The Satyam

Fiasco
How we will go about…
Introduction to Satyam and Maytas Utkarsh

The Chronicles and Opening of the Bhavik

Scam (Series of events)
Financial Implication, Fabricated Nishit
income statements, Maytas
Valuation, Satyam-Maytas Nexus,
Fake
StockFD receipts
Charting cycle. and
- Satyam Viral
Maytas, Satyam ADR’s, Role of RoC
& SEBI, Clause 49, Sarbanes Oxley
act
Legal Implications, Companies Act, Mayur
SEBI Act, Indian Penal code, The tax
angle
Role of Auditors, PwC in trouble, Siddharth
Current Board and In the News…
 SATYAM
• Set up in the year 1987 to
provide services in IT
sector
• India’s 4th biggest software
company in India
• It is listed in BSE, NSE,
NYSE and Euronext
(Amsterdam).
• BSE IPO oversubscribed 17
times when made public in
1991
• The company employs
53,000 IT professionals
 First IT Company in the
World Certified under
ISO9001:2000
 Ranked Among India’s Top
10 Best Employers, 2004 and
2003
 Top 13 Best-Managed
Companies in India
 Winner, Corporate Citizen I
award for Corporate Social
Responsibility
 SAP Pinnacle Award 2008 
 Satyam Wins golden
peacock award for excellence
in Corporate Governance on
Global level for 2nd time
 United Kingdom Trade and
Investment India Business
Award for Corporate Social
> Chairman and founder Satyam
Computers Services Limited
> MBA from Ohio University
> IT man of the year award by
Data Quest in 2002
> Winner of Ernst & Young
entrepreneur of the year award
in 2007
B. Rama Raju
Promoter & CEO, Satyam Computers
Ltd.
B. Ramalinga Raju
Founder & Chairman, Satyam
Computers Ltd.
> He became the Managing
Director and Chief Executive
Officer in 1991
> Mr. Rama Raju holds a Master
of Economics degree from
Loyola College, Chennai and a
MBA degree from Loredo State
University, Texas
> Before 1997, he was with
Maytas Infra Limited as one of
its Directors
Satyam Clients
A total of 650+
Clients
185 of the top
fortune 500
Companies
 Satyam Board Structure
Other
B.Rama Raju B.Ramalinga
Independe
Promoter & Raju
CEO nt Promoter &
Directors Chairman
Ram Srinivas
Mynampati Vadlamani
Whole time Chief
Executive Financial
Director Officer

Dr/ M.
Srinivas Prof.
Mr. Vinod Prof. M Mr. T R Prof. V S
Krishna G
an K Dham Rammoh Prasad Raju
Palepu an Rao

GTB/Dr. Sasken ISB Dean/

Former
Reddy’s Communication/ Bharat
CabinetSecretary
Laboratori Hellsoft /Montalvo electronic
/GMR Infra/ GVK
es Systems and Newpath s
Taj
 Satyam – Share holding
Pattern
Institutional & Non-
Institutional
Shareholders

LIC 4.34%
L&T 4%
Lazard
Aberdeen
13.16%
Fidelity
ICICI Prudential
Citigroup
Total Market capitalization JP Morgan
of Rs. 15,262 Cr
(As on Dec 16, 2008 )
Satyam Decade at a Glance
 Maytas Infrastructure
Mr. Teja
Raju(VC)
• The Raju’s hold 36.64 per cent while
institutional holding is 10.92 per cent
• The company had raised Rs 327.45
crore through IPO.
• It had a turnover of Rs 1,660 crore
and net profit of Rs 100 crore in the
last financial year
• Satyam planned to acquire 51 per
cent stake for Rs 1, 440 crore or $0.3
billion
 Maytas Properties
B. Rama Raju Jr.
(VC)
• Raju’s family owns 35% of Maytas
properties
• Founded in 2005, it has a land bank of
6,800 acres
• It has clearances for three IT SEZs
based on 148 acres
• An undisclosed stake is held by Infinite
India Investment Management, a realty
fund jointly promoted by JM Financial
and US-based SRM Investments, which
invested Rs 600 crore in February
So, How did it all begun?
 21 April 26 Jan
2008 2009

