Sh. J. L. Negi GM/RBI/CBI jlnegi@rbi.org.in gmrbi@cbi.gov.

in

Satyam Company Services Ltd. was incorporated on June 24, 1987 Promoters holding of the shares in 1992 was 18.78% 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 Listing in NASDAQ, USA- 1999 Listed on New York Stock Exchange- 2001 Revenue crossed $1 Billion-2006 Ramalinga Raju got the Ernst & Young Entrepreneur of the Year Award -2007

Revenue crossed $2 Billion -2008

B. Ramalinga Raju Born on 16.09.1954 at Garagaparru village of Andhra Pradesh. He got commerce degree from Loyola College and headed to Ohio University, USA for MBA , Vice Chairman, NASSCOM, Chairman of IT Committee in FICCI, Awarded Corporate Citizen of the Year Award-2002, IT Man of the Year Award-2001 and he was the Chairman of the company B. Rama Raju He was the Co-founder and MD of the company. He did a MA(Eco.) from Loyola College, Chennai and MBA from Loredo State University Texas, USA and he is the younger brother of Ramalinga Raju

 V.

was a member of Satyams Board from July 1991

P. Rama Rao- He was an IAS officer and he

Mrs.

Mangalam Srinivasan- She was a member of the Board since July 1991. A senior fellow at Havard University. Expert in International Financial Management. Vinod K. Dham- He was on the Board from 2003.Inventor of Pentium chip Krishna G. Palepu- He was a member of Board from January, 2003, Professor of Business Administration at Harvard School and expert in Corporate Governance

M. Mohan Rao- He was dean of Indian Business School, Hyderabad and expert in Corporate Finance and Financial Derivatives. He was appointed to the Board on July, 2005 Ram Mynampati He was inducted on the Board as whole time Director in August, 2006. He was in- charge of half of the Sales Portfolio of the company V. S. Raju- He was appointed as Directors in April 2007 . He was Chairman of DRDO and Director of the IIT, Delhi T.R. Prasad- He was appointed as member of the Board in April 2007 and was the ex. Cabinet Secretary, Government of India

The case was initially registered by CB-CID, Andhra Pradesh on January 9, 2009 on a complaint received from Smt. Leela Mangat, a retd. employee of Syndicate Bank stating that she had invested her retirement benefits for purchase of the shares of the company on seeing the performance of the company. She purchased 100 shares for a sum of Rs. 19000. She filed the complaint after the confessional letter of the chairman made public The case was handed over to CBI on February 16, 2009 by Government of India under section 5 of DSPE Act and notification under 6 of DSPE Act by the Government of Andhra Pradesh. ACB Hyderabad re-registered the case and investigation was started

 The

confession letter by B. Ramalinga Raju was submitted to SEBI/BSE and to the Board of Directors on January 7, 2009 which stated that balance sheet as on 30.09.2008, cash and bank balance, interest accrued on fixed deposits, debtors were overstated and liabilities were understated Company inflated operating profit. The gap in balance sheet was on account of inflated profits shown over a period

 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.

The brief discretion: 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

Management Information systems Manpower Management Sales Cash and bank balances Selling of shares Role of Statutory Auditors Role of Internal Auditors Board of Directors Purchase of land Floatation of 327 companies Acquisitions Income Tax Liability

There were always excess man power to the extent of 10000 Recruitment was done not in tune with actual sales Promoters published loading factor which was highly inflated Average loading factor off-shore was 62.02 published was 74.88, on-site 94.86 published was 96.76 More then of the expenses of the company was on manpower There was concept of distributed leadership and control of expenses on manpower was found to be lax

Actual figures not known to business heads MIS was filtered by the management No linkage between actual sales with investor link figures Publishing inflated sales in investor link Monthly reviews were done on stand alone basis None of the business leader tried to match the differences between sales in investors link and actual sales Targets of the business heads were fixed on stand alone basis Oracle Financial system was not used for generation and analyzing the MIS

