Shame for corporate India Shame for corporate India

Prepared by Aranya Adhikari 13 Mukul Varma 25 Pawan Mittal 32 Satendra Agrawal 45 Sanjay Singh 43

The Satyam Story Founded in : 1987 Profile : IT Services Head Quarter : Hyderabad, India Deals in : Application development & maintenance, Extended engineering solutions, Infrastructure management services Business Process Outsourcing Listed in : New York Stock Exchange ( 1 st Indian IT Inc. to be listed in NASDAQ) & Euronext

The Satyam Story Customers : 654 global companies ( including 185 Fortune 500 Co. ) : In 67 countries across 6 continents Development centre abroad : US, UK, UAE, Canada, Hungary, Singapore, Malaysia, China, Japan, Egypt & Australia Development centre in India : Hyderabad, Bangalore, Chennai, Pune, Mumbai, Nagpur, Delhi, Kolkata, Bhubaneswar, Visakhapatnam

Board of Directors Executives Directors : Mr. B. Ramalinga Raju (Founder & Chairman) Mr. B. Rama Raju (Co-Founder & CEO) Non-Executive Directors : Mr. V. P. Rama Rao, IAS (Retd.) Dr. (Mrs.) Mangalam Srinivasan Prof. Krishna G. Palepu Mr. Vinod Dham Mr. S V Krishnan Mr. Vijay Prasad Independent Directors : Mr. Prabhakar Gupta ( Ex-dean, ISB ) Mr. Keshab Panda Mr. Virender Agarwal Mr. A S Murthy

Key Stats

The basic Issue Is the Satyam scandal just about a promoter manipulating the financial statements of his company to show a superior performance? Is the Satyam scandal just about a promoter manipulating the financial statements of his company to show a superior performance? Is it about systematic siphoning of funds from the company over the years? Is it about systematic siphoning of funds from the company over the years? Emerging events seem to increasingly point to the latter. Emerging events seem to increasingly point to the latter.

The Story unfolds Satyam on December 16, 2008, announced acquiring of - Maytas properties and Maytas Infra The BOD of Satyam had approved the founder’s proposal to buy 51 per cent stake in Maytas Infrastructure and 100 % in Maytas Properties The total outflow for both the acquisitions was US$ 1.6 bn comprising of : US$ 1.3 bn -100% stake in Maytas Properties & US$ 0.3 bn for the 51% stake in Maytas Infra This is the move that sparked a row over alleged violation of corporate governance laws.

Reaction of Investors on acquisition of Maytas Reaction of Investors on acquisition of Maytas Investment giant Templeton and brokerage house CLSA opposed to this decision Investment giant Templeton and brokerage house CLSA opposed to this decision Result of Investor’s Reaction Result of Investor’s Reaction Part of investors succeeded to thwart the attempt Part of investors succeeded to thwart the attempt Satyam's investors lost about INR 3,400 crore in the related panic selling Satyam's investors lost about INR 3,400 crore in the related panic selling Satyam's shares fell 55% on the New York Stock Exchange Satyam's shares fell 55% on the New York Stock Exchange Three members of the board of directors resigned on Monday 29th Dec Three members of the board of directors resigned on Monday 29th Dec On 7 January 2009, company Chairman Ramalinga Raju resigned after notifying its board members and the SEBI that he had falsified accounts. On 7 January 2009, company Chairman Ramalinga Raju resigned after notifying its board members and the SEBI that he had falsified accounts.

Signs not noticed……

The Story …. Raju and his family held below 10% of the company’s Equity Raju and his family held below 10% of the company’s Equity Accounts in the names of relatives used to divert money and carry out insider trading Accounts in the names of relatives used to divert money and carry out insider trading Funds siphoned off from Satyam to Maytas Infra, Maytas Properties & various others Funds siphoned off from Satyam to Maytas Infra, Maytas Properties & various others Diversion of Rs crores from an overseas bank account Diversion of Rs crores from an overseas bank account This deal was not profitable for investors. So after this announcement they started to raise their voices against the deal This deal was not profitable for investors. So after this announcement they started to raise their voices against the deal

