SATYAM ANALYSIS

Presented by Jayesh Alwani

S Gautam & Associates

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

MANAGEMENT

B. Ramalinga RajuFounder & Chairman,

Satyam Computers Ltd.

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

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.

HISTORY OF SATYAMYear Particulars1987 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

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

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

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.

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.

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• 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.

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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…

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.

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• 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.

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.

Continued...

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

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.

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

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.

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.

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

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

• 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.

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Continued...

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 KARNIKFORMER PRESIDENT OF NASSCOM

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

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.

THANK YOU