22 Sep
2006
2008

Satyam receives the Golden

Peacock Award for
excellence in Corporate
Satyam becomes Governance from World
first Indian council
company to publish
IFRS audited
Satyam
financials
revenues
cross $1
Billion
16 Dec 17 Dec 26 Jan
2008 2008 2009

Satyam gets board

approval for Satyam backs out
controlling stake in of Maytas deal
Maytas Infrastructure citing investors
and Maytas properties protest
as fully owned Major Clients of
subsidiary for $1.6B Satyam express
(Rs. 8000 Cr.) dissatisfaction.
Contracts worth
$200 million up for
grabs

Satyam shares plunge Board meeting to be

55 percent in NYSE. held on Dec 29 for
BSE share plunges over proposed buyback of
30% shares
 19 20 23 206Jan
Dec Dec Dec 2009

British mobile solution World Bank bans Satyam for

provider Upaid files a 8 years due to inappropriate
law suit against Satyam payments to staff and
in a district Court in the inability to provide
US over Maytas deal. information sought on
May face $1 Billion in invoices
penalties

Centre refers
Satyam deal
to Registrar of
Companies
(RoC)
 26 28 29 26 Jan
Dec Dec Dec 2009

3 more Independent Directors resign.

Mendu Rammohan Rao, Krishna G
Board meet initially Palepu and Vinod K Dham
scheduled for 29th
postponed to 10th
1st independent January
director Dr.
Mangalam Board announces
Srinivasan exploring option Satyam asks Rumors in market
resigns from for buyback of DSP to review about strategic
Satyam board shares to restore board structure takeover by IBM,
investor Accenture
Satyam objects confidence
to world bank IL&FS sells 44.1 lakh
statements, Promoters disclose that shares pledged shares of
asks to their entire holding in Satyam promoters in 1 day.
apologies or
Satyam pledged with Promoters equity reduced
face legal action
institutional lenders from 8.6% to aprrox 7%
since 2006
 30 02 03 26 Jan
Dec Jan Jan 2009

Post cancellation Satyam board confirms

of deal, Maytas promoters stake to be
looks for raising around 5%. Further 3.2% still
IL&FS sells pledged.
$500 million
further 44.27 Lakh
through sale of
pledged shares
equities and
taking the tally to
properties
1.5 crore pledged
shares

Satyam-Upaid
case hearing over
the Maytas deal in
Texas court on
January 8.
 05 06 26 Jan
Jan Jan 2009

Tech Mahindra
Total pledged shares sold by (Revenues 3766 Cr.)
IL&FS reaches 2.5 Cr. in last offers to merge with
13 days. Promoters stake Satyam (Revenues 8473
Promoters down to 3.6%. Still a further Cr.)
stake in the 1.7% are pledged
company down
to 4.5%
The Night Before 7th Jan
SEBI considers
proposal to make it Merill Lynch discovers serious
mandatory for irregularities in books of
promoters and accounts and approaches
majority share regulator SEBI for further
holders to disclosed course of action and its inability
pledged shares to to investigate further. DSP
stock exchange submits report to SEBI and
Satyam management late night.
 07 26 Jan
Jan 2009

09:45 A.M. Hunt for Raju

ADR’s crash 90%
Satyam Chairman brothers begin. Amid
Satyam BSE scrip
Ramalinga Raju speculation over his
falls 78%
writes the following whereabouts,  Raju is
letter to the DSP snaps ties with believed to have left
company board satyam. for the United States
in connection with a
court case.
Adobe Acrobat
Document
Ram Mynampati
takes over as
interim CEO Satyam stripped
Auditing firm PWC according to Raju’s of Golden Peacock
under scanner letter award
NSE removes Satyam from its benchmark
index Nifty. It will be replaced by
Govt. instructs RoC Reliance Capital with effect from January
to review report 12. It will also be removed from various
other indices like CNX 100, S&P CNX
 08 09 10 26 Jan
Jan Jan Jan 2009

