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Satyam’s scam offers salutary lessons to companies

Introduction to IT Industry:

Information technology (IT), as defined by the Information Technology Association of America (ITAA), is "the study,
design, development, implementation, support or management of computer-based information systems, particularly
software applications and computer hardware.” Information Technology is one of the most important industries in the
Indian economy. The IT industry of India has registered huge growth in recent years. India's IT industry grew from
150 million US Dollars in 1990-1991 to a whopping 50 billion US Dollars in 2006-2007. In the last ten years the
Information Technology industry in India has grown at an average annual rate of 30%. In 1970, high import duties had
forced IBM to leave India. However, after the early nineties, many multi national IT companies, including IBM, have
set up their operations in India. During the ten year period 1992-2002, the Indian software industry grew at double the
rate as the US software industry. Deregulation policies adopted by the Government of India have led to substantial
domestic investment and inflow of foreign capital to this industry.

Introduction to Satyam Computer Services Limited:

Satyam Computer Services Ltd. is a consulting and information technology services company based in Hyderabad,
India. Satyam which means "truth" in Sanskrit was founded in 1987 by B.Ramalinga Raju. The company offers
information technology (IT) services spanning various sectors, and is listed on the New York Stock Exchange and
Euronext. It is considered as an icon among the IT as it is one of the premier IT companies whose network covers 67
countries across six continents. The company employs 40,000 IT professionals across development centers in India,
the United States, the United Kingdom, the UAE, Canada, Hungary, Singapore, Malaysia, China, Japan, Egypt and
Australia. It serves over 654 global companies, 185 of which are Fortune 500 corporations. Satyam has strategic
technology and marketing alliances with over 50 companies. Apart from Hyderabad, it has development centers in
India at Bangalore, Chennai, Pune, Mumbai, Nagpur, Delhi, Kolkata, Bhubaneswar and Visakhapatnam On February
23, 2008 Satyam completed 20 years of existence.


Established on: June 24, 1987

Global Headquarters: Hyderabad, India

Registered Office:
Satyam Computer Services Ltd.
1st Floor, Mayfair Centre, S P Road
Secunderabad – 500003
Andhra Pradesh, India
Phone: +91-40-30654343
Fax: +91-40-27840058
E-mail: MediaRelations@satyam.com

Executive Directors:
• Ramalinga Raju, founder and chairman
• Rama Raju, co-founder and CEO
• Ram Mynampati, member of the board and president
Non-Executive Directors:
• Dr. (Mrs.) Mangalam Srinivasan
• Krishna G. Palepu
• Vinod K. Dham
• Prof. M. Rammohan Rao
• T. R. Prasad
• Prof. V. S. Raju

Services Offered:
Application Development and Maintenance, Business Intelligence and Data Warehousing (BI&DW), Business
Process Outsourcing (BPO), Consulting and Enterprise Solutions, Embedded Services, Engineering Solutions,
Enterprise Storage Solutions, ERP, Infrastructure Management Services, Managed IT Services, Quality Consulting,
GIS Technology, High-Tech Solutions, MES and LIMS, Silicon Design Services, Six Sigma Consulting.

Development Centers:
Bangalore, Basingstoke, Beijing, Bhubaneswar, Budapest, California, Chennai, Chicago, Dalian, Georgia,
Guangzhou, Gurgaon, Hartford, Hyderabad, Kuala Lumpur, Melbourne, Mumbai, Munich, Mississauga, New Jersey,
Ontario, Pune, Sao Paulo, Shanghai, Singapore, Sydney, Tokyo, Wiesbaden.

• Name of Subsidiary Location
• Satyam BPO Limited India, Hyderabad
• Satyam Computer Services (Shanghai) Co. Ltd. China, Shanghai
• Satyam Computer Services (Nanjing) Company Ltd. China, Nanjing
• Satyam Technologies, Inc. United States
• Knowledge Dynamics Pte Ltd. Singapore
• Knowledge Dynamics Private Limited India Bangalore
• Knowledge Dynamics USA Inc. United States
• Citisoft Plc. United Kingdom
• Citisoft Inc. United States
• Satyam Computer Services (Egypt) S. A. E. Egypt, Giza

Joint Ventures:
• Satyam Venture Engineering Services Pvt. Ltd.
• CA Satyam ASP Pvt. Ltd.

