SATYAM CASE STUDYPRESENTING BY:GROUP: 7

ATUL KUMAR SINGH-178RAJKUMAR-158SURIN GANDHI-189LALSIVARAJU-138NAVITA NAWANI-181CHARAVI SARAF-182

IT IN INDIA• IT including BPO has increased its contribution to India's GDP from 1.2% in

FY1998 to 7.5% in FY2012.

• The major cities that account for about nearly 90% of this sectors exports are

Bangalore, Delhi, Mumbai, Chennai, Hyderabad, Pune, Kolkata and Coimbatore .

• According to Gartner, the "Top Five Indian IT Services Providers" are Tata

Consultancy Services, Infosys, Cognizant, Wipro and HCL Technologies.

• Bangalore is known as the Silicon Valley of India and contributes 33% of Indian

IT Exports. India's second and third largest software companies are head-

quartered in Bangalore.

• IT providing employment for 2.8 million, and indirectly 8.9 million people.

• India is dominant player in the global outsourcing sector. However, the sector

continues to face challenges of competitiveness in the globalized world,

particularly from countries like China and Philippines.

BACKGROUND OF SATYAM

• Satyam Company Services Ltd. was incorporated on June 24, 1987 by

Ramalinga Raju with an investment of less than $100,000.

• Promoters holding of the shares in 1992 was 18.78% and in 2008 it went down

• Main business of the company was IT related fields and it came into

prominence after Y2K problem .

• In 1991, it was in a rented house having 10 Engineers.

• Company was listed in Bombay Stock Exchange in 1992.

• company bags its first fortune 500 client John Deere & Co.

• Formed the joint venture with Dun & Bradstreet for IT services.

• Listed on NASDAQ, USA- 1999 and in NYSE – 2001.

• Revenue crossed $2 Billion -2008.

OVERVIEW OF SCAM• In 16 Dec. 2008 satyam met a proposal for diversification into real estate sector,

Satyam to buy Maytas Prop ($1.3 bn) & 51% stake in Maytas Infra ($300 mn).• Deal to be financed by Satyam’s “surplus” cash.• Next day investors outrage because of unrelated diversification and stock prices

of satyam fell down to Rs. 46.1 bn in a day reflecting share holders disbelief.• Raju and family own up to 35% stakes in Maytas.• Raju was siphoning the money from Satyam to Maytas since last 6 years. With

Satyam in deep cash crunch, Raju wanted to buy Maytas to cover up Satyam’s inflated cash.

• Last attempt to fill the fictitious assets with real ones failed. Raju nailed a hole in a sinking ship Satyam.

• The board reconvened next day and called off the decision.• Raju’s confession was followed by resignation of Srinivas vadlamani, chief

financial officer of satyam.

CONFESSION LETTER BY RAJU RAMALINGAM• Inflated non-existent cash – Rs. 5040 crore.

• Accrued interest – Rs. 376 crore.

• Understand liability- Rs. 1230 crore.

• Over stated debtors position - Rs. 490 crore.

• Operative margin 24% as against actual of 3% .

• Every attempt made to eliminate the gap failed. It was like riding a Tiger, not

knowing how to get off without being eaten.

• Aborted MAYTAS acquisition deal was the last attempt to fill the fictitious assets

with real ones .

• Neither he nor the MD took any money from the company.

• Board of Directors were not aware of the fraud.

Why confession letter

Whistle Blower :

• E-mail dated 18.12.2008 from Joe Abraham to Mr. Krishna G. Palepu and

subsequently circulated to other Board Members wherein misdeed of the

chairman/company was narrated

• Subsequently, Hemant Kothari, Non Executive Chairman of DSP, Marril

lynch Ltd. after having discussion with B. Ramalinga Raju forced him to

confess as during the discussion it was revealed that there was a big hole

in the balance sheet.

CORPORATE GOVERNANCE• All the directors were sponsored by B. Ramalinga Raju .• The Audit Committee members were not serious in analyzing the financial

position of the company.• The Directors got hand-sum remuneration, stock options at Rs. 2 against

the market price of Rs. 500. The directors acted as a rubber stamp and not even in a single dissent note was recorded .

• Meetings were conducted in perfunctory manner.• In the meetings the promoters were always present to influence the

decision.• There was not open discussions.• The back end support and helping hand to this scam was due lack of

corporate governance, sebi , indian govt .

CLIENTS

SATYAM SITUATIONFailed Acquisition Attempt:• On Dec 16, satyam announced its intent to buy Maytas properties and Maytas

infrastructure for $1.6B.• On Dec 17 , Satyam calls off the deal because of widespread protests from

investor community .• Investors felt that this was an ill-conceived plan to divert the cash($2b per

sept30) from satyam’s books to maytas group in which the satyam chairman. Ramalinga raju’s family had a majority stake.

Public Relations :• On Dec 24, the World Bank announces its decision to bar satyam for 8 years,

starting sep 2008 from bidding for any world bank related contracts on account of fraud.

• Dec 25-30;Several board members resign owing moral responsibility for not voting against the resolution related to acquisition of maytas.

Contd..

