Satyam Scam

SATYAM SCAM

Presented By Dhananjay kumar Jaipuria institute of management, Noida

Satyam

Introduction • Satyam a leading global business and information technology company, delivering consulting, systems integration, and outsourcing solutions to clients in over 20 industries. • Satyam Computer Services Ltd was founded in 1987 by B.Ramalinga Raju. • The company offers information technology (IT) services spanning various sectors, and is listed on the New York Stock Exchange and Euronext. • Satyam's network covers 67 countries across six continents.

Contd. • The company employs 40,000 IT professionals across development centers in India, the United States, the United Kingdom, the United Arab Emirates, Canada, Hungary, Singapore, Malaysia, China, Japan, Egypt and Australia. • It serves over 654 global companies, 185 of which are Fortune 500 corporations. • Satyam has strategic technology and marketing alliances with over 50 companies. • Apart from Hyderabad, it has development centers in India at Bangalore, Chennai, Pune, Mumbai, Nagpur, Delhi, Kolkata, Bhubaneswar, and Visakhapatnam.

• Just three months ago, India's fourth-largest software services exporter, Satyam Computer Services received a Golden Peacock Global Award from a group of Indian directors for excellence in corporate governance. • Ramalinga Raju himself was the recipient of many an award for corporate governance and transparency • The fraud has brought to light the fact that in India the distinction between owners and management is still not very clear. • Where the owners are also the managers, such frauds are always a possibility.

• Satyam is the biggest fraud in India's corporate history. • The company management, mainly disgraced chairman B Ramalinga Raju, kept everyone -- seemingly -- in the dark for a decade and tarnished shining India's image horribly, is as stupefying a fact as the Rs 7,800 crore (Rs 78 billion) scam itself. • The company's account books said that Satyam had over Rs 5,000 crore billion (Rs 50 billion) in the bank, when it did not. Raju said that he had been fudging the account books for 'several years' and despite this no one but he, and his brother, knew of this.

Satyam's auditors

• So what were the auditors, PricewaterhouseCoopers, doing? There was no cash with in the company's banks and yet the auditors went ahead and signed on the balance sheets saying that the money was there. • Not just the cash, even they even signed off on the non-existent interest that accrued on the nonexistent cash balance! • The company officials said they relied on data from the reputed auditors.

Other company bigwigs

Satyam CFO Vadlamani Srinivas (R) being brought to the Chanchalguda prison after his arrest in Hyderabad.

• Satyam's chief financial officer Srinivas Vadlamani has already been arrested. He has even admitted to signing on the dotted line, saying he never really paid much attention to the balance sheet! • But could only two or three people have managed to cook the books for years of a company so large? Highly unlikely. It is quite likely that some other top managers in the company too were in the know of what was happening but chose to keep quiet.

THE SEBI

• The Securities and Exchange Board of India, which says it is 'horrified at the magnitude of the fraud' had in December given a clean chit to Satyam saying that it had not found any violation of norms relating to takeover and corporate governance in its preliminary surveillance of the deal involving the acquisition of Maytas Infra by Satyam Computer Services. • Thus there was no need for a formal investigation. Therefore, the probe would be limited to the deal between the two listed entities -- Satyam and Maytas Infra -- and not cover the one involving Satyam and unlisted firm Maytas Properties.

• Analysts say the market watchdog lacks the teeth for ensuring compliance on governance. Now, after so much water has flown under the bridge, Sebi has moved to 'take action' against the company.

The 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.

• So, if the auditors were conned, it means that either the bank statement and certificates were forged or the auditors did not take any cognizance of the fact that bank statements were showing one figure and the management was showing some other figure. • Now, banks are looking at options to stop sanctioning additional credit lines to the company and seek an auditor's explanation. The banks said they would not be affected much following the findings of fraudulent transactions in Satyam's balance sheet.

Directors and independent directors

Satyam Campus in Hyderabad

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The role of the company's directors, including independent directors, in the entire episode too has been exposed after the Satyam episode. Most of them essentially remain 'nodders' in the boardroom and agree to whatever the management or the promoters want to push through. The Satyam board, including its five independent directors had approved the founder's proposal to buy 51 per cent stake in Maytas Infrastructure and all of Maytas Properties, owned by the family members of Satyam chairman B Ramalinga Raju. Despite the shareholders not being taken into confidence, the directors went ahead with the management's decision. The decision of acquisition was, however, reversed 12 hours later after investors dumped Satyam's stock and threatened action against the management.

