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Satyam Scandal - Satyam Saga

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Chandra M. Verma
Chandra M. Verma

- Ramalinga Raju is the founder and former CEO of Satyam Computer Services, one of India's largest outsourcing firms, who committed one of India's biggest corporate frauds amounting to $1.3 billion by falsifying the company's accounts. - It was discovered in January 2009 that for several years Raju had inflated cash and bank balances and profits and understated liabilities to cover up Satyam's real financial position. - The fraud had severe negative impacts, including a massive drop in Satyam and Sensex stock prices, loss of customers, and damage to investor confidence in Indian IT companies.

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Economic Times Presentation Satyam-Saga (A)
Black Faces of Indian IT Dinesh Dalmia (DSQ Software) Group 7 - ET Presentation V Chandrashekharan (Pentamedia group) Ramalinga Raju (Satyam) Byrraju Ramalinga Raju is the biggest fraudster in the Indian software industry, but he is not the first. Dinesh Dalmia, Vice-Chairman, DSQ Software, has been in jail for two years. Pentamedia company promoter V Chandrasekaran was found to be in cahoots with tainted broker Ketan Parekh in rigging up share prices.
Satyam A Snapshot Founded in 1987 Listed on NYSE, NSE, BSE, Euronext Controversies Upaid Lawsuit, Worldbank, Maytas acquisition A S Murthy Kiran Karnik "..we would like to assure Satyams customers that our immediate priority is to ensure sustainability of services with minimal disruption.." - Deepak Parekh, Board Member Satyam Deepak Parekh C Achuthan Major Satyam Clients
Satyam Current News Satyam Loses 46 Customers to Rivals (Economic Times Reports) Applied Materials Inc., Nissan Motor Co., Sony Corp., State Farm Mutual Automobile Insurance Co. to name a few - Dt. 17-Mar-09 Group 7 - ET Presentation
Group 7 - ET Presentation 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 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 2007 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
Satyam : Dec-2008 to Jan-2009 Group 7 - ET Presentation
Group 7 - ET Presentation Raju and family own up to 35% stakes in Maytas. Raju was siphoning the money from Satyamto Maytas since last 6 years. With Satyam in deep cash crunch, Raju wanted to buy Maytas to cover up Satyams inflated cash. Last attempt to fill the fictitious assets with real ones failed. Raju nailed a hole in a sinking ship Satyam. Satyam to buy Maytas Prop ($1.3 bn) & 51% stake in Maytas Infra ($300 mn) Deal to be financed by Satyams surplus cash Satyams share prices fell reflecting share holders disbelief. Valuation of Maytas turned out to be fraudulent Satyams secret back office Maytas riding a Tiger, not knowing how to get off
Group 7 - ET Presentation What happened next???
Group 7 - ET Presentation The Balance Sheet carries as of September, 30, 2008: Inflated Cash and Bank balance of Rs. 5,040 Crores Accrued interest of Rs. 376 Crores which is non-existent Understated liability of Rs. 1,230 Crores Over stated debtors position of Rs. 490 crores For the September Q2, reported a revenue of Rs. 2700 Crores and an operating margin of Rs. 649 Crores as against the actual revenues of Rs. 2,112 Crores and an actual operating margin of Rs.61 Crores ( 3% of revenues) . This has resulted in artificial cash & bank balances going up by Rs. 588 Crores in Q2 alone. Immediate Market Reaction: Sensex stock index dropped 7.3% Satyam shares fell nearly 78% Rajus Confession on 7th Jan09
