THE SATYAM COMPUTER SCAM-2009

Background

In 1987, two Hyderabadi brothers Mr. Ramalinga Raju (will be referred as Raju for rest of article) and Mr. Rama Raju established an IT firm. They named the business “ SATYAM COMPUTER SERVICES”. They offered services like software development, system maintenance, packaged software integration, business integration and many more.

Satyam Computer Services marched to quick fame and success. In1991, the company was listed on Bombay Stock Exchange. Similarly, in 1991, Satyam Computers got its first Fortune 500 client John Deere and Company. Its business escalated and, in no time Satyam Computers had its operation in 55 countries with more than 500 global companies. A firm started with just 20 employees was soon employing more than 50,000 employees across the continents. While in India, Satyam Computers had already joined the elite group of TCS, Wipro and Infosys.

Milestone of Satyam Computers

Started its business in 1987.
Listed in Bombay Stock Exchange in 1991, IPO oversubscribed by 17 times.
First Fortune 500 client John Deere & Company in 1991.

Joint Venture (JV) with Dun & Bradstreet for Enterprise Solutions in 1996.
JV with Computer Associates in 2000.
Made debut in Nasdaq in 1999 from its internet subsidiary Satyam Infoway.

Listed in the New York Stock Exchange in 2001.

Start of “ THE BIG FALL”

Satyam Computers faced the downfall after the resignation and confession of fraud by Mr. Raju on January 7, 2009. This event is one of the biggest scams in India and also known as “ Satyam Scandal 2009 ”.

Real Estate Boom

The Real Estate Boom in the mid 1990s is the prime factor for the Satyam Scandal. Real estate boom fueled the unethical practices by the responsible individuals of Satyam Computer Services. The scam bubble of Satyam Computers burst after the global crisis of 2008.

During the real estate boom, Mr. Raju purchased ample properties. He considered that he would benefit from these purchases in future. Mr. Raju started to buy the properties under the name of different companies managed by family members. This is so desperate and it is reported that Mr. Raju opened 356 companies to buy properties. Some of the workers who were earning 4 to 5 thousand rupees salaries were given executive positions in such fake companies. The whole real estate investment of Mr. Raju was based on this real estate bubble, which later burst in 2009 when economic recession hit globally.

Hyderabad Metro Project

Mr. Raju later in 2008 founded two big firms “Maytas Infra Limited” and “Maytas Properties”. When the government announced the mega project of Hyderabad Metro, the chairperson of Satyam Computer, Mr. Raju bid and won this project and a consortium of Maytas Infra Limited and Ital Thai were assigned to build this metro project.

The main reason why Mr. Raju was interested in this Hyderabad Metro Project was the real estate investment which he had made around Hyderabad and different places of Chennai and Bengaluru. It was reported that Mr. Raju owned 6,800 acres of land in the outskirts of Hyderabad. With this metro project, Mr. Raju could gain a lot from his real estate investment around Hyderabad. Global recession of 2009 hit the businesses in India. Mr. Raju had difficulty raising money for the businesses as the real estate investment was a big liability and there was no liquidity in the market.

Drama Behind the Curtain : Series of Unethical Behavior

Investment in real estate by Mr. Raju, under various companies and names, started back in 2003. Mr. Raju plugged the money from Satyam Computer Services to his real estate purchases. In 2009, when Mr. Raju confessed, if was found that he manipulated accounts by $1.47 billion i.e. Rs. 7,800 crore. To fulfill the need of liquidity for real estate investment, the chairperson created a years-long series of fake and unethical documents. Such transactions resulted in crores of financial figure manipulation. It was recorded that around 7,500 fake invoices, transactions and false documents were produced. To avoid detection, disclosure, Mr. Raju maintained the accounts and meeting minutes of Satyam Computers by himself.

The money raised by such fraudulent practices was used for purchasing acres of land. Some of the manipulated figures are:

S. No.	Items Rs. in crore	Actual	Reported	Difference
1.	Cash and Bank Balance	321	5361	5040
2.	Accrued Interest on Bank Fixed Deposits	–	376.5	376.5
3.	Understand Liability	1230	–	1230
4	Overstated Debtors	2161	2651	490
	Total	–	–	7136
5	Revenue (Q2 FY 2009)	2112	2700	588
6.	Operating Profit	61	649	588

When Mr. Raju started to represent false financial information, there was a huge gap between real financial position and manipulated financial transactions. Everything was going good, as Mr. Raju used to narrow the gap by injecting the benefit from real estate gain to Satyam Computers, until there came a global recession of 2008-2009 and real estate bubble burst. There was a huge liquidity crisis in the Indian Market and all the property then owned by Mr. Raju became a liability ( not able to sell it when required).

With not enough liquid assets, Mr. Raju faced a big turmoil in Maytas Infra Limited and Maytas Properties, affecting the Hyderabad Metro Project.

