SATYAM FIASCO

“SINKING SHIP OR TIP OF ICEBERG”

Somya MukherjeeManpreet Singh

Company ProfileFounded by Mr. Ramalinga Raju & Mr. B. Rama Raju

on 24th June,1987

Fourth largest IT Outsourcing Company of India

Employees more than 40,000 in India

High Global reputation

Offers services to more than 550 MNC’s

The Biggest Corporate Fraud

Motive Behind the Scam:

- To maintain the pace of growth

- To please investors and shareholders

- To justify the inflated P/E multiples.

Unveiling the truth• On 8th Jan,2009 the truth was relieved to the world.

• It was in the form of a 5-page letter given by Mr. Ramalinga Raju to the Board of Directors.

• Various confessions were made in this letter.

Confessions Made• Neither myself, nor the managing Director (including our

spouses) sold any shares in the last eight years-excepting for a small portion declared and sold for philanthropic purpose.

• That neither me, nor the Managing Director took even one rupee / dollar from the company and have benefitted in financial terms on account of the inflated results.

• Non of the board members, past or present, have any knowledge of the situation in which the company is placed. None of my or Managing Director’s immediate or extended family members has any idea about these issues.

Bridging the Gap

SATYAM MAYTAS

• It all started on 16.12.2008, when Ramalinga Raju thought,

buying an infrastructure firm .

• Raju and his immediate family members own up to 35%

stakes in Maytas.

• Satyam intended to buy 100% stakes in Maytas Properties for

$1.3 Billion and 51% stakes in Maytas Infra for another $300

Million.

• Non of the investors & fund managers were aware of the bid.

Violation of the Companies Act

• Violation of Section 372A of Companies Act.

-Acquiring shares in another corporate for an amount not

exceeding 60% of the acquiring company’s share capital &

free reserves.

-Passing resolution through a postal ballot & giving advance

intimation to the RoC (Hyderabad)

• Violation of Section 293 of Companies Act.

- Failed to pass resolution regarding the proposed acquisition of

stakes in Matyas Infra. & Matyas Properties.

Satyam's path to disaster• Following is the chronological summary of the events which send IT

major Satyam Computer Services, founded in 1987, to disaster:

1. December 16: Satyam gets board's approval for acquisition of Maytas Infrastructure and Maytas Properties for $1.6 billion

2. December 18: British mobile solution provider Upaid files a suit against Satyam in a district Court in the US over Maytas deal.

3. December 25: Mangalam Srinivasan, non-executive and independent director resigns from board.

4. December 27: Promoters disclose that their entire holding in Satyam pledged with institutional lenders since 2006.

5. January 1: Satyam-Upaid case hearing over the Maytas deal in Texas court on January 7.

7. January 2: Promoter holding in Satyam drops to 5.31 per cent from 8.27 per cent after sale of pledged shares by lenders.

8. January 6: Raju family holding in Satyam falls to 3.16 per cent after sale of pledged share by lenders

9. January 7: Satyam Chairman Ramalinga Raju sends letter to board tendering his resignation and admitting to fraud in accounting books.

10. January 7: Satyam Managing Director B Rama Raju also resigns

11. January 7: DSP Merrill Lynch terminated its advisory engagement with company

SATYAM CASE IN VIEW OF CORPORATE GOVERNANCE

• The whole perception of Corporate Governance was shaken to the very roots.

• Those companies who had already a question mark over their Corporate Governance were very badly hit.

• The realty sector, with its complex land bank valuations had been the worst hit.

• The firms with Satyam in their portfolios are trying to sell other stocks they held creating a situation in which short sellers reveled and rumors flew.

5312.62

ACTUAL CASH IN BANK IS

321INFLATED 5040cr2651.6

ACTUAL DEBT IS 2161

OVERSTATED 490 Cr

CURRENT ASSESTS

376

NO ACCURRED INTEREST

376 Cr

UNDERSTATED LIABILITY 1230 Cr which is arranged

by Mr.Raju

5040+376+1230+ 490= 7136

LIABILITIES

REVENUE 2700

OPERATING

MARGIN

690

ARTIFICIALLY ADDED 588OPERATING PROFIT ADDED

588INCREASING THE CASH

RESERVE ONLY FOR Q2 ALONE TO 588

Operating Profit

401.61468.72

545.49648.61 649.27

0

200

400

600

800

Quarter

Op

era

tin

Pro

fit

( IN

CR

OR

ES

)

Series1 401.61 468.72 545.49 648.61 649.27

Sep '07 Dec '07 Mar '08 Jun '08 Sep '08

ACTUAL OPERATING MARGIN 61 Cr ( CREATED AN ARTIFICIAL REVENUE OF 588)

GROWTH IN THE OPERATING PROFIT

ADJUSTED BALANCE SHEET

RATIO ANALYSISCURRENT RATIO : CURRENT ASSESTS/CURRENT LIABILITY

CASH RATIO : CASH & BANK BALANCE + CURRENT INVT / CURRENT LIABILITIES

BEFORE ADJUSTMENT AFTER ADJUSTMENT

= 8788.2

1603.07

= 5.48 : 1

= 2882.2

2833.07

= 1.01 : 1

BEFORE ADJUSTMENT AFTER ADJUSTMENT

= 5854.8

1603.7

= 3.65 : 1

= 814.8

2833.07

= 0.28 : 1

RATIO ANALYSIS (cont…)