The Story continues Maytas Infra Maytas Infra The company is run by the sons of Ramalinga Raju The company is run by the sons of Ramalinga Raju It was started in the late 1980’s by Ramalinga Raju It was started in the late 1980’s by Ramalinga Raju The main reason for the debacle of Maytas Infra is due to the debacle of Satyam The main reason for the debacle of Maytas Infra is due to the debacle of Satyam Maytas Properties Ltd Maytas Properties Ltd One of the reasons for the debacle of Maytas properties is the ongoing economic slowdown One of the reasons for the debacle of Maytas properties is the ongoing economic slowdown The Company has huge land banks and the prices have dropped down in the real estate significantly The Company has huge land banks and the prices have dropped down in the real estate significantly

Satyam’s justification for Maytas buyout deal Satyam’s justification for Maytas buyout deal de-risk the core business de-risk the core business the integrated organization would be stronger and more diversified to deal with the uncertainty of the market the integrated organization would be stronger and more diversified to deal with the uncertainty of the market feeling that in the recent times it is difficult to make a strategic deal with other IT companies. feeling that in the recent times it is difficult to make a strategic deal with other IT companies.

Satyam’s financial statements for years were totally false, cooked up Satyam’s financial statements for years were totally false, cooked up Never had Rs 5064 crores (US$ 1.05Billion) shown as cash for several years Never had Rs 5064 crores (US$ 1.05Billion) shown as cash for several years Its liability was understated by $ 1.23 Billions Its liability was understated by $ 1.23 Billions The Debtors were overstated by 400 million plus The Debtors were overstated by 400 million plus Actual Operating Margin Rs.61 Cr. Actual Operating Margin Rs.61 Cr. Reported- Rs.649 Cr Reported- Rs.649 Cr ( Created an Artificial Revenue of Rs. 588 Cr.) ( Created an Artificial Revenue of Rs. 588 Cr.) Facts behind the story….

Role of auditors : Role of auditors : PWC confirmed that two auditors appointed by Satyam Computer, were not partners of the audit firm at that point of time. Auditors do bank reconciliation to check whether the money has indeed come or not. They check bank statements and certificates. Is it total lapse in supervision or were the bank statements forged ?. PWC has written a letter to the BOD of Satyam that its audit may be rendered "inaccurate and unreliable“ due to disclosures made by Raju. Questions…….

Role of Role of SEBI : The SEBI had in December,2008 given a clean chit to Satyam in the probe on violation of corporate governance law Role of Banks Role of Banks : If the auditors were conned, it means that the bank statement and certificates were forged Satyam's banks -- ICICI Bank, HDFC Bank, Bank of Baroda, etc Questions……….

Role of Independent Directors : Role of Independent Directors : Despite the shareholders not being taken into confidence, the directors went ahead with the management's decision Role of Government : Role of Government : 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 Political angle : Protection – Why ?? Political angle : Protection – Why ?? Questions……….

Rich potential for scams in India Rich potential for scams in India Clear need for systems to prevent such scams. Clear need for systems to prevent such scams. The monitoring mechanism of Auditors, Sebi and the Independent directors were either compromised or duped. The monitoring mechanism of Auditors, Sebi and the Independent directors were either compromised or duped. Many more Satyams might be in the offing….. Many more Satyams might be in the offing….. The Path ahead….

‘Quis custodiet ipsos custodes? ’ Police the policemen – ?? ‘Quis custodiet ipsos custodes? ’ Police the policemen – ?? The US found its way – SOX act. The US found its way – SOX act. India needs to find what works here India needs to find what works here We can take lessons from US - We can take lessons from US - - Personal criminal liability of Fraud - Personal criminal liability of Fraud - Statutory Auditors to be rotated after a period specified by regulation - Statutory Auditors to be rotated after a period specified by regulation - Detailed financial disclosures - Detailed financial disclosures

‘Quis custodiet ipsos custodes? ’ Police the policemen – ?? Regulations to limit auditors from other roles like financial consulting. Regulations to limit auditors from other roles like financial consulting. Detailed procedure for related party transactions. Detailed procedure for related party transactions. And many more………… And many more…………

Thanks