There were two methods of generating invoices in the company Regular Application Flow The billing advice raised in PBMS was ported to IMS in the form of partial/consolidated bill and then the invoice was raised by the invoice team in IMS. There was a real time and online connection between PBMS and IMS. This was the procedure that is to be adopted for generation of invoices from the date of installation of IMS i.e. April, 2003. If the invoice was generated through this application , the same would have accessible and viewed by the Project Managers, Business Circles, Quality Control Managers, FICs
Excel Porting This was an option which existed in the IMS application to port partial/consolidated bills through the procedure called Excel Porting. This option was put in place to meet the emergency requirements to raise invoices bypassing the regular application flow

 OPTIMA

-Operational Real Time Management SPR- Satyam Project Repository ONTIME- Calculation of efforts put in PBMS Project Billing Management System IMS- Invoice Management System SHINE- Satyam Human Resource Information Network

SPR

OPTIMA

ONTIME

PBMS

IMS

OF

SHINE

Excel Porting

 Excel

Porting facility was provided for bypassing the regular flow of invoices generation for emergency case However, this facility was misused extensively. The invoices inserted through excel porting did not contain any trail up to PBMS

Normal course, whenever a Purchase Order is placed by a customer, the concerned Business Relation Manager sends the details through the FIC of a business circle to OPTIMA and the same is sent to Satyam Projects Repository (SPR), where the FICs and the Associate In-charges of the Circles approve the project and after approval a unique serial number called the Project ID gets generated in Satyam Project Repository (SPR). Then, details regarding associates are provided by another application called SHINE

OPTIMA forwards the details to ONTIME wherein the man-hours required is calculated and the billing on the customer gets decided. From there, it moves to next application PBMS. In PBMS, a bill is generated with unique serial number and details of the associates, their efforts in terms of manhours, amount per hour against each associate, total number of such associates along with the period and finally, a bill is raised in PBMS

Then, this bill is exported to IMS and the same gets consolidated in IMS and the Consolidated Bill is generated with a unique serial number. Based on this Consolidated Bill, a final invoice is generated to be sent to the customer. The invoice contains details of total amount, name of the customer, project ID, project name, Purchase Order, etc. Then these invoices are ported to the Oracle Financials and as and when payments are received, they get adjusted and if the payments are outstanding, then the same are shown as debtors

 IMS

application played the various roles like Admin Role, superior user role, FIC role. The Admin role was having absolute rights. IMS application was having superior user role and with this invoices can be hide and unhide. The hidden invoices is not visible to all except few users who have superior user role. The invoices were divided into two parts H & S, H stands for hide and S stands for show. But the fictitious invoices were generated under S by swapping the role of H & S. This facility was incorporated at the instance of G. Ramakrishna who was a process owner

There were two methods by which fictitious sales were shown 1. Invoices generated through Excel porting 2. Actual development of the products Period from 01.04.2003 to 31.12.2008, 7561 invoices were found to be fake. All these invoices were directly inserted in IMS through EXCEL porting. The value of the false invoices was Rs. 5118 crore It had fraudulently entered 6,631 false invoices into the receivables module of Oracle Finance amounting to Rs.4,766.20 crore These invoices were having the status of S which actual means should be visible but they got it changed to hide The false invoices were generated with the help of Super User facility

 Particular

set of people used to generate the fictitious invoices during the odd hours towards the end of the month/quarter The fictitious invoices were not visible to all Possibility of viewing these invoices by the Key persons chose not to assess through OF Key persons were aware of invoices generated without purchase order

Actual development of the products Execution of projects in the name of non existing 7 customers i.e, Mobitel, Cellnet, E care, Synony, Northsea, Autotech and Hargreaves M D asked the business heads to develop the products stating that customers will be introduced subsequently Without the purchase orders, products were developed and revenue was recognized. Products after development is still with the company Fictitious mails were generated as if it originated from these customers The domain was created in rediffmail and mails were sent 63 invoices were raised having value Rs. 430.66 crore

The company had booked Rs. 31.18 crore as exchange profit on account of fictitious sales during the fraud period

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 were failed to perform their duties 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

6000 acres of land purchased by 327 front companies Promoters also purchased land and flats Land ceiling act was circumvented by floating the companies Proceed of sale of shares and receipt of the dividends were used for purchase of the land Lands were purchased in the names of the close relatives also Majority of land was agricultural land Land purchased were spread over AP. TN, Bangalore and Nagpur

Number of properties acquired between 10.4.1999

to 30.06.2005 was 425 having 1224.77 acres and

between 1.07.2005 to 31.12.2008 were 444 properties having 4523.3 acres . The consolidated number of properties acquired during this period was 935 having 5757.30 acres of Rs. 3454.91 crore.

