Corporate Governance @ Finance - Sathyam Computers Ltd, India

 

Satyam Computer Services Ltd was started in 1987 at Hyderabad by the Raju brothers, Rama Raju and Ramalinga Raju. The company got listed in the Bombay stock and at  that time the shares were oversubscribed by 17 times. Ramalinga Raju became the chairman in 2006 and got the award for the Ernest and Youngest Entrepreneur in 2007. Soon their annual revenue touched 1 billion and by the end of 2008, it crossed 2 billion. The company spread its wings to 20+ countries 

Weeks before the scam began to unravel with his famous statement that he was riding a tiger and did not know how to get off without being eaten. Raju had said in an interview that Satyam, the then fourth-largest IT company, had a cash balance of Rs 4,000 crore and could leverage it further to raise another Rs 15,000-20,000 crore.

The man who spent three decades in IT services and built Satyam into India's fourth largest IT services firm, was described as a visionary, a global business leader and a thinker resigned as the company chairman on Wednesday (Jan 07, 2009)after confessing to a Rs 5040-crore fraud that was going on for years.

January 7, 2009, Ramalinga Raju sent off an email to Sebi and stock exchanges, wherein he admitted and confessed to inflating the cash and bank balances of the company. Now, the angry shareholders want him to be put behind bars.

The balance sheet has inflated cash balances of Rs 5,040 crore and accrued interest of Rs 376 crore is non-existent. Rs 1,230 crore, which was arranged to Satyam, is not reflected in the books. The second quarter numbers were inflated to Rs 2,700 crore when the actual figure was only Rs 2,112 crore.

Other Board members were unaware of the real numbers. Satyam’s top management simply cooked the company’s books by overstating its revenues, profit margins and profits for every single quarter over a period of five years, from 2003 to 2008.

They sewed up deals with fictitious clients, had large teams working on these pet ‘projects’ of the chairman, and introduced over 7,000 fake invoices into the company’s computer systems to record sales that simply didn’t exist. For good measure, profits too were padded up to show healthy margins.

Over the years, these ghostly clients understandably never paid their bills, leading to a big hole in Satyam’s balance sheet. The hole was plugged by inflating the debtors (dues from clients) in the balance sheet and forging bank statements to show a mountain of cash and bank balances.

A few months before Raju confessed, Satyam had announced it would take over its group company Maytas Infra (Maytas' name was Satyam's spelled in reverse). The evening the announcement came out, Satyam shares sold off in US trading, sealing the fate of the proposed acquisition. With the share price depleted, Satyam couldn't use its stock to buy Maytas. The next morning, Raju confessed

 

After several years of such manipulation, Satyam was reporting sales of over ₹5200 crore in 2008-09, when it was in reality making about ₹4100 crore. Its operating profit margins were shown at 24 per cent when they were actually at 3 per cent and its handsome profits on paper covered up for real-life losses. It was when the company ran out of cash (of the real variety) to pay salaries that Ramalinga Raju decided that he couldn’t ride the tiger any longer and made his confession.

Asked how he could have had no clue about something as basic as Satyam’s bank balances, the company’s ex-CFO, Vadlamani Srinivas, claimed that it was the company’s chairman and managing director who made decisions on investing all surplus cash. They also chose to safe-keep all the bank statements in their office, making them available only when the accounts were prepared.

But didn’t the CFO notice the yawning gap between the bank balances in the accounting system and the ones provided by the chairman’s office? He was too busy with ‘investor relations work’ to look into accounting issues, was his reply

The internal auditor hauled up by SEBI has frankly admitted that he did notice differences in the amounts billed to big clients such as Citigroup and Agilent when he scoured Satyam’s computerised accounts. But when he flagged this with Satyam’s finance team, he was fobbed off with the assurance that the accounts would be ‘reconciled’. Later, he was ‘assured’ that the problems had been fixed.

As to the external auditors who are supposed to look out for investors, they seem to have been quite a trusting lot. While verifying bank balances, they relied wholly on the (forged) fixed deposit receipts and bank statements provided by the ‘Chairman’s office’. The forensic audit reveals differences running into hundreds of crores between the fake and real statements as captured by the computerised accounting systems. But for some strange reason, everyone, from the internal auditor to the statutory auditors, chose to place their faith in the ‘Chairman’s office’ rather than the company’s information systems.

What is more, while being fully aware of the fictitious financials, the Rajus transferred 1.57 crore of their own shares to related entities through off-market transactions. SEBI alleges that these shares, valued at over ₹543 crore, were in turn sold in the stock market, netting a neat profit. The promoters also pledged another 6.2 crore shares to raise loans and cash amounting to ₹1253 crore. Top managers such as Vadlamani Srinivas (CFO), G Ramakrishna (VP-Finance) and VS Prabhakara Gupta (Head-Internal Audit) also sold shares valued at ₹4.5 crore between 2003 and 2008.

Satyam was listed on BSE in May 1992. Adjusted for a 5:1 split in July 2000 and a 1:1 bonus in October 2006, Satyam’s peak price was ₹ 723 on 7 March 2000, before falling to ₹ 11.50 in the days after Raju confessed to the accounting fraud.  On Jun 22, 2009 ₹ 77.05 as Mahindra unveils new brand identity for Satyam, Mahindra Satyam. The shares ended Wednesday at ₹ 115.30 apiece (05 July 2013) and the disappearance of ‘Satyam Mahindra’   fully merged with  Tech Mahindra

 

 

 

 

Questions

1.      Define

a.       Corporate governance

b.      Stakeholders

c.       Window dressing

d.      Insider trading

2.      Name the stakeholders in the business of Sathyam Computers, India

3.  spot the incidences that you feel had  conflict of Interest in relationship of stakeholders with reasons

 

References

1.      https://www.livemint.com/Industry/ZNBymyVSZNyLAWq2BqbdiL/Satyam-Computer-stock-ends-flat-on-last-day-of-trading.html

2.      https://www.ndtv.com/business/chronology-satyam-computer-history-of-events-share-price-movement-43806

3.      https://www.moneycontrol.com/news/business/10-years-to-satyam-how-indias-enron-moment-unfolded-3359941.html