Dr.

SHAKUNTALA MISRA NATIONAL

REHABILITATION UNIVERSITY
Lucknow

SUBJECT

INDIAN FINANCIAL MARKETING

CASE STUDY ON

SATYAM SCAM

SUBMITTED BY

YASH SHUKLA

SUBMITTED TO

Dr. MALINI ARGAL

The Satyam Computer Services scandal was publicly announced on 7 January 2009,
when Chairman Ramalinga Raju confessed that Satyam's accounts had been falsified.
Ramalingam Raju along with 2 other accused of the scandal, had been granted bail from
Supreme court on 4 November 2011 as the investigation agency CBI failed to file the
charge sheet even after more than 33 months of Raju been arrested.

Raju had appointed a task force to address the Maytas situation in the last few days
before revealing the news of the accounting fraud. After the scandal broke, the then-
board members elected Ram Mynampati to be Satyam's interim CEO. Mynampati's
statement on Satyam's website said:

"We are obviously shocked by the contents of the letter. The senior leaders of Satyam
stand united in their commitment to customers, associates, suppliers and all shareholders.
We have gathered together at Hyderabad to strategize the way forward in light of this
startling revelation."

On 10 January 2009, the Company Law Board decided to bar the current board of Satyam
from functioning and appoint 10 nominal directors. "The current board has failed to do
what they are supposed to do. The credibility of the IT industry should not be allowed to
suffer." said Corporate Affairs Minister Prem Chand Gupta. Chartered accountants
regulator ICAI issued show-cause notice to Satyam's
auditor PricewaterhouseCoopers (PwC) on the accounts fudging. "We have asked PwC to
reply within 21 days," ICAI President Ved Jain said.

On the same day, the Crime Investigation Department (CID) team picked up Vadlamani
Srinivas, Satyam's then-CFO, for questioning. He was arrested later and kept in judicial
custody.

On 11 January 2009, the government nominated noted banker Deepak Parekh,

former NASSCOM chief Kiran Karnik and former SEBI member C Achuthan to
Satyam's board.

Analysts in India have termed the Satyam scandal India's own Enron scandal. Some
social commentators see it more as a part of a broader problem relating to India's caste-
based, family-owned corporate environment.

Immediately following the news, Merrill Lynch (now a part of Bank of America)
and State Farm Insurance terminated its engagement with the company. Also, Credit
Suisse suspended its coverage of Satyam. It was also reported that Satyam's auditing firm
PricewaterhouseCoopers will be scrutinized for complicity in this scandal. SEBI, the
stock market regulator, also said that, if found guilty, its license to work in India may be
revoked. Satyam was the 2008 winner of the coveted Golden Peacock Award for
Corporate Governance under Risk Management and Compliance Issues, which was
stripped from them in the aftermath of the scandal. The New York Stock Exchange has
halted trading in Satyam stock as of 7 January 2009. India's National Stock Exchange has
announced that it will remove Satyam from its S&P CNX Nifty 50-share index on 12
January. The founder of Satyam was arrested two days after he admitted to falsifying the
firm's accounts. Ramalinga Raju is charged with several offences, including criminal
conspiracy, breach of trust, and forgery.
Satyam's shares fell to 11.50 rupees on 10 January 2009, their lowest level since March
1998, compared to a high of 544 rupees in 2008. In New York Stock Exchange Satyam
shares peaked in 2008 at US$ 29.10; by March 2009 they were trading around US $1.80.

On 14 January 2009, Price Waterhouse, the Indian division of PricewaterhouseCoopers,

announced that its reliance on potentially false information provided by the management
of Satyam may have rendered its audit reports "inaccurate and unreliable".

On 22 January 2009, CID told in court that the actual number of employees is only
40,000 and not 53,000 as reported earlier and that Mr. Raju had been allegedly
withdrawing INR 20crore rupees every month for paying these 13,000 non-existent
employees.

Acquisition by Mahindra Group

On 13 April 2009, via a formal public auction process, a 46% stake in Satyam was
purchased by Mahindra & Mahindra owned company Tech Mahindra, as part of its
diversification strategy. Effective July 2009, Satyam rebranded its services under the new
Mahindra management as "Mahindra Satyam" with a new corporate website
www.MahindraSatyam.com. C.P Gurnani is the current CEO.