PwC in major BSE to replace

trouble. Stocks Satyam Computer Former CFO
of PwC clients with Sun Valdamani
take a major Pharmaceutical in Srinivas
beating at the its benchmark remanded to
BSE and NSE index Sensex with judicial custody
effect from
CFO Valdamani January 12. Raju brothers arrested by the
Srinivas, who is police on charges of criminal
the financial conspiracy, cheating, forgery,
custodian of the misappropriation of funds and
company resigns criminal breach of trust.
PwC shot back at Satyam,
saying in a media
statement that the auditing Market Capitalization of satyam falls to
was based on the audit Rs. 1,607 Cr from Rs.15,262 Cr. on Dec
evidence provided by 16 in 19 trading sessions.
Satyam and in was
 13 14 15 16
26 Jan
Jan Jan Jan Jan
2009

Government
hands satyam Maytas stocks
case to SFIO 23 year old hit the lower
employee of circuit for 7th
satyam consecutive
commits suicide trading session
in Chennai
The newly appointed 3 The government expanded the
member board appoints three-member Satyam board to six
auditing firm KPMG and to include S Balakrishnan of Life
Delloitte to assist it in Insurance Corporation, Tarun Das,
cleaning the mess in the chief mentor of the Confederation
scam tainted company’s of Indian Industry and T N
accounts Manoharan, former president of the
Institute of Chartered Accountants
of India
 Why on 7th Jan 2009?
• DSP Merrill Lynch informed SEBI
about
Material irregularities in Accounts
on 6th Jan

• Minutes of Meeting of 16th

December,2008 were not
submitted to RoC-(This created
some doubts)

• Hearing of Upaid- satyam case on

8th Jan at the US court
 Raju ban gaya conman……
How?
• Proposing High risk Maytas
acquisition
• Overvaluing the proposed
acquisition
• Promoter pledging their holdings
(decrease in holding)

• Refusing to resign
• Fudging Income statement
 Maytas Acquisition
• Valuation of Maytas duo was done at
$1.6 bn
as against actual $ 225 mn

• Violation of Section 372A of the

Companies act
 Fabricated Income
Statements
‘Creative Account
Practice’

• Details of cash balances with Scheduled banks are not

there in the
Annual report

• Question raised by Equity analyst Kawaljeet Saluja -$500

mn cash
parked in current account
 Understated
Liabilities Fraud Amount
Overstated cash
balances,
Income
receivables
Why and How How
????
 Share Pledging

• Stake decreased from 21.6% to

3.6%
• Money raised through 4 Front run Co.
by offloading pledged shares (under
investigation) Amount(InRs. Cr)
Harangi Agro
Narayandri Greenfields
Amravati Greenlands Amount (In Rs. Cr)

Bangar Agro

0 50 100 150 200

Fake FD receipts and Employee
Nos.??

Repeat the
procedure
Parallel Finance
Department ???
 Satyam-Maytas Nexus
Contd…..
• Cash raised & siphoned off funds
used to buy several thousands of
acres of land across AP through
several benami accounts

• Helped Maytas in getting major

contract
 Some Comments
• If the first fraud is for Rs100, the next time add
another zero. It (accounting fraud) grows
exponentially – Anil Roy, Grant Thornton India

• It was like riding a tiger, not knowing how to get

off without being eaten- Raju Ramalinga while
admitting the fraud

• On Wikipedia, for the first time, India has been

put on to the list of largest corporate scandals in
the world, all thanks to Satyam – a blogger
STOCK CHARTING
Comparison – Satyam and Maytas share prices
 The Inside News
• Satyam's CFO Srinivas Wadlamani has sold
around 8,00,000 shares & even Satyam's
interim CEO, Maynampati has sold
4,00,000 shares in past 6 months above
Rs 300 per share.
• Satyam’s top 40 officials collectively sold
shares worth more than Rs 300 crores in
the past 6 months
 Allegations by ROC
• Violation of sect 372A of the Companies Act
regarding acquisition of shares in another
company

• Violation of sec 293 of the Companies Act

regarding the nature and proposed
acquisition of stakes in Maytas Infrastructure
and Maytas Properties.

