Examining the fraud controversy of Satyam Computer Services Limited

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Satyam Computer Services Limited, also known as Mahindra Satyam now, provides information technology services and business process outsourcing (BPO) services in various parts of the world. The company was founded in 1987 and is headquartered in Hyderabad and counts General Electric, Nestle, Qantas and Fujitsu among its major customers.

Scandal:

Maytas Infra and Maytas Properties were two separate empires created by Raju for his sons. As Satyam grew over the years, even these empires grew over the period of time. Chunks of the fraud money were transferred to these empires.

January 7, 2009 was a black letter day in the history of Indian Corporate industry as Satyam fell into a deep crisis. Ramalinga Raju inflicted a huge blow to the Indian image in the global business arena with a scam in par with Enron. He resigned as its Chairman after admitting to major financial wrongdoings. The companies across the world would be more cautious before engaging any Indian company for their business activities.

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The Balance Sheet of September 30, 2008 had inflated (non-existent)

Cash and bank balances of Rs.5,040 crore (as against Rs.5,361 crore in the books); accrued interest of Rs.376 crore, (non-existent)

Understated liability of Rs.1,230 crore

Overstated debtors' position of Rs.490 crore (Rs.2,651 in the books).

September quarter reported revenue of Rs.2,700 crore (Rs.2112 crore actual revenue) and an operating margin of Rs. 649 crore (actual operating margin of Rs. 61 crore). This has resulted in artificial cash and bank balances going up by Rs. 588 crore in Q2 alone.

The gap in the balance sheet had arisen on account of inflated profits over years. All attempts made to eliminate the gap failed. Maytas acquisition deal was the last attempt to fill the fictitious assets with real assets, which failed due to the opposition of independent directors.

Five banks, including HDFC Bank and BNP Paribas, informed that the reconciliation statements of the fixed deposits shown by Satyam Computers at auditing were not issued by them.

The holdings of Raju and his family decreased from 15.67% in 2005-06 to 8.61% in September 2008 and this year to a meager 2.3% without anybody noticing. It is not possible that Raju did not benefit from it. He benefited, and that too substantially.

S Gopala Krishnan and Srinivas Talluri (PricewaterhouseCoopers) auditors who are the auditors for Satyam Computers, were well aware of the fraud and executed it by signing the inflated audit reports.

The Satyam fraud grew worse; Raju had confessed that he diverted Satyam funds to family-owned Maytas Infra and Maytas Properties since 2004, which had denied receiving any funds from Satyam.

By the time the scandal exploded, Raju had diverted Satyam's money to his empire of fraud - siphoning off, Rs 20 crore every month, that was shown in Satyam's books as the salary bill of nearly 13,000 employees who did not exist. Provident Fund Organisation (PFO) had made it official that Satyam has only 43,622 employees.

Raju's youngest brother Suryanarayana Raju actually played a bigger role in the scam than Raju's other brother, Rama Raju. The money from these accounts flowed to benami companies and real estate fronts who, bought up vast pieces of land, mainly in Ranga Reddy, Nalgonda and Hyderabad. He flew almost a week before Ramalinga Raju confessed to the Satyam fraud. Suryanarayana is also suspected to have opened two investment firms in Mauritius where money was transferred through hawala. This was later routed back to the benami companies owned by the family.

The scam, revealed a clear pattern into the uncontrolled registration of 327 private companies by Raju, his family members and associates, and the spree of land acquisition in the names of these firms. The properties were acquired between 2005-2008 and are spread over Andhra Pradesh, Tamil Nadu, Maharashtra, Karnataka and Uttar Pradesh.

The Ministry of Company Affairs (MOC) came into action and asked ROC in Hyderabad to conduct preliminary inquiry. SEBI and state government all jumped in the dispute. The state government ordered CID inquiry and filed an FIR against Raju and others by themselves, as no one came to file a formal complaint against this fraud.

After receiving the inquiry report from ROC, MOC order inquiry by Serious Fraud Investigation Office (SFIO).

Impact of the Fraud:

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Post disclosure of the scam, banker Merrill Lynch terminated its engagement with Satyam. The Golden Peacock award was taken away from Satyam, they used this award to highlight the company's strong corporate governance structure to justify the board's decision to bid for Maytas.

The stocks had fell to its lowest level in over a decade, about 75% lower at the National Stock Exchange and pulled down the 30-scrip BSE Sensex 750 points to 9,587 and it also lost Rs. 10,000 crore in market capitalization. It lost its weightage in SENSEX. NSE removed Satyam from its benchmark index Nifty and other indices like CNX 100, S&P CNX 500,CNX IT and the CNX Services sector index, Dow Jones Indexes. NYSE halted trading in Satyam Computer.

The brothers Raju and Rama, and Chief Financial Officer Vadlamani Srinivas are in jail.

Satyam Computer named President Ram Mynampati as the interim CEO. Despite the uncertainty over the liquidity position of Satyam, big clients of the firm such as GE, Malaysia Airlines continued their existing contracts with the firm.

SEBI, paving way for take over of Satyam, had decided to revise the open offer norms in order to arrive at a fair price for such companies. Larsen & Toubro, Mahindra and Mahindra group, Hindujas, Spice and i-Gate, among others considered the take over of Satyam. Tech Mahindra is the new owner of Satyam by acquiring 31% stake, has come back in to the black in fourth quarter ended March 31, 2009 by posting Rs. 230 crore net profit.

A new Companies Bill, pending in Parliament, would make regulation more stringent for auditors. The new bill seeks to revamp old laws to help India's corporate sector adopt international practice, and companies more accountable.

The council decided that the name of the auditing firm, if implicated in any fraud, will be put up on the ICAI website for five years as an alert informing corporates and other institutional bodies about the firm's involvement in such an incident.

Conclusion:

The fraud had, exposed the failure of the regulatory mechanism and highlights cultural risks inherent in India's businesses. However the investigation has not come to end, as on the date of submission of this report, a fraud amounting Rs. 4739 crore has been reported by CBI. Regulations to avoid scams of this nature are being created.