Shareholders and the media

Kirit Somaiya, president, Investors' Grievances Forum, filed a case against Satyam Computer Services in the Bomaby High Court

• Sometimes activism just does not help. • When Raju sought to push through the Maytas deal without taking shareholders into confidence, he was faced with huge protests. • The media, keen to help the underdog, too joined in the protest. • Raju was forced to cancel the deal. • In hindsight, it appears that it would have perhaps saved Satyam if the deal had been allowed to go through, as Satyam would have been able to use Maytas's assets to shore up its own books.

• Raju, who showed artificial cash on his books, had planned to use this 'non-existent cash' to acquire the two Maytas (which is Satyam spelled in reverse) companies. • Since the Rajus held more than 36 percent stake in Maytas, it would have been easy to push through the deal, at least from that side. • But with the shareholders and the media queering the pitch, the deal fell through and now so has Satyam.

Investment bankers

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Investment banker DSP Merrill Lynch was appointed by Satyam to look for a partner or buyer for the company a fortnight ago.

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We now know that DSP Merrill terminated its engagement with the company soon after it found financial irregularities.

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Merrill Lynch is also understood to have sent the information and the reason for their termination of the contract to the Bombay Stock Exchange, Sebi and even the New York Stock Exchange, on which Satyam is listed.

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However, despite the fact that DSP Merrill Lynch blew the whistle, it is not yet clear why it took such a long time to inform the authorities, and why it did not let the public know of Satyam's misdeeds.

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DSP Merrill has not yet answered these questions.

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Yet in the whole shady affair, DSP Merrill comes out the best party as it was finally because of its move that Raju was forced to quit.

Police stand guard outside the Chanchalguda prison, where Satyam ex-chairman Ramalinga Raju is being held.

• The government, on its part, was perhaps too busy projecting the stellar show of the Indian IT sector and did not find it necessary to launch an enquiry into these 'complaints,' so to speak. • Thus by way of negligence the government too is equally guilty in not having managed to save the shareholders, the employees and some clients of the company from losing heavily.

Pooja, havan to help Raju get bail!

• Some ardent followers of B Ramalinga Raju and some employees of Maytas are invoking the Almighty to come to the aid of the beleaguered IT strongman. • These fans conducted a prayer and havan service to help the disgraced former chairman of Satyam Computer Services obtain bail. • The prayers are being held so that Raju comes out of this entire episode unscathed.

Satyam's new board meets, may elect chairman

HDFC Bank chairman Deepak Parekh.

• Satyam's three-member board constituted by the government met for the first time on Monday to discuss ways to get the IT company back on track. • Eminent banker Deepak Parekh, IT expert Kiran Karnik and former Sebi member C Achuthan arrived at the Infocity campus of Satyam in Hyderabad for the meeting, in which the chairman of the board is expected to be elected.

Raju to be treated like ordinary prisoner

Bharat Kumar, lawyer of Ramalinga Raju, speaks to the media outside Satyam's head office in Hyderabad.

• Founder of Satyam Computer, B Ramalinga Raju, who lived like a 'king' before admitting fudging of company accounts to the tune of Rs 7,800 crore (Rs 78 billion), slept on the floor of the Chanchalguda jail here like other ordinary prisoners. • According to sources, the Raju brothers have been given the status of 'C' class prisoners or undertrials. • The Raju brothers had to sleep on a mat on the ground like all other prisoners. • They were offered the usual prison dinner of rice and rasam, which the elder Raju refused, sources said.

Satyam CFO Vadlamani in custody

CFO Vadlamani Srinivas (R) being brought to the Chanchalguda prison after his arrest in Hyderabad.

• Srinivas Vadlamani, the chief financial officer of Satyam Computer, was remanded to judicial custody till January 23 by the 6th Metropolitan Magistrate on Sunday. • He was later shifted to the Chanchalguda central jail, where former chairman of Satyam B Ramalinga Raju and his younger brother Rama Raju have been lodged since Saturday.

