Company Law Project Satyam Scam
Company Law Project Satyam Scam
In The Subject Of
COMPANY LAW
[CLAW 217]
Submitted By
ABISHEK JAMES [200401427018]
JUDESON J [200401427045]
Submitted To
Dr. RASHMI K.S
Date Of Submission
20/11/2022
TABLE OF CONTENTS
1. INTRODUCTION
6. CONCLUSION
7. BIBLIOGRAPHY
CHAPTER 1
INTRODUCTION
Satyam Computer Services Limited was a rising-star in the Indian outsourced IT-services
industry. The company was formed in 1987 in Hyderabad (India) by Mr. Ramalinga Raju.
The firm began with 20 employees, grew rapidly as a global ‘business, which operated in 65
countries around the world. Satyam was the first Indian company to be registered with three
International Exchanges (NYSE, DOW Jones and EURONEXT).
Satyam Computers were once the crown jewel of Indian IT industry, but were brought to the
ground by its founders in 2009 as a result of financial crime. The untimely demise of Satyam
raised a debate about the role of CEO in driving a company to the heights of success and its
relation with the board members and core committees. The scam brought to the light the role
of corporate governance (CG) in shaping the protocols related to the working of audit
committees and duties of board members. The Satyam scam was a jolt to the market,
especially to Satyam stockholders, which tarnished the reputation of India.
The Satyam scandal highlights the importance of securities laws and Corporate Governance
in emerging markets. Indeed, Satyam fraud spurred the government of India to tighten the
Corporate Governance norms to prevent recurrence of similar frauds in future. Thus, major
financial reporting frauds need to be studied for lessons-learned and strategies-to-follow to
reduce the incidents of such frauds in the future.
An attempt is made in this paper to examine in-depth and analyse the case study of Satyam
Computers “accounting” scandal.
CHAPTER 2
BACKGROUND OF THE CASE
Satyam’s problems began when its chairman, Mr. Ramalinga Raju, announced a $1.6 billion
offer for two Maytas firms, namely, Maytas Infrastructure Ltd and Maytas Properties Ltd, on
December 16th, 2008, indicating that he wished to use the capital available for the benefit of
investors. Raju’s family has promoted and controlled the two businesses. Investors and the
market both gave him the thumbs down, forcing him to withdraw within 12 hours. Concerns
regarding Satyam’s corporate governance caused a 55 percent drop in share values of the
company. Satyam was forbidden from doing business with the World Bank for eight years on
December 23, 2008, after the international institute charged it with data theft and corrupting
its employees.
Under the Indian Penal Code, 1860, the Raju brothers were charged with criminal breach of
trust, cheating, criminal conspiracy, and forgery. Satyam’s board was reformed by the Central
Government, and three members were appointed, namely, the HDFC Chairman Deepak
Parekh, Ex NASSCOM Chairman and IT specialist Kiran Karnik, and former SEBI member
C Achuthan.
CII chief mentor Tarun Das, former president of the Institute for Chartered Accountants
(ICAI) TN Manoharan, and LIC’s S Balakrishnan were all named to the reconstituted Board
by the Central Government. Satyam’s auditors PricewaterhouseCoopers (PwC) ultimately
stated that their audit report was incorrect because it was based on incorrect financial
statements submitted by Satyam’s management, a week after Satyam founder B Ramalinga
Raju’s sensational confession.
1. The Indian government launched an inquiry right away, but it kept its direct
involvement to a bare minimum. Satyam was given a new board of directors by the
government in an attempt to preserve the firm; the objective was to sell it within 100
days.
2. The board promptly gathered with bankers, accountants, attorneys, and government
officials to prepare a selling strategy. The board of directors recruited Goldman
Sachs and Avenues Capital to sell the firm in the quickest period feasible.
3. Satyam was valued at Rs. 36,600 crores at its highest market capitalization in 2008. A
year later, Tech Mahindra bought the scam-hit Satyam for Rs. 58 a share, giving it a
market capitalization of Rs. 5600 crores. On January 9, 2009, when Raju confessed,
the stock, which had reached an all-time high of Rs. 542 in 2008, plummeted to an
unfathomable Rs. 6.30.
