Case Study on Satyam Computers “The Perspective of Corporate Governance”

04/20/23 St. Francis Institute of Management & Research 1


Case Study on Satyam Computers

“The Perspective of Corporate Governance”

Presented to:

Prof. Abhay SinghBy: MMS II – Div B – Group I

Group Members

304/20/23 St. Francis Institute of Management & Research


Flow of Presentation

Introduction


Introduction to Satyam Computers

• Icon among the IT companies and ranked 4th • Founded on 24th June, 1987 by B. Ramalinga Raju in Hyderabad

• 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• Employs 40,000 IT professionals across the globe

• Serves over 654 global companies, 185 of which are Fortune 500 corporations

• Has strategic technology and marketing alliances with over 50 companies

• Owns development centres in India at Bangalore, Chennai, Pune, Mumbai, Nagpur, Delhi, Kolkata, Bhubaneswar & Visakhapatnam604/20/23 St. Francis Institute of Management &

Research

• In 1991 it was recognized as a public limited company and got its first Fortune 500 client, Deere and Co.

• In 90s it started Satyam Renaissance, Satyam Infoway, Satyam Spark Solutions and Satyam Enterprise Solutions

• Satyam Infoway became the first Indian internet company to be listed on the NASDAQ

• The company signed contracts with various international players like Microsoft, Emirates, TRW, i2 Technologies and Ford

• International Move - Offices in Singapore, Dubai and Sydney



• The company had had various achievements like-– becoming the first ISO 9001:2001 company in the world,– certified by BVQI,– winning the Frost & Sullivan Award for Competitive Strategy

in ASP in 2001, etc

• Selected by the Switzerland-based World Economic Forum and World Link magazine as one of India's most remarkable and rapidly growing entrepreneurial companies

• Received the National HRD award - 2000 for outstanding contributions to HRD

• Role Model for IT companies across the Globe.



Introduction to Maytas Infra & Maytas Properties

• Started by Ramalinga Raju & run by Sons of Raju -Teja Raju & Rama Raju

• 35% stakes was owned by Raju & his immediate family members

• Overloaded Project book• Huge land banks

• Merger with Satyam Sudden fall in Land Prices to hide the Satyam Scam


The Corporate Governance At Satyam


The Corporate Governance at Satyam


Corporate Governance is given lots

of importance

in its Annual Report and

website

THE SCAM


• Satyam Computers had on December 16, 2008, announced that it will acquire two group firms - Maytas properties and Maytas Infra

• The BOD of Satyam had approved the founder’s proposal to buy 51 per cent stake in Maytas Infrastructure and 100 % in Maytas Properties

• The total outflow for both the acquisitions was expected to be US$ 1.6 bn comprising of US$ 1.3 bn for the 100% stake in Maytas Properties and US$ 0.3 bn for the 51% stake in Maytas Infra

• This is the move that sparked a row over alleged violation of corporate governance laws.

• This deal is not profitable for investors . So after this announcement they started to raise their voices against the deal

The scam


Satyam’s justification for Maytas buy-out deal:• de-risk the core business• the integrated organization would be stronger and more

diversified to deal with the uncertainty of the market.• feeling that in the recent times it is difficult to make a strategic

deal with other IT companies.

However…..• Satyam’s share prices drastically came down in U.S.A. after the

bid was announced. • The interrogation by investors forced Raju to reconsider his

decision, which he pulled off within hours.• World Bank, one of Satyam’s esteemed customers banned it

from providing service for next 8 years.• The aborted buy-out deal and the ban indicated that something

seriously went wrong at the board level.1404/20/23 St. Francis Institute of Management &

Research

The scam

• Satyam’s image in front of its customers, investors, and more importantly, the entire nation got dented.

• Share prices tumbled even further by about 16%

• Valuation of Maytas turned out to be fraudulent

• Merrill Lynch was hired to advise on alternatives to the failed acquisition. But they resigned the engagement

• All of the four firms, including Merrill Lynch and JP Morgan denied having done any valuation


The scam

• The move sparked row between the institutional investors from across the world and Satyam’s board members.

• One of company’s two independent directors Mr. T.R. Prasad defended the decision of buy-out believing it to be increasing share value.

• Another director Mr. Shrinivasan quit before it was too late.

• Mr. Vinod Dham (founder of Pentium) was also one of the non-executive

directors of Satyam who later resigned in the wake of controversy.


The scam

The Confession…..


The confession• It is not a mere coincidence that MaytaS is SatyaM spelt in reverse way.

• As spelled out in Raju’s letter it was an effort to cover-up Satyam Fiasco.

• Raju wanted to acquire Maytas in order to cover up the scam he was cooking, but failed miserably.

• He tried to fill the gap between the actual profits of the company and the profits that were shown in records, balance sheets etc. and also tried to cope up the situation till last minute.

• But the situation were beyond his hands and therefore he confessed the frauds (on Jan 7, 2009) made by him by showing inflated profits in the balance sheet.