Satyam Vs Enron Vs Group 7 - ET Presentation Malpractices amounting worth USD 1.3 billion Masterminded by its founder-owner R Raju (CEO) and his brother SENSEX tanked 7.2 % when Raju announced of the fraud Government appointed new auditors KPMG and Deloitte Government guaranteed safety of jobs for all 53,000 employees Accounting books were manipulated in conspiracy with its auditor Arthur Andersen NYSE tanked 0.9% when Enron filed for bankruptcy Government created Sarbanes Oxley Act US S.E.C. revoked CPA license of Arthur Andersen Satyam Enron Scott Sullivan (CFO), David Myers and Buford Buddy Yates (Director of General Accounting) used fraudulent accounting methods to mask its declining earnings Arthur Andersen withdrew its audit opinion for 2001 Government created Sarbanes Oxley Act Worldcom
Group 7 - ET Presentation Comments from Wharton Professors: "If there were one or two more such accounting scandals in the next six months, it would make international investors more wary. Foreign investors will look a little more askance at accounting data from India. And that may not be a bad thing. "When you have companies that are ostensibly growing their top lines at 30%, 40% or 50%, it is possible to paper over things. When growth rates slow down, you are unable to hide the financial reality of how much cash you actually have. It is possible that during this slowdown period, more scandals will come to light. shocking, painful & a good warning for other companies in the sector. We reaffirm our commitment that well focus on creating value for our customers with the same passion that we have demonstrated in the past while maintaining the highest ethical and governance standards. Experts Reaction
Perfect Auditors!!! Group 7 - ET Presentation
Role of PWC PWC Satyams auditors since Jun 2000 Credibility of PWC???...amount too big to be noticed PWC: our audit in accordance with the auditing standards generally accepted in India Satyam's financial statements are the responsibilities of the company's management under Satyams management controls over financial reporting and auditing Audit reports between June 2000 to September 2008 unreliable Group 7 - ET Presentation
Role of Independent Directors SEBI's Listing Agreement, calls for certain proportion of independent directors in the board. Companies appoint luminaries to the boards. Key Responsibilities protect interest of shareholders and strategy of the organization. Satyams Case - approval of buyout weakened the credibility of independent spirit. Future Impact - Independent directors will try to gain a greater understanding of a companys business. Group 7 - ET Presentation
The fallout Two class action suits files in US by shareholders of Satyams ADRs ICAI : Issued two revised accounting standards SA 500 and SA 720 to enhance quality of audits (effective April 1, 2010) Joint Audits for companies Scheme of rotation of auditors Planning to set up a rating system for corporate governance Planning to set up a serious fraud detection cell to assist regulators like RBI and SEBI to prevent similar incidents in future Government: Reviewing The Chartered Accountant Act, 1949, and the Chartered Accountant Regulations, 1988 to plug loopholes Serious Fraud Investigation Office (SFIO) of Ministry of Corporate Affairs probing accounts of 325 companies tied to Raju and family SEBI: Asks promoters of listed companies to disclose whether they have pledged shares Places PWC under probe Group 7 - ET Presentation
Today Board decides to sell 51% stake Prospective bidders must: Submit detailed expression of interest Show at least $290 million dollars on books by March 20 th Eligible buyers will gain access to business, financial and legal documents Potential suitors: Larsen & Toubro (has 12% stake) B.K. Modis Spice Group Tech Mahindra iGate IBM and others Fidelity Open offer of at least 20% of shares after acquiring up to 31% through a preferential allotment Group 7 - ET Presentation
Thank You ! Group 7 - ET Presentation

