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SYNOPSIS –

Satyam Computer Limited Scam

Corporate Governance Issues at
Satyam
Changes by SEBI after the Satyam Scandal
Ketan Parekh Scam
Lapses which led to the scam
After math of the scam
Role in 2001 stock market crash

Satyam Computer Limited Scam –

4th largest comp in India  established in 1987 and provide it services  Now
India’s top 5 corporate scams  Began in 2009, January 7  wanted to
acquire Maytas comp  as a result all the shareholders sold the shares and 3
BOD resigned and World Bank banned the business of Satyam for 8 yrs 
Email sent by B. Ramalinga Raju to SEBI  he was arrested and then he
admitted the fraud of amount 7800 Crores  fake acc and balance sheets,
fake interests, 6000 fake salary accounts  The accounts and audits of the
Satyam Comp were not true and fair  SEBI investigated in to this matter 
it was revealed that the books and accounts of the Satyam Computers were
false  the fixed deposit balance and the bank balance of the comp were
inflated i.e. not true  based on investigation  SEBI issued an order
against the firms practicing under the auditing
company/PricewaterhouseCoopers (offers audit, assurance, taxation,
advisory, corporate finance and legal services.)  those firms that audited
Satyam Comp they were banned from auditing any of the listed companies
further for a period of 2 yrs  the auditing fee was 30.09 crore rupees should
be reimbursed from Jan, 2009  SAT reversed the decision of the SEBI
against the auditor of the Satyam Computers  it said it was not within the
jurisdiction of SEBI to pass such an order against the auditing firm and
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banned them  the order was quashed  the auditing firm can continue the
profession but the reimbursement must be retained  Auditors business is
controlled by ICAI Institute of Chartered Accountants of India  the point is
SEBI’s jurisdiction is confined to securities market  ICAI have the
jurisdiction to pass order/penalty against the auditing firms  2015 ICAI
placed an order against the auditors involved in the scam  they were found
guilty of professional misconduct and were directed to remove their names
from the register of CA permanently  SAT relied on Bombay HC order 
SEBI’s jurisdiction to deal with the issue of auditing would depend on the
evidence available after investigation

B. Ramalinga Raju, the founder of Satyam Computers got into trouble after he admitted to
inflating the company revenue, profit and profit margins for every single quarter over a
period of 5 years, from 2003-2008. The amount embezzled by him is estimated to be around
Rs. 7,200 crore. He and the company’s global head of internal audit used a number of
different techniques to perpetrate the fraud. Raju created numerous bank statements to
advance the fraud. Raju falsified the bank accounts to inflate the balance sheet with balances
that did not exist. He inflated the income statement by claiming interest income from the fake
bank accounts. Raju also revealed that he created 6000 fake salary accounts over the past few
years and appropriated the money after the company deposited it. The company’s global head
of internal audit created fake customer identities and generated fake invoices against their
names to inflate revenue. He also forged board resolutions and illegally obtained loans for the
Company.
Soon after the disclosure by Raju, new Board members were appointed and they started
working towards a solution that would prevent the total collapse of the firm. The Board’s
goal was to sell the company within 100 days. The winning bidder, Tech Mahindra, bought
Satyam for $1.13 per share — less than a third of its stock market value before Raju revealed
the fraud—and salvaged its operations. Both Tech Mahindra and the SEBI became fully
aware of the fraud.
The investigation that followed the revelation of the fraud has led to charges against several
different groups of people involved with Satyam. Indian authorities arrested Mr. Raju, Mr.
Raju’s brother, B. Rama Raju, its former managing director, Srinivas Vdlamani, the
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company’s head of internal audit and its Chief Financial Officer (hereinafter referred to as
“CFO”) on criminal charges of fraud. Indian authorities also arrested and charged several of
the company’s auditors (PWC) with fraud. The ICAI ruled that “the CFO and the Auditor
were guilty of professional misconduct.”

Corporate Governance Issues at Satyam -

Raju admitted that the fraud which he committed amounted to nearly $276 million. In the
process, Satyam grossly violated all rules of Corporate Governance. The Satyam scam set an
example of poor Corporate Governance practices in India. It had failed to show good relation
with the shareholders and employees.

Corporate Governance issue at Satyam arose because of non-fulfilment of obligation by the

Company towards the various stakeholders. The following are as under:
i. Distinguishing the roles of board and management;
ii. Separation of the roles of the CEO and chairman;
iii. Appointment to the board;
iv. Directors and executive compensation; and
v. protection of shareholders rights and their executives.

