SATYAM- INDIA’S 4TH

LARGEST IT COMPANY
Satyam computers
were founded in
1987 by
Ramalinga Raju.
 It converted into
public Ltd. Co. in
1992.
 The company
offers consulting
and information
technology
services spanning
various sectors.
• Ramalinga Raju was born on
September 16, 1954.
• He was from a traditional
agricultural family of the
Kshatriya community of
Andhra Pradesh.
• He founded Satyam
Computers and was the
chairman until January, 2009
when he resigned from the
Satyam board after admitting
to corporate fraud.
 In the league of
best employers…

With high credibility

and profitability…
Who’s achievements have been recognized world over.

1999: Satyam Infoway 2000: World Economic

becomes the first Indian Forum identified Satyam
internet company listed as ONE of the “100
on NASDAQ leading pioneering
technology companies”
 SATYAM- a company whose name itself means
truth.

Who could have thought, that one day..

On 7th January 2009.

A 5000 crores rupee fraud- that shaken corporate India, deeply denting the
image of India in the global market and eroded the credibility of the IT
industry which serves on good corporate governance.
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 sessionsof 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
The balance sheet as on 30th September 2009 carried…
Q).Describe India’s environment that investors
should consider when investing in companies like
Satyam.
• Investor should consistently keep an eye on day-to-day
updates about the stocks they are investing.
• Be alerted when institutional investors reduce their
holding in a stock. They are the first to know good or bad
about a company.
• Auditors resignation is a red flag and investors need to
be careful. Its better to exit those co’s where auditors
raised governance issues.
Discuss the areas of the company culture and structure that could
have raised some red Flags about Satyam’s situation.
1) Weak corporate governance:-
- The mechanism for monitoring the actions, policies and decisions made in
Satyam was proved to be weak.
2) Dubious role of independent directors:-
- It is hard to believe the independent directors could not discover the well
planned massive fraud and manipulations.
-They should have questioned how and why company was sitting on such a huge pile
of cash.
3) Failure at all 3 levels of auditing:-
- Financial irregularities were ignored by the internal and external auditors.
 Internal audit headed by the CFO
 External audit by PwC
 Board’s audit committee headed by the independent directors.
 EXTERNAL AUDIT BY PwC :-

• IF a company claims it has huge cash on its hand, then auditors should check
whether that cash in hand is available or no
• There needs to be a physical verification of assets owned by the company.

 Board’s audit committee headed by independent directors

:-

• Board had to ensure that transparency in the company, that financial

disclosures and financial statements provided a true picture.
• That no kind of fraud existed in the company.
• But the audit committee of Satyam failed to detect any manipulation in the
aacounts.
Satyam had a whistleblower policy in place and an employee had written to
one of the directors claiming that the accounts had been manipulated. What
are the challenges of effective implementation of a whistleblower policy in a
company such as Satyam? How should directors react to whistleblower
complaints?

Challenges of effective implementation of a

whistleblower policy in a company such as Satyam :-
• Depending solely on auditors or the board is not
sufficient, a well-defined 'whistleblower' policy is vital to
good corporate governance.
• Lack of trust : Trust is the bedrock of any whistle blowing
platform as such, potential reporters are comforted by
the assurance that cases will be treated with the utmost
confidentiality.
 How should
directors react to whistleblower
complaints?
• After becoming aware of a whistleblower complaint, the
directors must quickly and thoroughly analyze the underlying
facts and circumstances.
• They must look into the matter seriously & ensure that the
identity of the whistleblower is not revealed.
• Outside counsel must be involved for proper investigation.
The counsel should not have any previous relationship with
the company and no involvement in the events at issue.
• In addition the director will document the results of the
report and follow up on the report in a confidential manner.
The director will also provide feedback on the right time.
Analyze the independence of the board and the ability of the board to exercise
independent judgment on the corporate affairs of Satyam. Given the
credentials of the non-executive directors, why would they still have missed
the fraud perpetrated in the company over a number of years?

• In case of satyam scam, co. did have the number of independent directors
as prescribed under companies act, 1956.
• The board came under fire when it approved SATYAM’s purchase of real
estate co. Maytas Infra in which Mr. Raju owned a huge stake.
• But they were independent in the name only. They were given stock
options at very cheap price and one even accepted compensation of $
2000000.
• BSEhas not paid attention to its enforcement. Co. listed on BSE need to
submit Clause 49 ut only 1228 co’s out of 4998 co’s have submitted the
required reports.