THESIS ON

UNFAIR TRADE PRACTICES

Case study on
SATYAM MEGA SCAM

A THESIS SUBMITTED BY

GANESH D. SHINDE

MMS-1 DIV-B

ROLL NO.1098

UNDER THE GUIDANCE OF

Prof. NADIRSHAW DHONDY

SUMMITTED IN PARTIAL FULFILLMENT OF THE

REQUIREMENTS FOR QUALIFYING

M.M.S SEMESTER – II (2010-2011)

MUMBAI INSTITUTE OF MANAGEMENT AND RESEARCH

J.K. KNOWLEDGE CENTER,

NADAKARNI PARK,

WADALA-(E), MUMBAI-400037

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 CERTIFICATE

I, Nadirshaw .K. Dhondy, Advocate Supreme court, have examined the thesis of Mr.
GANESH D. SHINDE who is enrolled in M.I.M.R.(Mumbai institute of management and
research) for the academic years 2010- 2012 in the Masters of Management Studies
programme. His unique roll no. is 1098. The Thesis is in part fulfilment of the University
programme for the subject LEGAL ASPECTS in Management. He has been rated to receive
_____ marks out of 40.

Dated this 4th day of MARCH 2011

Signature Signature

Name: GANESH D. SHINDE MR. NADIRSHAW K. DHONDY

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 Acknowledgement

I sincerely thank Prof. Nadirshaw .K. Dhondy for giving me an opportunity to compile this
project and also for providing me necessary information which helped me in completing this
project in a better manner.

I will be looking for such type of projects in near future and do our best.

I would also like to thank DR. R.K.Singh for support provided.

Last but not the least I would like to thank all my friends whose direct and indirect efforts
helped me to complete this project.

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Prologue

Satyam Computer Services Ltd was founded in 1987 by B. Ramlinga Raju. The company
offers IT services spanning across various sectors, and is listed in the New York Stock
Exchange and Euronext.The founding promoter of Satyam Computer Services Ltd. resigned
as the company’s chairman, putting out a confessional statement admitting that roughly 1.5
billion US dollars (or the equivalent of 70 billion Indian rupees) of the firm’s past funds were
“non-existent” or fictitious.

What has shocked analysts is that the money, that is now supposed to be fictitious, had been
recorded in Satyam’s balance sheets and books of account that had been audited by the
internationally reputed firm of auditors, PriceWaterhouseCoopers.

Raju, who is politically influential, disclosed details of the fraud in a resignation letter to the
company’s board of directors forwarded to stock exchange authorities as well as the regulator
of the country’s capital markets, the Securities and Exchange Board of India (SEBI). Of the
revenue reported as of Sep.30, 2008, the letter said, almost 1.03 billion dollars, or 95 percent,
never existed. SEBI’s chairman C.B. Bhave described the financial wrongdoing in Satyam as
an event of "horrifying magnitude".

Let us look into the Mega Corporate fraud, Satyam (truth) Vs Asatyam (evil).

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 Case Study Index

TOPIC Page No.

Understanding the Scam 5

Satyam Maytas fiasco 6

Satyam’s justification for Maytas 7

buyout deal
Guilty Parties to the Scam 8

Impact on Clients 9

Impact on Employees 9

Impact on IT Industry 10

Impact on Auditors 11

Impact on INDIA Inc. 12

Impact on Investors 12-13

Charges on Raju & Co. 14

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Case Study

Understanding the Scam

The scam has dominated the India media and what is ironical is that the Indian word
"Satyam" translates as "truth". A most alarming aspect of the episode was that Raju
acknowledged that his company’s financial records had been fudged and manipulated for the
"last several years". "It was like riding a tiger, not knowing how to get off without being
eaten," wrote the disgraced Raju in his letter. While there were rumours that Raju had fled
India, his lawyer has said he is in Hyderabad, the capital of the southern Indian state of
Andhra Pradesh, where the Satyam is headquartered.

The Balance sheet as on September 30, 2008 showed:

 Inflated (non-existent) cash and bank balances of Rs.5040 crores (as against Rs.5312
reflected in the books)

 An accrued interest of Rs.376 crore which is non-existent.

 An understated liability of Rs.1, 230 crore on accounts of funds arranged by BR Raju.

 An overstated debtors position of Rs.490 crore (as against Rs.2651 crore reflected in
the books)

 For the second quarter Satyam reported a revenue of Rs.2,700 crore and an operating
margin of Rs.649 crore (24% of revenues)

 As against the actual revenues of Rs.2112 crore and an actual operating margin of
Rs.61 crore (3% of revenues)

 This has resulted in artificial, cash and bank balances going up by Rs.588 crores in Q2
alone.