The 2009 scandal highlighted the nefarious potential of an improperly governed corporate
leader. As the fallout continues, and the effects were felt throughout the global economy, the
prevailing hope is that some good can come from the scandal in terms of lessons learned.
Here are some lessons learned from the Satyam Scandal:

a) Investigate All Inaccuracies: The fraud scheme at Satyam started very small, but
eventually growing into $276 million. Indeed, a lot of fraudulent schemes initially start out
small, with the perpetrator thinking that small changes here and there would not make a big
difference, and is less likely to be detected, but it had been revealed later on. So, it is
essentials to look into all inaccuracies. b) Ruined Reputations: Fraud does not just only
bring disrepute to the Company but to entire Nation. India’s biggest Corporate Scandal in
memory threatened future foreign investment flows into Asia’s third-largest economy and
casts a cloud over growth in its once booming outsourcing sector. The news sent Indian
equity markets into a tail-spin, with Bombay’s main benchmark index tumbling 7.3% and the
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Indian rupee fell. Due to Satyam scandal, Indians business will come under greater
scrutiny by the regulators, investors and customers.

b) Corporate Governance Needs to Be Stronger: The Satyam case is just another

example supporting the need for stronger Corporate Governance. All Public Companies
must be careful when selecting executives and top-level managers. Also, there is need to
separate the role of CEO and Chairman of the Board. Splitting up the roles, thus, helps
avoid situations like the one at Satyam.

Changes by SEBI after the Satyam Scandal –

a) A record of all transactions with respect to the stock markets to be maintained by the
companies for inspection by SEBI.
b) Regular monitoring of all transactions by SEBI between investors, shareholders,
brokers and the company.
c) Special attention to large, unusual transactions by SEBI while inspection of balance
sheets.
d) Appointment of the CEO to be made by the Audit Committee after proper assessment
of their background, qualifications etc.
e) Appointment of Independent Directors on the Board to ensure the fair and honest
functioning of the company. No stock options to be given to these directors and the
salary should also be given in the form of reimbursements.
f) Several audit norms were introduced like the mandatory rotation of auditors/ audit
firms every 5 years.
g) Preventing auditors from undertaking any non–audit related to activities to ensure
that the auditors are true to their work and there is no conflict of interest.
h) Adoption of the International Financial Reporting Standards by all major companies
in the preparation of various financial reports by the companies.
i) Interim Disclosure of balance sheet figures (audited balances of major account heads) on
a half-yearly basis.
j) Strict timelines for the submission of various financial reports to SEBI throughout the year.

Ketan Parekh Scam - The Crash that Shook the Nation

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Year of scam: 2001

Amount of scam: Rs. 120 crores (approx)

Period of the scam: 1999 – 2001

1997-2002  CA by qualification  training from Harshad Mehta

 looked after family business relating to brokerage service 
window dressing – pump and dump scheme (Fake growth, fake
future prospect, fake contract, overall fake image)  showing focus
on stock and manipulated the same  price of the share as a result
would increase  actual investor would invest  Foreign
Industrial Investors  Institutional Investors attract towards the
stocks with high volume so that it is easy to buy and sell  K.
Parekh used to involve in circular trading ( few people decide
among themselves the price of the share and the time and duration
of buying and selling)  FII used to invest on those shares as a
result of volume in it  K. Parekh used to focus that shares must
get media attention  insider trading used to take place by Parekh
 source of Fund –Promoter of the company and banks 
Promoter used to keep pledge against the securities to bank and
provide fund to comp  as a result of investment the price of the
shares of Parekh would go high and that would fetch him more loan
for investment in circular trading  banks involved Global Trust
Bank & Madhupura Mercantile Co-operative bank  Parekh used
to keep pledge with GTB and invest the money in share market 100
cre loan  MMCB 137 crore loan  Pay order issued by MMCB to
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BOI to get money  forwarded to RBI for clearing  RBI didn’t

approve the same after even 12 days cos MMCB did not participate
in the entire process of clearing  BOI askd the money in return
from Parekh but Parekh claimed he had already invested 130 crore
in the share market and he can only return 7 crore to BOI 
Sucheta Dalal exposed

Brief description of the scam:

Parekh started his career in the late 1980s at Narbheram Harakchand Securities (NH
Securities), a reputed institutional brokerage firm. In the 90s, he came in contact with
Harshad Mehta, a well known stock broker and subsequently joined Mehta's firm GrowMore
investments, a firm that Mehta had set up and which was involved in the 1992 Indian stock
market scam. Though one of the accused in some of the scams that Grow more was involved
in, Parekh was never convicted in them. Unlike Mehta, Parekh ensured that he remained low
key, with a simple lifestyle thus presenting a humble "feet-on-the-ground" demeanor even
when interviewed by journalists like Sucheta Dalal, as she related in her 2003 article in rediff.

