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Satyam 1
Satyam 1
In the Indian outsourced IT-services market, Satyam Computer Services Limited was a rising star. Mr.
Ramalinga Raju established the firm in Hyderabad in 1987. The company began with 20 workers and
quickly expanded to become a worldwide company with operations in 65 countries across the world.
Satyam was the first Indian business to be listed on three global stock exchanges, namely New York
Stock Exchange (NYSE), DOW Jones, and EURONEXT.
After TCS, Infosys, and Wipro, it was recognized as India’s fourth-largest software exporter. The
corporation had significant expansion in the 1990s. Satyam Renaissance, Satyam Info way, Satyam
Spark Solutions, and Satyam Enterprise Solutions were formed as a result of the same. Satyam Info
Way (Sify) was the first Indian internet business to be listed on the NASDAQ. In the new century,
Satyam acquired a number of firms, extended its operations to a number of countries, and signed
MoUs with a number of international corporations.
Factors that contributed to the
Satyam Fraud Case
• Becomes the Official IT Services Provider for the FIFA World Cups, 2010 (South
Africa) and 2014 (Brazil) 2007
• Becomes the first Asian company to feature in the Training Magazine’s list of
Top 125 companies for learning
The Satyam Board of Directors had nine members. As required by Indian listing rules,
five members of the Board were independent. Satyam stated in regulatory filings with
the SEC that it did not have a financial specialist on its Board of Directors in 2008.
Concerns also arose afterward about the Board of Directors’ lack of independence.
The Board of Directors included a number of well-known corporate heavyweights,
which possibly contributed to Satyam’s lack of scrutiny. Krishna Palepu, a Harvard
professor and corporate governance specialist, Rommohan Rao, the Dean of the Indian
School of Business, and Vinod Dham, co-inventor of the Pentium Processor, were
among the Board’s members.
On December 16, 2008, the Board came under fire for approving Satyam’s purchase
of real estate firms in which Mr. Raju had a significant stake. After a shareholder
uprising, the Board of Directors revoked the approval. Within two days of the
transaction’s cancellation, Krishna Palepu, Rammohan Rao, and Vinod Dham all
resigned from the Board.
The bungled deal gave the appearance to investors that the Board of Directors was not
actively monitoring Satyam. Furthermore, the Board of Directors should have noticed
some of the same red signals that PwC, the auditor, missed.
Furthermore, the fact that Mr. Raju reduced his Satyam shares considerably in the
three years leading up to the fraud’s discovery should have troubled the Board of
Directors. Mr. Raju’s stake in the company dropped from 15.67 percent in 2005-2006
to 2.3 percent in 2009.
ACQUISITION BY MAHINDRA GROUP
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:
Investors and authorities urged for a stronger regulatory environment in the securities markets after
the Satyam crisis. The SEBI increased corporate governance (CG) 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 .
Satyam blatantly flouted all corporate governance requirements. The Satyam debacle served as a cautionary
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.
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 CG 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.
CONTROVERSIES
TAX EVASION
Before the asset inflation scandal hit, the Income Tax Department had issued notices to the company seeking ₹
6.17 billion tax, for the assessment years from 2003–04 to 2008–09 after disallowing exemptions claimed by the
software firm. The Central Board of Direct Taxes attached the properties of Mahindra Satyam on 30 January 2012,
after issuing notices to the company seeking payment of the tax. The Andhra Pradesh High Court stayed the order
in February 2012.
MAYTAS ACQUISITION
In December 2008, Satyam founder B. Ramalinga Raju made a final attempt to conceal his falsification of the Satyam
Computer Services balance sheets by acquiring Maytas Infrastructure and Maytas Properties for $1.6 billion, despite concerns
raised by independent directors. Both companies were founded by Raju's family members and were owned by Raju's sons.
This eventually led to a review of the deal by the government, and a veiled criticism by the then Vice President of India Hamid
Ansari. Several of Satyam's clients responded by re-evaluating their relationship with the company. Satyam's investors lost
about ₹3,300 crore (equivalent to ₹92 billion or US$1.2 billion in 2023) in the related panic selling, as Satyam's shares fell
55% on the New York Stock Exchange. Four members of the board of directors resigned on 29 December 2008.
ACCOUNTING SCANDAL
On 7 January 2009, Chairman Raju resigned after publicly announcing his involvement in a
massive accounting fraud, in which he had inflated the company's cash assets by over $1
billion. In a letter to the Securities and Exchange Board of India, he explained that "what
started as a marginal gap between actual operating profit and the one reflected in the books
of accounts continued to grow over the years ... It has attained unmanageable proportions as
the size of the company operations grew significantly".
In 2015, Raju was sentenced to seven years in jail and fined about $800,000.
GOVERNMENT’S REACTION TO
SATYAM SCAM
The Satyam fraud case taught India a lot. Indian law is continually evolving. However, this is how the
government responded to the Satyam Scam:
STEPS DESCRIPTION
COMPANIES ACT The Companies Act of 1956 was abolished, and the
Companies Act of 2013 took effect. Corporate fraud is
a criminal offence under the new act's terms. The
statute explicitly defines and identifies cost
accountants, auditors, and corporate secretaries as
obligated to disclose Satyam fraud.
ICAI- The Institute of Chartered Accountants of India The accounting organization underlined the auditors'
comprehensive reporting of fictional assets & contingent
liabilities in its audit report.
Serious Fraud Investigation Office (SFIO) This regulatory authority, constituted under the
administration of the Ministry of Corporate Affairs,
was given the status of a statutory organization under
the Companies Act of 2013. In India, it looks into
business and accounting fraud.
Corporate governance best practices have become an
urgent need.
ACCOUNTING REPORTS
AS ON PROMOTER’S HOLDING IN %
2002 22.26
2003 20.74
2004 17.35
2005 15.67
2006 14.02
2007 8.79
2008 8.74
The Satyam accounting fraud is the largest fraud scandal to happen in the history of India. It was
conducted over a period of about 10 years by the company’s chairman and other top executives. It is
evident from the foregoing discussion that Satyam’s management did not honor the code of ethics and
standards that govern the accounting profession. They inflated their financial accounts in order to present
a false image of their company’s financial performance. The scandal was exposed by Merrill Lynch after
discovering financial inconsistencies in the financial statements of Satyam. The chairman and other top
executives resigned, the company’s share price fell drastically, investors lost $2.2 billion, and the
government appointed a board to handle the situation. The company was sold to Tech Mahindra, and the
two entities merged to form Mahindra Satyam. The Satyam accounting fraud occurred due to many years
of financial manipulation of accounts that was intended to fool investors and the public into believing that
Satyam was performing well financially. Such occurrences can be avoided by adhering to accounting
ethics, honoring business ethics, and by promoting transparency and accountability within organizations.
LESSON LEARNT
Compelled government to rewrite Corporate Governance rules, and tighten the norms of
Chartered Accountants.
Criteria for remuneration to key personnel and strengthening quality review should be there
in place
Voluntary corporate governance code should be adopted.
Company should build sustainable competitive advantage through ethics, values, excellence,
quality, social responsibility and human development.
Whistleblowers play an important role in letting others know about the fraud .