Satyam Computer Services Ltd

The Flawless Public Facade

Satyam Computer Services Ltd was founded in 1987 in
Hyderabad by brothers, Rama Raju and Ramalinga Raju
(henceforth Raju). The name in the ancient Indian language
Sanskrit meant ‘Truth’. The firm began with 20 employees
offering IT and BPO services across various sectors.
The initial success of the company soon led to it getting listed
and opting for an IPO in the BSE in 1991. Post this the
company soon got its first Fortune 500 client- Deere and Co.
This further allowed the business to grow rapidly into
becoming one of the top players in the market.
Satyam soon became the fourth largest IT software exporter in
the industry after TCS, Wipro, and Infosys.
Satyam Company
 The Satyam Computer Service scam is a corporate fraud of Rs. 7,000 crores
committed by the promoters of Satyam Computer Services in the year 2009. The
Satyam Computers was at its peak and kept flourishing with years. It was also
known as “IT Crown Jewel of India.” The Satyam Company Services Limited was
incorporated as a private company on 24th June 1987 in Hyderabad with a strength
of 20 employees. It originally had two shareholders viz.B.Ramalinga Raju and D.V.
Satyanarayana Raju. These two were also the promoters of the company. The
company became public in the year 1992 by getting itself listed on the Bombay
Stock SCSL was a company that majorly dealt in full range of IT services. It also
served business process outsourcing services. The company operated on a global
level and it was incorporated in more than 55 countries with more than 30,000
employees who served more than 500 companies of the corporation. Out of 500
companies, 150 companies constituted a part Fortune 500 companies. In 1999, it
was declared to be the fastest growing IT company in India.Mr. Ramalinga Raju was
also awarded “Entrepreneur of the Year” by Ernest & Young in 2007. It was also
awarded “Global Peacock Award ”by World Council for corporate governance in
September 2008. Just after 5 months of being awarded Global Peacock award, the
satyam scam was unfolded, and it was also termed as “India’s Enron” and “debacle
of Indian Financial System.”
Mr. Ramalinga Raju’s Confession

 Mr. Ramalinga Raju on 9th January 2009 resigned from his post and
informed the board of directors through a letter confessing to the
manipulation of accounting numbers for years. Through this confession it
came into light that nearly $ 1.04 billion amount in bank loans and cash owed
to be claimed by the company was non-existent. SCSL overstated its income
in order to meet the analyst’s expectation every quarter resulting in piling up
of fraud in such a huge amount. Mr. Raju created several bank accounts and
used these bank accounts to escalate the balance sheets with fake balances.
He also admitted to create nearly 6,000 salary accounts with the intent to
appropriate the money deposited by the company. It is also believed that the
cash raised from the American depository receipts never made it to the
company’s accounts. Mr. Raju breached the fiduciary relationship he had
with the company as a promoter, at various levels and also affected the
employment of various persons serving the company at different positions.
Manipulation of books of Accounts

 Estimating the profits and the trending boom in purchase of property in

the city, Mr. Raju also got attracted to the industry. At that time, Raju
bought properties in Hyderabad aggressively which resulted in shortage
of funds hence to obtain more funds and profits, he went on to
manipulate the books of accounts of the company. Mr. Raju kept
practising this system and he opined that he will obtain profits once the
prices of the properties start to increase. Further, he planned to balance
the amount when he incurs profits from the properties purchased.
Meanwhile, the manipulations in the books of accounts made sure that
the condition of company seemed growing and incurring profits. He also
kept increasing the prices of shares so as to gain profits and with those
profits he would again buy more properties. With time, the gap in the
actual profits and the profits shown in books of accounts kept growing.
 But when due to recession in 2008 the prices decreased, Mr. Raju found himself surrounded in
a quagmire and therefore, this gave birth to his last opportunity to save SCSL and fill the gap
between the actual profits and manipulated profits in books of accounts of the company. He
decided to buy Maytas Properties and Maytas Infra which could possibly be the only solution
to get away with the situation and ameliorate the fraud initiated by him. The transaction was
planned in such a manner that the companies will be purchased only on papers but there will be
no actual cash transaction and hence, this will balance the amounts already mentioned in the
books of accounts. The board of directors of SCSL agreed and sanctioned the purchase of
companies without prior approval of the shareholders. The problem occurred again when the
purchase made investors unhappy which resulted into a sudden decrease in the shares of the
company. A law suit was also filed against SCSL which led to a decrease in the shares by 55%
on the NYSE. The increasing pressure served as the final nail in the coffin for Mr. Raju and
hence he confessed of manipulation of books of accounts and committing of fraud before
Securities Exchange Board of India (hereinafter referred as SEBI).
 This confession came as a shock to investors, shareholders and to everyone else. The
Government immediately appointed new board of directors for the company and ultimately
51% of SCSL shares were bought by Mahindra and it was then known as “Mahindra Satyam”.
Consequently, it merged with Mahindra group and now it is famously known as ‘Tech
Mahindra.
Role of Accountants in Satyam Scam