Fall of the Empire

There was a slowdown in real estate business due to recession of 2008-09. The plan of Mr. Raju to earn fat and fast profit by selling his real estate investment failed. There was a bad liquidity crisis in “ Maytas Infra Limited” and “Maytas Properties”.

Despite all these difficulties, Mr. Raju came up with another plan to revive his investments. For this, he decided to invest the money (to reflect that the profit earned by Satyam is reinvested i.e. diversified) of Satyam Computer in purchasing the stake of his own companies “Maytas Infra Limited” and “Maytas Properties”. So, he proposed to buy 51% stake of Maytas Infra Limited and 100% stakes of Maytas Properties.

On December 2008, Satyam BOD approved this plan of investment whereas Satyam Institutional Investors disapproved this plan. In Fact out of disapproval, an USA Investor filed a Lawsuit against Satyam. The share price of Satyam Computer Services fell by 55% as investors were concerned about the corporate governance of Satyam. On 23rd December, 2008, the World Bank barred Satyam Computer from doing business with the World Bank for 8 years. With this, three independent directors Mr. Mangalam Srinivasan, Mr. Vinod K Dham and M Rammohan Rao resigned from their responsibilities.

On the other hand, E. Sreedharan, the Metro Man, was on his trial to prove Hyderabad Metro Project as a Real Estate Project and was claiming it to be a fraud. With a lot happening, on 7 January 2009, Mr. Raju resigned from the market regulator Security Exchange Board of India (SEBI), confessing to all financial irregularities. Within no time, this news was forwarded to the Ministry of Corporate Affairs, Institute of Chartered Accountants of India (ICAI) and Institute of Company Secretaries of India (ICSI). In no time, Satyam Computer Scandal is India’s Biggest Accounting Fraud.

Charges and Punishments

After the investigation by the Security Exchange Board of India (SEBI) and Serious Fraud Investigation Office (SFIP), a total of 10 executive level employees were charged in this fraudulent case. The accused in the case are:

Founder and Chairman: B. Ramalinga Raju

Managing Director: B. Rama Raju
Chief Financial Officer: Vadlamani Srinivas
PwC Auditors: Subramani Gopalkrishna & T Srinivas

Ramalinga Raju’s brother: B Suryanarayana Raju
Former Employees: G Ramakrishna, D Venkatapathi Raju & Ch Srisailam
Internal Auditor: VS Prabhakar Gupta

Actions taken

SEBI banned PWC for 2 years and fined Rs 13 crore for not fulfilling the responsibilities. PWC was the external auditor for Satyam Computer Services. PWC failed to recognize more than 7500 fake bills created over 9 years by Satyam Computers. The US Stock Market Regulator also fined PWC for 6$ million.
On 9 January 2009, both brothers Mr. Ramalinga Raju and Mr. Rama Raju was arrested for a fraud worth Rs. 7000 crores.

CBI charged Mr. Raju for Money Laundering through European countries to buy Benami Properties.
The Enforcement Directorate (ED) also charged both brothers , 47 other persons and 166 companies for Money Laundering and seized their properties.
SEBI charged them for Insider Trading and asked to return a profit of Rs 1850 Cr on 12% Interest Rate. Both Mr. Ramalinga Raju and Mr. Rama Raju was banned from investing in the Stock Market for the next 14 years.

On 10 April 2015 Special CBI Court , a sentence of 7 years of rigorous imprisonment was awarded to all culprits including Vadlamani Srinivas the Chief Financial Officer (CFO) , PWC and few others.

Biggest irony is that the CFO and other Executives of the company sold their Shares before the confession of this Fraud. After this confession Satyam Share Price fell to its lowest from Rs 554 to Rs 11.5 due to this Satyam Investors faced a loss of Rs 14,162 Crore in one go.

Reason why Satyam Computers Collapsed

A multi-billion, multi-national company “Satyam Computer Services Pvt. Ltd.” was collapsed within a span of 2 months after Confession of Founder and Chairman Mr. Ramalinga Raju. Such a big scam is not possible without a series of unethical and wrong practices acting together. There are various human and non-human factors that led to this situation and fall of Satyam empire, a company employing 50,000+ employees operating in 60+ companies. Some of the factors that led to this turmoil are:

Unethical Conduct
A case of insider trading

A case of false books and bogus accounting
Lenient and “Yes Man” Board
Unconvinced role of independent directors

Questionable role of audit committee
Dubious role of rating agencies
Questionable role of banks

Fake Audit
False Disclosure

Conclusion

The Satyam Computer Scandal created a huge shock wave in the Indian and related international market. It clearly raised the question of corporate governance and challenged the related authorities and controlling bodies as this fraudulent process lasted for more than 9 years without detection.

Many people were affected directly and indirectly by this scam. But in the end, everyone has something to learn from this case “Satyam Computer Scandal”. Most corporations are aware of corporate governance, the government has revised various acts and proposed various statutory statuses, and provided authority to controlling bodies.

Story of Vijay Shekhar Sharma -Paytm

References:

Iodglobal

NDTV