satyam crisis

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  • 7/31/2019 Satyam Crisis



    2011-2012 YEAR OF SUBMISSION

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    ROLL NO. 77




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    Sr.No. TOPIC Page No.

    01. What Happened At Satyam? 03-05

    02. How Satyam Scam Happened? 06-08

    03. The Overall Impact 09-11

    04. The Dealings 12-14


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    WHAT HAPPENED AT SATYAM?Satyam Computers Services Limited (Satyam) is one of Indias largest IT

    companies and is listed on the Indian and US stock exchanges. On 7 January2009, the Chairman of Satyam, Mr. B. Ramalinga Raju issued a letter (the 7January letter) to the Board of Satyam and the Indian stock exchanges andconfessed that the books of Satyam reflected non-existent cash and bank balances, fictitious accrued interest, an overstated debtor position and

    understated liability in an aggregate amount of Rs.71, 360 million(approximately US$1.5 billion).

    Additionally, the September 2008 quarterly accounts

    did not reflect the true position of the companysrevenues and operating margins and resulted in

    artificial cash and bank balances of Rs.5,880 million(approximately $120 million). Mr. Raju stated that

    the financial statements showed inflated profits overa period of several years.

    Satyams stock price had been under pressure sincemid-December 2008, when its Board announced theproposed acquisition of two companies owned and

    controlled by Mr. Rajus sons, Maytas Infra Limited (alisted company) and Maytas Properties Limited, for

    an aggregate purchase price of approximately US$1.6 billion. These twocompanies were in the infrastructure and real estate sectors and the proposed

    acquisition was of secondary shares held by the existing shareholders. Theacquisition proposal was withdrawn after adverse investor reaction and fourindependent directors on the Board resigned subsequently. In the 7 January

    letter, Mr. Raju admitted that the proposed acquisition of the Maytascompanies was an attempt to hide the gap in Satyams balance sheet by

    acquiring real assets.

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    The stock market reaction to the 7 January letter was immediate. The shareprice fell from a high of Rs.188 to a closing price of approximately Rs.40

    during the day.

    On 7 January 2009, the Indian stock market regulator, the Securities andExchange Board of India (SEBI) commenced investigations under various SEBI

    regulations. The Ministry of Corporate Affairs of the Central Government separately initiated a fraud investigation through its Serious Fraud

    Investigation Office (SFIO). In addition, the Ministry of Corporate Affairs fileda petition before the Company Law Board (CLB) to prevent the existingdirectors from acting on the Board and to appoint new directors. On 9

    January 2009, the CLB suspended the current directors of Satyam and allowedthe Government to appoint up to 10 new nominee directors. Subsequently,

    the new, six-member Board has appointed a Chief Executive Officer andexternal advisors, including the accounting firms KPMG and Deloitte to restate

    the accounts of Satyam.

    Following the 7 January letter and in accordance with the requirements underthe Indian and the United States accounting standards,

    PricewaterhouseCoopers (PwC), Satyams auditors, issued a letter stating that the audit reports and the opinion prepared by them for Satyam should not be

    relied upon.There are press reports that other Government agencies are also investigatingSatyam. These include the Income Tax Department (for income tax

    violations), the Enforcement Directorate (foreign exchange violations) and theProvident Fund authorities (non-payment of compulsory contributory

    pension and insurance dues).

    Mr. Raju, his brother (who was the Managing Director on the Board of Satyam) and the former Chief Financial Officer (CFO) have been arrested. Two

    PwC partners were also arrested in connection with the fraud. Their bailapplications have been refused by the Metropolitan M agistrates court in

    Hyderabad and they continue to remain in police custody.

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    The Institute of Chartered Accountants of India (ICAI), the body that regulatesaccounting firms in India, has also commenced an investigation of the


    Several class action suits have been filed in the District Court of the SouthernDistrict of New York, against Satyam, Mr. Raju, his brother and the CFO for

    violations of US federal securities laws. The members of the class have beenidentified as the purchasers of American Depositary Shares between 6

    January 2004 and 6 January 2009.

    The US Securities and Exchange Commission (SEC) have also commenced its

    own investigation of Satyam. The SEBI and the SEC signed a non-bindingmemorandum of understanding in March 1998 for cooperation, coordinationand the provision of technical assistance between the two regulators. These

    two agencies are also signatories to the International Organization of Securities Commissions Multilateral Memorandum of Understanding

    Concerning Consultation and Cooperation and the Exchange of Information,which is a multilateral mechanism for sharing surveillance information

    between regulators.

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    As soon as Ramalinga Raju confessed about the fraud, all the government departments started investigating about the fraud. The departments include


    It is not a mere coincidence that Maytas is Satyam spelt in reverse way.

    As spelled out in Rajus letter it was an effort to cover -up Satyam Fiasco.

    Raju wanted to acquire Maytas in order to cover up the scam he was cooking,

    but failed miserably. After all isnt Maytas a part of his family business?The answer lies in Maytass burgeoning growth in last 6 -8 years. Maytas is a 2decade old company. However it has been doing remarkably well for the last 6-7 years. Projects worth billions were riding on them.

    Satyams justification for Maytas buyout deal :-

    De-risk the core business

    The integrated organization would be stronger and more diversified todeal with the Uncertainty of the market.

    Feeling that in the recent times it is difficult to make a strategic dealwith other IT companies.