However, this started to change in 1999-2000 as Parekh got closer to celebrities. Parekh
began cultivating friendships with people in Bollywood including Amitabh Bachchan and the
diamond merchant Bharat Shah, thus coming into the media's eye and limelight. This led to
an investigative story on him which was first published on 25 August 2000 covering a
millennial bash that he had given at his palatial bungalow at Mandwa (near Mumbai), which
was attended by Mumbai's gliteratti, industrialists and media personalities. This was followed
by his acquiring expensive luxury cars including a Cadillac, throwing regular high profile
parties that were eagerly lapped up by the tabloid media. His pictures began to appear in
newspapers with his comments on matters related to finance and the budget. The media
covered every incident in his life including that of him forming KVP Ventures (a
collaboration with Vinay Maloo and the Australian magnate Kerry Packer), forming an
investment bank (Triumph international) and turning the loss making ABCL into a profitable
firm by arranging funding from HFCL.[9] He invested heavily in stocks related to IT, media
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and communication and propagated them. As cover stories emerged in the financial media of
his malpractices related to the stock market, scrutiny shifted to his activities leading to his
arrest on 30 March 2001.

Ketan Parekh had single handedly caused one of the biggest scams in the history of Indian
financial markets. He was charged with defrauding Bank of India (Bol) of about $30 million
among other charges.

For two years, market men followed his every action because all he touched turned to gold.
KP was a chartered accountant by profession and used to manage a family business, NH
Securities started by his father. He was known as the 'Bombay Bull' and had connections with
movie stars, politicians and even leading international entrepreneurs like Australian media
tycoon Kerry Packer, who partnered KP in KPV Ventures, a $250 million venture capital
fund that invested mainly in new economy companies. Over the years, KP built a network of
companies, mainly in

According to market sources, though KP was a successful broker, he did not have the money
to buy large stakes. Analysts claimed that KP borrowed from various companies and banks
for this purpose. He bought shares when they were trading at low prices and saw the prices go
up in the bull market while continuously trading. When the price was high enough, he
pledged the shares with banks as collateral for funds. He also borrowed from companies like
HFCL. This could not have been possible out without the involvement of banks. A small
Ahmedabad-based bank, Madhavapura Mercantile Cooperative Bank (MMCB) was KP's
main ally in the scam. In December 2000, when KP faced liquidity problems in settlements
he used MMCB in two different ways. First was the pay order route, wherein KP issued
cheques drawn on Bol to MMCB, against which MMCB issued pay orders. The pay orders
were discounted at Bol.

The second route was borrowing from a MMCB branch at Mandvi (Mumbai), where different
companies owned by KP and his associates had accounts. KP used around 16 such accounts,
either directly or through other broker firms, to obtain funds.

KP's modus operandi of raising funds by offering shares as collateral security to the banks
worked well as long as the share prices were rising, but it reversed when the markets started
crashing in March 2000. Be it investment firms, mostly controlled by promoters of listed
companies, overseas corporate bodies or cooperative banks, all were ready to hand the money
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to Parekh, which he used to rig up stock prices by making his interest apparent. But the
vicious cycle of fraud did not end with price rigging. The inflated stocks had to be dumped
onto someone in the end, for which Parekh used financial institutions like the UTI. KP began
to have liquidity problems and lost a lot of money during that period.

Lapses which led to the scam:

 Laxed attitude of SEBI in monitoring the stock market activities -

The market regulator was blamed for being lax in handling the issue of unusual price
movement and tremendous volatility in certain shares over an 18 month period prior to
February 2001. Analysts also opined that SEBI's market intelligence was very poor. Media
reports commented that KP's arrest was also not due to the SEBI's timely action but the result
of complaints by Bol. When prices moved up, SEBI watched these as 'normal' market
movements. It ignored the large positions built up by some operators. It asked no questions at
all. It had to investigate these things, more as a probing agency than as a regulatory body
coordinating with other agencies. An equally crucial question was raised by media regarding
SEBI's ignorance of the existence of an Over exposure to the stock market by the Banks;
MMCB was the main bank through which Ketan Parekh conveniently operated for financing
the stock market. It was alleged that MMCB issued funds to KP without proper collateral
security and even crossed its capital market exposure limits.

As per a RBI inspection report, MMCB’s loans to the stock market were around Rs 10 billion
of which over Rs 8 billion were lent to KP and his firms.

Management of the Bank hands in gloves with the broker for figging of their
own shares-

Apart from direct borrowings by KP-owned finance companies through 16 different accounts
in MMCB, a few brokers were also believed to have taken loans on his behalf. It was alleged
that Madhur Capital, a company run by Vinit Parikh, the son of MMCB Chairman Ramesh
Parikh, had acted on behalf of KP to borrow funds. It was also alleged that another bank
which went bust during the scam, Global Trust Bank (GTB) issued loans to KP and its
exposure to the capital markets was above the prescribed limits. According to media reports,
KP and his associates held around 4-10% stake in the bank. There were also allegations that
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KP, with the support of GTB's former CMD Ramesh Gelli, rigged the prices of the GTB scrip
for a favorable swap ratio before its proposed merger with UTI Bank.