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Satyam Maytas Fiasco

Satyam Computers had on December 16, 2008 announced that it will acquire two group firms
– Maytas Properties and Maytas Infra. The Board of Directors of Satyam had approved
the founder’s proposal to buy 51 per cent stake in Maytas Infrastructure and 100% in Maytas
Properties.

The total outflow for both the acquisitions was expected to be US$1.6 billion comprising of
US$ 1.3 billion for the 100% stake Maytas Properties and US$ 0.3 billion for the 51% stake
in Maytas Infra.

This is the move that sparked a row over alleged violation of corporate governance laws.

This deal is not profitable for investors. So after this announcement they started to raise their
voices against the deal.

Maytas Infra

The company is run by the sons of Ramalinga Raju. It was started in the late 1980s by
Ramlinga Raju. The main reason for the debacle of Maytas Infra is due to the debacle of
Satyam.

Maytas Properties Ltd.

One of the reasons for the debacle of Maytas Properties Ltd was the ongoing economic
slowdown. The company has huge land banks and the prices have dropped down in the real
estate significantly.

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Satyam’s justification for Maytas buyout deal

The founder, Ramlinga Raju felt that this would de-risk the core business. The integrated
organisation would be stronger and more diversified to deal with the uncertainty of the
market feeling that in the recent times it is difficult to make a strategic deal with other IT
companies.

Reaction of Investors

Investment giant Templeton and brokerage house CLSA opposed to this decision. It results
that part of investors succeeded to thwart an attempt by the minority-shareholding promoters
to use the firm’s cash reserves to buy out two companies owned by them — Maytas
Properties and Maytas Infra

That aborted attempt at expansion precipitated a collapse in the price of the company’s stock
and a shocking confession of financial manipulation and fraud from its chairman, B.
Ramalinga Raju.

Impact
The Maytas deals acted as a red flag for international investors, with a host of companies like
Unpaid Systems of Britain accusing Satyam of fraud, forgery and breach of contract. Shortly
thereafter, on Dec. 23, the World Bank barred Satyam from offering its computer services for
eight years citing a potential trail of corruption -- data theft and bribery -- that led to Raju.
The last straw perhaps came on Tuesday when an Indian associate of Merrill Lynch
terminated an agreement on grounds of "material accounting irregularities".

The government has stepped in to investigate all important directors and employees
associated with Satyam who could be involved in the fraud. All those found guilty could face
up to ten years in prison. The auditing licences of the partners of PricewaterhouseCoopers
could also be revoked

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Two days after shocking the country by admitting to Rs 7,800-crore fraud, Satyam founder
Ramalinga Raju and his brother Ram Raju were arrested on Friday night as part of the
crackdown by state authorities and the central government, which disbanded the tainted IT
firm's board on a day of fast-paced developments. Fifty four-year-old Raju, who stepped
down as Chairman after admitting to the fraud on Wednesday, and Rama Raju, who resigned
as CEO and MD of the company, were arrested by the police on charges of criminal
conspiracy, cheating, and forgery, misappropriation of funds and criminal breach of trust. The
police questioned the two brothers; Director General of Police S S P Yadav said that the
company's Chief Financial Officer Valdamani Srinivasan would be arrested on Saturday.

Guilty Parties to the Scam

To start with the auditors – what were the auditors doing? Rs 5,000 crore of cash not in the
banks and auditors have gone ahead and signed on the balance sheets saying that its there on
the banks. The interest accrued – where is this interest accrued from? It has to be there.
Auditors are supposed to do bank reconciliation to check whether the money has indeed come
or not. They need to check bank statements and certificates.

The second are bankers of Satyam which are quite a few actually because it is a big
company. You have ICICI Bank, HDFC Bank, BoB and lot of other banks which are bankers.
These banks are supposed to provide bank statements on a quarterly basis and bank
certificates on basis of which auditors go ahead and signed the balance sheet.

Either the bank statement and certificates are false or auditors haven’t taken cognizance of
the fact that bank statements are showing some other figures and the management is depicting
some other figure.

The third one – the I-bankers – now what we understand from sources is that Merrill Lynch
withdrew from Satyam mandate yesterday evening. It did not inform the exchanges till today
after Mr. Raju informed the stock exchanges. We want to know why Merrill Lynch after
withdrawing the mandate did not inform the stock exchange or at least public in general or
the shareholders before market hours.