 It is believed by a lot of people that the chartered accountants are

involved in the Satyam Scam i.e. Price Waterhouse India because of
the fact that fraud went undiscovered for such a long time. A similarity
between the role of PWC in the aforesaid case is drawn to the conduct
of accountants in Enron case. The SFIO report also opined that the
accountants instead of using independent testing mechanism used the
tools of Satyam and hence were negligent in performing their statutory
duties and reporting standards.[2] The accountants in the instant case,
not only failed in bringing the clear picture in the eyes of the public
but also perpetrated the fraud by giving a clean chit to the company
and by depicting the correctness of books of accounts. Lamentably,
PWC was managing the accounts of the company from the past 9
years and still it failed to unveil such a huge scam.
SEBI’s Judgement
 SEBI in 2014 ordered that Mr. Ramalinga Raju and 4 others should be barred to deal in the
markets for 14 years and also asked for an amount of Rs. 1,849 crores worth of unlawful gains
with interest. The interest was charged at the rate of 12% per annum with effect from the date
on which Mr. Raju made such confession about the fraud and manipulation of the books of
accounts. The amount was supposed to be deposited within 45 days from the date of order
along with interest. The 4 others culprits who are facing prohibitory orders were B Rama Raju
(Managing Director of Satyam), VadlamiSrinivas (Ex-Chief Financial Officer), G Ramakrishna
(Ex-Vice President) and VS Prabhakara Gupta (Head of Internal Audit). SEBI acknowledged
the fact that a sophisticated white-collar crime has been committed by the promoters and
accountants of the company and this deliberate action of the persons involved was a well-
designed plan to incur personal gains and was detrimental to the company and the investors
involved.

 The Securities Appellate Tribunal (hereinafter referred as SAT) also identified the actions as
fraudulent under the Prohibition of Fraudulent and Unfair Trade Practices (hereinafter referred
as PFUTP) and also held the erstwhile promoters and SRSR liable for conducting insider
trading which is prohibited under the Prohibition of Insider Trading (hereinafter referred as
PIT). However, through a fresh order dated 2nd November 2018, SEBI decreased the amount
of penalty to Rs. 813 crores.
Consequences faced by India’s Corporate
Governance

 The revelation of such huge accounting scam has created several problems in
India. The primary and the most lethal repercussion of the scam which was
foreseeable was reluctance and decrease in India’s appeal for foreign investment in
the IT services sector. Further the shares of Satyam hit the lowest at 30 and saw a
decline of 77% in its value. Though necessary steps were undertaken by the Indian
corporate governance, the Federation of Indian Chambers of Commerce and
Industry also issued a statement addressing the issue and stating that the investors
need not worry about accounting standards and corporate governance in India.