Financial Summary:
Consolidated Indian GAAP Highlights for FY 2008:
• Revenue: Rs. 8,473.49 crore; a growth of 30.7% over fiscal 2007
• Net Profit after Tax: Rs. 1,687.89 crore; a growth of 20.2 % over fiscal 2007
• Employee strength is 52,000 (Including employees in subsidiaries and joint ventures)


Award Awarded by

SAP Pinnacle Award 2008 under “Service – Ecosystem Expansion (Growth)” SAP
Best IR Website in the Asia Pacific & Africa region for providing complete, MZ Consult
accurate and timely investor relations information.
Award for Best IT Practices in IT Sector Amity Business School

Partner Innovation Award for Anti-Money Laundering (AML) solution Pegasystems
Entrepreneur of the Year Award 2007 for Ramalinga Raju, Satyam’s Ernst & Young (E&Y)
founder and chairman
Competitive Strategy Leadership Award for Offshore Testing Market Frost & Sullivan
Asian MAKE (Most Admired Knowledge Enterprise) Award Teleos, in association with
KNOW Network
Indian MAKE (Most Admired Knowledge Enterprise) Award Teleos, in association with
KNOW Network
Award for "Strengthening Customer Relationships" ITSMA (IT Services
Marketing Association)
Winner of the First “Partner Innovation” Award Software AG/WebMethods
Ranked # 1 in the ASTD BEST Award American Society for
Training and Development (ASTD)
First Asian company to rank in Training Magazine's Top 125 Training Magazine
Companies for learning
Citizenship Partner of the Year Award, 2007 Microsoft
Vision, Impact, Progress (VIP) Award, 2007 Computer Associates
Second-Best Employer in India Hewitt India
The only IT Services Company from India in the list of the TOP 20 Hewitt Asia
Best Employers in Asia
BML Munjal Award for Excellence in Learning and Development Hero Mindmine Institute (part
of the Hero group of industries)

TDWD Best Practices Award TDWI (The Data Warehousing
Institute) of North America
Top Asian Knowledge Organization Most Admired Knowledge
Enterprise (MAKE)
Third-Best Company to Work for in India BT-Mercer-TNS
Award for most innovative recruitment practices RASBIC (Recruiting &
Staffing Best in Class)
Ranked in the ASTD Fourth BEST awards American Society for Training &
Development (ASTD)
Recognition Of Commitment (ROC) Award The Institute of Internal
Auditors, USA (IIA)

Winner, Corporate Citizen I award for Corporate Social Responsibility Business World, FICCI & SEDF
CMMI Level 5 Company-wide SEI, CMU authorized Lead Assessor
ISO 27001 Global Certification BVQI , UK
Forbes Top Asian Companies under US$1 billion Forbes Magazine
Top 13 Best-Managed Companies in India Business Today and AT Kearney
AS 9100/EN 9100 (Aerospace Standards Certification) BVQI , UK
People CMM Level 5 Assessment, Pune facility TUV Rhineland

Ranked Among Top 10 Best Companies to work for in India Business Today, Mercer, TNS
Ranked Among India’s Top 10 Best Employers, 2004 and 2003 CNBC-Hewitt Best Employers
Best Risk Management and Solution Delivery Gartner
Organization that Creates Fun and Joy at Work HT Power Jobs Awards

National Award for Bright Ideas for Idea Junction™ Indian National Suggestion
Schemes’ Association
IT Offshore Service Delivery Program Aberdeen Group
named “Industry Best Practice”
Golden Peacock for Excellence in Corporate Governance Institute of Directors, Ministry
of HRD
Security Standards Certification BS 7799 International Information
Security and Management Standards
Best Global Data Warehousing Solution TDWI
First IT Company in the World Certified under ISO9001:2000 Bureau Veritas Quality

Before 2001:
SEI CMM® Level 5 Certification SEI, CMU authorized Lead Assessor
“100 Leading Pioneering Technology Companies” World Economic Forum
Golden Peacock Award for Innovation Institute of Directors, Ministry of

• Revenue crosses US $ 2-billion mark
• Adopts new tagline “Business Transformation. Together.”
• Enters agreement to acquire S&V Management Consultants, a Ghent, Belgium-based supply chain
management (SCM) consulting firm
• Agrees to acquire Caterpillar’s market research and customer analytics (MR&CA) operations
• Becomes the first company to launch a secondary listing on Euronext Amsterdam under NYSE Euronext’s
new “Fast Path” process for cross listings in New York and Europe
• Becomes the first company to be invited by the National Stock Exchange (NSE) to ring the opening bell
• Enters into a definitive agreement to acquire Chicago-based Bridge Strategy Group

