The scam at Satyam Computer services, which had showcased and fi scally pampered the information technology industry, has had an unusual trajectory. Though the beginning showed just a marginal gap between actual operating profi t and the one refl ected in the books of accounts, it continued to grow over the years, leading to a collapse in the price of the company’s stocks and a mockery of the term “Corpo- rate Governance.”
How the Skeletons Came Out of the Closet
Maytas Infra Ltd. and Maytas Properties, an infrastructure development, construction, project manage- ment company and a property development company, respectively, were supposed to be acquired by Satyam Computers in 2008, for $1.6 billion. Maytas Properties was supposed to be bought by Satyam for a value of $1.3 billion. Satyam intended to have a 51% stake in Maytas Infra Ltd for a value of
$300 million. The deal was to be fi nanced from “surplus cash.” The news of Satyam being an IT gi- ant attempting to acquire a company whose business goals were not strategically aligned to that of its own raised doubts in the minds of the investors. Moreover, the bidding process was carried out without informing the investors and the fund managers. This move sparked a row between the institutional in- vestors across the world and Satyam’s board members. An element of mistrust was evident among the investors. This ultimately led to a review of the deal by the Government of India, a veiled criticism by the Vice President of India.
Ramalingam Raju was compelled to reconsider his own decision due to the interrogation by the investors. There was suddenly panic selling of the company’s shares due to which the investors lost
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about Rs 3,400 crores. Thereafter, the acquisition worth $1.6 billion was met with skepticism as the company’s shares fell by 55% on the New York Stock Exchange (NYSE).
The Investigation Revealed the “Concealed Truth”
Satyam-Maytas… it was truly not a coincidence that Maytas was Satyam reverse spelt. When the inves- tigation started, the following loopholes regarding the whole acquisition of Maytas was exposed to the world. The Maytas duos were actually owned by Ramalingam Raju’s sons. It was seen as an attempt by Mr. Raju to exploit Satyam’s cash resources through this acquisition, which would have left Satyam in a debt of around $400 million .
Ramalingam Raju therefore tried to carry out this deal and as a result violated Section 372A of the Companies Act. The provisions under the Companies Act, 1956, that Satyam bypassed.
Section 293(1)© imposes restrictions on the powers of the Board of Directors of a public company or a private company which is a subsidiary of a public company and states that the directors shall not, except with the consent of the company, in a general meeting, of which they are directors, invest, other than in trust securities in any undertaking which it owns or substantially owns.
Mr. Raju attempted to acquire Maytas which was not in accordance with the statutory require- ments.
Section 297 of the Act states that the consent of the Board of Directors of a company shall be re- quired for underwriting the subscription of any shares or debentures of a company, if the following persons are a party to the contract:
Director of the company or his relative a.
b. A fi rm in which such a director or the relative is a partner c. Any other partner in such a fi rm as mentioned in (b) or,
d. A private company in which the director is a member or director.
The company that Mr. Raju wanted to acquire was controlled by his relatives and for which he did not take the consent of the Board nor reveal the connection he had with the company. Thereby, contraven- ing the provisions of the Act.
Section 299(1) the Act states that every director of a company who is in any way interested in any con- tract or arrangement entered into by the company will have to disclose his interest or concern at a meeting of the Board of Directors. The acquisition of Maytas was the last attempt to fi ll the fi ctitious assets with real ones and he did not disclose his interest in a meeting of the directors. Despite numerous concerns being raised by the independent board directors of Satyam, the company still attempted the acquisition.
All these investigations compelled Mr. Raju to send a confession letter to his Board and to the Secu- rities and Exchange Board of India (SEBI).
Confession Letter: A Brief Description
Infl ated nonexistent cash Rs. 5,040 crores.
Understated liability of about Rs. 1,230 crores.
Infl ated debtors position was Rs. 490 crores.
The accrued interest amounted to Rs. 376 crores.
Operative margin which was actually 3% was stated as 24%.
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He failed in every attempt that he made to fi ll up the gap and thus in his letter he stated that “it was like riding a tiger, not knowing how to get off without being eaten.”
