SATYAM SAGA

Now I am not expecting this topic to come in this year GD. But I have seen cases where in PI of several colleges this year questions on Satyam fraud were asked. So on request from some of you I will go through the important fact and figure of the company and the fraud.

The Company

Satyam was founded in 1987 by Ramalinga Raju. It was presently the fourth largest IT company in the country. It is spread over 66 countries and it’s reported employee strength before the fraud was 53,000.

The company offers information technology (IT) services spanning various sectors, and is listed on the New York Stock Exchange, Euronext and BSE. Satyam has strategic technology and marketing alliances with over 50 companies.

The Fraud

In 2008, Satyam attempted to acquire two infrastructure companies (Maytas Infrastructure and Maytas Properties) founded by family relations of company founder Ramalinga Raju for $1.6 billion, despite concerns raised by independent board directors. Both companies are owned by Raju's sons.  The deal was overvalued and what raju tried to do with this deal is that he wanted to transfer the inflated profits shown in satyam’s balance sheet towards these companies.

Another alarming bell was Raju’s consistent decreasing stake in the company. Stock Exchange figures show a number of senior people in the company, including Raju and CFO Vadlamani were reportedly selling Satyam's shares over the last 22 quarters.

June 2001, Raju had nearly 23 per cent shares. By December that year, his share was down to 22.4 per cent.

September 2002, it fell to 21.6 per cent which fell a year later to just over 19 per cent.

2004, Raju's holding was 16 per cent which fell to 14 per cent in 2005, 11 per cent in 2006. In 2007 it was in single digit.

September 2008, Raju's share was just 8.27 per cent.

Other senior officials also reportedly sold large number of shares. Sources say they include one Kiran Cavale who reportedly sold 400,000 shares and 10,000 ADRs and one Rajan Nagarajan who reportedly sold 430,000 shares and 70,000 ADRs.

While some say that the Satyam scandal will not have a long-term negative impact on the working of India’s reputed information technology (IT) industry, others say it could negatively impact India’s booming IT services which chalked up overall sales worth 52 billion dollars in 2007-2008. 

Overstated Numbers

Satyam’s employee strength was shown to be 53,000 but it said to be actually only 40,000 or may be less.

Satyam’s operating margin wasn’t the 24% as shown in its accounts audited by PricewaterhouseCoopers, but just 3%. 

Satyam’s worth was estimated at seven billion dollars, before the fraud, is now worth less than 330 million dollars. 

The shares of Satyam plunged nearly 78% and also brought down the broader market.

See Ramalinga Raju’s letter for more.

World Bank Angle

The World Bank had banned Satyam from doing business with it for 8 years due to inappropriate payments to the World Bank's staff. The World Bank accused Satyam of giving improper benefits to its (the Bank's) staff and of failing to maintain documentation to support fees charged for its subcontractors. However, it clarified that Satyam was not involved in incidences of data theft or malicious attacks that had been made on the Bank's information systems. 

Pricewaterhouse Coopers

It is the world's largest professional services firm. It was founded in 1998.

This company carried out audits of satyam over the year’s and never had a good record.

India's accounting standards agency ICAI is investigating partners of PwC for professional negligence in the now-defunct Global Trust Bank Ltd. case of 2007. Like Satyam, Global Trust Bank was also based in Hyderabad. This led to Reserve Bank of India banning PwC from auditing any financial company for over a year. PwC was also associated with the accounting scandal at DSQ Software in India. In July 2006, PwC’s Japanese affiliate Chuo Aoyama was handed a two-month ban. Following the Satyam scandal, the Mumbai-based Small Investor Grievances Association (SIGA) has requested the Indian stock market regulator SEBI to ban PwC permanently and seize its assets in India alleging few more scandals like "Ketan Parekh stock manipulations."

Lawsuits

There are 11 firms who have filed lawsuits against satyam in US. To know the names follow the link. 

Upaid also filed a lawsuit, Upaid employed Satyam in 1997 to develop software needed for the commercial deployment of Upaid's advanced intelligent payments processing framework. Court admissions in London show that the Indian company deliberately and systematically misled Upaid about the existence of internal assignments of IP by Satyam's own employees. Satyam's own witness testimony makes clear at the time Satyam purportedly assigned all ownership rights to Upaid in 1998; it did not in fact own what it was selling to the payments service firm.

A patent infringement court case launched in Texas against third parties in 2005 revealed the use of forged signatures by Satyam employees on critical documents provided to Upaid by Satyam in the course of the software development.

After Effects

Ramalinga Raju resigned and now can face a seven year long imprisonment.

CBI will try to find out the details of the missing Rs 7,000 crore, the 250 benami accounts and the alleged thousands of accounts in the brothers' names.

Tech Mahindra acquired Satyam. Upon being declared the highest bidder, Tech Mahindra and Satyam executed an agreement whereby Tech Mahindra agreed to subscribe to and acquire 30.28 crore shares of Satyam, representing 31 per cent of its share capital, at Rs. 58 a share. This will infuse Satyam with Rs. 1,756 crore. The subsequent open offer for 20 per cent, amounting to Rs. 1,132 crore, will result in a total of Rs. 2,889 crore coming into the company for the 51 per cent stake.

Corporate governance in India

It passes one’s understanding how malfeasance of such a magnitude could escape the eyes of the auditors, with even cash balances apparently remaining unconfirmed with banks. It is puzzling too that such a huge hole in the finances did not show up somewhere and could not be spotted by the numerous investment analysts or the several investment banks and institutional investors holding shares in Satyam. The Satyam fiasco casts a shadow over the nature of corporate governance in India.

Learning’s

We need to put in place systems and procedures to prevent their recurrence. A start could be made with changes in audit procedures and in the role and the responsibility of auditors.