Satyam Saga
Confession – January 7th , 2009
“I did it ”
INDIA’S LARGEST CORPORATE FRAUD
Background It was set up as Private Limited Company by
Ramalingam Raju in 1987 which was later in 1991 recognized as public limited company.
One of the major providers of IT service in India which provides Software development service , embedded service , engineering service , system integration , ERP solution , Enterprise Application Integration , Customer relationship , e-commerce and consulting.
First company listed on NYSE, EURONEXT and NSE
First Indian company to list its American Depositories Shares
Achievement & Awards
• DescriptionYear• World Economic Forum identifies Satyam as one of the hundred leading pioneering technology company
• HRD awards Ramalinga Raju as “ The IT Man of the Year “
2000• Top choice by SAP Support by GIGA
research group2002• Facilitated with Lotus Award• Outsourcing contract awarded by World
Bank2003• Ranked amongst top 10 best employers
by CNBC 2004
Contd..• Ranked amongst top 13 best managed
company by Forbes • Largest global development centre
outside India being operations2005
• Ranked number one in ITO global processing consulting vendor
• Raju wins the Ernst & Young Entrepreneur of the year
2007
• First company listed on NYSE and NSE• First Indian company to list its American
Depositories Shares2008
Fall of Satyam
Three Phases of the Scam
First Phase :1999-2001 Ascent of Indian IT sector on
Y2K phenomenon
Second Phase :2001-2005Maintaining Growth
Third Phase :2007The Debacle
Why Confession ?
Recession drained the liquidity to run the show
Out standings were piling up
Unmanageable gap between actual and book profit
“Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in a take-over, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten”.
Who are the responsible parties?
Ramalingam Raju
Indian Banker
s
Auditors
Board of Director
s
Fabricated Income Statements
‘Creative Account Practice’
• Details of cash balances with Scheduled banks are not there in the Annual report
• Question raised by Equity analyst Kawaljeet Saluja -$500 mn cash parked in current account
Fake FD receiptsTake fake FD
receipts
Tell to Banks FD receipt is
Lost
Ask for Duplicate Receipts
Use the Duplicate to
Withdraw money
Park the
Money in
other Bank
At the end show the original
FD receipts
The money
has already vanishe
d
Repeat the procedure
Chairman Raju’s role Inflated billing to customers
Non-existent cash & bank balances $ 1 bn
Overstated Debtors $ 100 million
Operating margin shown high at 24% in Q2 (Sept 2008) as against 3% real profit margin
Such manipulation done in earlier years( 6 yrs-$ 1.2 Bn)
Increased costs to justify higher level of operations.
Actual employee strength was 40000 but shown at 53000.
Attempt to merge Son’s Company ‘Maytas’ with huge land Bank to bridge the gap failed
Role of Director
Satyam's Board of Directors consisted of nine members including Krishna Palepu Harvard Professor and corporate governance expert, Rammohan Rao, the Dean of the Indian School of Business, and Vinod Dham, co-inventor of the Pentium Processor.
Satyam revealed that it did not have a financial expert on the board during 2008.
The Board of Directors were not independent.
The Board first came under fire on December 16, 2008 when it approved Satyam's purchase of real estate companies in which Mr. Raju owned a large stake.
Furthermore, the Board should have caught some of the same red flags.
Role of Auditors
Global auditing firm Price Waterhouse Coopers ("PWC") audited Satyam's books from June 2000 for nearly 9 years and did not uncover the fraud, whereas Merrill Lynch discovered the fraud as part of its due diligence in merely 10 days
PWC signed Satyam's financial statements and was responsible for the numbers under Indian law. One particularly troubling item concerned the $1.04 billion that Satyam claimed to have on its balance sheet non interest bearing securities.
It appears that the auditors did not independently verify with the banks in which Satyam claimed to have deposits.
The fraud went on for a number of years and involved both the manipulation of balance sheets and income statements. Whenever Satyam needed more income to meet analyst estimates, it simply created fictitious sources and it did so numerous times without the auditors ever discovering the fraud.
Role of Bankers
The company's bankers -- and it has a whole bunch of them, considering it is a huge company -- too have been shown in poor light.
Satyam's books showed cash to the tune of over Rs 5,300 crore (Rs 53 billion) in its banks.
Satyam's banks -- ICICI Bank, HDFC Bank, Bank of Baroda, etc -- were supposed to provide bank statements on a quarterly basis and bank certificates on basis of which auditors go ahead and signed the balance sheet.
Maytas Infra Ltd
An infrastructural development, construction and project management company
Founded on May 6 , 1988 by Ramalinga Raju ‘s kins
Run by Teja Raju ,son of Ramalinga Raju
Raju’s hold 36.64 per cent while institutional holding is 10.92 per cent
Satyam planned to acquire 51 per cent stake for $0.3 billion
Maytas Properties Ltd
A property development company
Founded in 2005 by Ramalinga Raju ‘s kins
Raju’s family owns 35% of Maytas properties
Satyam planned to acquire 100 per cent stake for $1.3 billion
In 2008 , Satyam proposed to acquire Maytas Infrastructure Ltd and Maytas Properties founded by family relations of company founder Raju for $1.6 billion
Intention was to bail out Satyam by covering up the irregularities in the books of accounts such as inflated cash balance etc
This was met with strong opposition from independent directors and shareholders and ultimately proposal was withdrawn
It was a major blow to Satyam ’s credibility as it was unethical and violated corporate governance laws
Consequences of confession
Investors- Panicked as Stock plummeted & Class action suits filed in US
Employees- stranded in many ways- morally, financially, legally and socially
Customers- shocked and worried about the project continuity, confidentiality and cost over run
Bankers - concerned about recovery of financial and non-financial exposure and recalled facilities
Government- worried about image of the Nation & IT Sector affecting faith to invest or to do business
Anchoring the downfall
Government• Board
Restructuring• SFIO
investigation• Delliote &
KPMG
ICAI• Action against
PWC• S
Gopalakrishnan and V S Prabhakar Gupta ban for life
Tech Mahindra• Rs1757 crore
-> 31% stake• Turnaround of
the company
Recommendations : Auditor Appointment and remuneration of auditors
should be done by stock exchanges. Involvement of Forensic auditors Implementation of Investigative audit techniques Audit must be conducted in accordance with
AAS(Auditing and Assurance Standard) Rotation of auditors with limited tenure
Recommendations: Management
Independent director must be chosen from a pool of qualified professionals
The tenure of Independent director must be finite
360 degree feedback system should be used
Market driven compensation guidelines should be disclosed
Recommendations: Regulators
▶ Clear guidelines should be given for admission of watchdogs
▶ Special investigation should be undertaken of top 100 hundred companies and some other select companies to examine their balance sheets.
▶ Amending laws and regulations for improved corporate governance.
Avinash Kumar Kanchan Nishit Kumar Wg. Cdr. R. K. Vashisht Siddhant Goyal Shalabh Gupta Shivans Gupta Surabhi Sehgal Vijendra Pandey
TEAM MEMBERS