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SATYAM FIASCO

SINKING SHIP OR TIP OF ICEBERG

Company Profile
Founded by Mr. Ramalinga Raju & Mr. B. Rama Raju on 24th
June,1987
Fourth largest IT Outsourcing Company of India
Employees more than 40,000 in India
High Global reputation
Offers services to more than 550 MNCs

The Biggest Corporate Fraud


Motive Behind the Scam:
- To maintain the pace of growth
- To please investors and shareholders
- To justify the inflated P/E multiples.

Unveiling the truth


On 8th Jan,2009 the truth was relieved to the world.
It was in the form of a 5-page letter given by Mr.
Ramalinga Raju to the Board of Directors.
Various confessions were made in this letter.

Confessions Made
Neither myself, nor the managing Director (including our spouses) sold
any shares in the last eight years-excepting for a small portion declared
and sold for philanthropic purpose.
That neither me, nor the Managing Director took even one rupee / dollar
from the company and have benefitted in financial terms on account of the
inflated results.
Non of the board members, past or present, have any knowledge of the
situation in which the company is placed. None of my or Managing
Directors immediate or extended family members has any idea about these
issues.

Bridging the Gap


SATYAM
MAYTAS
It all started on 16.12.2008, when Ramalinga Raju thought,
buying an infrastructure firm .
Raju and his immediate family members own up to 35%
stakes in Maytas.
Satyam intended to buy 100% stakes in Maytas Properties for
$1.3 Billion and 51% stakes in Maytas Infra for another $300
Million.
Non of the investors & fund managers were aware of the bid.

Violation of the Companies Act


Violation of Section 372A of Companies Act.
-Acquiring shares in another corporate for an amount not
exceeding 60% of the acquiring companys share capital &
free reserves.
-Passing resolution through a postal ballot & giving advance
intimation to the RoC (Hyderabad)
Violation of Section 293 of Companies Act.
- Failed to pass resolution regarding the proposed acquisition of
stakes in Matyas Infra. & Matyas Properties.

Satyam's path to disaster


Following is the chronological summary of the events which send IT
major Satyam Computer Services, founded in 1987, to disaster:
1. December 16: Satyam gets board's approval for acquisition of Maytas
Infrastructure and Maytas Properties for $1.6 billion
2. December 18: British mobile solution provider Upaid files a suit
against Satyam in a district Court in the US over Maytas deal.
3. December 25: Mangalam Srinivasan, non-executive and independent
director resigns from board.
4. December 27: Promoters disclose that their entire holding in Satyam
pledged with institutional lenders since 2006.
5. January 1: Satyam-Upaid case hearing over the Maytas deal in Texas
court on January 7.

7. January 2: Promoter holding in Satyam drops to 5.31 per cent from


8.27 per cent after sale of pledged shares by lenders.
8. January 6: Raju family holding in Satyam falls to 3.16 per cent after
sale of pledged share by lenders
9. January 7: Satyam Chairman Ramalinga Raju sends letter to board
tendering his resignation and admitting to fraud in accounting books.
10. January 7: Satyam Managing Director B Rama Raju also resigns
11. January 7: DSP Merrill Lynch terminated its advisory engagement
with company

SATYAM CASE IN VIEW OF


CORPORATE GOVERNANCE
The whole perception of Corporate Governance was shaken to the very
roots.
Those companies who had already a question mark over their Corporate
Governance were very badly hit.
The realty sector, with its complex land bank valuations had been the worst
hit.
The firms with Satyam in their portfolios are trying to sell other stocks
they held creating a situation in which short sellers reveled and rumors
flew.

CURRENT ASSESTS
2651.6
5312.62

ACTUAL CASH
IN BANK IS
321
INFLATED
5040cr

376
ACTUAL DEBT IS 2161
OVERSTATED 490 Cr

NO ACCURRED
INTEREST
376 Cr

LIABILITIES

REVENUE

2700

OPERATING
MARGIN

690

ARTIFICIALLY ADDED 588


OPERATING PROFIT
ADDED 588
INCREASING THE CASH
RESERVE ONLY FOR Q2
ALONE TO 588

UNDERSTATED
LIABILITY 1230
Cr which is
arranged by
Mr.Raju
5040+376+1
230+ 490=
7136

ACTUAL OPERATING MARGIN


61 Cr ( CREATED AN ARTIFICIAL
REVENUE OF 588)

GROWTH IN THE OPERATING PROFIT

ADJUSTED BALANCE SHEET

RATIO ANALYSIS
CURRENT RATIO : CURRENT ASSESTS/CURRENT LIABILITY
BEFORE ADJUSTMENT

AFTER ADJUSTMENT

= 8788.2
1603.07
= 5.48 : 1

= 2882.2
2833.07
= 1.01 : 1

CASH RATIO : CASH & BANK BALANCE + CURRENT INVT / CURRENT


LIABILITIES
BEFORE ADJUSTMENT

AFTER ADJUSTMENT

= 5854.8
1603.7
= 3.65 : 1

= 814.8
2833.07
= 0.28 : 1

RATIO ANALYSIS (cont)