After this letter was made public, Smt. Leela Mangat, a retired employee of Syndicate Bank who had invested her retirement benefi ts for the purchase of the company’s shares, complained with the CB-CID, Andhra Pradesh on 9 January 2009. Under Section 5 of DSPE Act of Government of India and notifi cation under 6 of DSPE Act by AP Government, the case was handed over to the CBI on 16 February 2009.
The Allegations against the Company by CBI
(a) Corporate governance rules violated: The company directors were sponsored by Mr. Raju and they received handsome remuneration, stock options at Rs 2 against the market price of Rs 500. Moreover, the fi nancial position of the company was not correctly analyzed by the audit committee PricewaterhouseCoopers.
(b) Loans taken from various banks: Majority of the short-term loans and advances availed between the period 2003 and 2008 from banks and other fi nancial institutions were on the basis of false and fi ctitious Board resolutions and were not shown in the books of accounts.
The interest paid on such loans amounted to Rs. 37.62 crores and the company availed of Rs. 1,493 crores worth of loans without recording them in the books.
(c) Purchase of land by company and promoters: The proceeds of the sale of shares to the public and receipt of the dividend were used for the purchase of 600 acres of land by 327 front companies. Moreover, lands were purchased in the name of close relatives. The properties that were purchased were mainly agricultural lands and hence they could easily evade the payment of tax.
(d) Fictitious sales: 7,561 invoices that were drawn between the period from April 2003 to December 2008 were found to be fake. The value of such fake invoices amounted to Rs. 5,118 crores.
(e) Maytas acquisition: Valuation of Maytas was actually done at $ 1.6 billion as against the actual $ 225 million. Also, the loans that were supposed to be fetched for the acquisition were looked down upon.
ETHICAL DILEMMA
An ethical dilemma is a moral situation in which a choice has to be made between two equally undesir- able alternatives. According to Keith Davis and William C. Frederick, ethical challenges in business take several forms and raise different kind of ethical dilemmas. Ethical challenges and their attendant dilemmas may arise due to
Failure of personal character
Confl ict of personal values and organizational goals
Organizational goals versus social values
In this case the company had moral responsibilities towards the following stakeholders -- employees, shareholders, clients, public, directors and competitors (Diagram1). The company was unable to follow an equitable distribution of wealth among all the above stakeholders. Since the balance was tilted towards some of the stakeholders, the corporation was criticized.
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DIAGRAM 1—STAKEHOLDERS MODEL
EMPLOYEES
SHAREHOLDERS
COMPETITORS
CLIENTS
DIRECTORS
PUBLIC
SATYAM
Employees:
More than 50,000 employees of Satyam Computers had to suffer from intense sce- narios like non-payment of salaries, cancellation of projects and lay offs. Due to the charge sheet against the company, thousands of employees lost their jobs and as a result Internet job sites were fl ooded with thousands of resumes. Job consultants were of the opinion that the economic scenario then was such that these employees might have to settle down for lower salaries outside.
Shareholders:
Shareholders were under the impression that the company in which they had in-
vested would protect their rights and work accordingly. But the accounting fraud came as a shock as it was least expected from the IT giant. The scam was likely to affect the image of the Indian companies among the global investors. The company’s share price experienced a plunge (from Rs. 190 to Rs. 30) after Mr. Raju’s confession.
Clients:
Satyam’s client profi le included big giants like General Electric, General Motors, Nissan, CISCO Systems, Nestle, SBI, etc. The sudden downfall dented the company’s global image and hence forced the clients to review their contracts and look at other offshore suppliers. Australian telecom company Telstra had already decided to split ways with Satyam and look for other Indian suppliers.
Public:
The company which had once bagged the Golden Peacock award for best corporate gover- nance by the World Council for Corporate Governance suddenly provided the biggest scam. This
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raised many doubts in the minds of the public. The incident had hurt the perception of Corporate India and resulted in unjustifi able damage to Brand India and brand IT in particular.
Directors:
Satyam’s CFO, Mr. Srinivas Vadlamani, was arrested soon after the scam broke out.