 To curb these problems in the ICG a task force was set up by Confederation of
Indian Industries and based on recommendation of this task force the Ministry of
Corporate Affairs issued voluntary guidelines for Corporate Governance in 2009.
The National Association of Software and Services Companies also established a
Corporate Governance and Ethics Committee which suggested reforms concerning
audit committees, rights of shareholders and policies relating to whistle blower.
 SEBI also amended the existing guidelines relating to corporate
governance. Amendments in the Listing Agreement were also made to
ensure prevention of such fraudulent activities. SEBI also introduced
SEBI 2015 which is applicable on all public companies, thereby
making stringent rules and guidelines in regards to disclosure of
material events and accounts of the companies.
 The government also took necessary measures by introducing
Companies Act, 2013 which vehemently focussed on interest of
stakeholders. The Act also declared corporate fraud as a criminal
offence. It created clear guidelines for disclosure of fraud by cost
accountants, company secretaries and auditors. It also created a rule of
checks and balances in the Act thereby ensuring proper governance and
management of companies in the country. It also embodied a clause
making it mandatory to rotate individual auditors of the company in
every five years and in auditing firms every 10 years. Further the
accountants are obligated to disclose if they find any kind of fraud
being practised by the company or persons related to it, while
performing their duties.
Punjab National Bank Heist
 The Punjab National Bank Fraud Case relates to fraudulent letter of
undertaking worth ₹11,356.84 crore (US$1.4 billion) issued by the
Punjab National Bank at its Brady House branch in Fort, Mumbai;
making Punjab National Bank liable for the amount. On 14 th February
2018, Punjab National Bank (PNB), disclosed that it had been
defrauded out of roughly 1.4 billion dollars. This news shook the
nation and all eyes turned to the culprit Nirav Modi, a rich diamond
tycoon. The fraud was allegedly organized by jeweller and designer
Nirav Modi. Nirav, his wife Ami Modi, brother Nishal Modi and
uncle Mehul Choksi, all partners of the firms, M/s Diamond R US,
M/s Solar Exports and M/s Stellar Diamonds; along with PNB
officials and employees, and directors of Nirav Modi and Mehul
Choksi's firms have all been named in a charge sheet by the CBI. It is
alleged that Modi was helped by former PNB employee, Gokulnath
Shetty, who was a deputy general manager in the foreign exchange
department and Manoj Kharat who was a clerk, both of them
repeatedly issued Letters of Undertaking (LoU) to Nirav Modi's
companies without following the processes.
According to the bank, the employees issued the LoUs without
securing cash reserve or collateral and without recording the
transactions in the bank's core banking software. An LoU is a
guarantee by the issuing bank to the receiving bank and the
companies that it would undertake to pay a certain amount of
money on a specific date.
Nirav and his companies allegedly leveraged those LoUs in Hong
Kong to secure buyers' credit from the local branches of
Allahabad Bank, Union Bank, Axis Bank, Bank of India, and
State Bank of India. These suspect bank officials issued the LoUs
and informed these branches via the international cash transfer
service called SWIFT (Society for Worldwide Interbank Financial
Telecommunication). The service connects all international banks
worldwide. PNB employees misused the SWIFT network to
transmit messages to Allahabad Bank and Axis Bank on fund
requirement. While all this was done using SWIFT passwords, the
transactions were never recorded in the bank’s core system —
thereby keeping the PNB management in the dark for years.
March 2011: Nirav Modi got his first fraudulent guarantee from PNB on March 10, 2011.
Between then and January 2017 Shetty issued several fake PNB letters of undertaking –
without any collateral – for Modi. Nirav Modi managed to get 1212 more such
guarantees during this period.
January 2018: The scam came to light in January 2018, when representatives of Modi’s
companies approached PNB for a fresh loan. By then, Shetty had retired and his
successor declined to honour Modi’s request. “At this the firms contested that they have
been availing this facility in past also but the branch records did not reveal details of any
such facility”, PNB said. This was when the fake Letters of undertaking were discovered.
On January 29, 2018 PNB files police complaint against Nirav Modi, Mehul Choksi and
others accusing fraud.
 February 2018: CBI launches an investigation into the alleged scam and on 17 th
February, CBI makes first arrest in this case, two PNB employees and an executive of
Nirav Modi’s group were detained. On the same day, Government of India suspended
passports of Nirav Modi and Mehul Choksi for four weeks. The Enforcement
Directorate (ED) seized a cumulative Rs 56.74 billion worth of diamonds, gold and
jewellery from Nirav Modi’s home and offices and they seized nine luxury cars
belonging to Nirav Modi and his firms. A magistrate’s court issues a bail able arrest
warrant against diamond trader Nirav Modi.
 June 2018: The Interpol issues Red Corner Notice against Nirav Modi for money
laundering. On June 25, the ED moves a special court in Mumbai seeking his
extradition.
 August 2018: The Indian government sends a request for the extradition of Nirav Modi
to the UK authorities.
 December 2018: The UK government informs India that Nirav Modi is living in the
country.
 March 2019: British newspaper ‘The Telegraph’ confronts Nirav Modi on London’s
streets and confirms his presence in the country. Westminster Court in London issues
arrest warrant against fugitive Nirav Modi after the Indian government request was
forwarded to the court by the UK Home Office. Nirav Modi sent to Her Majesty’s
Prison (HMP) Wandsworth till March 29. Nirav Modi’s bail application was denied and
April 26 was fixed as the next date of hearing.
  August 2019: Nirav Modi’s remand extended till
September 19, UK extradition trial expected in
May 2020.
 May 2020: Nirav Modi’s five-day extradition trial
in PNB fraud case begins in UK. Indian
government submits more proof against Nirav
Modi in money laundering case.
 February 2021: UK court rules Nirav Modi can
be extradited to India to face charges of fraud
and money laundering.

Impacts
• PNB was essentially left holding bank guarantees worth in excess
of Rs 11,400 crore which it has to pay to a multitude of different
parties including the State Bank of India, Allahabad Bank and Union
Bank. The said payments were expected over the next few months.
• Furthermore, the banking sector, jewellery sector and the
insurance sector were stunted with serious negative repercussions
Big questions arose with regard to the credibility of public sector banks as a whole, and
also the whether regulators like the RBI and SEBI were performing their duties to the
required standard.

Aftermath
 In response to all this, the Reserve Bank of India immediately banned
banks from issuing guarantees in the form of letters of undertaking
(LOU) to prevent any further misuse of the medium. It was also decided
that the process of issuing LoUs for trade-related credits for imports in
India was to be discontinued by commercial banks with immediate
effect. The RBI had also directed banks to connect their core banking
systems (CBS) to the SWIFT (Society for worldwide interbank financial
telecommunication) system by April 30, of that. Meanwhile, Nirav Modi
was charged with criminal conspiracy, cheating, dishonesty, fraud,
breach of trust and breach of contract and was arrested in London after
the release of an arrest warrant against him.