• Becomes the Official IT Services Provider for the FIFA World Cups, 2010 (South Africa) and 2014 (Brazil)
• Announces acquisition of UK-based Nitor Global Solutions Limited
• B. Ramalinga Raju, founder and chairman of Satyam, was named the "Ernst & Young Entrepreneur of the
Year "
• Opens Global Development Center (GDC) in Malaysia
• Opens Development Center in Vizag, India
• Becomes the first Asian company to feature in the Training Magazine’s list of Top 125 companies for

• Revenue exceeds US$1 billion
• Sets up the first “Global Innovation Hub” in Singapore
• Sets up operations in Guangzhou, China

• FLC framework launched across the entire organization
• Largest global development center outside India (in Melbourne) begins operation
• Citisoft and Knowledge Dynamics acquired

• Satyam BPO launched in Hyderabad
• First Customer Summit conducted
• Satyam becomes world’s first ISO 9001:2000 company to be certified by BVQI
• Listed on the NYSE (SAY)
• APAC headquarters established in Singapore 2000
• Associate count reaches 10,000
• Satyam receives National HRD Award from Indian government
• Dataquest names Ramalinga Raju "IT Man of the Year"

• Assessed at SEI CMM® Level 5
• Satyam Infoway (Sify) becomes the first Indian Internet company listed on NASDAQ
• Satyam forms joint venture with TRW Inc.
• Presence established in 30 countries

• Satyam signs joint venture with Dun & Bradstreet for IT Services
• Awarded ISO 9001 Certification
• Satyam Technology Center (STC) inaugurated
• Joint venture with GE announced

• Offshore software project with John Deere & Co.—Satyam’s first Fortune 500 customer—announced
• Recognized as a public limited company; debuts on the Bombay Stock Exchange (BSE)
• IPO oversubscribed by 17 times

• Incorporated as private limited company


Background to the Satyam Scam:

Corporate India will never be the same again. What transpired at Satyam Computer Services in January, culminating
in the historic confession letter of former chairman B Ramalinga Raju, admitting a fraud of Rs. 78 billion (US$1.6
billion), has caused investors and regulators everywhere to re-examine corporate governance standards. The multi-
billion dollar scam is unprecedented and idiosyncratic for more than one reason. That a company which was audited
by one of the most prestigious audit firms and adopted the most advanced accounting and transparent International
Financial Reporting Standards (IFRS) accounting systems much ahead of time can perpetrate such a colossal and
global fraud is clearly eye opening for corporate counsel worldwide.

The Satyam scam is a classic case of negligence of fiduciary duties, total collapse of ethical standards, and a lack of
corporate social responsibility. It is human greed and desire that led to fraud. This type of behavior can be traced to:
greed overshadowing the responsibility to meet fiduciary duties; fierce competition and the need to impress
stakeholders especially investors, analysts, shareholders, and the stock market; low ethical and moral standards by top
management and greater emphasis on short term performance.

Controversies Surrounding the Satyam Scam:

Satyam planned to acquire a fifty-one percent stake in Maytas Infrastructure, a leading Infrastructure Development,
Construction and Project Management Company, for $300 million. The Rajus’s had a 37% stake. The total turnover
was $350 million and a net profit of $20 million. Raju’s also had a 35% share in Maytas Properties, another real estate
investment firm. Satyam revenues exceeded $1 billion in 2006. In April, 2008 Satyam became the first Indian
company to publish IFRS audited financials. On December 16, 2008, the Satyam board, including its five independent
directors had approved the founder's proposal to buy the stake in Maytas Infrastructure and all of Maytas Properties,
which were owned by family members of Satyam’s Chairman, B Ramalinga Raju, as fully owned subsidiary for $1.6
billion. Without shareholder approval, the directors went ahead with the management's decision. The decision of
acquisition was, however, reversed twelve hours after investors sold Satyam's stock and threatened action against the
management. This was followed by the lawsuits filed in the US contesting Maytas deal. The World Bank banned
Satyam from conducting business for 8 years due to inappropriate payments to staff and inability to provide
information sought on invoices. Four independent directors quit the Satyam board and SEBI ordered promoters to
disclose pledged shares to stock exchange. Investment bank DSP Merrill Lynch, which was appointed by Satyam to
look for a partner or buyer for the company, ultimately blew the whistle and terminated its engagement with the
company soon after it found financial irregularities. On 7 January 2009, Saytam’s previous Chairman, Ramalinga
Raju, resigned after notifying board members and the Securities and Exchange Board of India (SEBI) that Satyam's
accounts had been falsified. Raju confessed that Satyam's balance sheet of September 30, 2008, contained the
following irregularities:
• Inflated figures for cash and bank balances of US$1.04 billion vs. US$1.1 billion reflected in the books;
• An accrued interest of US$77.46 million which was non-existent;
• An understated liability of US$253.38 million on account of funds was arranged by himself;
• An overstated debtors' position of US$100.94 million vs. US$546.11 million in the books.
Raju claimed in the same letter that neither he nor the managing director had benefited financially from the inflated
revenues. He claimed that none of the board members had any knowledge of the situation in which the company was
placed. The fraud took place to divert company funds into real estate investment, keep high earnings per share, raise
executive compensation and make huge profits by selling stake at inflated price. The gap in the balance sheet had
arisen purely on account of inflated profits over a period that lasted several years starting in April 1999. Every attempt
to eliminate the gap failed, and the aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with
real ones. But the investors thought it was a brazen attempt to siphon cash out of Satyam, in which the Raju family
held a small stake, into firms the family held tightly.



