SATYAM SCANDAL – A CASE STUDY

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

2. BACKGROUND OF THE CASE

3. SATYAM FRAUD AFTERMATH

4. INDIA’S REGULATORY AND CORPORATE GOVERNANCE REFORMS

5. SUGGESTIONS AND RECOMMENDATIONS

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. 

On December 28, 2008, one independent director of the company, US academician

Mangalam Srinivasan, announced his resignation, followed by three more independent
directors, Vinod K Dham (famously known as the father of the Pentium and an ex-Intel
employee), M Rammohan Rao (Dean of the prestigious Indian School of Business),
and Krishna Palepu (professor at Harvard Business School).

B. Ramalinga Raju resigned as chairman of Satyam on January 7, 2009, after admitting to a

financial scam involving over Rs. 7800 crores. In his letter, he indicated that his purchase of
Maytas firms was his final attempt to replace fictional assets with genuine ones. It was like
riding a tiger and not knowing how to get off without getting devoured, he said in his letter.
Satyam’s proprietors, B Ramalinga Raju and his brother B Rama Raju, were detained by state
police in Andhra Pradesh, and the firm was taken over by the Central Government.

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.

Satyam’s CFO Srinivas Vadlamani confessed to having inflated the number of employees by

10,000 on January 22, 2009. He informed CID investigators that this enabled him to
withdraw roughly Rs 20 crore per month from the related but fictitious salary accounts.

Andhra Pradesh State CB-CID had raided the house of Suryanarayana Raju, Ramalinga

Raju’s younger brother who owned 4.3 percent of Maytas Infra. 112 sale deeds of different
land purchases and development agreements were recovered from the house.
PricewaterhouseCoopers (PwC) senior partners S Gopalakrishnan and Srinivas Talluri were
detained for their suspected participation in the Satyam scam. They were arrested by the
state’s CID police on allegations of fraud (Section 420) and criminal conspiracy (Section
120B).
 CHAPTER 3
SATYAM FRAUD’S AFTERMATH

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

INDIA’S REGULATORY AND CORPORATE GOVERNANCE

REFORMS

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: 

1. Investors and authorities prompted for a stronger regulatory environment in the

securities markets after the Satyam crisis. The SEBI increased corporate governance
standards as well as financial reporting rules for publicly traded businesses listed in
the nation in reaction to the Satyam scandal. In addition, the SEBI reaffirmed its
commitment to the implementation of International Financial Accounting Reporting
Standards (IFRS). The Ministry of Corporate Affairs (MCA) has also developed a
new Corporate Code and is considering amending securities rules to make it simpler
for shareholders to file class-action lawsuits. The following are some of India’s recent
CG reforms:

 Independent Directors are appointed,

 Pledged securities disclosure.

 Financial accounting disclosures increased.

  IFRS, and

 The Ministry of Corporate Affairs has created a new corporate code.

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,

 Separating the functions of the CEO and chairman,

 Appointment to the board,

 Directors and executive remuneration, and

 Protecting the rights of shareholders and their executives.

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

1. Bhasin, Madan Lal. (2013). Corporate Accounting Fraud: A Case Study of

Satyam Computers Limited Open Journal of Accounting.
2. Basilico, Elisabetta, Grove, Hugh, & Patelli, Lorenzo. (2012). Asia's Enron:
Satyam (Sanskrit Word for Truth). Journal of Forensic & Investigative
Accounting.
3. Ahmad, Tabrez, Tabrez, Malawat, Kochar, Yashovardhan, & Roy, Ayan.
(2010). Satyam Scam in the Contemporary corporate world: A case study in
Indian Perspective. IUP Journal.
4. Ramachandran, S. (2009). Raju brings down Satyam, shakes India. Asia
Times Online Ltd.