Restatement of results

As a result of the scandal, under the directions of the new Mahindra management team,
Satyam Computer Services restated its financial results for the period 2002 to 2008.
These restated results were published in September 2009.
 The Inside Story

The Serious Fraud Investigation Office will probe also Maytas infrastructure as part of
the Satyam financial scam probe. Corporate affairs minister P C Gupta said on Monday
evening that initial investigations suggest a clear nexus between Satyam, Maytas
properties and Maytas infrastructure earlier, the Andhra High Court dismissed Ramalinga
Raju's revision petition against his police custody. But SEBI still did not get to question
Raju on Monday as a court order on the body's petition to question him was postponed
till January 22. Meanwhile the CID is questioning the Raju brothers and former Satyam
CFO Vadlamani Srinivas. They are also looking into their e-mails and phone records over
the last one month. Meanwhile, Andhra chief minister Y S R Reddy reiterated his
government did not flout any rule in awarding the Hyderabad metro rail project to
Maytas.
But how deep and how wide is the rot inside India's fourth largest software company?
Sources tell CNN-IBN the company is facing serious money crunch, and needs Rs 1,110
crore to tide over the crisis and Rs 500 crore to pay the January salary to employees.
Meanwhile a search is also on for a new CEO for the embattled IT firm. Network-18
learns that the board is looking at a 10-day time period to pick someone to head the
company. Over 40 applications have come in so far.
There is now also a question mark on the number of employees Satyam has. It is reported
that Satyam has 53,000 employees.

HOW THEY DID IT?

Investigators are now reportedly coming across evidence of insider trading by the
promoters even before the scandal broke. The big take away from the Registrar of
Companies report is that the top management of Satyam - the directors and senior
officials - sold shares ahead of the Big Bang revelation by Raju. The reports say Satyam
books have been overstated by Rs 5,000 to Rs 6,000 crore, leading to an inflated stock
price that helped the top management make money.

WHO SOLD WHAT?

Raju has claimed that no one else in the company was privy to the fudging of accounts.
But exclusive information with CNN-IBN suggests insider trading.
BSE 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.
In June 2001, Raju had nearly 23 per cent shares. By December that year, his share was
down to 22.4 per cent.
In September 2002, it fell to 21.6 per cent which fell a year later to just over 19 per cent.
In 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.
By September 2008 Raju's share was just 8.27 per cent.
BSE figure also show Vadlamani sold 92,538 shares while the then CEO Ram
Mynampati sold 700,000 shares plus 2, 50,000 ADRs.
Apart from these, 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.
 Complete Coverage
You can fool some of the people all of the time, and all of the people some of the time,
but you cannot fool all of the people all of the time-Abraham Lincoln.
Satyam chairman Ramalinga Raju managed to disprove the American president and has
put some of the biggest fraudsters to shame by fooling the whole IT industry,
stakeholders and employees.

What unfolded in the last week has not only tarnished the squeaky clean image of the $60
billion Indian IT services industry but has thrown corporate governance and ethics
literally out of the window, potentially impacting the whole industry, stakeholders, global
customers and the careers of 53,000 employees of Satyam. What started as a failed
acquisition bid of Raju family promoted two real estate companies Maytas Properties and
Maytas Infra (Maytas is Satyam spelt backwards!) on December 16, took a new turn with
Raju's admission of a Rs 7,000 crore fraud on 7 January and ended three days later, with
Raju and his brother Rama surrendering to DGP Andhra Pradesh.
While the court cases may implicate several accountants, auditors and members of the top
management, it has already rocked the foundations of corporate governance laws in India
as also shaken up India Inc.

RISE OF A GLOBAL MAJOR

Back in the 1980s a young entrepreneur Ramalinga Raju started Satyam Spinning Mills.
A keen observer of global markets, with a mind for new thinking, Raju read the growth
potential of the information technology and the role India could play in it.

Without any background in IT but a strong belief that the 'spirit of entrepreneurship' is
transferable across any field of endeavour Raju founded Satyam Computer Services on
24 June 1987. From 1987 till the damning revelation on 7 January 2008, the fairy tale, the
saga continued alongside the Indian IT growth story - complete with bagging the First
Fortune 500 client, Deere & Co in 1991, listing on BSE, an IPO oversubscribed 17 times,
later a NYSE listing, global accolades and awards.

The most prestigious being the now withdrawn, 'Golden Peacock Global Award for
Excellence in Corporate Governance for 2008' from London based World Council For
Corporate Governance, awarded as recently as 22 September 2008. And the company
boasted contracts with such envious global customers like Microsoft, FIFA, GE, Nissan,
Nestle, and Applied Materials and so on.

CHINKS IN THE ARMOUR

But there were some indications of a fraud running even at least five years back. Many
people who had worked or were invited to work for Satyam left in a short period of time.
According to industry sources, a very senior consulting head was once offered a job as a
CEO at one of the Satyam's subsidiaries. But the executive refused to join as he was not
even being allowed to see the balance sheet of that subsidiary along with Satyam.