The Satyam deal with Matyas was salvageable. It could have been saved only if “the deal had been allowed to go
through, as Satyam would have been able to use Maytas' assets to shore up its own books.” Raju, who showed
artificial cash on his books, had planned to use this non-existent cash to acquire the two Maytas companies. Given the
stake the Rajus held in Matyas, pursuing the deal would not have been terribly difficult from the perspective of the
Raju family. The auditors, bankers, and SEBI, the market watchdog, were all blamed for their role in the accounting
fraud. To what extent did the fraud take place and who else was involved? It is likely the fraud extended beyond Raju
to other top managers. The fraud itself, however, was enough.

Although there is fierce speculation as to what prompted Raju to write the confession, the bigger question is how this
happened and whether the current laws are adequate to counter such frauds? The Indian corporate governance regime
is fairly detailed and similar to most developed countries. But it is because of this that corporate counsels need
to be more careful post-Satyam, because if a Satyam can happen in India, it can happen elsewhere as well. A post
mortem is clearly essential. Where did the systems fail? Whose fault was this? Will the shareholders and investors
receive any pecuniary compensation for the losses that they suffered? An insight into the corporate governance regime
is much warranted, and this article attempts to analyze certain key aspects of the Satyam Scam - The greatest
corporate scandal ever in Indian corporate history.
Aftermath of the Satyam Scam:

• Raju had appointed a task force to address the Maytas situation in the last few days before revealing the news
of the accounting fraud. After the scandal broke, the then-board members elected Ram Mynampati to be
Satyam's interim CEO. Mynampati's statement on Satyam's website said: "We are obviously shocked by the
contents of the letter. The senior leaders of Satyam stand united in their commitment to customers, associates,
suppliers and all shareholders. We have gathered together at Hyderabad to strategize the way forward in
light of this startling revelation."
• 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. Chartered accountants regulator ICAI issued show-cause notice to Satyam's auditor
PricewaterhouseCoopers (PwC) on the accounts fudging. "We have asked PwC to reply within 21 days," ICAI
President Ved Jain said. On the same day, the Crime Investigation Department (CID) team picked up
Vadlamani Srinivas, Satyam's then-CFO, for questioning. He was arrested later and kept in judicial custody.
• On 11 January 2009, the government nominated noted banker Deepak Parekh, former NASSCOM chief Kiran
Karnik and former SEBI member C. Achuthan to Satyam's board.
• Immediately following the news, Merrill Lynch (Now with Bank of America) terminated its engagement with
the company.
• Also, Credit Suisse suspended its coverage of Satyam.
• It was also reported that Satyam's auditing firm PricewaterhouseCoopers will be scrutinized for complicity in
this scandal. SEBI, the stock market regulator, also said that, if found guilty, its license to work in India may
be revoked.
• Satyam was the 2008 winner of the coveted Golden Peacock Award for Corporate Governance under Risk
Management and Compliance Issues, which was stripped from them in the aftermath of the scandal.
• The New York Stock Exchange has halted trading in Satyam stock as of 7 January 2009.
• India's National Stock Exchange has announced that it will remove Satyam from its S&P CNX Nifty 50-share
index on January 12.
• The founder of Satyam was arrested two days after he admitted to falsifying the firm's accounts. Ramalinga
Raju is charged with several offences, including criminal conspiracy, breach of trust, and forgery.
• 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.
• The Indian Government has stated that it may provide temporary direct or indirect liquidity support to the
company. However, whether employment will continue at pre-crisis levels, particularly for new recruits, is
• On 14 January 2009, Price Waterhouse, the Indian division of PricewaterhouseCoopers, announced that its
reliance on potentially false information provided by the management of Satyam may have rendered its audit
reports "inaccurate and unreliable.”
• On 22 January 2009, CID told in court that the actual number of employees is only 40,000 and not 53,000 as
reported earlier and that Mr. Raju had been allegedly withdrawing INR 20 crore rupees every month for
paying these 13,000 non-existent employees. Ramalinga Raju is currently in a Hyderabad prison along with
his brother and former board member Rama Raju, and the former CFO Vadlamani Srinivas.
• About a dozen lawsuits have been filed against Satyam Computer in US courts, charging the Indian IT firm
with duping thousands of American investors out of billions of dollars. Asked about the specific damages
sought in the lawsuit, law firm Vianale & Vianale LLP's counsel Keneth J Vianale said that the sum duped
could be in hundreds of millions of dollars. Vianale said in an emailed statement to media: "We have not
alleged a specific damages amount that we are seeking. That will be a subject of expert testimony. However,
in cases of this sort, it is not unusual for the damages to be in the hundreds of millions of dollars."
• Another law firm Pomerantz Haudek Block Grossman & Gross said that it "has commenced an investigation
of the scandal on behalf of investor clients, and is exploring the possible claims that can be raised, including
under the federal securities laws and focusing on identification of possible defendants in addition to the Raju
brothers, such as outside auditors, and on the location of assets in this country."
• While two lawsuits were filed on January 7, the day when Satyam's founder-chairman Ramalinga Raju
resigned after disclosing massive financial irregularities to the tune of over a billion dollar, so far there has
been nearly a dozen lawsuits that have been filed against the company.
• Earlier, nearly six law firms including Brodsky & Smith LLC, Glancy Binkow & Goldberg LLP, Harwood
Feffer LLP, Sarraf Gentile LLP, Vianale & Vianale LLP and Izard Nobel LLP had filed class action law suits
against Satyam Computer.