• According to the ‘confessional’ statement of Mr. Raju, the balance sheet shortfall was more than Rs.7000 crore.



• Satyam’s financial statements for years were totally false, cooked up and...

Never had Rs 5064 crores (US$ 1.05 Billion) shown as cash for several years.

Its liability was understated by $ 1.23 Billions

The Debtors were overstated by 400 millions plus.

The interest accrued and receivable by 376 Millions never existed

What Went Wrong ???


5312.62

ACTUAL CASH IN BANK WAS

321INFLATED

5040cr2651.6

ACTUAL DEBT WAS 2161OVERSTATED 490 Cr

CURRENT ASSESTS

376

NO ACCRUED INTEREST

376 Cr

UNDERSTATED LIABILITY 1230

Cr which was arranged by

Mr.Raju

5040+376+1230+ 490= 7136

LIABILITIES

REVENUE 2700

OPERATING MARGIN

690

ARTIFICIALLY ADDED 588OPERATING PROFIT

ADDED 588INCREASING THE CASH RESERVE ONLY FOR Q2

ALONE TO 58804/20/23 21

St. Francis Institute of Management & Research

Operating Profit

401.61468.72

545.49648.61 649.27

0

200

400

600

800

Quarter

Op

era

tin

Pro

fit

( IN

C

RO

RE

S)

Series1 401.61 468.72 545.49 648.61 649.27

Sep '07 Dec '07 Mar '08 Jun '08 Sep '08

ACTUAL OPERATING MARGIN 61 Cr REPORTED-649 Cr( CREATED AN

ARTIFICIAL REVENUE OF 588)

GROWTH IN THE OPERATING PROFIT04/20/23 22St. Francis Institute of Management &

Research

2112

2700

588

0

500

1000

1500

2000

2500

3000

ActualRevenue Q 2

Reported Difference

REVENUE

61

649

588

0

100

200

300

400

500

600

700

Actual Op Reported Difference

Operating Profit

INFLATING THE PROFIT AND REVENUE

04/20/23 23St. Francis Institute of Management & Research

People Involved in Scam


• Mr. Raju is by far the father of this fraud.

• With only 9% stake in company the guy tried to transfer $1.5bn of cash to the completely unrelated business.

• Raju’s perception on Satyam-Maytas deal:

“Combined entity would deliver greater shareholder value”

• Correct perception:

“Maytas promoters are getting benefited at the cost of Satyam's shareholders”

The Promoters



The Auditors


The Auditors


The Auditors“Satyam's financial

statements are the responsibilities of the company's

management. Our responsibility is to

express an opinion on these financial

statements based on our audit.”


The Auditors"We have neither come across any

instance of fraud on

or by the company

(Satyam), noticed or

reported during the

year, nor we have been informed of such case by the management."


The Auditors"We conducted our

audit in accordance with the auditing

standards in India. Those standards

require that we plan

and perform the audit

to obtain reasonable

assurance about

whether the financial

statements are free of material

misstatements"

• Auditors do bank reconciliation to check whether the money has indeed come or not. They check bank statements and certificates.

• There may be an argument that the audit firm was defrauded as well.

• There is complicity, incompetence or both with either the auditors or their customers or both. Inadequate procedures over confirmation indicates that the auditors missed something really big.

The Auditors


• PwC gave wrong PAN to Satyam, as it turns out.

– PWC gave their Bangalore PAN Number to Satyam instead of New Delhi. PwC Hyderabad falls in New Delhi jurisdiction

• As per Satyam's accounts, vetted by Price Waterhouse, auditors were paid Rs 3.73 crore during 2007-08 as against Rs 3.67 crore in the previous fiscal.


The Auditors


• “A company filing returns in the US according to (its) Security Exchange Commission (SEC) guidelines could not have done this without the cognizance of key executives,”

• It’s impossible to go by the claim that none of the board members had any clue about the inconsistencies in Satyam’s balance sheet; if the fraud went on for ’several years’, it won’t be wrong to rule out that most of them, if not all, had some idea about the happenings.

• Satyam's CFO Srinivas Vadlamani has been arrested.

The Board of directors


• Independent directors of Satyam Computers, who agreed to the company's proposal of buying out two promoter-related companies, failed to be independent in ‘spirit’.

• The Satyam board, including its 5 independent directors had approved the founder's proposal to buy 51 % stake in Maytas Infrastructure and 100 % in Maytas Properties

• The role of Satyam's independent directors is termed as ‘unpardonable’, since they acted against the interest of larger shareholders especially when the promoters themselves owned a little more than 9% stake in the company and institutional investors owned more than 45 %.

• All independent directors voted in favour of Satyam-Maytas proposal.

The Independent directors


• If the auditors were conned, it means that the bank statements and certificates were forged

• Satyam's banks - ICICI Bank, HDFC Bank, Bank of Baroda, etc

The BANKERS


• The Stock Exchange Board of India had in December given a clean chit to Satyam in the probe on violation of Corporate Governance Law.

