by

Anusha,
Sumanth,
Ravindra,
Rambabu,
Murali

BUSINESS ETHICS AND GOVERNANCE
Satyam scandal
DOWN MEMORY LANE @ Satyam
1987 : Incorporated as Pvt. Ltd. Company
1988-1992 : IPO
1993-1996 : Satyam Technology Centre established
1997-2000 : Presence in 30+ countries
2001-2004 : Founded Satyam BPO
2005-2008 : Acquisition of Bridge Strategy, CitiSoft, Knowledge
Dynamics, Nitor Solutions, S&V Management
2009 : On 7
th
January, erstwhile chairman declared that the
companys profit had been overstated for several years
13
th
April 2009 : TECH MAHINDRA acquired majority stake in
Satyam
21
st
June 2009 : New brand MAHINDRA SATYAM launched
It should be noted that Satyam was the 1
st
Indian company to be
listed on 3 international stock exchanges i.e. NYSE, DOW and
EURONEXT
Major Satyam Clients
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 were artificially boosted from the actual 61
cr. to 649 cr.

Satyam also showed an interest earning of Rs. 376 cr. that
was fictitious.

An over stated debtors position of Rs. 490 crore (as against
Rs. 2651 reflected in the books)


Slippery Slope to Disaster
December08 brought news of pending litigation by a former client,
online mobile-payments service Upaid Systems which filed a case of
intellectual fraud and forgery against Satyam in 2008

World Bank banned Satyam from doing any of its work after it found
Satyam employees had hacked into its system and gained access to
sensitive information. It also did not renew their five-year contract

On Dec. 16, when Raju announced the company would spend $1.6
billion to buy Maytas only to reverse the decision a few hours later
under shareholder pressure. Satyam ADRs lost 50% of their value
overnight




Satyams secret back office Maytas


It is not a mere co-incidence that Maytas is Satyam spelt in reverse
way. It was an effort to cover up Satyam fiasco.

Maytas is actually run by Satyam Family. It includes Maytas Properties
& Maytas Infra Ltd.

Maytas was a 2 decade old company. It had been doing remarkably
well in the past 6-7 years and projects worth billions were riding upon
them.
RAJUS PROPOSAL FOR MAYTAS

It all began on 16-12-2008, when Raju thought, buying an
infrastructure firm made sense!

Satyam to buy Maytas Properties for $ 1.3 billion and 51% stake in
Maytas Infra for $ 300 million

Deal to be financed by Satyams surplus cash.

Raju said that the deal was in complete interest of the investors and
informing them was unnecessary


WHAT WAS THE REALITY?
Raju and family own up to 35% stake in Maytas

Raju had shown a swollen gross margin in the period of July-
December by almost 600 crores (meaning, swollen records of 1000
crores in a year). So it would take him about 5-6 years to show an
accumulated wealth of over 5000 crores (Satyams supposed cash
reserve)

Raju was siphoning the money from Satyam to Maytas since last 6
years. With Satyam in deep cash crunch, Raju wanted to buy Maytas
to cover up Satyams inflated cash

Rajus last attempt to fill the fictitious assets with the real ones failed
and he nailed a hole in the sinking ship Satyam
Reaction of Investors
The shareholders realised that the buyout was not profitable for them.
Satyam using the reserve cash to purchase Maytas Infra and Maytas
Properties was a big risk.
Result of Investors Reaction
It results that part of investors succeeded to thwart an
attempt by the minority-shareholding promoters to use the
firms cash reserves to buy out two companies owned by
them Maytas Properties and Maytas Infra.
That aborted attempt at expansion precipitated a collapse
in the price of the companys stock and a shocking
confession of financial manipulation and fraud from its
chairman, B. Ramalinga Raju.



The promoters decided to inflate the revenue and
profit figures of Satyam. In the event, the company had a
huge hole in its balance sheet, consisting of non-existent
assets and cash reserves that have been recorded and
liabilities that are unrecorded.
The Scam
On 7 January 2009, companys previous Chairman Ramalinga Raju
resigned after notifying board members and the Securities and
Exchange Board of India (SEBI) that Satyam's accounts had been
falsified.
Raju confessed that Satyam's balance sheet of 30 September 2008
contained:
1. Inflated figures for cash and bank balances of Rs 5,040 crores as against
Rs 5,361 crore reflected in the books.
2. An accrued interest of Rs. 376 crore which was non-existent.
3. An understated liability of Rs. 1,230 crore on account of funds was
arranged by himself.
4. An overstated debtors' position of Rs. 490 crore (as against Rs. 2,651
crore in the books.