Victims of the Satyam Scam:

• Employees of Satyam spent anxious moments and sleepless nights as they faced non-payment of salaries,
project cancellations, layoffs and equally bleak prospects of outside employment. They were stranded in many
ways – morally, financially, legally, and socially.
• Clients of Satyam expressed loss of trust and reviewed their contracts preferring to go with other competitors.
Cisco, Telstra and World Bank cancelled contracts with Satyam. Customers were shocked and worried about
the project continuity, confidentiality, and cost overrun.
• Shareholders lost their valuable investments and there was doubt about revival of India as a preferred
investment destination. The VC and MD of Mahindra, in a statement, said that the development had "resulted
in incalculable and unjustifiable damage to Brand India and Brand IT in particular."
• Bankers were concerned about recovery of financial and non-financial exposure and recalled facilities.
• Indian Government was worried about its image of the Nation & IT Sector affecting faith to invest or to do
business in the county.

Factors Contributing to the Satyam Scam:

1) Corporate Governance:
The concept of corporate governance emanates from Clause 49 of the equity listing agreement as entered into between
listed companies with the stock exchanges in India. While several institutions are vested with the responsibility of
ensuring good corporate governance, the corporate and securities laws in India, just like in any other market, rely
heavily on the institution of auditors, audit committees and independent directors to ensure good corporate
governance. Also, institutional investors or private equity players have played a significant role in encouraging good
corporate governance. However in case of Satyam, where a substantial stake was held by institutional investors,
most of these rights appear to be only on paper and the funds often rely on the decisions taken by the incumbent
management. Most of these funds will now have to tender explanations to their investment committees and investors
as to the reason why they did not exercise proper diligence earlier and expose the fraud earlier.

2) Accounting Practices:
Any listed company in India is required to have two sets of auditors – an internal auditor and an external auditor.
While both the internal and the external auditors are appointed by the board, their roles differ. An internal auditor is
meant to be the first level of check that is required to escalate its findings to the audit committee, which is the second
level check to ensure accurate financial reporting and proper internal control systems. The external auditors – the third
level of accounting check – then perform their independent audit on the books of accounts of the company, taking into
account the findings of the internal auditors and the audit committee and report to the board. If the fraud escaped these
three levels, the conclusion is fairly clear – accounting laws are adequate, but lack on account of implementation.

3) Financial Implications:
Institute of Chartered Accountants of India (ICAI) may debar or inflict a maximum penalty of Rs. 500,000
(US$10,000) only on individual members proved involved in the fraud. ICAI may not be able to inflict any penalty on
Price Waterhouse as an entity. Also, the Ministry of Corporate Affairs may impose a fine up to Rs10,000 (US$200) on
the audit firm under section 233 of the Companies Act, 1956 (Companies Act), the only section providing for auditor
liability under the Companies Act. Satyam may not be able to sue the auditors in light of the Bombay High Court
ruling in the case of Tri Sure India where the court held that the company could not sue its auditors for failure to
detect its own fraud. Finally, shareholders, not being privy to the contract between the company and the auditors, may
initiate an action against auditors in common law for breach of statutory duty. However, the sustainability of such an
action is debatable, and the prospect of being lost in lengthy courtroom battle is very high.