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Impact on Clients
Does Satyam's loss result in gain for its bigger rivals, TCS, Infosys and Wipro to be specific?
Yes, say analysts. According to whom, the debacle may force the clients of beleaguered
Satyam to review their contracts and look at other offshore suppliers.
"Satyam clients will naturally be concerned and many clients will be forced to review their
contracts and talk to the other offshore suppliers in the account about potentially taking over
work from Satyam," said a Forrester Research analyst.

According to a senior executive from a rival IT firm, Australian telecom company Telstra,
which contributes $20-25 million to its revenues, had already decided to split a new contract
worth $200 million among three Indian vendors. “There was intense competition among
Satyam and other offshore vendors earlier but Telstra now seems to be more tilted towards
Infosys and EDS-Mphasis. Satyam seems to have lost the race,” said the official, whose
company was one among the bidders for the contract.

Another partner and customer of the company, Cisco Systems said that a proposed
investment in Satyam subsidiary (Satyam Global Life net) could be in jeopardy.

However, allaying the fears of employees and clients in the Asia-Pacific, Satyam today said it
is committed to its customers in the region. "Satyam as an organization remains committed to
its customers in (the) Asia Pacific, a region which continues to offer promising growth," said
Satyam's Senior Vice-President (Asia Pacific, Middle East, India and Africa) Virender
Agarwal, based in Singapore.

The fourth largest software company's clients include General Electric, Nissan Motors and
General Motors.

Impact on Employees

It is very clearly anxious moments, sleepless nights and heartburns for the over 53,000
employees of Satyam Computers as they conjure up worst case scenarios like non-payment of
salaries, project cancellations , layoffs and equally bleak prospects outside.

As the company's management tries to reassure shocked employees, jobs sites have got
flooded from resumes of hundreds of Satyam employees. "Till Tuesday evening, there were

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about 7,800 people from Satyam who had posted their resumes on job sites. By Wednesday
afternoon, it has gone up to 14,000. By the end of the day, the numbers may be much higher,"
said Kris Lakshmikanth, CEO of Head-hunters India.

However, job consultants believe that in the current economic climate when the IT industry is
already facing tough time, Satyam employees might have to settle for lower salaries outside.
Also, with most IT companies already announcing a hiring freeze, it is an employers' market.

On its part, the new leadership team is sending out mailers and open letters to its employees
to keep the faith. Earlier, Ram Myampati the interim CEO, had said, "We recognise that our
associates have committed a significant part of their careers to build Satyam. We will pursue
all avenues to secure their future in the company." “Operations are all continuing. We do not
envisage any problems in paying salaries to our employees in future,” a Satyam official told
media.

In a letter to the Centre, Andhra Pradesh chief minister Rajasekhara Reddy too has expressed
concern about the fate of Satyam employees.

Impact on IT industry

The Satyam fraud couldn't have come at a worse time for the IT Inc already reeling under
slowdown. The incident has put the sector in limelight, and for all the wrong reasons. Fears
are being expressed that the scam may affect investors’ confidence in the sector already
facing rough weather.

For years, Satyam and larger rivals such as TCS, Infosys and Wipro were feted as among the
new ambassadors of Indian industry with their corporate governance practices winning
accolades around the world and their strong growth rates luring investors

The shaken apex body of Indian software industry issued a statement expressing "shock" and
at the same time emphasising it to be "a stand-alone case of failure of corporate governance,
and not a systemic failure of corporate governance among Indian IT companies".

Besides Nasscom, Satyam rival and the second-largest IT firm and Nasscom member Infosys
too issued a statement stating "(The) Satyam fraud is an aberration ... I don't think it would

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shake clients faith in other Indian IT companies." Suresh Senapaty, executive director and
CFO, Wipro said, "Global standards of corporate India are very high and we are confident
that this is an isolated case and not representative of the IT industry."

While the Satyam episode could temporarily cast a cloud over Indian IT firms, IT in India is
unlikely to be as affected. Allaying the fears that India's IT image would be tainted, a
Forrester analyst said, “I look at it as an isolated case and don't think Satyam developments
would have any impact on India's position as an offshore location. But if similar trend of
fraud continues in Indian IT vendors' space, then there is a good enough reason to be
concerned."

Impact on Auditors
The Satyam fiasco has put the spotlight on the role of external auditors in a company. Enron
& WorldCom had changed the world of auditing from ‘Big 5’ to ‘Big 4’. The brazen fraud at
Satyam has the potential to shrink it to ‘Big 3’, at least in India. The falsification of accounts
by Satyam for the past several years has put a question mark on the very survival of its
auditor, PricewaterhouseCoopers (PwC).

