Corporate Governance @ Legalframework - 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 exchange with  oversubscription  17 times. Ramalinga Raju became the chairman in 2006 and got the award 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. In that email to SEBI and stock exchanges, wherein he admitted and confessed to inflating the cash and bank balances of the company. Whether he got off the tiger or had fallen off it, what is certain is that he made a huge dent in the lives of the 53,000 employees of the company and that of his shareholders apart from hurting the image of the Indian IT outsourcing story.

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. The 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).

Foreign institutional investors (FIIs), mutual funds and insurance companies own a little over 60 per cent of the company. On December 25, 2008 nine days after Satyam announced its aborted acquisition bid, Dr Mangalam Srinivasan, 69, took the lead and quit the board of the company. Srinivasan had been on the board of Satyam since July 1991 as an independent director.

On December 29, 2008 after reports surfaced that the Satyam promoters had pledged their shares, the company issued a press release that stated: The promoters informed Satyam 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. Following this belated disclosure, three independent directors, Vinod Dham, Krishna Palepu and M. Rammohan Rao, resigned , leaving it with  just five directors.

They were quick to protest what they interpreted as sheer brazenness of the promoters to push through non-synergistic acquisitions of family-promoted companies, ostensibly to transfer money from a cash-rich company (Satyam) to the other family-owned ones. The Raju family owned (till the news came of pledged shares having been sold) barely 8.6 per cent of the company but over 30 per cent in the two infrastructure companies. The $1.6 billion (Rs 8,000 crore) proposed acquisitions of Maytas Properties and 51 per cent in Maytas Infra would have used up the company's entire cash. 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.

Regarding 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.

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.

 

 

 

 

Questions

1.       Define

a.       Corporate Governance

b.      Business Ethics

2.       Spot the incidences that you feel had  conflict of Interest in relationship of stakeholders with reasons

3.       List the major regulations inspired by the Sathyam Computers incident in the Indian Corporate Governance area.

4.       Spot the lapses in the company and relate to the fixing of it by related provisions specifying the details of regulation or its amendments with respect to Corporate Governance

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

 

Clue :

Q No. 3

The major three regulations that ensure corporate Governance are

A.    Companies Act 2013

a.       Separation of Chairman , CEO

b.      Class and Quality of IDs

c.       Committees - 5 nos.

B.     SEBI Listing Obligations and Disclosure Regulation 2015

a.       Clause 49

 

                                                              i.      Disclosures

                                                            ii.      Audit Committee

                                                          iii.      Certification of annual report by CEO and CFO

C.     SEBI (Prohibition of Insider Trading) Regulation 2015

 

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