An insight into the Satyam Scandal


On 7th January 2009 India woke up to a witness a shocking new scandal. India's high riding prince had suddenly been stammered down by a series of small potholes which has grown into a deep fall. On this day it was discovered, or rather admitted, that the money that was claimed by the king's treasure was only made of hay and stack.

Ramalinga Raju, the founder and Chairman of Satyam computers, India's 4th largest IT company, resigned after notifying the Board of chairman of the company and Securities Exchange Board of India (SEBI), in a 5 page letter drafted by him, that Satyam's accounts had been cooked and falsified to the tune of a whooping Rs. 7000crore! Raju acknowledged his culpability in hiding news that he had inflated the amount of cash on the balance sheet of India's fourth-largest IT company by nearly $1 billion, incurred a liability of $253 million on funds arranged by him personally, and overstated Satyam's September 2008 quarterly revenues by 76% and profits by 97%. After submitting his resignation, Raju ended his letter by apologizing for his inability to close what began as a "marginal gap between operating profits and the one reflected in the books of accounts" but grew unmanageable. "I am now prepared to subject myself to the laws of the land and face the consequences thereof," he wrote.

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After the news of one of India's biggest corporate scandals broke out, Satyam's investors fled like a stampede, crushing Satyam's stocks to about 78% of their trading value. Satyam's shares fell to 11.50 rupees on 10 January 2009, their lowest level since March 1998, compared to a high of 544 rupees in 2008. In New York Stock Exchange Satyam shares peaked in 2008 at US$ 29.10; by March 2009 they were trading around US $1.80. On 10 January 2009, the Company Law Board decided to bar the current board of Satyam from functioning and appoint 10 nominal directors. "The current board has failed to do what they are supposed to do. The credibility of the IT industry should not be allowed to suffer." said Corporate Affairs Minister Prem Chand Gupta.

The company's globally reputed auditor firm, PriceWaterHouseCooper's Indian operations came under the scrutiny as well. Chartered accountants regulator ICAI issued show-cause notice to PricewaterhouseCoopers (PwC) on the accounts fudging. "We have asked PwC to reply within 21 days," ICAI President Ved Jain said.

ndustry executives are desperately trying to contain the fallout. "The decline in governance and institutions represents a serious challenge to India," says Rajeev Chandrashekhar, president of the Federation of Indian Chambers of Commerce and Industry. Wipro Technologies (WIT) Chief Financial Officer Suresh Senapaty, went on TV to say that Satyam's actions should not infect the entire Indian IT industry. And Mohandas Pai, head of human resources at Infosys (INFY) and the company's former chief financial officer, argued Satyam's behavior is atypical. "We wish the regulators will investigate and punish the guilty," he says. "But this is not representative of our industry." John McCarthy, vice-president of Forrester Research, allays some fears. "I look at Satyam as an isolated case, and don't think the developments would have any impact upon India's No. 1 position as an offshore location."

Raju's confession is the latest in a rocky ride for Satyam, its shareholders, and its stakeholders over the past year. The company's clients include multinationals such as Nestlé, General Motors (GM), and General Electric (GE). But in September, the World Bank banned Satyam from doing any of its work after it found Satyam employees had hacked into its system and gained access to sensitive information. It also did not renew their five-year contract. Satyam denied any wrongdoing. Then came a fresh blow on Dec. 16, when Raju announced the company would spend $1.6 billion to buy two infrastructure companies run by this sons, only to reverse the decision a few hours later under shareholder pressure. Satyam ADRs lost 50% of their value overnight. December also brought news of pending litigation by a former client, online mobile-payments service Upaid Systems, which filed a case of intellectual fraud and forgery against Satyam in 2007; a Texas court is scheduled to conduct a hearing on the case Jan. 7. With Satyam's management focused elsewhere, business suffered. Clients complained about lack of attention, and many professional managers began to leave.

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CLSA valued Satyam at $600 million only after the case broke out. The 40000 employees of Satyam(as opposed to 53000 employees claimed by Satyam) lost all hopes as they saw their hardwork and dedication thrown into a pit of lies and deceit by their leader. Thousands of employees were laid off and many more were put on a hold. Some of the employees describe the situation in the days of crisis as "abysmal" "hopeless" "grave" "torturing".

The battle of winning back the lost glory seemed like a long lost one for Satyam and its employees. With AP government issuing out arrest warrants for Raju and his accomplices and SEBI launching probes into Satyam accounts one after the other, government finally came into rescue Satyam by raising a bid to the corporate to take over the ailing tiger. Amidst nervous and doubtful bidders, Satyam finally found a savour in Mahindra Tech and Satyam's now come to be called Mahindra Satyam. The battle for the employees of Satyam and its stakeholders finally came to end. Its founder faces charges of 7 years into prison on account of fraud and deceit.

Satyam's story formulates into one of India's biggest corporate scandals, India's very own Enron!

Satyam's founder and top management could not live up to the name and in their greed and passion to succeed, made it bite the dust instead.

Satyam is another example of to what extend can the corporate greed lead to the failure of the giant in the making. Past cannot be undone but we can prevent the future from taking a similar turn. That is the biggest learning from Satyam's story.