• Maytas properties and Maytas Infrastructure

made investments and advances in group
companies far in excess of the limits laid
down by sec 372, at a rate of interest lower
 SEBI Investigation
• Regulation 7 of the SEBI (Prohibition of Fraudulent
Unfair Trade Practices relating to the Securities
Markets) Regulations, 2003
• Sub-regulation (1) of Regulation 5 of the SEBI
(Prohibition of Insider Trading) Regulations, 1992
• Sub-regulation (1) of Regulation 29 of the SEBI
(Merchant Bankers) Regulations, 1992
• Regulation 38 of the SEBI (Substantial Acquisition
of Shares and Takeovers) Regulations, 1997.
• Section 24(Contravening provisions of the Act or
any rules or regulations) - Imprisonment up to 10
years and/or fine of up to Rs 25 crore
 Share Pledging
• SEBI Board has decided to make it mandatory for
promoters of companies to make full disclosures if they
pledge shares

• The move, follows Satyam Computer Services Ltd

promoter B Ramalinga Raju’s admission that he
clandestinely raised funds upto Rs. 1200 crores by
pledging his shares in the company.

• Promoters are required to inform their company of any

pledge; the company would then inform the public
through the stock exchanges.

• On 22 jan, Unites Spirits Ltd. share prices lost 23% on

news that the promoters had pledged 18.6 million USL
 Clause 49
• The clause speaks about complying to
various corporate governance policies
regarding directors, disclosures,
transparency, accountability etc.

• Satyam managed to pull off a fraud of such

magnitude despite formally complying with
all the requirements under Clause 49

• Following the Satyam Saga, SEBI has

already initiated steps towards
strengthening the laws pertaining to
Corporate Governance with the SEBI
Committee on Disclosures and Accounting
Standards (SCODA)
 Sarbanes Oxley Act-2002
• Satyam has ADRs listed on the NYSE, so they
have to follow American rules similar to those of
American publicly traded companies. That
includes having audited financial statements,
using US GAAP, complying to SOX Act; still they
managed to report cash more than $1 bn which
does not exist at all
• “Some things can slip through the cracks.“- an
attorney
• Satyam is listed in the US and accordingly may
face penal action by the US Securities and
Exchange Commission(SEC)
• A lawsuit has already been filed against Satyam
by a law firm to check the compliance
• Investigation under Sec 302 of SOX Act.
THE SATYAM FIASCO
THE LEGAL ANGLE…..
THE ETERNAL
TRUTH
WHEN IT POURS ,IT RAINS
IDHAR AAG.. UDHAR KHAI..
U.S. INDIA

CLASS ACTION COMPANIES ACT 1956

ANTI FRAUD PROVISION SECURITIES CONTRACT

SECTION 10 B OF S.E.A REGULATION ACT
SEBI ACT , 1992

INDIAN PENAL CODE

 COMPANIES ACT , 1956

• SECTION 209:
Inspection of books of account, etc., of companies
• SECTION 388 B:
Reference to Tribunal of cases against managerial personnel.
• SECTION 388C:
Interim order by Tribunal.
• SECTION 408:
Appointment a completely new board or appointment of
additional directors once approved by the Company Law
Board (CLB)
 SECURITIES CONTRACT
REGULATION ACT
• Non-compliance with the listing agreement invites
sanctions under the Securities Contracts (Regulation) Act
(SCRA) which include imprisonment and fines.
• The SCRA independently imposes an obligation to maintain
books of accounts or records as per the terms of the listing
agreement.
• Violation of these terms may lead to a penalty of Rs 1 lakh
for each day of violation or Rs 1 crore whichever is lesser.
• The SCRA also provides that if a company fails to comply
with the listing conditions or commits a breach thereof, it
shall be liable to a penalty up to Rs 25 crore.
SEBI ACT ,1992-15G. PENALTY FOR INSIDER
TRADING.