In another instance, a very senior executive in a finance role quit just within two months
of joining Satyam. The executive is now working with a Mumbai based IT company.Says
CFO of a top tier Indian IT company, "for competitive purposes when I used to analyse
their balance sheet, large amount of money in current account did not make any sense.
Perhaps it was being siphoned off to other businesses."

Similarly, in another instance a Kotak analyst had inquired in October, last year from
Satyam CFO about the rationale behind keeping $500 million in current account from
Satyam, which draws no interest. ET too had got a similar response in September, last
year. A senior executive who quit Satyam BPO who said that he had many a times asked
Mr. Raju to spend the excess cash assets to spend for attractive buyouts for the BPO, like
Infosys and Wipro were doing, but it all fell on deaf ears.
Obviously Raju went from strength-to-strength revealing terrific quarter-on-quarter
performance, often beating street expectations without anyone catching on to any
wrongdoing.

THE FINAL FALL

Things peaked in August of 2008, when many top level officials of Satyam started
resigning, rumoured to be on confrontation with Raju's vision for the company. For
instance, the entire top team of Satyam BPO had resigned by October. Satyam executive
management team also started getting rickety, with the resignations of top level officials
like Shailesh Shah, head of strategy.

Inside sources say that many team members had confrontations with Mr. Raju on missing
attractive buyout propositions despite huge cash in hand. It was only later, that those
individuals realized that the cash never existed. On December 16, 2008, around 6:30 pm,
two hours post closing of the markets, then Satyam Chairman Raju announced a buyout
of 100% stake in Maytas Properties and 51% in Maytas Infra, thus effectively making
Satyam, a core real estate company from a core IT company overnight. The total outflow
for both the acquisitions was a whopping $1.6 billion comprising of $1.3 billion for the
100% stake in Maytas Properties and $300 million for a 51% stake in Maytas Infra.

The buyout was met with severely negative reactions from the investors and
shareholders, with many threatening to sell off entire stake in the company. This
prompted a huge list of prospective buyers as share price of Satyam suddenly dropped.
It's ADR on NYSE fell almost 54% the same day. Within 24 hours, Satyam made a U-
turn. He said, "We have been surprised by the market reaction. In deference to the views
expressed by many investors, we have decided to call off these acquisitions." The Raju’s
had lost Rs 3,400 crore in the day as share prices of Satyam plummeted.
The gameplan behind the takeover of Maytas was to fill the gap of cash reflected in the
books but actually non-existent, by taking over his own company, with his sons running
the show.

Board members Prof. Krishna G Palepu, non-executive director and Vinod K Dham, non-
executive & independent director, Prof. Mendu Rammohan Rao, non-executive &
independent director resigned from the Satyam board following the adverse public
reactions to Raju's decision. The board members alleged that important facts were
concealed from the board and thus they were misguided. Next came the confrontation,
with the World Bank. On December 23, Satyam was barred from bagging or bidding for
contracts with the World Bank for eight years for providing Bank staff with "improper
benefits". The shares fell almost 14% to its lowest in four years.

Ramalinga Raju then spent his Christmas countering the allegations by World Bank. The
company asked World Bank to immediately withdraw those statements and apologise to
Satyam, which obviously the Bank never did. Meanwhile, Raju's share in the company
fell from 8% to 5% making it an attractive bid target.

HOW THE LID WAS BLOWN?

Post the Maytas fiasco, DSP Merill Lynch was appointed to look into Satyam's books and
possibly find it a suitor and soothe the shareholder outcry. On Tuesday, January 6,
DSPML is reported to have met Sebi officials and told them about large scale accounting
irregularities. It told the regulator that it was uncomfortable in handling the mandate.

It also submitted a letter to Sebi on the same. The night of January 6, was one of the most
discomforting nights for Raju and his family. As day broke, at 9.45 am, before the
opening of the markets, a letter was faxed to Sebi Chairman, the board of Satyam, BSE
and NSE. Rest is history. In the letter Raju, admitted about an inflated (non-existent) cash
and bank balance of Rs 5,040 crore, an over stated debtor position of Rs 490 crore (as
against Rs 2651 reflected in the books) and a fake liability of Rs 1,230 crore.

Nasscom went into an immediate damage control due to the disclosures made by its past
Chairman. Nasscom President Som Mittal said: "This is a stand-alone case of failure. We
expressed shock at the disclosures made by Mr. Ramalinga Raju."