Institute of Chartered Accountants of India (ICAI) has decided to issue a show cause notice
to PwC. ICAI President Ved Jain said, "We have set the ball rolling. On the basis of
statements made by Ramalinga Raju, ICAI has already initiated proceedings against the
concerned auditor."

PwC had audited about 139 companies in India in the last fiscal. Of this, 97 are listed and 45
are part of BSE 500 Index. A few of these companies are already reviewing their relationship.
For instance, Glen mark Pharma has said its board will decide on January 27 on whether to
propose a change in the auditor.

Some other large companies audited by PwC include Maruti Suzuki, United Breweries,
United Spirits, GMR Infra, Piramal Healthcare and Marico.

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Impact on India Inc.

The incident has hurt public perception of Corporate India. Howsoever one-off incident one
may term it, it is likely to hurt shareholders' confidence in India Inc. No doubt, India Inc
reacted with shock and dismay to the scam. The VC and MD of Mahindra and Mahindra,
Anand Mahindra in a statement said that the development had "resulted in incalculable and
unjustifiable damage to Brand India and Brand IT in particular.

He however, reiterated that the whole of the Indian industry, "should not be tarred with the
same brush" as most companies "uphold the highest standards of corporate governance and
this will help us mitigate the damage done to India’s image.

Impact on Investors

An accounting fraud was the last thing investors in India would have imagined as a trigger for
a reversal in investor sentiment. The Satyam accounting fiasco has come at a time when the
sentiment is already brittle and is likely to affect the image of Indian companies among
foreign portfolio investors.

Fund managers said the revival of India’s position as a preferred investment destination
would depend on the speed of regulatory action to salvage the situation. “The regulators
would have to take drastic measures to regain the confidence of foreign investors in Indian
companies as frauds like these will have greater implications on emerging markets than
developed markets,” said a CIO with a leading private mutual fund.

National Association of Small Investors (NASI), a registered NGO, has said that it will file a
complaint against scam-hit software exporter Satyam Computer Services for "cheating
shareholders and investors".

"This is a financial attack on the country. We are filing a complaint against Satyam, with the
Economic Offences Department (EOD), for cheating the shareholders and investors," NASI
president Pradeep Bhavnani told PTI.

Law firms in the US have begun filing class-action complaints against Satyam Computer
Services and its executives for securities fraud. The lawsuit has been filed on behalf of all
buyers of Satyam ADS between January 6, 2004 and January 6, 2009.

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On Wednesday, Satyam's ADS fell $8.42, or 90%, before opening of the New York Stock
Exchange. The exchange suspended trading in the ADS after the disclosure by Satyam.

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Charges on Raju & Co.

Although Ramalinga Raju has gone out of his way to make out that none of the other board
members and senior executives of Satyam were aware of the fraud, the law of the land is
expected to take its course and Raju and any other director/executive found to be involved in
the scam are liable to be prosecuted on charges punishable with imprisonment up to 10 years.

Some of the more serious penalties that Raju and others are likely to face under various laws
are:

* Section 23 of the securities contract regulation Act 1956, that imposes a penalty of
imprisonment up to 10 years and fine up to Rs 25 crore. The adjudicating officer of SEBI
(Securities and Exchange Board of India) is empowered to award such punishment to
directors and management executives for violating the listing agreement by making false and
inaccurate disclosures in the company's quarterly and annual results. The penalty is severe
because of the enormous damage that the investors are liable to suffer on account of false
disclosures.

* Section 24 of the SEBI Act 1992 that imposes a penalty of imprisonment up to one year
for infringement of any provisions of the law or rules and regulations, including fraudulent
and unfair trade practices (FUTP).

* Section 477-A of the Indian Penal Code, that imposes a penalty of imprisonment up to
seven years. The police may, on their own or on the recommendation of the serious fraud
investigation office (SFIO) invoke this IPC provision meant to punish those found to have
falsified accounts "wilfully and with intent to defraud."

* Section 211 of the Companies Act that imposes a penalty of imprisonment up to six
months. The company law board is empowered to punish those who are found to have
"wilfully" failed to comply with the requirements of law relating to the annual financial
statement.

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Comments

Because, the Chairman of Satyam, Ramalinga Raju decided to make a confession of

sorts as he was unable to keep his conscience quite for very long. We don’t know how
long he was trying to keep his conscience shut before he decided to listen to conscience.
But, in his confession letter, he has told for several quarters he was repeatedly fudging
the books to overstate profits and assets.