OPERATING PROFIT RATIO : OPERATING PROFIT / SALES X 100

EARNING PER SHARE : NPAT – PREF DIVIDEND/ NO OF EQUITY SHARE HOLDERS

BEFORE ADJUSTMENT AFTER ADJUSTMENT

= 649.27 X 100

2700.52

= 24.04 %

= 61.00 X 100

2700.52

= 2.25 %

BEFORE ADJUSTMENT AFTER ADJUSTMENT

= 597.43

67.35

= 8.87 RS

= 9.430

67.35

= 0.14 RS

IMPACT ON STAYAM

SHARE PRICES PLUNGES

JAN 7

IMPACT ON STOCK MATKET:

shares fell to 6.00 rupees on 10 January 2009, compared to a high of 544 rupees in 2008. The sensex fell from its closing peak of 20,837 on January 8,

2008 to less than 10,000 by October 17, 2008.Sensex on Wednesday tumbled over 340 points at noon to dip

belowIndia's National Stock Exchange has announced that it will

remove Satyam from its S&P CNX Nifty 50-share index on January 12 and added Sun PharmaIn New York Stock Exchange Satyam shares peaked in 2008 at

US$ 29.10; by March 2009 they were trading around US $1.80.The New York Stock Exchange has halted trading in Satyam

stock as of 7 January 2009. Withdrawal of FII of actual $66.5 billion at the beginning of

2008 to pull out of $ 11.1billion during the first nine and a half months of 2008 triggered a collapse in the stock market.Withdrawals in FII also led to sharp depreciation in rupees.

Regulators in action:• Department of Company Affairs(DCA): Scanning for further

misappropriations in the balance sheet.

• CLB(Company Law Board): Looking into the violations of the Securities Act.

• SEBI: Investigating matters relating to trading of shares.

• Serious Frauds Investigation Office: Constituted with members from SEBI, RBI, CBI etc for investigating under DCA.

• Enforcement Directorate: Looking into possible violations of rules governing foreign exchange transactions.

• CID/CBI: Investigating the criminal aspects of the fraud.

Tech Mahindra acquires Satyam

+

ABOUT TECH MAHINDRA

• Tech Mahindra is India’s 6th largest software exporter, and serves telecom service providers, equipment manufacturers, software vendors and systems integrators

• Operations over 25 countries

• Around 25,000 professionals across the globe

• Strong presence in Europe and Germany

BITTER SWEET DEAL

● The potential bidders were Larsen & Turbo, Tech Mahindra

and Wilbur Ross.

• Tech Mahindra = 58/share

• Larsen & turbo = 45.9/share

• Wilbur Ross = 20/share

● Tech. Mahindra will Buy 31 percent of Satyams equity share,

followed by a further acquisition of 20% through an open offer

● Tech Mahindra will pay Rs 2,900 crores for 51% stake.

Highlights of Tech Mahindra Bid• Tech Mahindra emerged as the highest bidder. The bid as

made by the company’s 100% subsidiary venturbay consultants.

• Management plans to raise debt through SPV.

• A company claims to have largest support from its largest client BT.

• The management intends to meet key clients of the company personally to restore their faith and confidence in satyam’s service delivery and governance.

• Tech Mahindra has acquired 475 acres of land assets of Satyam.

Impact of Acquisition

• Satyam is completely complimentary to Tech Mahindra with negotiable business overlap.

• Spresence in Europe.atyam has strong presence in US and Tech M has strong

• The stock price of Tech Mahindra has raised appreciably from of Rs.200 to Rs.365 in a short span of 1 month.

• Employee satisfaction

• Customer Retention

Satyam & PWC• The audits were conducted by Price Waterhouse Cooper in

accordance with applicable auditing standards.

• 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.

• 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,

• A fallout of the Satyam case is the issue of delays involved in

enforcement of Indian corporate laws.

• Shareholders should ensure that the composition of Board of

Directors is a balanced mix of independent directors and

management appointees.

• Ties between the company management and auditors and

independent directors need to be cut.

• Securities and Exchange Board of India (SEBI), has called for

peer reviews of audits among the companies that are part of

the Nifty and Sensex indices.

• Regulation and transparency can only serve to lower the

incidences of fraud.

``Investing in Corporate Governance

• Companies need to invest in good governance

▫ Corporate governance has a direct bearing on business performance and thereby ROI

• A study reveals that-

On an average, businesses with superior governance practices generate 20 percent greater profits than other companies

IMPACT ON 'BRAND INDIA• Damage to India's appeal for foreign investors and the IT

services industry.

• IMPACT ON IT INDUSTRIES:It greatly affected the Indian IT sector.The impact is short-term.The bluest of blue-chip reputations [such as] Infosys and TCS"

could actually gain in the current environment, because of a potential "flight to quality" among client companies. The third-tier and weaker companies will probably undergo a lot more.

• IMPACT ON INDIAN ECONOMY:Minimal effect on Indian economy as it was an isolated

incident.

Thank You!