Ram Mynampati got more salary than Raju, directors!

• A prime prospect for probe by regulators and authorities investigating the Satyam fraud, acting-CEO Ram Mynampati appears to be the IT company's most valued asset and drew a salary more than that of founder Ramalinga Raju and all the directors put together. • At the same time, its independent directors, many of whom have quit Satyam board after the Maytas fiasco on December 16, got at least Rs 1 lakh (Rs 100,000) a month as commission and sitting fees. • Mynampati, who is now being questioned by the team of market regulator SEBI, got a total package of over Rs 3.5 crore (Rs 35 million) during the year ended March 2008, while founder and Chairman had to contend with just about one fifth.

• A perusal of company documents reveals all the directors, except Mynampati, got a total of Rs 2.6 crore (Rs 26 million) as salary, commissions, sitting fees, professional fees and other receivables. • What is surprising is the difference between the package of Mynampati and all the others put together is about Rs 1 crore (Rs 10 million), almost the same that the second best package that was given to independent Satyam director Krisha G Palepu. • After Mynampati the package for Ramalinga Raju totals Rs 60.4 lakh (Rs 6.04 million), followed by his brother Rama Raju at Rs 44.07 lakh (Rs 4.40 million). • The company paid a total of Rs 1.56 crore (Rs 15.6 million) to its seven non-executive directors.

• Other than V P Rama Rao, who was on the Satyam Board for just about a month, independent directors got between Rs 12 lakh to Rs 13.2 lakh (Rs 1.2-1.32 million) a year. • Harvard Business School professor Palepu bucked the trend and got Rs 91.91 lakh (Rs 9.19 million) for 2007-08, which includes a professional fees of Rs 79.51 lakh (Rs 7.95 million).

Nasscom advises against poaching Satyam's clients • While welcoming the reconstitution of the scam-tainted Satyam board, the Nasscom chairman Ganesh Natrajan said the apex body had advised its members to desist from making "unsolicited offers" to the customers of the beleagured company, which has earned the dubious reputation of being 'India's Enron'.

• The IT industry in the country was "mature" enough to resist such undesirable practices and poaching on the customer base of Satyam, whose business continuity needs to be ensured, he told PTI. • The government had taken the right steps in the matter and Nasscom was hopeful that new board with proven track record of its directors would restore credibility of Satyam taking care of the liquidity aspect and uninterrupted business schedules, Natrajan said. • It was important to ensure that in the outsourcing, customers did not lose their faith in Indian companies, he stressed.

The main trading floor of the New York Stock Exchange.

About a dozen lawsuits filed against Satyam in US • About a dozen lawsuits have been filed against Satyam Computer in US courts, charging the Indian IT firm with duping thousands of American investors out of billions of dollars. • Asked about the specific damages sought in the lawsuit, law firm Vianale & Vianale LLP's counsel Keneth J Vianale said that the sum duped could be in hundreds of millions of dollars. • Vianale said in an emailed statement to PTI: "We have not alleged a specific damages amount that we are seeking. That will be a subject of expert testimony. • "However, in cases of this sort, it is not unusual for the damages to be in the hundreds of millions of dollars."

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Another law firm Pomerantz Haudek Block Grossman & Gross said that it "has commenced an investigation of the scandal on behalf of investor clients, and is exploring the possible claims that can be raised, including under the federal securities laws . . . ". . .and focusing on identification of possible defendants in addition to the Raju brothers, such as outside auditors, and on the location of assets in this country." After the scandal was revealed, trading in Satyam shares was halted by the NYSE on January 7 and the stock exchange has said that it is assessing whether the firm deserves to stay on the bourses. The trading could be resumed on Monday if its review is satisfactory, the exchange said in a statement. In these lawsuits, Satyam Computer has been charged with duping thousands of American investors by artificially inflating share price.

• While two lawsuits were filed on January 7, the day when Satyam's founder-chairman Ramalinga Raju resigned after disclosing massive financial irregularities to the tune of over a billion dollar, so far there has been nearly a dozen lawsuits that have been filed against the company. • Earlier, nearly six law firms including Brodsky & Smith LLC, Glancy Binkow & Goldberg LLP, Harwood Feffer LLP, Sarraf Gentile LLP, Vianale & Vianale LLP and Izard Nobel LLP had filed class action law suits against Satyam Computer.