    Reaction of Investors after the announcement of

    Acquisition of Maytas:-

    Investment giant Templeton and Brokerage house CLSA opposed to thisdecision.

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    Result of Investors Reaction:-

    It results that part of investors succeeded to thwart an attempt by theminority- shareholding promoters to use the firms cash reserves to buy out two companies owned by them Maytas Properties andMaytas Infrastructure.

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

    Why he Failed ???? The promoters decided to inflate the revenue and profit figures of


    In the event, the company had a huge hole in its balance

    So to fill up this gap.. Company announced Acquisition of 51% stake in Maytas Infra and 100% stakein Maytas Properties on 16th Dec 2008 but:-

    The deal was not profitable for investors. Inve stors dumped Satyams stock and threatened action against the

    management. This was mainly done to hide the irregularities in the accounts of

    satyam. It is also said the close association with the political leaders is one of the reasons.

    On 7th January 2009, Board Members and Chairman resigned

    after announced involvement in fraud.

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    WHAT WENT WRONG? Inflated figures for cash and bank balances of INR 5,040 cr. (as against INR 5,361 crore reflected in the books).Operating Profit was artificially boosted from the actual 61 cr. to 649cr.Satyam also showed an interest earning of Rs. 376 cr. that wasfictitious.

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    It is surely going to be more difficult for otherIndian IT service players to win business.

    Undoubtedly, this is going to hurt the prospects of foreign money flowing into India.

    Global perception about Indian companies.

    Indian stock market slipped over 7% on 7 th

    Jan., 09.


    1. Employees:- It is very clearly anxious moments, sleepless nights and heartburns for theover 53,000 employees of Satyam Computers as they conjure up worst casescenarios like non-payment of salaries, project cancellations , layoffs andequally bleak prospects outside. As the company's management tries toreassure shocked employees, jobs sites have got flooded from resumes of hundreds of Satyam employees. "Till Tuesday evening, there were about 7,800people 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, thenumbers may be much higher," said Kris Lakshmikanth, CEO of HeadhuntersIndia.

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    However, job consultants believe that in the current economic climate whenthe IT industry is already facing tough time, Satyam employees might have tosettle for lower salaries outside.

    Also, with most IT companies already announcing a hiring freeze, it is anemployers' market .

    2. Customers:-

    The debacle may force the clients of beleaguered Satyam to review theircontracts and look at other offshore suppliers."Satyam clients will naturally be concerned and many clients will be forced toreview their contracts and talk to the other offshore suppliers in the account about potentially taking over work from Satyam," said a Forrester Researchanalyst. According to a senior executive from a rival IT firm, Australiantelecom company Telstra, which contributes $20-25 million to its revenues,had already decided to split a new contract worth $200 million among threeIndian vendors. There was intense competition among Satyam and otheroffshore vendors earlier but Telstra now seems to be more tilted towardsInfosys and EDS- Mphasis. Satyam seems to have lost the race, said theofficial, whose company was one among the bidders for the contract. Anotherpartner and customer of the company, Cisco Systems said that a proposedinvestment in Satyam subsidiary (Satyam Global Lifenet) 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 anorganization remains committed toits customers in (the) Asia Pacific, a region which continues to offer promisinggrowth," 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, NissanMotors and General Motors.

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    3. Shareholders :-

    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 fiascohas come at a time when the sentiment is already brittle and is likely to affect the image of Indian companies among foreign portfolio investors. Fundma nagers said the revival of Indias position as a preferred investment destination would depend on the speed of regulatory action to salvage thesituation. The regulators would have to take drastic measures to regain theconfidence of foreign investors in Indian companies as frauds like these willhave greater implications on emerging markets than developed markets, saida CIO with a leading private mutual fund.

    National Association of Small Investors (NASI), a registered NGO, has filed acomplaint against scam-hit software exporter Satyam Computer ServicesEconomic Offences Department (EOD), for "cheating shareholders andinvestors". Law firms in the US have also filed 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, 2004and January 6, 2009.

    4. General Public:-

    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. Nodoubt, India Inc. reacted with shock and dismay to the scam. The VC and MDof Mahindra and Mahindra, Anand Mahindra in a statement said that thedevelopment had "resulted in incalculable and unjustifiable damage to BrandIndia and Brand It in particular."

    In a write-up in ET, Rahul Bajaj said, "It is likely to dent the public credibilityabout the concepts of corporate governance that the Indian industry has beenso assiduously trying to cultivate for the last ten years."

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    The Indian Government has stated that it may provide temporary direct orindirect liquidity support to the company. Govt. has appointed new board of members for Satyam consisting of heavy weights from India's corporatesector. Satyam is seeking bank loans to help cover salaries and otheroperating expenses


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    What Management could do???

    Change the name of the company.

    Reconstitution of the board: - Restore the management of thecompany and appoint some reputed people as the board of directors.

    Try building confidence in the clients to get back the lost projects.

    The image of the company could be revived by a Series of Press Conferences highlighting the ongoing contracts with theclients.

    It could also be merged with any other software company.

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    Tech Mahindra wins bid for Satyam Scam:-

    Tech Mahindra is paying Rs1757 crore for a 31% stake in thecompany, or Rs 58 per share.

    Satyam Computer Services has now zoomed 15% to Rs 54.20

    ahead of the announcement of the highest bidder for thecompany on April 13, 2009.

    In India this moment was full of praise for the manner andspeed with which the reconstituted board of Satyam ComputerServices found a strategic invest.

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    Internet sources:-