 On

the basis of charge sheet, Directorate of Enforcement has started attachment of the properties purchased out the proceed of crime under Prevention of money laundering act, 2002 of the properties acquired w.e.f 2005. The properties acquired from the date of the crime to 2005 mapping of the properties are going on to attach the properties under Criminal Law (amendment) Ordinance , 1944. 100 properties having value of Rs. 3.00 crore has been mapped

The company had availed short term loans and advances

from Banks and Institutions during the period between 2000 and 2008 on the basis of false and fabricated board resolutions and majority of the loans were not shown in the books. They have taken loans from the HDFC, HSBC, Citi Bank, BNP Paribas, ICICI Bank, Fincity/Higrace and Elem Investments Pvt. Ltd.

The company had paid interest of 37.62 crore and availed 1493.84 crore loan from banks without accounted in the books.

 Loan

taken from Banks and its companies were not shown in the books. However, equivalent amount was shown as amount being transferred from the accounts maintained at BOB New York. The fictitious sales were reported as realized and shown as deposited in the account of the company maintained with BOB, New York

The auditor did not confirm the bank balances independently The various protocols were violated Two set of Confirmation No sample checking of invoices Liability against tax not reported Extra-ordinary payment of audit fee Not verifying the accrue interest on fake FDs Not verifying the TDS on accrued interest Not doing end to end audit Systems were found to be lax and same was not taken up for rectification

The auditor did not do beginning to end transactions verification Cash and bank balances were not verified Fake invoices were ignored The matter was not reported to Audit Committee The audit plans were prepared on the basis of the approval of the promoters Serious findings of the auditing team were ignored by the audit team leader

The Auditors did not follow the minimum protocols. The connection to OF was disconnected and it was not taken up for connectivity. Mr. V.P.S. Gupta was given stock option and off-loaded the shares and received Rs. 5.30 crore. The company switched to process audit from the transaction base audit . However end to end verification was not done even for sample selected on the basis of random sampling. The auditors were more faithful to promoters rather than to the company.

The companies were divided into three groups. Group 1 owned by B. Ramalinga Raju and his family. Group 2 owned by B. Suryanarayana Raju and his family. Group 3 owned by B. Ramanraju and his family. There were 12 addresses of 327 companies. The relatives and loyal employees were Directors in these companies. By these companies the promoters had purchased land, layered funds, borrowed the money against the share for Satyam.

The company had taken Rs. 1230 crore

loan from the front companies and these were not shown in the books. The loan amounts were used for payment of salaries, acquisition and payment of dividends. The amount of loan were raised against the shares of the promoters

In India- Money was diverted to customers not having dealings with them In Overseas- The amounts were paid to the companies who were not having dealings with the company and the amounts were diverted to British Virgin Islands An amount of USD 0.666 million was paid to Medbiquitous on two occasions of USD 0.333 million each. The stock worth USD 0.001 per share was purchased at a premium of USD 1.00 which was almost thousand times more than The face value.

The company has diverted Rs. 154.40 crore to global networking solutions, Infotech solutions, Alpha software and Tech. consultant Ltd. during 1999

to 2002 and was not accounted in the books. All

the companies were not having commercial deals with the companies. Rs 390 crore out of the proceeds of ADRs used for repayment of loans not reflected in the books

Company tried to purchase MPL and MIL to fill the gap of hole in the balance sheet Valuation was not done properly Amount arrived at was almost equivalent to the fictitious amounts Valuation was done even for the properties not owned by MPL The liabilities were not factored into Due diligence report was not taken into accounts Valuation was done for different purpose Valuation was done on unsigned financial position of MPL

Out of the sources of funds of Rs. 10,961.03 crore, an amount of Rs. 8,842.54 crore (Sundry debtors Rs. 2651.36 crore, cash and bank balances Rs. 5312.62 crore and other current assets Rs. 878.56 crore) were liquid assets which could be immediately utilized for the purpose of acquisition. Only after using the available reserves and raising a loan of 25% of the acquisition cost, the company was suppose to acquire 51% of MIL and 100% of MPL by having the minimum balance . The company was having only Rs. 2,944.50 crore (after removing fake amount of Rs. 5899 crore )of liquid assets and after considering the proposed borrowing of Rs. 1979.52 crore there would still be a shortfall of Rs. 2991.58 crore

