The Satyam Scam – A whopping Rs.7,000 Cr fraud

Before we dive in to the details of the fraud as it happened, let’s understand a bit about the company and the man behind this scam, B. Ramalinga Raju.

About the Company      

The Satyam Company Services Limited (hereinafter referred as SCSL) 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 Exchange (hereinafter referred as BSE). The 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 of the Fortune 500 companies. In 1999, it was declared to be the fastest growing IT company in India.

About Ramalinga Raju

Ramalinga Raju, the eldest of four children, was born on 16 September 1954. He earned a Bachelor of Commerce degree from Andhra Loyola College at Vijayawada and subsequently earned an MBA from Ohio University in the United States. After returning to India in 1977, he ventured into many businesses including hotels and a cotton mill funded by the Andhra Pradesh government. As these businesses failed, he moved into real estate and started a construction company named Maytas Infra Limited.

In 1987, Raju incubated Satyam Computer Services along with one of his brothers-in-law, DVS Raju in Secunderabad and 20 employees.

What was the Satyam Scandal/Scam?

The Satyam Scam is about corporate governance and fraudulent auditing practices allegedly in connivance with auditors and chartered accountants. The company misrepresented its accounts both to its board, stock exchanges, regulators, investors and all other stakeholders.

It is a fraud, which misled the market and other stakeholders by lying about the company’s financial health. Even basic facts such as revenues, operating profits, interest liabilities and cash balances were grossly inflated to show the company in good health.

What exactly happened?

Dear Board Members,

It is with deep regret, and tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice:

1. The balance sheet carries as of September 30, 2008
a) Inflated (non-existent) cash and bank balance of Rs.5,040 crore (as against Rs.5361 crore reflected in the books)
b) An accrued interest of Rs.376 crore which is non-existent
c) An understated liability of Rs.1,230 crore on account of funds arranged by me
d) An over stated debtor position of Rs.490 crore (as against Rs.2651 reflected in the books)

2. For the September quarter (Q2) we reported a revenue of Rs.2,700 crore and an operating margin of Rs.649 crore (24 per cent of revenues) as against the actual revenues of Rs.2,112 crore and an actual operating margin of Rs.61 crore (3 per cent of revenue). This has resulted in artificial cash and bank balances going up by Rs.588 crore in Q2 alone.

These are the exact words from the then-Chairman, B. Ramalinga Raju’s letter to the Board members of Satyam Computer Services Ltd, unfolding a colossal 7,136 crores financial fraud!

Mr. Ramalinga Raju on 9th January 2009 resigned from his post and informed the board of directors through this letter confessing to the manipulation of accounting numbers for years. In the letter, Mr. Raju admitted to inflating profits over last several years and how the gap between real and fictitious profits continued to increase as the company grew in size.

The following line from the letter summarizes the sad story of Satyam’s Ramalinga Raju:

It was like riding a tiger, not knowing how to get off without being eaten

It all started when Satyam struck a deal to acquire 51% stake in Maytas Infra for $300 million and 100% stake in Maytas Properties for $1.3 billion on December 16th 2008, both promoted by Raju and sons (Maytas read as “Satyam” backwards).

Following backlash from the investors, the company reversed its decision to acquire the stakes on December 17th 2008, the very next day and the deal is called off.

Raju states is his letter as well that “the aborted Maytas acquisition was the last attempt to fill the fictitious assets with real ones.”

During the course of next few days, many independent directors started resigning, leading to further speculation about the governance of the company.

The following table depicts the key events that led to the glum demise of one of the top IT companies of India.

The following table depicts the original and adjusted state of affairs of the company, after the revelation made by Raju through his letter:

What followed next?

Following the January 7 letter and in accordance with the requirements under the Indian and the United States accounting standards, PricewaterhouseCoopers (PwC), Satyam’s auditors, issued a letter stating that the audit reports and the opinion prepared by them for Satyam should not be relied upon. Mr. Raju, his brother (who was the Managing Director on the Board of Satyam) and the former Chief Financial Officer (CFO) were arrested. Two PwC partners were also arrested in connection with the fraud.

On 9th January, 2009, the government tightened its screws on the Satyam management and superseded the Board of Directors. The swiftness with which the Ministry of Corporate Affairs acted in superseding the board of Satyam and appointing the government nominees on the board prevented a sure liquidation of the company after the fraud of such a large magnitude had surfaced.

The new Board met numerous times to discuss selling a portion of the company to a strategic investor and in April 2009, Mahindra beat L&T in the bidding process to acquire the company. Satyam was then rebranded as Mahindra Satyam. Mahindra Satyam later merged into Tech Mahindra in June 2013.

Shares of the company

It was a free fall for the company’s shares trading on the stock market. The share price of the company nosedived from a high of Rs.178.95 on January 6, 2009 to below Rs 40, wiping out Rs 9376 crore of investors’ wealth in just one day!

Mahindra Satyam shares stopped trading from July 3rd and all Mahindra Satyam shareholders were to get two shares of Tech Mahindra of Rs 10 each for every 17 shares they held (2:17).

To sum it up!

Six years after the biggest accounting fraud shook the corporate world in India, Satyam founder B Ramalinga Raju was in 2015 sentenced to 7 years in jail and was fined Rs 5 crore by a special court in Hyderabad, at the time when he had already served 32 months in prison.

In January 2018, SEBI issued an order banning PwC firms and a couple of its auditors from providing audit services to listed companies and market intermediaries for two years.

The Satyam fraud was a total failure of corporate governance. It provided evidence that despite sound norms of corporate governance, unscrupulous persons have ways to circumvent the law. The Satyam fraud also highlighted the multiplicity of regulators, courts and regulations involved in a serious offence by a listed company in India. Some of the regulators investigating Satyam included: the Ministry of Corporate Affairs (Government of India) including the Serious Fraud Investigation Office, the Registrar of Companies in Hyderabad, the Company Law Board; the Central Bureau of Investigation; Income Tax Department; the Enforcement Directorate; the Provident Fund authorities; the Securities and Exchange Board of India; and the Institute of Chartered Accountants of India.

The impact of several parallel investigations on the successful prosecution of the accused was unclear. The wheels of justice grind slowly in India.

And the biggest irony here – Satyam had received the “Golden Peacock Award’ for excellence in corporate governance from the London based World Council for Corporate Governance.

Come on, guys – You gotta be kidding me!?

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