4) Corporate Laws:
The Companies Act 1956 does not define an independent director, and therefore doesn’t differentiate between a non-
independent and an independent director. Though India’s definition of independent directors is instep with most other
markets, independent directors and auditors are usually appointed and paid at the discretion of promoters who mostly
dominate the board and shareholder meetings. Also, an audit committee is required to have two thirds of its committee
members as independent directors. Satyam outdid the proportion by appointing four independent directors on
committee so it was made up only of independent directors. It is also observed that under the Companies Act,
recommendations of the audit committee are binding upon the board of directors. If the board does not accept them,
the reasons need to be put on record and communicated to the shareholders. But these are powers which are rarely
exercised by members of audit committee. Questions are now raised whether such committees are redundant and
should be abolished.

5) SEBI Loopholes:
The scandal has also highlighted that the pledging of shares did not warrant disclosures under any of the securities
laws in India. This came to light when the company’s promoters on December 29 2008 announced that all their shares
in the company were pledged with institutional lenders, and that some lenders may exercise or may have exercised
their option to liquidate shares at their discretion to cover margin calls since September 2006.

6) Investor Remedies:
Apart from the criminal liabilities that the State may inflict upon those involved, shareholders remedies to make good
their losses are fairly limited. Aggrieved shareholders may either write to SEBI for securities law violations or petition
the courts under section 397 and 398 of the Companies Act seeking remedies against oppression and mismanagement
against the company. In such cases, courts usually direct the board of the company to maintain discipline and stop or
reverse any oppressive act. However, in light of the government taking control and reconstituting the board of Satyam
under section 408 of the Companies Act, this remedy may be fruitless as the government has already initiated steps to
restore corporate discipline. From a pecuniary damages perspective, unlike the US shareholders who have already
filed class action suits against the company, Indian law does not provide for any such remedy to Indian shareholders.

CORPORATE LAW: Companies Act, 1956

Sections Breach Penalties prescribed Persons liable for
209 Failure to maintain proper Imprisonment up to 6 Director or any such person
books of account months and/or fine up to who has been assigned the
Rs. 10,000 responsibility of
maintaining the books of
accounts of the Company
233 Non-compliance by auditor Fine up to Rs. 10,000 Auditor concerned and any
with duties of the auditors person signing the report
628 Penalty for false statements
Imprisonment of up to 2 Every person making such
years and/or fine. false statement
SECURITIES LAW: Securities (Contract) Regulation Act, 1956
Sections Description Penalties prescribed Persons liable for
23E Penalty for failure to Penalty up to Rs. 250 The Company would be
comply with provisions of million liable
listing agreements
23A Penalty for failure to Penalty up to Rs. 1 million Person responsible to
furnish information, per day or Rs. 10 million, manage and furnish such
return, etc. whichever is less. information
Sections Description Penalties prescribed Persons liable for
15HA Penalty for fraudulent and Penalty up to Rs. 250 Any person who is held
unfair practices relating to million or three times the liable for unfair practices
securities amount of profit made out relating to securities
of such practices,
whichever is higher.
24 Contravention of the Imprisonment up to 10 Any person who is held
provisions of the SEBI Act, years and/or with fine up to liable for such
1992 or rules or regulations Rs. 250 million contraventions
made there under
CRIMINAL LAW: Indian Penal Code, 1860
406 Criminal Breach of Trust Imprisonment up to 3 years Any person who is held
and/or fine. liable for criminal breach
of trust
418 and 420 Cheating Imprisonment up to 7 years Any person who is held
and/or fine. liable for the offence of
463, 464 and 465 Forgery Imprisonment up to 2 years Any person who is held
and/or fine. liable for the offence of
477 A Falsification of accounts Imprisonment up to 7 years Any person who is held
and/or fine. liable for the offence of
falsification of accounts
Post Scam - Satyam is now Mahindra Satyam:

In April 2009, Tech Mahindra Ltd. won the bidding for control of Satyam Computer Services Ltd., the software
exporter at the center of India’s biggest fraud inquiry, beating Wilbur Ross and Larsen & Toubro Ltd. with a $579
million offer. Tech Mahindra, based in Pune, paid 58 rupees a share for a 31 percent stake and acquired a further 20
percent from investors at the same price, Satyam. That’s about a tenth of Satyam’s one-year peak of 524.9 rupees on
May 29. U.S. billionaire Ross offered 20 rupees and Larsen 45.9 rupees a share, Satyam Chairman Kiran Karnik said.
“We took a lot of scenarios into account and we’ve taken a very calculated risk in making this bid, We think they are
reasonable risks we’re going to be facing.” Chairman Anand Mahindra said after receiving the news about winning
the bid. By the end of 2009, Mahindra Group unveiled the new brand identity, “Mahindra Satyam”. Furthermore, Tech
Mahindra announced an open offer to buy an additional 20% in Satyam from existing shareholders. This
announcement has seen the returning of the investor confidence to the new Mahindra Satyam which is visible in the
above graph.


Vineet Nayyar
Vineet Nayyar is the Chairman of Mahindra Satyam & Vice Chairman of Tech Mahindra.

C. Achuthan
C. Achuthan is an Independent Director with Satyam BPO Limited.

T. N. Manoharan
A longstanding member of the ICAI, Mr. Manoharan was nominated by the Government to the Board.

C. P. Gurnani
CEO of Mahindra Satyam

Ulhas N. Yargop
President of IT Sector and Member, Group Management Board of Mahindra & Mahindra Ltd.

M Damodaran
M. Damodaran is an Independent Director and Consultant with Mahindra Satyam.
Gautam S. Kaji
Gautam S. Kaji is a Director and Consultant with Mahindra Satyam.
Satyam Scam - Lessons Learnt:

The Satyam scandal has reiterated the importance of checks on related party transactions. Stringent checks and
balances on these ought to be incorporated into the Indian corporate and securities laws to prevent transactions like
Maytas in future.

1. Independent Directors:
Establish a nomination committee comprised solely of independent directors or a majority of the independent directors
and give them the powers to appoint the board and evaluate its performance. Evaluating the performance of
independent directors is critical. While it’s not a mandatory requirement under the extent corporate governance
regime, it would be sensible. Evaluation by a peer group comprising the entire board, (excluding the director being
evaluated) may be considered. There should be a fixed tenure beyond which an independent director should not be
associated with a company. While an aggregate limit of nine years has been prescribed under Clause 49 VII (ii) of the
equity listing agreement, such a requirement is not mandatory. Pecuniary payouts to an independent director in Indian
companies are usually incommensurate with the onerous role that they are expected to perform. Adequate
remuneration may ensure that the directors discharge their duty with care and diligence, rather just playing an
ornamental role in the organization. The agenda of each board meeting must be prepared with consensus of the
independent directors and must be mandatory required to be circulated to each director well in advance so that board
members have access to information. Independent directors should meet separately without any member of the
management to discuss the affairs of the company. This will help them decide on matters without being
euphemistically ‘guided’ by the management. In the Satyam case, most of the directors believed that the decision to
acquire Maytas companies would need shareholder approval as well, which was clearly not the case.

2. Auditors:
Though there are views that periodic rotation of the audit firm may be enough to break the collusive links between
company and auditors. The alternatives to rotation are joint audits, rotation of managing partners, harsh penalties for
collusion and regulation that will make it difficult for companies to sack auditors who insist on qualifying fudged
accounts. A joint audit is an audit on a legal entity by two or more auditors to produce a single audit report, thereby
sharing responsibility for the audit. The work allocation may be rotated after a set number of years to mitigate the risk
of over familiarity. Work performed by each auditor is reviewed by the other, in most cases by exchanging audit
summary reports. The flipside to this is the increased cost because of excessive time spent by both the audit team.

3. Supervising Body:
In the US, Public Companies Accounts Oversight Board (PCAOB), an independent body oversees the audits of public
firms. A similar supervisory structure may be mandated for Indian audits as well as ICAI is not vested with such

4. Risk Management:
Companies need to devise a strong risk management framework to systematically manage and regularly review the
risk profile at a strategic, operational and functional level. Companies operating under the jurisdiction of one or more
regulators and those with a significant presence in their business segments should have a group conglomerate policy.
This would ensure reliable, timely and comprehensive management information systems help introduce scientific risk
management systems and practices, ensure proper disclosures of risk concentrations for the multiple regulators. While
a few corporations in India have a whistleblower policy ingrained in their model code of conduct, such provisions
should be mandatory for all listed companies to encourage transparency.