4. Satyam’s stock dropped to 11.50 rupees on January 10, 2009, its lowest level since
March 1998, after reaching a high of 544 rupees in 2008. Satyam’s stock peaked at
US$ 29.10 on the New York Stock Exchange in 2008, and by March 2009, it was
trading at roughly US $1.80. As a result, Satyam stockholders lost $2.82 billion.
5. Mr. Raju was charged with criminal conspiracy, breach of trust, and forgery, among
other things. Following the Satyam debacle and PwC’s participation, investors grew
apprehensive of PwC’s clients, resulting in a drop in share prices of roughly 100 firms
ranging from 5% to 15%. The announcement of the scam (which was soon linked to
Enron’s demise) caused anxieties in the Indian stock market, with the benchmark
Sensex index falling more than 5%. Satyam’s stock has dropped by more than 70%.
CHAPTER 4
The Satyam scandal highlighted the many flaws of the Indian legal system while also
throwing light on the developing democracy’s financial system. The reforms that were
introduced post the well-known scandal has been laid down hereunder:
2. Satyam blatantly scorned all corporate governance requirements. The Satyam debacle
served as a exemplary tale for improper CG practices. It had failed to maintain a positive
relationship with its shareholders and staff. Satyam’s CG problem occurred as a result of the
company’s failure to meet its obligations to many stakeholders. The following are of
particular interest, Separating the duties of the board and management,
3. Scandals ranging from Enron to the present financial crisis have repeatedly demonstrated
the need for ethical behaviour based on solid ethics. It’s unsurprising that such deceptions
may occur anywhere in the world at any moment. The Satyam scandal prompted the Indian
government to strengthen Corporate Governance regulations in order to prevent such frauds
in the future. The government acted quickly to protect investors’ interests while also
preserving India’s reputation and image at a global level.
CHAPTER 5
SUGGESTIONS AND RECOMMENDATIONS
The scam at Satyam brought to the light the role of CG in shaping the protocols related to the
working of audit committee and duties of board members. The Indian government took very
quick actions to protect the interest of the Satyam investors, safeguard the credibility of India,
and the nation ‘s image across the world. Moreover, Satyam fraud has forced the government
to re‐ write the CG rules and tightened the norms for auditors and accountants.
Keeping in view the ―modus operandi used by the management in Satyam scam, some of
the recommendations are following
Corporations must uplift the moral, ethical and social values of its executives.
Board members need to feel the importance of the responsibility entrusted with them:
be proactive and watchful in protecting the interests of owners.
Shareholder activism is an excellent mechanism of keeping a check on the corporation
and its executives.
Block-holders and institutional investors can also serve as an effective means
for boards and management’s accountability.
The professional firms should introduce partners audit review and partner-rotation
programs. This will also ensure healthy participation on the part of the partners.
Appointment and remuneration of auditors should not be left to the companies they
audit, as the fees can easily influence the auditor’s report.
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.
Corporate Governance framework needs to be implemented in letter as well
as spirit.
CHAPTER 6
CONCLUSION
The Satyam fraud has shattered the dreams of different categories of investors, shocked the
government and regulators alike and led to questioning the accounting practices of statutory
auditors and corporate governance norms in India. Severe corporate governance problems
emerge out of the above-mentioned corporate wreckage. Many of these governance problems
were noticed in several other such corporate failures in USA, UK and Europe. These
countries reacted strongly to the corporate failures and codes & standards on corporate
governance came to the centre stage.
Corporate scams and frauds committed against unwary investors have been a regular and
almost an annual feature in India. But the scale, magnitude, the reach and impact that the
Satyam scam had created is unparalleled in the corporate history of India
Corporate governance framework needs to be implemented in letter as well as spirit. The
increasing rates of white-collar crimes demands stiff penalties and punishment. The small
distortions created by few immoral executive’s lad far reaching negative consequences.
Hopefully, creating an awareness of the large consequences of small lies may help some to
avoid this trap.
BIBLIOGRAPHY