Valuation of MPL was done by E&Y Excess FSI taken Some of the projects were only on paper Valuation was done in one day Valuation done not as per the guidelines prescribed by RBI Equity value as on 30.9.2008 was assessed at Rs. 6525.30 crore

 The

cash and bank balances shown in various banks in the form of current account and Fixed Deposit ws Rs. 5160.34 crores for the period 2002 to 2008. While actual balances was only 139.78 crore. Thus, there was a difference of Rs. 5020.55 crore. The company was having account with 36 banks in India and 7 banks overseas. The certificate shown to the auditors did not carry details of Fixed Deposit number

No actual physical Fixed Deposit existed , balance conformation letter did not tally the amount actually maintained with banks, balance did not contained account number, no mention about signatories name and employment number etc.

The company has shown accrued Interest on fictitious FDRs. The amount shown as on Sept., 2008 was Rs. 375.53 crore wherein actual interest was only 7.42 lakh

 The

Satyam had gone for many acquisitions like Citi soft Knowledge dynamics, Nitor Global Solutions, Bridge Strategy S & V Management consultant, Nipuna and Medbiquitous services Ltd. The Nipuna now Satyam BPO was acquired by the company at very adverse conditions. The shares of Olympus and Intel who invested in Nipuna were purchased by Satyam at high rate

The promoters were holding 2.18% of total shares as on Dec., 2008 which was 18.78% in 1991 The shares were sold through various brokers and some were benami transaction and amounts received by the promoters was Rs. 767.73 crore. The promoters in planned way sold the shares when the price of the share was high. They resorted to inside trading. The promoters also borrowed the money from NBFCS by pledging the shares of the company. The loans were to the extent of Rs. 1951.46 crore were raised against pledging of 100941592 shares.

 The

shares were unloaded through margin calls .The un loading of the shares was done at the instance of B. Ramalinga Raju The promoters and their families wrongfully gain to the extent of Rs. 2743 crore (767 crore + 1951 crore+25.80 crore dividend payment) V.Srinivas Rs. 32 crore G.Ramakrishan Rs. 11.27 crore D. Ventapathi Rs. 1.76 crore

The promoters received dividend to the extent of Rs. 27.08 crore for the year 2007-08 and 2008-09 where the actual profit after adjustment of fake revenue was Rs. 176.12 crore in 2007-08 and 269.16 crore in 2008-09. They were not eligible to get the dividend as per company law section 205.

37 companies out of 327 companies had given advances to Satyam to the extent of Rs. 1425 crore between November 2006 to October 2008. 194.60 crore was returned back to 15 companies between October 2008 to December 2008 Net amount of Rs. 1230 crore still outstanding The borrowing and returning was not reflected in the books while out of the amount salary, dividend and acquisitions have been made.

The quantum of law suffered by various institutions and the investors was 14162.25 crore on the basis of actual law suffered by various

institutional investors, loss suffered on account of

slide in share price was average price. As on 01/09/2009 price was Rs. 19.76 and average price as on 16.12.2008 was Rs. 227.55.

The sales were inflated and in order to

get the benefit the tax paid overseas were

shown and deductions were obtained in India. The tax assessment was made without actual verification of the records

 Fake

TDS Rs. 60.84 crore Actual TDS Rs. 20 crore Actual interest Rs. 1 crore Fake interest Rs. 269.01 crore Fictitious sales were shown as off shore exports Other income as a part of income of USA but actually not included False claim in overseas tax payments Rs. 329.59 crore

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

 120-B

-Criminal conspiracy to commit an offence 409 -Criminal breach of trust 420 -Cheating 467 -Forgery of a valuable security 468 -Forgery for the purpose of cheating 471- Using as genuine a forged documents which is known to be forged 477 A- Falsification of accounts

 First

charge sheet was filed on April 7, 2009 Supplementary charge sheet filed on November 22, 2009 Additional Charge sheet filed on January 7, 2010 All charge sheet have been clubbed together for faster trail The case is with Additional Chief Metropolitan Magistrate which has been approved by High Court of AP on 17 February 2010

Thanks