After math of the scam:

The Stock bubble created by Ketan Parekh, which went bust in 2000-01 and took down two
banks - Global Trust Bank and Madhavpura Mercantile Co-operative Bank, was kept alive
for more than 10 years, due to its political connections. Ironically, Dr Mehta, the then SEBI
chairman who allowed this to happen under his watch, was allowed to remain in office for
seven years. Interestingly, Satyam Computers of Ramalinga Raju who confessed to a fraud in
2008 was a part of the K-10 scrips which were ramped up by Ketan Parekh. A second JPC
was appointed to probe the Ketan Parekh scam with Pramod Mahajan, as the strategist for the
BJP-led government, ensuring that it was packed with sympathisers of the accused. Most of
the culprits of these scam got away. Every corporate / promoter who colluded with Ketan
Parekh (such as Himachal Futuristic Communications, Zee, Padmini Technologies, Shonkh
Technologies) has got away scot-free. Some, like Manoj Tirodkar, the 45- year-old chairman
& managing director of GTL Group have even snagged massive loans from banks to go
nearly bust.

Unlike journalists, activists, investigators and regulators, they are not required to take a moral
stand on who they represent.

Consequently, the best brains in India are always and invariably working at getting scamsters
and crooks off the hook for enormous fees. These fees are linked to conferences and court
appearances and not the completion of cases or their success. The worst victims are innocent,
or just weak, bank officials who couldn’t say no. They are slowly destroyed in decades of
court appearances and the absence of decent legal representation. Ironically, the office of the
custodian which claims that it has filed 11,000 cases (disputed by all others involved in the
trial) has continued to file fresh ones. After a decade, the custodian finally woke up in
February 2012 to ask Ketan Parekh (and 19 entities connected with him) the source of over
Rs72 crore that he repaid in instalments to Bank of India and Madhavpura Bank under a court
order. On 31st March 2012, a media report said that it was set to contest the discharge by a
magistrate’s court of two key cronies of Ketan Parekh—one Mr. Dharmesh Doshi, who
worked with him, and another a stockbroker Mukesh Babu. Ketan Parekh’s skill was in his
trading prowess and ability to sense the market pulse . He has been allegedly operating
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through fronts and has been dealing with many brokers on a profit- sharing basis. He is also
said to have actively engaged many foreign funds to invest in the scrips, which he operates
through fronts. Rumours also suggest that many top managers of foreign funds have been
structuring their portfolios with the active ‘guidance’ of the banned operator Parekh is also
known to structure complex deals through tax havens to manipulate the stock price. People
who know him closely say he has managed to pull on thus far because of his strong
connections with financiers in Kolkata.

Role in 2001 stock market crash

Parekh purchased large stakes in less known small market capitalization companies, and
jacked up their prices through circular trading with other traders, and collusion with these
companies and large institutional investors. This resulted in steep hikes in share prices (for
example: shares of Zee telefilms zoomed up from Rs. 127 to a price of Rs. 10,000. This set of
ten stocks was colloquially referred to as "K-10" stocks and Parekh was playfully referred to
as "Pentafour".

It later transpired that promoters and industrialists often gave Parekh funds to artificially rig
up their share prices. Thus in just a few months, scrips of virtually unknown companies like
Visualsoft rose from Rs 625 to Rs 8,448 per share and Sonata Software rose from Rs 90 to Rs
2,936.60. However, the bear cartel in Bombay stock exchange started to hammer his K-10
stocks in February 2001, leading them to fall and precipitating a payment crisis in Kolkata.

A 30 member Joint Parliamentary Committee (JPC) investigation ensued which found that
Parekh had been involved in circular trading throughout the time period from and with a
variety of companies, including Global Trust Bank (GTB) and Madhavpura Mercantile
Cooperative Bank (MMCB). The JPC found him to have played a major role in rigging the
prices of a set of Ten Indian Companies, from 1995 up to 2001.

This resulted in Parekh's first conviction, which carried a one-year sentence, coming as a
result of a transaction he conducted involving a unit of Canara Bank in 1992.

Though Parekh was subsequently barred from stock trading, the Securities and Exchange
Board of India alleged in 2009 that a variety of companies and other actors were trading on
behalf of Parekh. An investigation ensued and 26 entities were banned from trading as a
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result of that investigation.In March 2014 he was convicted by a special CBI court in
Mumbai for cheating and sentenced to two years rigorous imprisonment.