Many others were also taken into custody mainly due to their own mistake of not actively partici- pating in the management of the organization.
Competitors:
The competitors like Infosys, HP and Accenture were the main benefi ciaries due to this scam. This was also a lesson well learnt for other companies in this sector.
CORPORATE GOVERNANCE
The whole concept of corporate governance is based on the values and the processes that are followed in the organization. This relates to the procedures followed in the various departments where every in- dividual has his or her own share of contribution, in maintaining and following the policies. It is a way of regulating the way the business operates. This case reveals that a member having a 10% stake in the organization can commit a fraud and cover it up for years by forging the documents.
A good corporate governance focuses on creating a value for both the internal customers as well as the external customers and on increasing the shareholders value. It also serves as a deterrent for the corporate crimes as the main idea behind “Corporate Governance” is to keep the functioning transparent and effective. The Satyam scam, however, reveals that the corporate governance policies of the compa- ny were not effective. There was no transparency in the way the accounts were mismatched. There was only a central authority, Mr Ramalingam Raju, who at his own will changed the practices and nobody not even the auditors could question the authenticity of the accounts and the forged documents. There was no transparency in the accounting practices as well.
In short, we can say that the whole Satyam scam is a perfect example of a complete failure of “Cor- porate Governance.”
Road Ahead
Satyam was acquired by Tech Mahindra for Rs. 1,757 crores (31% stake at the price of Rs. 58 per share).
This acquisition had a positive impact on the stock market and the share prices of Satyam Computer Services appreciated. The deal got a lot of appreciation and praise as the reconciled Board of Satyam was prompt enough to fi nd a strategic investor as huge as Tech Mahindra.
What remains to be seen is how the new board will take the company forward and regain the trust of the stakeholders.
CONCLUSION
According to Indian culture, Satyam stands for truth, but the company could not justify its values as per its name. Being ethical in its dealings with the clients, and other business operations, being transparent in its policies, being true to the stakeholders of the organization and to the society at large is a tough task for the companies in today’s competitive world. However this doesn’t mean that companies misuse the funds of the shareholders and investors. Interestingly, Satyam had once bagged the Golden Peacock Award for best corporate governance given by World Council for Corporate Governance. From this case study what we can learn is that corporate governance is an ongoing process. The primary elements of corporate governance are auditing, independent directors, regulators and last but not the least the Board including the CEO. This scam prompted the independent directors to sit up and take interest in
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the fear of facing penalizing action. A change was seen in the entire IT industry and the Board started acting more responsible. Even the Audit Committee has taken this scam as a learning lesson and has started being more careful to ensure that the external auditors perform their role sincerely.
REFERENCES
www.mahindrasatyam.com/
http://www.goldenpeacockawards.com/GPA_RESULTS_ANNOUNCEMENT_2008.pdf http://news.bbc.co.uk/2/hi/business/7821087.stm
http://articles.economictimes.indiatimes.com/2011-08-20/news/29909332_1_pwc-auditor-subramani- gopalakrishnan-b-ramalinga-raju-satyam-scam
http://businesstoday.intoday.in/story/the-great-satyam-robbery.html/1/3680.html http://www.indianexpress.com/fullcoverage/satyam-scam/187/
http://www.businessweek.com/managing/content/jan2009/ca20090116_465633.htm http://www.reuters.com/fi nance/stocks/SAY.N/key-developments
http://www.sify.com/fi nance/nyse-halts-trading-in-satyam-stock-news-national-jegu0achifi .html
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There has been a complete failure, resulting in an operational and fi nancial loss. We have only 23 per cent stake in the company, we will do anything from our side that can be done to salvage the company.
ICICI venture has a fi duciary responsibility towards its investor.
– Renuka Ramnath, Chief Executive Offi cer (CEO), ICICI Venture, in February 2009 There was no prudence; (there was a mismatch) between what the real consumer demand was and the number of stores opened. Retailers have spread themselves too thin to benefi t from scale.
– Pinakiranjan Mishra, Partner of Retail and Consumer Product Practice at Ernst & Young, in February 2009