THE SATYAM SCAM

DEVAL SHAHSHAHIL PUNJANIRUSHANK RAJWAT PRAKRITI SETH DARSHIL SHAH

INTRODUCTION

Company Profile

Set up in the year 1987 by B.Ramalinga Raju.

India’s 4th biggest software company.

On 26th August, 1991 it was converted into a Public Limited Company and went for PUBLIC ISSUE in 1992.

BSE IPO oversubscribed 17 times when made public.

It is listed in BSE, NSE, NYSE and Euronext (Amsterdam).

The company employs 53,000 IT professionals across development centers in 6 continents.

It serves over 654 global companies, 185 of which are Fortune 500 corporations.  

Company Profile

B. Ramalinga RajuFounder & Chairman, Satyam

Computers Ltd.

B. Rama RajuPromoter & CEO, Satyam

Computers Ltd.

Background of the Fraud Case

Background of the Fraud Case• Maytas Infra Ltd., Company owned by Two sons of Raju were investing in the real

estate business and recently their real estate business was not in good shape.

• Raju started using the manpower and other resources for the Satyam Company for the welfare of his sons’ real estate business.

• Four main shareholders of Satyam Company were horrified by the changing behavior of Raju.

• With Sat yam's management focused elsewhere, business suffered. Clients complained about lack of attention, and many professional managers began to leave.

• Before the shocking confession from Raju, there was a long list of reported suitors for Satyam. They included HCL Technologies, Wipro, IBM (IBM), Hewlett-Packard (HPQ), Larsen & Toubro InfoTech, Cognizant (CTSH), Cap Gemini (CAPP.PA), and even private equity players KKR and TPG.

• Ramalinga Raju on Dec. 16 proposed that Satyam would buy a 31 percent stake in Maytas Infra from his family, and an additional 20 percent from minority shareholders, as well as all of Maytas Properties, for $1.6 billion.

Satyam ADR’s lost 50% of their value over night.

Raju was forced to reverse his decision under the shareholder’s pressure.

But what was widely seen as a move by Raju to bail out his sons was actually aimed at covering Sat yam's tracks through fictitious cash transfers.

December also brought news of pending litigation by a former client, online mobile-payments service Upaid Systems ,which filed a case of intellectual fraud and forgery against Satyam in 2007; a Texas court is scheduled to conduct a hearing on the case Jan. 7.

What triggered the wrongdoing confession was investment banker DSP Merrill Lynch's letter to the company (followed by another to Sebi this morning) terminating its 10-day-old agreement with Satyam to advise it on strategic options because of ``material accounting irregularities”. ( One day before confession)

Impact of the Confession

Impact of the Confession• Satyam had become "India's Enron," said CLSA India analyst Bhavtosh

Vajpayee, calling the case "an accounting fraud beyond imagination [and] an embarrassing and shocking episode in Indian corporate governance."

• Damaged India's reputation as a reliable provider of IT services.

• Indian rivals will now come under greater scrutiny by regulators, investors, and customers.

• Tech Mahindra made a public statement that it would not be interested in acquiring Satyam "in the current environment.

• Price waterhouse cooper, sat yam s official auditors are under scrutiny.

• Raju family’s holding in Satyam falls to 3.64%.

• Infosys, Tata Consultancy Services, Wipro, Accenture, and IBM could benefit from $500 to $700 million in business from Satyam over the next six months if the company flounders.

• Satyam Computer crashed by Rs 139.15 or 77.69 per cent to close at Rs 39.95, after the Chairman announced the company had falsified accounts and assets for several years.

• Bse Fell 700 points because of this.

• The Sensex, which had gained over 688 points in the last four sessions of 2009, tumbled below the crucial 10,000 point level, losing 749.05 points to reach 9,586.88. It touched the day's low of 9,510.15 and a high of 10,469.72 points, showing a wide fluctuation of nearly 960 points.

• The declining Sensex recorded the biggest single-day loss in the past two months, after Satyam Computers Services, the country's fourth-largest software developer, plunged around 80 per cent, the highest since getting listed in 1992.

• The 50-share National Stock Exchange index Nifty tumbled by 192.40 points at 2,920.40, after hitting the day's low of 2,888.20 points during the day.

• The timing of what is being called `India's Enron' could not have come at a worse time - just when the stock market was showing signs of responding positively to the Centre and RBI's moves to stimulate the economy through interest rate cuts, duty reductions and accelerated government spending. A day after the sensex crossed the 10,000-mark, it plunged by 749 points, wiping out almost Rs 1.3 lakh crore (or trillion) of market capitalization.

