SATYAM SCANDAL
Satyam’s Business Leadership & Accountability
Introduction
Satyam means ‘Truth’, Satyam Computer Services was established in 1987 as a major IT services firm globally across healthcare, Bio-Tech, Telecommunication, Banking and Finance, etc. Prior to 2009, Satyam Computer Services was the fourth largest Indian IT Service Provider, generating USD 2.1 Bn revenue with 9% of the market share employing 53000 staff working on different IT Projects at Satyam’s Development Center globally. Its clients comprised of 163 Fortune 500 Companies. The exports of Satyam accounted for nearly 75.9% of its total sales revenue with the USA being the largest contributor (65%).
Unethical Conduct — Ramalinga Raju
Raju was solely driven by the greed of money & acquiring lands, he forged accounting books for 9 years, avoided taxes, diverted shareholders' money, created fake clients, account salaries and invoices, proving unethical standards at Satyam.
Insider Trading
Promoters indulged in insider trading of Satyam’s shares to raise funds & purchase lands based on the inflated books & projected healthy financial position of Satyam in market
False Books & Accounting at Satyam
- As per SFIO reports, Satyam’s balance sheet as of Sept 7, 2008, carried an accrued interest of Rs. 376 Cr, which was actually non-existent. Falsified fixed deposits records totaling Rs 3318.37 Cr but actually held FDRs of Rs 9.96 Cr
- Forgery in terms of inflating the number of employees wherein Raju claimed 53,000 employees on its payroll but in real registered 40,000 so as to fictitiously create bogus companies with a large number of employees
The dubious role of Independent directors, rating agencies
6 out of 9 directors on Satyam’s Board were independent directors of good reputation, however, it raises questions on their integrity when Maytas deals were unanimously finalized and were mindful of malpractices. PwC as auditor compromised on scrutinization by not using standard testing tools rather relying on Satyam book records and not conducting its own physical verification.
Why did Raju confess?
The gap between fake accounts and actual ones was ballooning too quickly and his stake fell in Satyam, which can later become a takeover target and would create problems: as a buyer will verify his books before acquiring and would divulge his fake assets.
Timeline of Events Followed On Disclosure Of Scandal
- On January 8, 2009, Citibank suspends 30 accounts of Satyam Computers
- On January 9, 2009, The Central Government disbanded Satyam’s Board and appointed seventeen directors after Ramalinga Raju and his younger brother B. Rama Raju were detained.
- On January 11, 2009, Deepak Parekh, Kiran Karnik and C. Achuthan were appointed to Satyam Board by the Government
- In February 2009, CBI handled the investigation and filed 3 charge sheets
- March 6, 2009, Satyam receives affirmation from SEBI for bidding to select investors
- On April 22, 2009, Tech Mahindra gives an open offer at Rs. 58/share to Satyam shareholders
- On June 22, 2009, Tech Mahindra Ltd, Mumbai, merged with Satyam Computer Services Ltd, buying the remaining stake in an all-stock transaction worth Rs 5,150 crore and created a new entity Mahindra Satyam
- On October 28, 2013, a criminal complaint was filed by Enforcement Directorate against 47 persons and 166 corporate entities headed by R. Raju
- April 9, 2015, CBI special Court announced ten accused as guilty of criminal conspiracy and cheating among other offenses — B. Ramalinga Raju, founder and CEO of Satyam Computers along with 9 others and awarded 7 years of imprisonment. The trial Court also levied a fine of 5.5 crores on Ramalinga Raju and his brother Rama Raju
The aftermath of the Satyam Scandal on Changes in Corporate Accountability Strategies in India
- Post-scandal, Confederation of Indian Industries established task force — National Association of Software and Services Companies set up a corporate governance and ethics committee presided by Narayana Murthy to suggest reforms relating to shareholder rights, audit committees and whistleblower policy
- SEBI’s committee on accounting standards and disclosure issued a discussion paper in 2009 for adopting international financial reporting standards such as the appointment of chief financial officers based on qualifications, experience, background; and rotating auditors every 5 years to avoid corporate mismanagement and malpractice
- In 2009, the Ministry of Corporate Affairs published a set of voluntary guidelines for corporate governance on issues such as The roles and responsibilities of audit committees, The Independence of Directors, The roles and responsibilities of the Boards of companies, The separation of the offices of the chairman and the CEO to ensure independence, Whistleblower policies, and on a system of checks and balances
- As per the revised Companies Act 2013, auditors cannot perform non-audit services for the company holding and subsidiaries to ensure that there is no conflict of interest while performing accounting and investment consultancy services for the company.
- The duty of Auditors is now to report fraudulent acts observed during the verification of records
- Independent Directors are now barred from receiving stock options and not permitted to accept remuneration for services, except reimbursement. At least 1/3rd of the company’s Board has to comprise of independent Directors.
- The audit committee needs to include the majority of independent Directors and also 1 independent director is needed to be part of the remuneration committee.
- Additional disclosure norms are now mandated as formal evaluation of the Board of Directors’ performance, filing returns with the Registrar of Companies to report the change in the shareholding positions of promoters and shareholders