'Govt should protect Satyam employees'

A bunch of worried employees

• The Bharatiya Janata Party asked the Centre and Andhra Pradesh government to take steps to protect the interests of 53,000 employees and investors of the scam-hit Satyam Computer. • "The government of India and Andhra Pradesh government should take all steps to protect the interests of investors and the company's employees," senior BJP leader Venkaiah Naidu said on the sidelines of the BJP's Youth Rally in Chennai.

CAI asks PwC to explain Satyam account

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Chartered accountants body ICAI served a showcause notice on auditor PriceWaterhouse and asked it to submit balance sheets of Satyam Computer audited by it in the last five years. "We today served showcause notice on PriceWaterhouse and asked it to reply within 21 days," Institute of Chartered Accountants of Indiap resident Ved Jain told PTI. If the reply to the notice does not come by 21 days, all members of PriceWaterhouse who audited the Saytam accounts could be banned for life time, Jain said. The firm has also been asked to submit balance sheets, financial statements and other relevant documents of Satyam Computer audited by it for the last five years, he said.

• The audit firm has maintained that it followed applicable audit standards and went by audit evidence provided by the company. • The ICAI president said action against CAs, who audited the accounts of Satyam Computer, can be expected in 2-3 months, if found guilty. • Jain said Satyam founder Ramalinga Raju's statement that only he knew about the financial wrong-doings did not look like the whole truth, as he did not write the accounts of his company. • Ramalinga Raju in a letter written to the company board admitted, "...None of the board members, past or present, had any knowledge of the situation in which the company is placed." Chartered accountants body ICAI on Saturday served a showcause notice on auditor PriceWaterhouse and asked it to submit balance sheets of Satyam Computer audited by it in the last five years.

ver half-a-million people have stake in Satyam survival

K V Kamath, MD, ICICI Bank

• The big question on survival of Satyam Computer is giving anxious moments not only to its over 50,000 employees but also to over half-a-million people, who would get impacted indirectly if the IT firm does not come out of the trouble, Confederation of Indian Industry president K V Kamath said on Saturday. • Kamath said each of over 50,000 Satyam employees supports a family of four. "Every white collar job creates four another jobs. (So) you are talking about anything between half-a-million to a million people, who could directly or indirectly have been impacted by this single event," Kamath said.

• He said the crisis had such a social magnitude that made the government act swiftly and save the company. • Besides CII, Assocham and Ficci have also welcomed disbanding of the Satyam board of directors by the government. • They expressed hope that the move would help restore investor confidence not only in Satyam but in corporate India in general.

AP govt not involved in Satyam scam'

• Andhra Pradesh government was in no way involved in the massive accounting fraud at Satyam Computer, State Finance Minister K Roasaih has said. • "The State government has nothing to do with the Satyam Computer issue. The Centre was looking into the issue," he told reporters in Vijayawada. • The minister was responding to Opposition parties' charge that the Congress government was involved in the scandal at the Hyderabad-based software firm.

• "Instead of giving suggestions how to revive Satyam Computer and protect the interest of its 53,000 employees, Opposition parties were making baseless allegations against the government," Roasaih said. • The '108' emergency services in the state, currently maintained by EMRI Satyam Group Trust, would not be affected in wake of the financial fraud, he said. • Many philanthropists and organisations are coming forward to support and run the emergency services (which can be availed by dialing 108), the minister added.

'No delay in Satyam probe' • The government said that there was no delay in acting against the tainted founder of Satyam, B Ramalinga Raju. • "There would be no laxity against the guilty... So let us not talk about any individual or the auditors (PwC) of the company," Minister for Corporate Affairs Prem Chand Gupta told reporters when asked what action would be taken against Raju and auditors.

• "We are very clear and a co-ordinated action would be taken," he said. • The apex body of accounting firms Institutes of Chartered Accountants in India has sought some information from the auditors of the company and Financial Reporting Review Board, the minister said, adding that they can ask for working papers of the audit and that has already happened. "Once that (the papers) is received, ICAI will take its view," he added.