The fraud was committed not once. The confession only reveals about the peak level of
the fraud. It was being perpetrated on a continuous basis over many quarters or
several years. If the Company needed growth in revenues and profits, they got it; the
desired profit was just few book entries away. They most likely made these entries
during the last week of the reporting period so that the invented profits filled the blanks
perfectly.

It is all well if they were a small company, audited by another small firm of auditors.

Let us first understand that scams happen worldwide - Enron, Barrings, and Madoff
and now Satyam is one more. I feel regulators need to show to the world that decisive
action is taken against the culprits. Price Waterhouse Coopers were their auditors; they
need to be punished more than anyone else. Satyam was listed in the US too, what US
regulators and PWC US were doing. I feel the Auditors and regulators in the US and
India need to be pulled up along with the board and the independent Directors of
Satyam.
Satyam was a big and strong company (till yesterday, I want to stress, because, they are
now in distress) and audited by one of the big four as already told. It is required to
strictly adhere to the stricter IFRS (International Financial Report Standards) and
GAAP (Generally Accepted Accounting Practices) norms before the accounts were
certified.

Hence, it was bemusing to me how Satyam could have indulged in accounts fudging
without getting detected by the auditors.

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So Mr. Raju did his master stroke. He booked bogus income, most likely with fictitious
companies and cleared off the debtor balances by showing collections and thereby
increasing the cash and bank balances.

Huge losses to investors aside, the Satyam scandal has caused “serious damage” to India
Inc’s reputation as well as the country’s regulatory authorities outside.

The admission of fraudulent manipulation of the financial affairs has created an

adverse impression in the minds of the trade, business and industry across the world.
This has also resulted in serious damage to the reputation of Indian Corporate sector
and the regulatory mechanism in the eyes of the world.

The Satyam scam showed its deathly effects, almost literally. Apparently fearing that he
may lose his job, a 23-year-old employee of scam-ravaged Satyam Computer allegedly
committed suicide in Chennai. Can we charge Mr.Raju for murder as well?

The impact, however, on the IT industry is short-term and will pass quickly unless there
is another scandal involving another IT services firm. I believe the negative publicity is
largely media hype amid a political backlash against off shoring of US jobs in the
current economic slump. International corporations will continue to make the right
decisions for their business models to remain competitive.

Satyam does not decide the course of economy or the stock market. Surely the impact
will be bad in terms of corporate governance image of India and we may see some
negative sentiment in terms of foreign investment into India, long term the markets will
behave keeping in mind the macro-economic factors. Regulators and Auditors will
become more vigilant and companies who are still cooking their balance sheets will get
shut or will correct their balance sheet. Companies whose stock prices are up due to
wrong balance sheets would be affected most as they will now try to get them to order
and which may show a grim picture.

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 Bibliography:

 The Economic Times. Aug 27, 2010.

 The Business Standard. January 25, 2011.
 The Hindu. Jan 14, 2009.
 The Financial Express. 4 March, 2011.

• http://www.livemint.com/2009/01/07223603/Satyam-fraud-a-blow-to-Indian.html
• http://satyamscam.in/
• http://www.slideshare.net/rishu18/satyam-scam
• http://www.thaindian.com/newsportal/business/satyam-fraud-shocks-investors-employees-
lead_100139365.html
• http://www.itejas.com/index.php/2009/01/08/satyam-fraud-story
• http://www.shvoong.com/business-management/management/1864878-satyam-scam/
• http://ipsnews.net/news.asp?idnews=45347
• http://www.nytimes.com/2009/01/08/business/worldbusiness/08satyam.html?_r=1
• http://www.paperarticles.com/2009/01/more-regulation-is-not-answer-to-satyam.html
• http://www.karmayog.org/newspaperarticles/newspaperarticles_23191.htm

Epilogue

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It is not quite clear why Raju decided to come clean eventually, but let’s for now accept it
was a brave decision. Corporate accountability, ethics and transparency became the
biggest casualties of a multi-billion dollar Satyam fraud. India must "reflect on ways to
demonstrate its quality of governance and enhance the confidence of stakeholders".

To end with, We can one ask one question; it’s all related to political or at corporate level?
What we can do for those issues?

We have to take all these issues as awareness. We have to reduce all of the dishonesty
activities at our level! We have to do our responsibility on time!

Cross Reference Index

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TOPIC Page No.

Certificate 1

Acknowledgement 2

Prologue 3

Case Study Index 4

Case Study 5-14

Comments 15-16

Bibliography 17

Epilogue 18

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