• If any insider who, -

• (i) either on his own behalf or on behalf of any
other person, deals in securities of a body
corporate listed on any stock exchange on the
basis of any unpublished price-sensitive
information; or
• (ii) communicates any unpublished price-sensitive
information to any person, with or without his
request for such information except as required in
the ordinary course of business or under any law;
or
• (iii) counsels, or procures for any other person to
deal in any securities of any body corporate on
the basis of unpublished price-sensitive
 INDIAN PENAL CODE

• SECTION 120 B :

Punishment of criminal conspiracy

• SECTION 409 :

Criminal breach of trust by public servant, or by banker,

merchant or agent
• SECTION 420:

Cheating and dishonestly inducing delivery of property

• SECTION 468:

Forgery for purpose of cheating

• SECTION 471:

Using as genuine a forged document or electronic record

 Criminal Prosecution

• Failure to comply with Adjudication Officer’s orders

attracts penalty of:
– Imprisonment of at least one month, and upto ten
years; or
– Fine of upto another Rs. 25 crores; or

– Both

• New concept of private prosecution in the SCRA

• Sessions Court alone may try offences

 Immunity Power
• GOI may provide immunity from any penalty or
prosecution .

• Immunity may be issued only on recommendation

by SEBI.

• Raju can turn approver

49
 CLASS ACTION
• Class action is a law suit brought on behalf
of a class or group of people who are
harmed in similar manner by an individual
, group or body.
• Useful for people with economic losses
small enough to hire a lawyer individually
• Lawyers don’t charge but get a share of
compensation.
 THE TAX ANGLE

• Till 2005 , satyam enjoyed complete

exemption of taxes under 80 HHC.
• Tax exemption to IT under sec 10 A-
Software technology park scheme.
• Hence satyam needs to repay and resettle
the deduction unduly enjoyed.
However the dark cloud is with a
silver lining……
 THE MANAGEMENT
PERSPECTIVE

• Corporate governance

• Comparison with similar cases

Role of Auditor

• According to law there should be an

external and an internal auditor(can
be outsourced)
• Job is to check whether processes are
being followed and are accurate and
adequate
• One of the key audit test is to
validate firm’s cash and bank
• Dec 05 - RBI bars PwC from bank audits
after it found that the firm under-provided
for non-performing assets of Global Trust
Bank
• Mar 06 - Out of court settlement with
shareholders of Internet Company E-
district
• Mar 07 - Raid by Russian Ministry in
criminal cases related to oil firm OAO
Yukos
• July 07 - Paid $225 million to shareholders
of Tyco international after proved guilty of
accounting fraud
In the trap..PwC
• One of the big four Auditors world wide
( Revenues of $28 Bn)
• Arthur Andersen(child of PwC) & Enron
-Year 2001-02
• Evading Income tax & Service tax in at
least two cases of tax evasion.
• Imp thing to note that How could PwC
have no clue of inflation of Balance sheet to
5,040 crores since yrs and DSP ML realizing
it in less than 2 weeks
Wary Investors exit
PwC Clients

• Investors brought shares

of other companies in the
same sector
• Out of 100 clients of PwC,
most companies share fell
by 5-15%.
• Risk of Reputation
• The ICAI & RBI stand on
 What’s on currently….
• CA ministry dissolved the Satyam
Board and announced new members
• 3 more members-chief mentor of CII
Tarun Das, ex-president of ICAI T N
Manoharan and S Balkrishna Mainak
of LIC What after that:
• Board says No to financial
Bailout package
• Lazard sold its 5.3 % stake
• KPMG and Deloitte
Deepak Parekh Kiran karnik
C Achutan
appointed as auditors but will
Former HDFC Former
Former SEBI
be working through Indian
NASSCOM
Chairmam
Chairmam Member subsidiaries
 Other Options for the
Government
• Satyam to be broken up into pieces
BPO, Verticals, Service Lines
• Stabilize Satyam and merge with
bigger IT firm ( as L & T hike in its
stake)
• The new team may fight back to
retain the existing clients and once
everything settled may emerge
again
In the News..
Thankyou