Satyam was originally started as Satyam Constructions. In 1987, Ramalinga Raju with his
bother in-law DVS Raju founded Satyam Constructions. It was perhaps here that he
inherited the construction and real industry balance sheet skills. Perhaps it’s Mr. Raju's
real estate genes that he tried to impregnate inside an IT setup that back fired.

GOVERNMENT ACTS

Concerned about the fate of its 53,000 employees spread across 55 countries, the
government took stern steps. PC Gupta, the Minister for Company Affairs, announced
sacking of the board and appointment of new directors, to be announced over the next
few days.

The former Satyam chairman and his brother have been booked for non-bailable under
the Indian Penal Code, which could put them behind bars for years. And by superseding
the board, the government has sought to ensure business continuity and that documents
are not tampered with.

SEBI committee on corporate governance chairman and Infosys chief mentor NR

Narayana Murthy says he is shocked and painfully dismayed.
THE WAY FORWARD

With the government now taking over things it will be reassuring for Satyam customers,
employees and stakeholders. These are assurance now of business continuity and this
could eventually help the beleaguered company find a buyer. In fact, things look bright
for a government assisted transaction like a Bear Stearns type of rescue where JP Morgan
bought (assisted by the US government) the beleaguered investment bank for as low as
$10 a share.

Alternately, post a thorough due diligence by government and auditors, Satyam could be
broken up into pieces (BPO business, verticals, service lines et al) and sold to several
buyers, like energy giant Enron was. "With the government taking over the board, we are
advising our clients to stay put as the cost and time of transition is very large at the
moment," says Avinash Vasishtha, CEO of Tholons.

There are three options before the government. According to Tholons, the best option is
to stabilize Satyam and merge it with an indemnity against any financial liability with a
bigger IT company.