OPERATING PROFIT RATIO : OPERATING PROFIT / SALES X 100
BEFORE ADJUSTMENT

AFTER ADJUSTMENT

= 649.27
X 100
2700.52
= 24.04 %

= 61.00
2700.52
= 2.25 %

X 100

EARNING PER SHARE : NPAT PREF DIVIDEND/ NO OF EQUITY


SHARE HOLDERS
BEFORE ADJUSTMENT

AFTER ADJUSTMENT

= 597.43
67.35
= 8.87 RS

= 9.430
67.35
= 0.14 RS

IMPACT ON STAYAM
SHARE PRICES PLUNGES

JAN 7

IMPACT ON STOCK MATKET:


shares fell to 6.00 rupees on 10 January 2009, compared to a high of 544
rupees in 2008.
The sensex fell from its closing peak of 20,837 on January 8, 2008 to less
than 10,000 by October 17, 2008.
Sensex on Wednesday tumbled over 340 points at noon to dip below
India's National Stock Exchange has announced that it will remove Satyam
from its S&P CNX Nifty 50-share index on January 12 and added Sun Pharma
In New York Stock Exchange Satyam shares peaked in 2008 at US$ 29.10; by
March 2009 they were trading around US $1.80.
The New York Stock Exchange has halted trading in Satyam stock as of 7
January 2009.
Withdrawal of FII of actual $66.5 billion at the beginning of 2008 to pull out
of $ 11.1billion during the first nine and a half months of 2008 triggered a
collapse in the stock market.
Withdrawals in FII also led to sharp depreciation in rupees.

Regulators in action:
Department of Company Affairs(DCA): Scanning for further
misappropriations in the balance sheet.
CLB(Company Law Board): Looking into the violations of the
Securities Act.
SEBI: Investigating matters relating to trading of shares.
Serious Frauds Investigation Office: Constituted with members from
SEBI, RBI, CBI etc for investigating under DCA.
Enforcement Directorate: Looking into possible violations of rules
governing foreign exchange transactions.
CID/CBI: Investigating the criminal aspects of the fraud.

Tech Mahindra acquires Satyam

ABOUT TECH MAHINDRA


Tech Mahindra is Indias 6th largest software exporter, and serves telecom
service providers, equipment manufacturers, software vendors and systems
integrators
Operations over 25 countries
Around 25,000 professionals across the globe
Strong presence in Europe and Germany

BITTER SWEET DEAL


The potential bidders were Larsen & Turbo, Tech Mahindra and Wilbur
Ross.
Tech Mahindra = 58/share
Larsen & turbo = 45.9/share
Wilbur Ross = 20/share
Tech. Mahindra will Buy 31 percent of Satyams equity share, followed by
a further acquisition of 20% through an open offer
Tech Mahindra will pay Rs 2,900 crores for 51% stake.

Highlights of Tech Mahindra Bid


Tech Mahindra emerged as the highest bidder. The bid as made
by the companys 100% subsidiary venturbay consultants.
Management plans to raise debt through SPV.
A company claims to have largest support from its largest client
BT.
The management intends to meet key clients of the company
personally to restore their faith and confidence in satyams
service delivery and governance.
Tech Mahindra has acquired 475 acres of land assets of Satyam.

Impact of Acquisition
Satyam is completely complimentary to Tech Mahindra
with negotiable business overlap.
Satyam has strong presence in US and Tech M has strong
presence in Europe.
The stock price of Tech Mahindra has raised appreciably
from of Rs.200 to Rs.365 in a short span of 1 month.
Employee satisfaction
Customer Retention

Satyam & PWC


The audits were conducted by Price Waterhouse Cooper in
accordance with applicable auditing standards.
As per Satyam's accounts, vetted by Price Waterhouse, auditors
were paid Rs 3.73 crore during 2007-08 as against Rs 3.67 crore in
the previous fiscal.
Credibility of audit firms has come into question as the amount was
too big for any audit firm not to notice. If the audit firm claims that
they didnt know about then their capabilities would come under the
scanner,

A fallout of the Satyam case is the issue of delays involved in


enforcement of Indian corporate laws.
Shareholders should ensure that the composition of Board of
Directors is a balanced mix of independent directors and
management appointees.
Ties between the company management and auditors and
independent directors need to be cut.

Securities and Exchange Board of India (SEBI), has called for


peer reviews of audits among the companies that are part of
the Nifty and Sensex indices.
Regulation and transparency can only serve to lower the
incidences of fraud.

``Investing in Corporate Governance


Companies need to invest in good governance
Corporate governance has a direct bearing on business
performance and thereby ROI
A study reveals thatOn an average, businesses with superior governance
practices generate 20 percent greater profits than other
companies

Damage to India's appeal for foreign investors and the IT


IMPACT
ON 'BRAND INDIA
services industry.
IMPACT ON IT INDUSTRIES:
It greatly affected the Indian IT sector.
The impact is short-term.
The bluest of blue-chip reputations [such as] Infosys and TCS"
could actually gain in the current environment, because of a
potential "flight to quality" among client companies. The thirdtier and weaker companies will probably undergo a lot more.
IMPACT ON INDIAN ECONOMY:
Minimal effect on Indian economy as it was an isolated
incident.

Thank You!