Satyam India’s Enron : How the Scandal Unfolded

Brief of Satyam Computer
On 24th June 1987, Satyam Computer was incorporated as private limited company for providing software development and consultancy services to large corporation. The company was promoted by B Rama Raju and B Ramalinga Raju.
In 1991, Satyam Computers became the first Indian company to provide offshore services. His first major client John Deere, was skeptical about outsourcing to Satyam, but Raju`s simple extensive management module convinced it.
What started as humble beginning in 1990`s by the end of the decade catapulted the Satyam Computer into the big league of IT companies in India. Satyam became the fourth largest IT Company.
‘Humpty Dumpty had a great fall’, Satyam computer image got severe hit that  can never be mended when its promoter accepted in writing to SEBI about the fudging of books of account of the company for showing inflated profit. Investor lost all out faith in the working of the company and dumped the share of the company. Satyam share price had a free fall on 07 Jan 2009 and it closed about 80% down from the previous day close price at Rs40. Chart shown below

As can be seen from the chart the stock of Satyam Computers fell from Rs.180 to Rs.5 in 2 trading sessions.

 

EVENTS LEADING TO THE FALL:

• 2008 December 16– Satyam Computer Services announces $1.6 billion acquisition of 100% stake in Maytas properties and 51% stake in Maytas Infra, both promoted by Ramalinga Raju and sons.
• December 17-Satyam-Maytas deal is scrapped following investor-shareholders rebellion. Raju mulls on the share buyback.
• December 21-Government asks registrar of companies to submit the report with factual evidence on Satyam-Maytas deal.
• December 24-World Bank bars business with Satyam for 8 years starting September 2008.
• December 25– Academician and independent director Mangalam Srinivasan exits from Satyam on Christmas owning moral responsibility for not voting against it.
• December 28– Satyam Computer defers crucial board meet from December 28 to January 10.
• December 29– Satyam appoints DSP Merrill Lynch to review strategic option and assess implications of possible dilution of Ramalinga Raju`s stake; Non-executive director Krishna Palepu and in dependent director Vinod Dham resign from board.
• December 30– Satyam`s board nearly halved as Indian school of Business dean Rammohan Rao also quit.
  2009.
• January 2– Satyam discloses to stock exchange that Raju and his family have pledged all their shares, held in a corporate entity SRSR limited, to institutional lenders.
• January 3-Ramalinga Raju`s stake in Satyam falls to 5.13% from 8.27% as lenders sell shares.
• January 6-Ramalingu Raju`s stake falls further to 3.6% from 5.13%.
• January 7– Chairman Ramalinga Raju and MD Rama Raju resign.
• January 8, 2009: Citibank freezes Satyam’s 30 accounts.
• January 9, 2009: Ramalinga Raju and his younger brother B. Rama Raju arreste. Central govt disbands Satyam’s board, to appoint its own 10 directors.
• Jan 9, 2009: Satyam removed from Sensex, Nifty.
• Jan 10, 2009: Satyam’s former CFO Srinivas Vadlamani arrested.
• Jan 11, 2009: Government appoints Deepak Parekh, Kiran Karnik and C. Achuthan to Satyam board.
• February 2009: CBI takes over investigation, goes on to file three chargesheets.
• Mar 6, 2009: Gets SEBI nod for bidding process to select investor.
• April 22, 2009: Tech Mahindra makes open offer to Satyam shareholders at Rs. 58/share, offer to close June 9.
• June 22, 2009: Mahindra unveils new brand identity for Satyam, Mahindra Satyam.
• 2010: Raju says charges levelled by CBI are false.
• November 2, 2011: Supreme Court grants bail to Raju since CBI failed to file chargesheet on time.
• October 28, 2013: Enforcement Directorate files a criminal complaint against 47 persons and 166 corporate entities headed by Ramalinga Raju.
• December 8, 2014: Ramalinga Raju and three others given six months jail term by SFIO.
• December 23, 2014: Judge postpones verdict citing voluminous documents.
• March 9, 2015: Special court defers verdict till April 9.
• April 9, 2015: All 10 accused found guilty

 

MAGNITUDE OF FRAUD:

The Global corporate community was shocked and scandalised when the chairman of Satyam, Ramalinga Raju resigned on 7 January 2009 and confessed that he had manipulated the accounts by US$1.47-Billion.

The fudging of books of account by the promoters of Satyam is one biggest fraud that Indian corporate world has witnessed. Raju admitted the falsifying of the earning and asset in his letter to the SEBI chairman. He admitted of the following:

• Inflated cash and bank balance of Rs 5040 crore.
• Non-existence of accrued interest of Rs 376 crore.
• Understated liabilities of Rs 1230 crore on account of funds arranged by Raju.
• Overstated debtors position of Rs 490 crore.
• Q2 2008-09 revenue was stated as Rs2700 crore as against Rs 2100 crore. Operating profit margin was stated as 24% as against actual 3%.
• Profit inflated over last several years attained unmanageable levels as company grew.
• Aborted Maytas acquisition was a last an attempt to fill the fictitious asset with real ones.

 

How did such a big fraud escape detection?

Didn’t someone in the management notice that a good chunk of the company’s clients, projects and bank balances were actually  missing? SEBI’s investigations show that many of them did. But they either helpfully supported the cover-up or turned a blind eye, deferring to ‘instructions from the Chairman’s office’.

Asked how he could have had no clue about something as basic as Satyam’s bank balances, the company’s ex-CFO, Vadlamani Srinivas, claimed that it was the company’s chairman and managing director who made decisions on investing all surplus cash. They also chose to safe-keep all the bank statements in their office, making them available only when the accounts were prepared.

But didn’t the CFO notice the yawning gap between the bank balances in the accounting system and the ones provided by the chairman’s office? He was too busy with ‘investor relations work’ to look into accounting issues, was his reply. Now we know what CFOs of large corporations do!