SATYAM STOCK CHART

Satyam Stock ChartOPEN--

PREVIOUS CLOSE38.85

DAY HIGH--

DAY LOW--

52 WEEK HIGH05/30/08 - 544.00

52 WEEK LOW01/9/09 - 11.50

MARKET CAP26.2B

AVERAGE VOLUME 3 mo42.5M

DILUTED EPS TTM29.94

SHARES OUTSTANDING673.9M

EX-DATE10/29/08

P/E TTM1.3x

DIVIDEND7.00

DIVIDEND YIELD18.02%

K = Thousands  M = Millions  B = Billions

Accounting Scam

• Satyam faced is the biggest fraud in India's corporate history.

• The company management, mainly disgraced chairman B Ramalinga Raju, kept everyone in the dark for a decade.

The Scam…• On 7 January 2009, company’s previous Chairman Ramalinga Raju

resigned after notifying board members and the Securities and Exchange Board of India (SEBI) that Satyam's accounts had been falsified.

Raju confessed that Satyam's balance sheet of 30 September 2008 contained:

1. Inflated figures for cash and bank balances of Rs 5,040 crores as against Rs 5,361 crore reflected in the books.

2. An accrued interest of Rs. 376 crore which was non-existent.

3. An understated liability of Rs. 1,230 crore on account of funds was arranged by himself.

4. An overstated debtors' position of Rs. 490 crore (as against Rs. 2,651 crore in the books.

ACTUAL DEBT WAS 2161.OVERSTATED 490 CRORES.

ACTUAL CASH IN

BANK WAS 321 CRORES,

INFLATED 5040 CR.

NO ACCRUED INTEREST 376.34 CR.

UNDERSTATED LIABILITY 1230 Cr.

Which was ARRANGED BY MR.RAJU

5,040 + 376 + 490

(Rs. Cr)

Rs. 1,230 Cr

Rs. 7,136

Cr

Actions Taken

Actions Taken

• Chartered accountants body ICAI constituted a six-member special committee to look into the auditing of crisis-hit Satyam Computer and will submit its auditing report on February, 11.

• The special committee will headed by ICAI Vice-President Uttam Prakash Aggarwal .

• ICAI council members –

S L Dogra, Amarjeet Chopra;

Subodh Aggarwal ;

Akshay Gupta ;&

K R Maheshwari, a banker and chartered accountant.

• Government asked the Serious Frauds Investigation Office (SFIO)-- a body set up to crack complex white collar crimes-- to probe the financial irregularities in Satyam Computer Services and report its findings in three months.

This decision to refer Satyam to SFIO is based on the recommendation of the Registrar of Companies (RoC) in Hyderabad, who inspected the books of Satyam which were being fudged for the past 7 years.

Raju was arrested on charges of cheating, fraud and and other criminal charges under various sections of Indian Penal Code (IPC).

The Securities and Exchange Board of India (SEBI) officials came to Hyderabad to investigate the entire scam, but they could not do so as Raju was in the custody of CID.

The former chief executive officer (CEO) of Satyam Computers, Raju and his younger brother Rama Raju were remanded to judicial custody by sixth additional Metropolitan magistrate for 14 days (ie till January 23) and both were shifted to Chanchalguda Central Jail near the city.

Satyam's New BoardGovernment of India announced a new board for Satyam. Three “eminent persons”

were selected to serve on Satyam’s board, the minimum number of directors required under Indian law. The three are :-

• Deepak Parekh, the chairman of the Housing Development Finance Corp;• Kiran Karnik, a former head of the National Association of Software and Services

Companies;&• C. Achuthan, a lawyer and former member of the Securities and Exchange Board

of India, the country’s market regulator.

• T.N. MANOHARAN IS THE NEW CHAIRMAN ( Former President of ICAI).

• Amarchand & Mangaldas, Suresh A Shroff and Co have been appointed legal advisers to Satyam board. Where as Chartered accountants Brahmayya and Co of Chennai have been named internal auditors with immediate effect.

Recent Developments• It has been said that companies employees have been inflated in the books.

Actual Employees of Satyam are 40,000 which were shown as 53,000.

• Raju, was signing off 20 crore rs of the company in the name of fictitious employees.

• L & T stake in Satyam have been increased to 12%.

• Raju admits of diverting funds to Mayta s properties and Maytas Infra.

• Two pricewaterhouse Coopers officials have been arrested in this fraud case.

• Raju s jail custody has been extended till 31 st Jan.

• Satyam 3rd chief financial officer has been arrested.

Conclusion• Conclusion The Satyam Scam

can be avoided : If auditor firm is honest. If SEBI plays an active role. Review legal compliance report periodically by independent directors.