The SEBI


• 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.

• There was lack of Regulation on part of Government for not keeping in check such frauds.


Government

The New Beginning


• The scam affected the reputation of Satyam Computers as well as the whole of IT industry in India.

• Govt. of India was very concerned about it’s image in International Market especially IT , as it is also main source of foreign exchange for the country and drives economic growth of the country.

• The IT industry contributes 5.7 % to the GDP of India. In value terms, in 2007-08, it was around $ 40 billion.

• Also the Govt. wants to give a clear message to the International Clients that the problem will be taken care-off and it will not be repeated in future and they can continue their engagements with Indian companies without suspicion.

Government intervention


• Also to safeguard the interest of small investors, so that faith can be restored in the market again.– Small investors are the largest number of buyers in the

Capital Market. If they will go away it would be difficult for other companies to raise money through Public Issues.

• Also to take care of the employees working in Satyam, as it was never their fault for whatever happened. Their job has to be secured by the Govt. that too in economic recession time.

• Also to give the message to the people and to investors that the guilty will be punished and will not go scot free as it used to happen earlier. That’s the only reason why Mr. Raju is still behind the bars and not able to secure a bail till now.



Steps Taken After Satyam Fraud :

• Introduction of new rules by the stock market regulator, making it compulsory for promoters of companies to disclose the percentage of shares pledged by them to lenders

• Appointment of Independent Auditors and Company Secretary by Company Law Board to conduct Audit of any private organization.

• Set-up of 5 member Committee to suggest how to implement effective compliance and Corporate Governance in private sector by CLB.



• Change the name of the company.

• Reconstitution of the board :Restore the management of the company and

appoint some reputed people as the board of directors.

• Try building confidence in the clients to get back the lost projects.

• The image of the company could be revived by a series of press conferences highlighting the ongoing contracts with the clients.

• It could also be merged with any other software company.

Steps taken by Management


• Tech Mahindra paid Rs1757 crore for a 31% stake in the company, or Rs 58 per share.

• Satyam Computer Services has now zoomed 15% to Rs 54.20 ahead of the announcement of the highest bidder for the company on April 13, 2009.

• In India, this moment was full of praise for the manner and speed with which the reconstituted board of Satyam Computer Services found a strategic investor .

• This would send a strong signal globally that the country can respond well and fast to financial crisis.

Mahindra - satyam


Important areas of corporate culture


• The Corporate Governance in India is in a very rotten state due to vicious promoter-politician nexus endemic across different sectors of the economy.

• It would be naive to believe in the comments by select industry leaders and select politicians that the Satyam case is one-off and that the entire Indian IT sector (or for that matter, the entire Indian business fraternity) cannot be tarred by the same paintbrush.

• Satyam most certainly is not a only one-off high profile situation that India has been forced to face. It is not the first one and will certainly not be the last of the high profile ones.

• It should be a "principle-based" system rather than being "rule-based”

Corporate governance


• Independent directors need to be more active and need to maintain their independent spirit.

• In instances of larger issue of change in the entire business focus of the company, the Independent Director should take the decision to the shareholders before approving.

• Independent directors need to be vigilant in protecting minority interest and be ‘brave’ enough to take adequate steps.

• It is cumulative responsibility of the independent directors to protect the interest of shareholders and strategy of the organisation.

• There is no point in having independent directors if they can't guide the management on critical issues.

Role of Independent Directors



Investor Activism

• In the past, institutional investors in this country haven't really spoken up against corporate misbehaviour. The promoters were enriching themselves, at the cost of minority shareholders.

• There have been numerous other instances, admittedly of smaller consequence.

• But now it's time institutional shareholders got together to show promoters that they simply cannot get away with this kind of behaviour.

• Now, in case of Satyam, the same institutional shareholders have found their tongues. This time, their stake is big.

• In India it only needs a 10 % stake to call an EGM. The shareholders need to use this provision.

• Managements should be asked to take shareholders into confidence for any unrelated diversification, with the definition of 'unrelated' clearly spelt out.

Investor Activism


Satyam & Business Ethics






• Individual Level





• Organizational Level

Satyam Maytas Promoters Management Independent Directors Auditors Bankers





• Association Level

ICAISEBILaw – Companies ActCorporate Governance CommitteesNational Association of Software and Services Company

(NASSCOM)





• Societal Level





• International Level

World BankNew York Stock Exchange International Clients and Operations



Conclusion


• There was lack of Regulation on part of Govt. as well as other bodies responsible for keeping in check such frauds. Stringent rules and regulations regarding compliance should be introduced to check fraud like this.

• The Auditors and Independent Directors should take their role seriously and act responsibly.

• Corporate Non Governance – India Indeed need such blow so that Corporate Governance can be properly adhered to in practice and just not be taught in Business Schools alone.

Conclusion


Documents

Case Study on Satyam Computers “The Perspective of Corporate Governance”