Nirav Modi Group were taken into custody by CBI for interrogation and investigation.
21st February, 2018
CBI started taking into custody many corrupt officers who were involved in the scam including the general manager of PNB, Mr. Rajesh Jindal who served for many years in
the Mumbai Branch where the scam allegedly took place.
23rd February, 2018
Institute of Chartered Accountants of India (ICAI) appointed independent auditors to investigate the PNB scam.RBI declared stricter control in supervising and regulating the
SWIFT system.
27th February, 2018 Bankruptcy proceedings were filed by Nirav Modi’s firm Firestar Diamond International in the United States.
28th February, 2018 M.K.Sharma, a former auditor was arrested by CBI for manipulating the audit system in the PNB scam.
1st March, 2018 Internal Auditor of PNB Bishnubrata Mishra was arrested by CBI for his role in the scam.
6th March, 2018 CBI took into custody Vipul Chitalia, Vice President of Banking Operations of Gitanjali group.
2nd June, 2018 Interpol issued a Red Corner Notice against Nirav Modi for money laundering and fraud.
26th June, 2018
A Mumbai Court issued an order against Nirav Modi and Mehul Choksi to appear before the Court or be declared as fugitives as per the provisions of the Prevention of
Money Laundering Act (PMLA), 2002.
3rd August, 2018 The Indian government requested the UK government for the extradition of fugitive billionaire Nirav Modi back to India to face trial.
18th March, 2019
The Westminster Court in London issued an arrest warrant against fugitive diamantaire Nirav Modi after the Indian government’s request was duly forwarded to the Court by
the UK Home Office.
20th March, 2019
Nirav Modi was arrested in London after the Westminster Court issued an arrest warrant against the fugitive billionaire and he was sent to Her Majesty’s Prison (HMP)
Wandsworth.
29th March, 2019 The bail application by Nirav Modi was rejected by the Westminster Court.
25th February, 2021 The UK’s Westminster Magistrates’ Court, presided by District Judge Sam Goozee ruled Nirav Modi can be extradited to India to face charges of fraud and money laundering.

15. ENRON
Key Takeaways
• Enron’s leadership fooled regulators with fake holdings and off-the-books
accounting practices.
• Enron used special purpose vehicles (SPVs), or special purpose entities (SPEs), to
hide its mountains of debt and toxic assets from investors and creditors.2
• The price of Enron’s shares went from $90.75 at its peak to $0.26 at bankruptcy.1
• The company paid its creditors more than $21.7 billion from 2004 to 2011.