5th MSOPIndore Chapter of WIRC of the ICSI

PRESENTED BY:- CORPORATE REGULATORS

SANJIV NAIDUAKARSHAK MAHESHWARINEETU DUBEYSWATI SHARMAMITALI CHAKRABORTYHEENA BEHRANI

SATYAM FIASCO(Biggest Indian Corporate Governance

Failure)

CONTENTS Introduction – Satyam ComputersWhat was the Satyam FiascoUnderstanding the FiascoModus OperandiNegative Impacts on society by the Satyam

FiascoChronology of the Regulator’s ProceedingsRegulations prevailing before Satyam FiascoChanges in the Regulations after Satyam FiascoPenalty imposedConclusion

INTRODUCTIONAbout The Company : Satyam Computer Private Limited was incorporated on June

24,1987. Converted into a public limited company in August, 1991. The company offers consulting and information technology services spanning various sectors.

Mr. Ramalinga Raju and Mr. B Rama Raju, were the founders of Satyam Computers. First Indian Company to be listed in three international stock exchanges: NYSE, DOW and EURONEXT. Satyam was the Country’s fourth largest company after TCS, Infosys and Wipro and ahead of HCL. It had 53,000 employees and Revenue $ 2.1 billion.

Satyam Computers was taken over by Tech Mahindra on April 13, 2009 and re-branded the same as Mahindra Satyam.

WHAT WAS SCAM Country’s Biggest Corporate Governance Failure. A corporate scandal that worked in India in 2009

where Chairman, Ramalinga Raju confessed that the company's accounts had been falsified.

Ramalinga Raju had used dummy accounts to trade in Satyam's shares and also Ramalinga Raju had faked 7561 invoices which raked up fake revenues to the tune of Rs. 5117 Crore and rakes up fake cash worth Rs. 3983 Crore. He had tampered with the invoice management software to give birth to this massive scam which is worth Rs. 7900 Crore in its totality and siphoned out funds from this Modus Operandi to Maytas. (Company of his sons)

The Global corporate community was shocked and scandalised when the chairman of Satyam, Ramalinga Raju resigned on 7 January, 2009 and confessed that he had manipulated the accounts by $1.47 Billion in February 2009.

UNDERSTANDING THE SCAM The balance sheet of the Company as of September 30,

2008 showed Inflated (non-existent) cash and bank balances of Rs. 5361 Crore (as against Rs. 321 Crore reflected in the books)

Non existent accrued interest Rs. 376 Crore   Overstated Debtor position by Rs. 490 Crore Understated Liablity by Rs. 1230 Crore Revenue of Rs. 2700 Crore (Actual were Rs.2112 Crore)

MODUS OPERANDIFake Invoices for revenue generation to

the tune of Rs. 5117 Crore and rakes up fake cash worth Rs. 3983 Crore.

Fake salaries of 13,000 employees and withdrawed Rs. 20 Crore each month for payment of dummy salaries.

Floated two other Companies for their own use Maytas Infra & Maytas Properties.

Acquired both the Companies.

Negative Impacts on society by the Satyam Fiasco:

Faith ended on all the Regulators and regulatory Provisions.

Investors fall-out from the market and hurt the sentiments of primary/secondary investors in the market.

Fall in share price at Indian Stock Exchange from Rs. 188 approx to Rs. 40 per share approx.

Investment bank DSP Meryl Lynch terminated their engagement.

Continued…Price Waterhouse Coopers (PwC),

India’s Big-4 CA Firm, came under intense scrutiny and the role of Statutory Auditors in the Company.

Awards stripped from the Company.

Fall in share price at New York Stock Exchange.

Investors lost $2.82 Billion.

CHRONOLOGY OF THE REGULATOR’S PROCEEDINGS Jan 7, 2009: Ramalinga Raju, founder and chairman of

SCSL, confesses to fudging of accounts to the extent of about Rs. 7,000 Crore in a letter to the board.

Jan 9, 2009: Ramalinga Raju and his brother Rama Raju (managing director of erstwhile Satyam Computers) were arrested by the Andhra Pradesh police on charges of forgery and cheating; Central Govt supersedes Satyam’s Board.

Jan 10, 2009: The Company Law Board (CLB) bars the Satyam board from functioning; Govt nominates Deepak Parekh, Kiran Karnik and C Achuthan to the Board.

Jan 13, 2009: Govt orders Serious Fraud Investigation Office (SFIO) to probe the scandal.

REGULATION PREVAILING BEFORE SATYAM

Duties of Independent Directors not defined

No proper rules prescribed for disclosure purpose

No provision for rotation of AuditorsNon-disclosure with respect to shares

pledged by DirectorsNo evaluation of Board of DirectorsInsider trading norms were not strict.

Regulatory Changes after the Satyam Fiasco by SEBI

SEBI’s Committee on Disclosure and Accounting Standards (SCODA) issued a discussion paper in 2009 to deliberate on:

1. the voluntary adoption of International Financial Reporting Standards (IFRS).

2. the appointment of Chief Financial Officers (CFO) by the Audit Committees based on qualifications, experience, etc.

3. the rotation of auditors every five years so that familiarity does not lead to corporate malpractice and mismanagement

In 2010, SEBI amended the Listing Agreement to include the provision dealing with the appointment of a Chief Financial Officer but it did not insist on the compulsory rotation of auditors.

Changes made by the Companies Act, 2013

1. Rotation of Auditor.2. An auditor cannot render Non-audit Services.3. Role of Independent Director is enhanced as follows: One-Third of Board to be ID Audit Committee’s Chairman should be ID At-least one ID in Nomination & Remuneration Committee. Formal Evaluation of ID by Board of directors. An ID cannot serve in more than seven listed entities.

Section 245 of the Companies Act, 2013 speaks about class action where 100 people together can file a common suit against a company if any of their right is hampered. (The said section is yet to be notified.)

PENALTY IMPOSED

Ramalinga Raju and his brother, B Rama Raju, were arrested by the Andhra Pradesh police on charges of breach of trust, conspiracy, cheating, falsification of records.

The special court imposed a fine of Rs. 5 Crore and Imprisonment of 7 years, each on Ramalinga Raju and his brother B Rama Raju.

CONCLUSIONMore scandals like Satyam can be avoided if:

Ethical values should be maintained by the Company through its Board/Staff/Employees.

An active Whistle-blower MechanismAuditing firm/Internal Auditor should be of high

standard.SEBI/Regulators should play an active role.Periodic review of legal compliance reports by

Independent Directors. Internal Auditor of the Company should act as a

whistle-blower.The Professional Institutions should have a very

active role.

THANK YOU