The Satyam Scandal

Satyam Computer Services was a publicly traded company listed on the Bombay Stock Exchange
(BSE) and the National Stock Exchange (NSE) in India, and cross-listed on the New York Stock
Exchange (NYSE) in the United States. Founded by B Ramalinga Raju and his brother B Rama Raju in
1987 it became one of the largest providers of Information Technology (IT) services globally. By
2008 it had become a USD $2.1 billion company demonstrating an annual compound growth rate of
35% with 185 Fortune 500 companies as customers and operations in 66 countries.

Board Composition

Name Designation Qualification Profile

RamalingaRaju Executive chairman, MBA Promoter of Satyam Computers
promoter-director
Rama Raju Managing director, MBA Promoter of Satyam Computers
promoter-director
Ram Mynampati Executive director, MCA Employee and executive director
declared interim CEO on board of Satyam
Prof. Krishna G. Non-executive director, Ph.D. Professor at Harvard Business
Palepu consultant School
Dr. (Mrs) Non-executive director, Ph.D. Management consultant and
MangalamSrinivasan independent advisor to Kennedy School of
Management
Mr. Vinod K. Dham Non-executive director, B.E/ M.E(Electrical) Director of New Path Ventures
independent LLC, NEA – Indo U.S Ventures
LLC
Prof. M. Non-executive director, Ph.D. Dean, Indian School of Business
RammohanRao independent
Mr. T. R. Prasad Non-executive director, M.Sc.(Physics) Retired bureaucrat (Cabinet
independent Secretary, Government of India)
Prof. V.S. Raju Non-executive director, Ph.D. Chairman of the Naval Research
independent Board, Defense Research and
Development Organization ,
Government of India

Described as a “gold-plated group,” Satyam’s board consisted of nine directors of which five were
independent directors (They met the standards set by the NYSE1 (on which Satyam’s securities are
listed) and Clause 49 of SEBI) included US academician Mangalam Srinivasan (the independent
director since 1991), Vinod K. Dham (famously known as father of the Pentium and an ex Intel
employee), M Rammohan Rao (Dean of Indian School of Business), US Raju (former director of IIT
Delhi), T.R. Prasad (former Cabinet Secretary) and Krishna Palepu (professor at Harvard Business
School). They were luminaries, men of standing & reputation. Each of the members was on the
board on the personal invitation of founder chairman Ramalinga Raju.

On December 16, 2008, Satyam’s Board convened a meeting to consider the proposed acquisition of
Maytas Infra Limited and Maytas Properties Limited, companies focused on real estate and
infrastructure development. Two major issues in the proposed transaction surfaced. First, the
Maytas companies were focused on real estate and infrastructure development – two industries
unrelated to Satyam’s core information technology business. Second, the Raju family owned
approximately 30 percent of the Maytas companies. If effected, this related-party transaction
“would have resulted in a significant amount of cash flowing from Satyam . . . to its individual
promoters, the Raju family.” Yet the board adopted a resolution to proceed with the proposed
acquisition. Satyam notified the stock exchanges of the board approval as required under the listing
agreement. The market reacted badly to the news, and the company quickly withdrew the Maytas
proposal.

It is amazing that seven out of the nine directors were present at the board meeting where the
unanimous decision to acquire Maytas Infra and Maytas Properties for $1.6 billion was taken. To
avoid any controversy, the two founder directors did not participate in the decision making process
for the reason that the provisions of the Companies Act and SEBI regulations mandate presence of
only disinterested directors in board meeting where the agenda of such a nature is discussed.

A person who used a pseudonym of Jose Abraham, and claiming to be a former senior executive of
the company involved with Satyam’s contract with the World Bank, acted as the whistleblower via
an email on December 18, 2018 to a Satyam board member. On December 23, 2008, the World Bank
announced that Satyam has been barred from business with World Bank for eight years for providing
Bank staff with “improper benefits” and charged with data theft and bribing the staff.

Financial of Satyam for 2008

Items Rs. in crore Actual Reported Difference
Cash and Bank Balances 321 5361 5040
Accrued Interest on Bank Fixed Deposits Nil 376.5 376
Understated Liability 1464 234 1230
Overstated Debtors 2161 2651 490
Total Nil Nil 7136
Revenues (Jul- Sep 2008) 2112 2700 588
Operating Profits 61 649 588
Sources: Corporate Accounting Fraud: A Case Study of Satyam Computers Limited , Madan Lal Bhasin ,
Open Journal of Accounting, 2013, 2, 26-38 http://dx.doi.org/10.4236/ojacct.2013.22006 Published
Online April 2013 (http://www.scirp.org/journal/ojacct) and The Business Today, February 8, 2009,
p50.