ACTUAL DEBT
WAS 2161.
OVERSTATED
490 CRORES.
ACTUAL CASH
IN BANK WAS
321 CRORES,
INFLATED
5040 CR.
NO ACCRUED
INTEREST
376.34 CR.
UNDERSTATED
LIABILITY 1230
Cr. Which was
ARRANGED BY
MR.RAJU
5,040 + 376
+ 490 (Rs.
Cr)
Rs. 1,230 Cr
Rs. 7,136
Cr




Actual scenario

Despite the shareholders not being taken into confidence, the directors went
ahead with the management's decision.

The government too is equally guilty in not having managed to save the
shareholders, the employees and some clients of the company from losing
heavily.

Simple manipulation of revenues and earnings to show superior
performance.

Raising fictitious bills for services that were never rendered.

To increase the Cash & bank balance correspondingly.

Operating profits were artificially boosted from the actual Rs 61 crore to Rs
649 crore.





Its financial statements for years were totally false, cooked up and...

Never had Rs 5064 crores (US$ 1.05 Billion) shown as cash for several years.

Its liability was understated by $ 1.23 Billions.

The Debtors were overstated by 400 million plus.

The interest accrued and receivable by 376 Millions never existed. So when
the case came in light following are the actions that has been taken:

Nasscum sets up panel to avoid satyam like case in future- formed a corporate
Governance & ethics committee, chaired by N.R.Narayana Murthy (chairman
and chief mentor of Infosys.)

8 Year ban on satyam to be reviewed.





Corporate governance issues @
Satyam


Governance issue at Satyam arose because of non fulfillment of obligation of the
company towards the various stakeholders. It proved a poor relationship with all
the stakeholders.

It is well known that a shareholder has a right to get information from the
organization, such information could be with respect to the merger and
acquisition. Shareholders expect transparent dealing in an organization. They
even have right to get the financial reporting and records.

In the case of satyam, the above obligations were never fulfilled. The acquisition
of Maytas infrastructure and properties were announced without the consent
of shareholders. They were even provided with false inflated financial reports.
The shareholders were cheated.





Employees were shown with a inflated figure.
The excess of employees in the organization were kept under VIRTUAL POOL
who received just 60% of their salaries and several were removed.
The entire scam had its impact on management.
Questions were raised over the credibility of management.

Any organization has its obligation towards the Government by means of timely
payment of taxes and abiding by the rules and laws framed up by the
Government. As per the case with Satyam , the company did not pay advance
tax for the financial year 2009. As per the rule, the advance taxis to be paid
4 times a year; such was not fulfilled by them.

SCS was blacklisted by world Bank over charges of Bribery. It was declared
ineligible for contracts to providing

1. Improper benefit to bank staff.
2. Failing to maintain documentation to support fees.
Ethical Issues Involved
Not following corporate governance norms.
Tampering the financial data.
Misleading the shareholders fund.
Putting self-interest at the expense of shareholders interests.
Recommendations to avoid tragedies
like Satyam in the future.
The Satyam fiasco, makes it imperative that corrective measures need to be
taken at the earliest to stem the rot.
Government needs to set up a Board of Audit, is empowered to conduct
surprise audit or on complaints of whistle-blowers.
The same auditor should not be allowed to continue for more than 3 years
with a Company.
Cross-directorships must be banned.
Incentives should be provided to Whistle-blowers.
Laws should be made more stringent.
The Department of Corporate Affairs should create a pool of independent
directors with high integrity and prescribe for them adequate remuneration.
The conviction rate in corporate frauds, currently under a pathetic 5 per
cent, must be improved.
The law and administration should come down heavily on breach of trust
and fraud.


Conclusion
Satyam scam is unparalleled in the corporate history of India, and as some
keen corporate observers point out, the world itself.
The idea of a corporation, and the values and principles that should guide
its governance have hardly been imbibed by promoters.
An careless administration, ill-equipped regulatory system and terribly
delayed justice delivery process only make things easier for the corporate
crooks to make a killing.
Corporate governance framework needs to be implemented in letter as
well as spirit. The increasing rates of white collar crimes demands stiff
penalties and punishment.
Creating an awareness of the large consequences of small lies may help
some to avoid this trap.