However, even as the government would prefer a quick end to the current turmoil, there
could be delays due to the sheer magnitude of the mess. Whichever way things go,
experts agree that Satyam may not exist as a standalone entity for very long. With
government support it will be easier, to begin with get cash to manage the operations of
the cash starved company, reassure global clients and stakeholders and eventually find a
buyer.
Introduction
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. 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. "The truth is as old as the hills" opined
Mahatma Gandhi, christened the Father of the Nation by Indians. So a company named
"Satyam" (Truth, in Sanskrit) inspired trust. The IT boom in India, was fuelled by young,
middle-class, and educated, budding Indian entrepreneurs and Western firms anxious to
outsource to take advantage of high-skill, low-wage worker. This trend created a new
breed of businessmen for the 21st century and generated many fortunes literally
overnight. The global corporate community was flabbergasted and scandalized when the
Chairman of Satyam, Mr. Ramalinga Raju resigned on 7th January, 2009 and confessed
that he had manipulated the accounts by $1.47-billion.
On 7th Jan 2009 morning, we tune into CNBC TV 18 and the host Udhayan Mukherjee
was there commenting on the up move of Satyam and said it may be capped at around
Rs.180 / 190 levels. Capped it did and started moving southwards to a bottomless pit.
Why? Because, the Chairman of Satyam, Ramalinga Raju decided to make a confession
of sorts as he was unable to keep his conscience quite for very long. We don‘t know how
long he was trying to keep his conscience shut before he decided to listen to conscience.
But, in his confession letter, he has told several quarters he was repeatedly fudging the
books to overstate profits and assets. We went through his confessions in detail. We were
discussing with few friends of mine. Also my friends were aghast that the auditors of the
company did not detect this fraud earlier. The auditors of Satyam are not a small name,
they are a reputed name and one of the Big Four (the way things are unfolding, that list
may soon become Big Zero). The fraud was committed not once. The confession only
reveals about the peak level of the fraud. It was being perpetrated on a continuous basis
over many quarters or several years. If the Company needed growth in revenues and
profits, they got it; the desired profit was just few book entries away. They most likely
made these entries during the last week of the reporting period so that the invented profits
filled the blanks perfectly for analyst purposes. We were discussing to find answer about
the liability of Raju as the promoter and the director of Satyam. As Satyam was floated
by Raju and was headed the Board‘s of Member. Liability of Auditor is also one of the
important issues to be determined. Pricewaterhouse Coopers has been the statutory
auditor for Satyam Computer services for last six years. Auditor‘s involvement is crystal
clear. Satyam had paid twice the amount of what was charged by other Audit Firms. The
issues discussed in the paper that : What will be the liability of Raju as the Promoter and
the Director ? ;Whether Independent Directors are really Independent of the management
when it comes to taking decisions on behalf of the Shareholders ; Whether shareholders
have a locus standi to file a lawsuit against Pricewaterhouse Coopers? If so then what
will be the extent of liability of Pricewaterhouse Coopers? The fundamental objective of
our research is to find out the role of Raju in Satyam scam. Secondly the extent of
involvent of the independent Directors and the Auditors. The Researcher has analyzed the
Company Law provisions with respect to above mentioned material facts. The Scope is
confined only to Company Law in India and further to the Satyam fraud. The paper
argues that the independent directors discharge their roles independently or are
influenced in discharging their functions and do they owe any responsibility towards
shareholders like other directors. The shareholders have a locus standi to file a lawsuit
against Pricewaterhouse Coopers(Auditor). The whole work is divided into three
chapters. Chapter 1 deals about the role, power, function and liability of the Director.
Chapter 2 provides the Role, power, function and liability of the Independent Director.
While Chapter 3 analyses legal implication on Auditor and their duty of care.
The Satyam episode has sparked a big debate on whether India possesses adequate laws
and guidelines for corporate governance. Risk managers say that while India has no
dearth of such provisions in various enactments, the real issue emanates from the ability
to follow these provisions in spirit and the means to monitor and enforce the same. The
law makers in India, they believe, need to ascertain the merits of encouraging a principle-
based approach (like in the case of the combined code in the UK) to compliance - where
the nature, size and complexities of a business govern compliance and disclosures -
instead of a standard rules based approach for universal compliance (like in the US). The
Satyam fiasco has called into review the Corporate Governance in India. The problem in
India relates to the fact that we have been adopting Corporate Governance rather than
formulating our own. The watchdog of investors SEBI was instituted as a body under
SEBI ACT, 1992. Thus it has been only 16 years since a watchdog for the investors has
been incorporated. In the past 16 years this is the first major scam which has affected
Corporate Governance in India and the concept of India Inc. as a whole. In India,
guidelines for corporate governance are provided in clause 49 of the listing agreement
and also in various sections of the Companies Act. Industry experts hold view that once
appointed, the performance and contributions of these directors should be monitored and
evaluated objectively with peer reviews serving as a means of such evaluations.
The Satyam scandal has, ironically, uncovered the second most populated country in the
world, of having a problem with numbers in terms of finding the requisite number of
directors who can exercise their independence while influencing decisions of the board.
The challenge for India Inc, is to come out of the mindset that only well known
personalities can be nominated as independent directors. The role of Independent
Directors has again been brought under preview however there is still a conflict between
SEBI and Company Bill, 2008 as to the percentage of Independent Directors on the
board.
The shareholders of a company place very high reliance on the auditor‘s report, which
apparently shows the true and fair view of the accounts of a company. The auditors
should perform their duties with utmost care and vigilance to ensure that there are no
illegal or improper transactions. But still, Satyam has happened. The role of the UICAI
and MCA should now not Just be confined to punishing Satyam‘s auditors, but they
should also re-examine the present system to strengthen and intensify internal audit
system. Some of such remedial steps, which may be taken, are as follows:
1). Appointment and remuneration of auditors should not be left to the companies they
audit, as the fees can easily influence the auditor‘s report. A better option would be to
pool in money and hand it over to the stock exchanges that can appoint auditors. This will
make the auditors answerable to the bourses and not corporate executives;
2). Forensic auditors should be used to unearth evidence of wrongdoing, which needs a
combined team of people from the police or the CBI, lawyers and audit professionals
with an adversarial approach;
3). Other than forensic audits, even investigative audit techniques could be applied
wherever major weaknesses in internal controls or their implementation are found. An
investigator does not accept a stated fact as correct unless it is substantiated;
4). The professional firms should introduce partners‘ audit review and partner-rotation
programs. This will also ensure healthy participation on the part of the partners; and
5). The auditors should also ensure that the audit is conducted in accordance with the
Auditing and Assurance Standards (AAS), which are is benchmark on which the quality
of audit performance can be measured, and any material departure should be disclosed.
AAS-4 talks about the Auditor‘s responsibility in considering fraud in audit of financial
statement. Besides these, steps should be taken to ensure that the auditors are fulfilling
their general duties of getting third party evidence, identifying and assessing the risk of
material misstatement in financial statement due to fraud, contacting major
customers/suppliers etc. These steps will bring in light fraud but won‘t stop them.
Strong laws have never deterred criminals. But if there is a comprehensive paperwork to
support it, over a period of time, it can be detected by common sense approach instead of
mechanical. Meanwhile many feel that if the two pending bills in Parliament related to
company affairs- The Companies Bill 2008 and Limited Liability Partners Act were
passed earlier, stringent action could have been taken against corporate fraudsters and
protect the interest of shareholders.