These chain of events culminated in the chairman Mr Raju confessing to a financial crime - a colossal
fraud in the company’s financial statements. On January 7, 2009, in a letter to the board Mr. Raju
confessed to a $1.47 billion (or Rs. 7800 crore) fraud, admitted that he had made up profits for
years. This created a growing gap in the balance sheet which was filled by reporting debtors
(receivables) and cash that did not exist. As Mr. Raju in his letter stated “Every attempt made to
eliminate the gap failed.......... It was like riding a tiger, not knowing how to get off without being
eaten. The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real
ones.”

Very smartly fictitious invoices were created in Satyam’s self developed ERP models which generated
into debtors and then shown as received by bank accounts outside India. By showing a rosy picture
of the company, the promoters were jacking up the share price and simultaneously selling off their
holdings raking in handsome money. The promoters’ holdings had gradually decreases from 20.74%
in 2003 to 8.74% by 2008 while institutional holding during the same period increased from about
56% to 61% and non-institutional holdings from 23% to 30% which included an increase in share of
Indian public from 8.47 to 10.25. In 2008 Foreign Institutional investors had a 48% share in the
company. By Dec 2008 they held only 2.18 % holding yet exercised full control. Together with their
family members during April 2000 to January 7, 2009 sold more than 3.9 crores shares pocketing
Rs.3029.67 crores.

Table-3: Stake Sale by Promoters

Name of Promoter No of Shares Money Earned

Sold Rs (in cr)
B. Ramalinga Raju 98,25,000 773.42

B. Rama Raju 1,13,18,500 894.32

B. Suryanarayana Raju 1,11,000 12.81

B. Nandini Raju 40,47,000 327.59

B. Radha 38,73,500 313.55

B. Jhansi Rani 1,00,000 11.25

B. Pritam Teja 9,42,250 49.01

B. Rama Raju (Jr) 9,34,250 48.59

Elem Investments Pvt Ltd 25,47,708 181.29

Fincity Investments Pvt Ltd 25,30,400 180.41

Highgrace Investments Pvt Ltd 25,30,332 170.83

Veeyes Investments Pvt Ltd 57,500 71.79

Other individuals connected to investment companies 68,000 515.58

Offmarket transfers by investments companies in the year 1,90,000 78.29

2001(value estimated)

Promoters Group Total 3,029.67

Source: SFIO Report published in the Pioneer (New Delhi), May 4, 2009, p 10

As per the ED investigations, several gardeners, truck drivers and others, who were working in the
mango gardens and orchards belonging to Raju family for meagre salaries of Rs 4000 to Rs 5000 per
month, were found to be made directors in shell companies that possessed more than 4200 acres of
land valuing in 2006 valuing over Rupee 4000 crores.

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. ‘Why
was a company with 5000 crore borrowing even 200 odd crores? Did the directors need finance
degrees to question this? Global auditing firm, PricewaterhouseCoopers (PwC), audited Satyam’s
books from June 2000 until the discovery of the fraud in 2009. The excess cash should have been a
flag to auditors and the directors. The auditors never independently verified the balances with
banks. Interestingly between 2003- 2008, audit fee from Satyam had increased three times. Price
Waterhouse received an annual fee of 4.3 crore for financial year 2007-2008, which is almost twice
of what Satyam peers in the IT sector paid their audit firms.

In September 2008, the World Council for Corporate Governance awarded Satyam the prestigious
“Golden Pea- cock Award” for the best governed company. . Investor Relations Global Rankings
(IRGR) rated Satyam as the company with Best Corporate Governance Practices for 2006 and 2007.
Ironically, Satyam means “truth” in the ancient Indian language “Sanskrit”. But it was lies weaved
through ‘creative accounting’ that led to investors losing about $2.82 billion as the share prices fell
from Rs 541 in January 2008 to Rs 6.50 on Jan 10 , 2009.

As a result of the scandal, the MCA, Government of India, and the SEBI initiated investigations. Raju,
Satyam’s managing director, and the company’s CFO were arrested. Two partners from Lovelock &
Lewis, an Indian affiliate of PriceWaterhouseCoopers and Satyam’s auditor were also arrested and
suspended. Further, the government nominated and replaced remaining Satyam board members
with candidates of its choice. In April 2009, Tech Mahindra purchased the company through a global
bidding process for just about a $1.13 per share. US investors filed a class action suit and were
awarded $150 million.

The Satyam scandal had a profound effect to Indian corporate and there stakeholders. Following
Satyam with “at least 620 independent directors” resigning in 2009 alone “a figure that is . . . by far
without precedent globally.” Sweeping changes were made to corporate governance in India. The
old Companies Act 1956 was modified in 2000 and replaced by Companies Act 2013 and clause 49
was updated and later replaced with LODR (2015). Stringent Governance laws were implemented
not just for listed companies but also for large public companies.