5. International Laws to deal with Corporate Fraud: Corporate lawmakers need to review international laws relating to
corporate fraud and update the Companies Act to bring it up to time. Some of the International laws that can be
referred to are:
a. Sarbanes–Oxley Act 2002:
The Sarbanes–Oxley Act of 2002 also known as the 'Public Company Accounting Reform and Investor Protection
Act' (in the Senate) and 'Corporate and Auditing Accountability and Responsibility Act' (in the House) and commonly
called Sarbanes–Oxley, Sarbox or SOX, is a United States federal law which sets new or enhanced standards for all
U.S. public company boards, management and public accounting firms. It is named after sponsors U.S. Senator Paul
Sarbanes (D-MD) and U.S. Representative Michael G. Oxley (R-OH). The bill was enacted as a reaction to a number
of major corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia, Peregrine
Systems and WorldCom. These scandals, which cost investors billions of dollars when the share prices of affected
companies collapsed, shook public confidence in the nation's securities markets.
b. Foreign Corrupt Practices Act 1977:
The Foreign Corrupt Practices Act of 1977 (FCPA) is a United States federal law known primarily for two of its main
provisions, one that addresses accounting transparency requirements under the Securities Exchange Act of 1934 and
another concerning bribery of foreign officials. The anti-bribery provisions of the FCPA prohibits: Issuers, domestic
concerns, and any person from making use of interstate commerce corruptly, in furtherance of an offer or payment of
anything of value to a foreign official, foreign political party, or candidate for political office, for the purpose of
influencing any act of that foreign official in violation of the duty of that official, or to secure any improper advantage
in order to obtain or retain business.

6. Other Measures:
• SEBI now allows certain changes or exemptions in the takeover code in case of companies in crisis.
• With a view to prevent insider trading and SEBI has introduced strong mechanisms against it. Going ahead
activities such as details of acquisition of more than 5% or more shares in a listed company; details of shares
held by Directors and Officers of a listed company; details of change in shareholdings in respect of persons
holding 5% or more shares in a listed company and details of change in shareholdings held by Directors and
Officers of a listed company.
• Compulsorily appoint external auditors to do internal audits. These auditors are allowed to restate the profit, if
required. Making it mandatory for companies to disclose the percentage of promoter shareholdings that is
• National Institute of Securities Market in conjunction with SEBI will carry out initiatives to train
professionals in internal auditing. This programme aims at helping audit professionals to carry out an effective
internal audit of the books of accounts in order to satisfy the requirements of SEBI and regulated exchanges.
This audit will help companies comply with SEBI Act 1992, Securities Contracts Regulation Act 1956, SEBI
Stock Brokers and Sub-Brokers Regulations Act 1992.
• Stringent requirements for financial qualifications and/or financial literacy for the Chief Financial Officer in a
listed company.
• Modification in the formats of limited review report and statutory reports of listed companies. Interim
disclosure of balance sheet items by listed entities. Fixed timelines for submission of financial results by listed
• Adoption of International Financial Reporting Standards by listed companies having domestic and
international subsidiaries.
• Quality Review Board, an independent body setup under the MCA is looking into the standards of audit for
Chartered Accountancy firms with a view to redefine new stringent norms for audit firms.


Corporate governance framework needs to be implemented in letter as well as spirit. The increasing rates of white
collar crimes demands stiff penalties and punishment. The small distortions created by few immoral executives lad far
reaching negative consequences. Hopefully, creating an awareness of the large consequences of small lies may help
some to avoid this trap.

1. “World Economic Outlook.” International Monetary Fund White Paper.

2. “India FDI Factsheet.” Indian Ministry of Commerce and Industry.
3. “India’s Rising Growth Potential.” Goldman Sachs.
4. 2004-2008 SEC Annual Filing. Satyam Computer Services, Ltd.
5. “Financial Scams Storm the Market and Killed the Innocent Investors.” Investors Protection and Redressal
6. Ashani, Peeyush. “Change in Management in an Organization with Reference: Satyam Computer Services.”
7. Manoharan, T.N. “Financial Statement Fraud and Corporate Governance.”
8. Steen, Margaret. “India’s Changing Ethics.”
9. Dunfee, John. "Business Ethics."
10. Wikipedia
11. Economic Times Articles
12. IBNLive News Articles
13. LiveMint News Articles
14. The Hindu News Articles
15. Financial Express Articles
16. Money Control News Articles
17. Los Angeles Times News Articles
18. Reuters News Articles
19. http://satyamscam.in/
20. http://www.blonnet.com
21. http://satyamscam.in/2009/03/govt-to-provide-help-to-cbi-in-satyam-scam-case/