Accounting Fraud:

• On Jan 7, Raju admitted to misquoting revenue, cash balances and profit

numbers on satyam books for the past few years.

• For sept quarter , satyam overstated the revenues by around $120M and

overstated operating margin by $120M , Inflated cash and bank balances by over

$1b.

• Accrued interest of approximately $100M which is non-existent.

• Understated liability of around $240M & Overstated debtors position.

Government of India intervenes:

• On jan 9, Ministry of corporate affairs disbands current board and appoints a

new board on the 11th. New board to asses situation and make decisions.

REPERCUSSSIONS FOR SATYAMLegal Action:• Regulatory action in India and U.S.• Possible criminal action against the CEO for falsifying accounts.• Lawsuits against satyam by the investor community both in India and the U.S.Loss in Reputation:• Loss of investor confidence. Several investors have dumped the stock from their

portfolio.• Loss of confidence by clients-expected that clients will re-evaluate and consider

alternative vendors.Financial/Operational:• Lack of cash reserves will severely limit growth.• Working capital management will be constrained-ability to pay employees and

vendors will be stretched.• Erosion in market capitalization of satyam; satyam stock fell by over 70% between

jan 6th and 7th and is expected to fall further.

Contd..• Potential acquisition of satyam. However, given the accounting scandal,

acquisition will be dependent on the ability to separate core operations from the promoters and associated liabilities .

Employee Morale:• Employee morale is hit. Several employees will look for alternate

opportunities as well as be poached by rivals.

KEY ACCUSED PERSONS

• B. Ramaraju• V. Srinivas• Gopalakrishnan• T. Srinivas• B. Suryanarayana Raju• G. Ramakrishna• D. Venkatapathi Raju• Srisailam Chetkuru• VS P Gupta

FACTORS CONTRIBUTING TO FRAUDNumerous factored contributed to the Satyam fraud:• Deceptive reporting practices—lack of transparency.• Executive incentives.• Stock market expectations.• ESOPs issued to those who prepared fake bills.• Audit failures Internal & External.‐• Rating agencies & investors

VICTIMS OF FRAUD

Employee:• They spent anxious moments and sleepless nights as they faced non payment‐ of salaries, project cancellations.Clients:• They expressed loss of trust and reviewed their contracts preferring to go with other competitors.Share holders:• lost their valuable investments and there was doubt about revival of India as a preferred investment destination.Bankers:• They were concerned about recovery of financial and nonfinancial exposure and

recalled facilities.Indian Government:• It was worried about its image of the Nation & IT Sector affecting faith to invest or to do business in the county.

Black Faces of Indian IT

Dinesh Dalmia(DSQ Software)

V Chandrashekharan (Pentamedia group)

Ramalinga Raju(Satyam)

By Ramalinga Raju is the biggest fraudster in the Indian software industry, but he is not the first.

Dinesh Dalmia, Vice-Chairman, DSQ Software, has been in jail for two years.

Pentamedia company promoter V Chandrasekaran was found to be in cahoots with tainted broker Ketan Parekh in rigging up share prices.

Satyam – A Snapshot

• Founded in 1987 – Listed on NYSE, NSE, BSE, Euronext• Controversies – Upaid Lawsuit, Worldbank, Maytas acquisition

A S MurthyKiran Karnik

"..we would like to assure Satyam’s customers that our immediate priority is to ensure sustainability of services with minimal disruption.."- Deepak Parekh, Board Member – Satyam

Deepak Parekh C Achuthan

Major Satyam Clients

COMPANY BACKGROUND- Tech Mahindra

• Formed in 1986, because of joint venture between Mahindra &

Mahindra ltd.

• Headquarter in Mumbai has a revenue of Rs 44,647 million for

Mar.09.

• Company has a niche in the telecom space & provides the services in

Europe too.

• After the rampage in satyam because of Ramalinga Raju; new board

was sought out in 2009, and Tech Mahindra saw the synergy matching

between two firms & hence went out for bidding process.

Bail granted to Raju

• An apex court bench of Justice Dalveer Bhandariand Justice Dipak Misra

said from the facts of the case and considering the totality of the

circumstances, it was appropriate to grant them bail.

• CBI states "Ramalinga Raju is highly influential and if he is released on bail,

there is every possibility, almost to a point of certainty, that he would

impede and interfere with the process of trial and make every effort to

tamper with evidence and delay the trial“.

CONCLUSION

• Satyam’s fraud spurred the government of India to tighten corporate norms to prevent investors and safeguard the credibility of India and the nation’s image across the world

• an effective ‘whistle blower policy’ in place, education on ethical values,criteria for remuneration to key personnel, and strengthening of quality review

CONT…

• A transformed organizational culture which pays highest attention to ethical conduct and moral values will strengthen sustainable roots of the company.

• Transparency and effective auditing and regulatory checks through internal and external auditors and monitoring agencies will help establish long lasting credibility for any company.

CONT…

• Corporate governance framework needs to be implemented in letter as well as spirit. The increasing rates of white collar crimes demands stiff penalties and punishment. The smalldistortions created by few immoral executives lad far reaching negative consequences.Hopefully, creating an awareness of the large consequences of small lies may help some to avoid this trap.