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Satyam Scandal - Satyam Saga

  • 1. Economic Times Presentation Satyam-Saga (A)
  • 2. Black Faces of Indian IT Dinesh Dalmia (DSQ Software) Group 7 - ET Presentation V Chandrashekharan (Pentamedia group) Ramalinga Raju (Satyam) Byrraju Ramalinga Raju is the biggest fraudster in the Indian software industry, but he is not the first. Dinesh Dalmia, Vice-Chairman, DSQ Software, has been in jail for two years. Pentamedia company promoter V Chandrasekaran was found to be in cahoots with tainted broker Ketan Parekh in rigging up share prices.
  • 3. Satyam A Snapshot Founded in 1987 Listed on NYSE, NSE, BSE, Euronext Controversies Upaid Lawsuit, Worldbank, Maytas acquisition A S Murthy Kiran Karnik "..we would like to assure Satyams customers that our immediate priority is to ensure sustainability of services with minimal disruption.." - Deepak Parekh, Board Member Satyam Deepak Parekh C Achuthan Major Satyam Clients
  • 4. Satyam Current News Satyam Loses 46 Customers to Rivals (Economic Times Reports) Applied Materials Inc., Nissan Motor Co., Sony Corp., State Farm Mutual Automobile Insurance Co. to name a few - Dt. 17-Mar-09 Group 7 - ET Presentation
  • 5. Group 7 - ET Presentation 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 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 2007 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
  • 6. Satyam : Dec-2008 to Jan-2009 Group 7 - ET Presentation
  • 7. Group 7 - ET Presentation Raju and family own up to 35% stakes in Maytas. Raju was siphoning the money from Satyamto Maytas since last 6 years. With Satyam in deep cash crunch, Raju wanted to buy Maytas to cover up Satyams inflated cash. Last attempt to fill the fictitious assets with real ones failed. Raju nailed a hole in a sinking ship Satyam. Satyam to buy Maytas Prop ($1.3 bn) & 51% stake in Maytas Infra ($300 mn) Deal to be financed by Satyams surplus cash Satyams share prices fell reflecting share holders disbelief. Valuation of Maytas turned out to be fraudulent Satyams secret back office Maytas riding a Tiger, not knowing how to get off
  • 8. Group 7 - ET Presentation What happened next???
  • 9. Group 7 - ET Presentation The Balance Sheet carries as of September, 30, 2008: Inflated Cash and Bank balance of Rs. 5,040 Crores Accrued interest of Rs. 376 Crores which is non-existent Understated liability of Rs. 1,230 Crores Over stated debtors position of Rs. 490 crores For the September Q2, reported a revenue of Rs. 2700 Crores and an operating margin of Rs. 649 Crores as against the actual revenues of Rs. 2,112 Crores and an actual operating margin of Rs.61 Crores ( 3% of revenues) . This has resulted in artificial cash & bank balances going up by Rs. 588 Crores in Q2 alone. Immediate Market Reaction: Sensex stock index dropped 7.3% Satyam shares fell nearly 78% Rajus Confession on 7th Jan09
  • 10. Satyam Vs Enron Vs Group 7 - ET Presentation Malpractices amounting worth USD 1.3 billion Masterminded by its founder-owner R Raju (CEO) and his brother SENSEX tanked 7.2 % when Raju announced of the fraud Government appointed new auditors KPMG and Deloitte Government guaranteed safety of jobs for all 53,000 employees Accounting books were manipulated in conspiracy with its auditor Arthur Andersen NYSE tanked 0.9% when Enron filed for bankruptcy Government created Sarbanes Oxley Act US S.E.C. revoked CPA license of Arthur Andersen Satyam Enron Scott Sullivan (CFO), David Myers and Buford Buddy Yates (Director of General Accounting) used fraudulent accounting methods to mask its declining earnings Arthur Andersen withdrew its audit opinion for 2001 Government created Sarbanes Oxley Act Worldcom
  • 11. Group 7 - ET Presentation Comments from Wharton Professors: "If there were one or two more such accounting scandals in the next six months, it would make international investors more wary. Foreign investors will look a little more askance at accounting data from India. And that may not be a bad thing. "When you have companies that are ostensibly growing their top lines at 30%, 40% or 50%, it is possible to paper over things. When growth rates slow down, you are unable to hide the financial reality of how much cash you actually have. It is possible that during this slowdown period, more scandals will come to light. shocking, painful & a good warning for other companies in the sector. We reaffirm our commitment that well focus on creating value for our customers with the same passion that we have demonstrated in the past while maintaining the highest ethical and governance standards. Experts Reaction
  • 12. Perfect Auditors!!! Group 7 - ET Presentation
  • 13. Role of PWC PWC Satyams auditors since Jun 2000 Credibility of PWC???...amount too big to be noticed PWC: our audit in accordance with the auditing standards generally accepted in India Satyam's financial statements are the responsibilities of the company's management under Satyams management controls over financial reporting and auditing Audit reports between June 2000 to September 2008 unreliable Group 7 - ET Presentation
  • 14. Role of Independent Directors SEBI's Listing Agreement, calls for certain proportion of independent directors in the board. Companies appoint luminaries to the boards. Key Responsibilities protect interest of shareholders and strategy of the organization. Satyams Case - approval of buyout weakened the credibility of independent spirit. Future Impact - Independent directors will try to gain a greater understanding of a companys business. Group 7 - ET Presentation
  • 15. The fallout Two class action suits files in US by shareholders of Satyams ADRs ICAI : Issued two revised accounting standards SA 500 and SA 720 to enhance quality of audits (effective April 1, 2010) Joint Audits for companies Scheme of rotation of auditors Planning to set up a rating system for corporate governance Planning to set up a serious fraud detection cell to assist regulators like RBI and SEBI to prevent similar incidents in future Government: Reviewing The Chartered Accountant Act, 1949, and the Chartered Accountant Regulations, 1988 to plug loopholes Serious Fraud Investigation Office (SFIO) of Ministry of Corporate Affairs probing accounts of 325 companies tied to Raju and family SEBI: Asks promoters of listed companies to disclose whether they have pledged shares Places PWC under probe Group 7 - ET Presentation
  • 16. Today Board decides to sell 51% stake Prospective bidders must: Submit detailed expression of interest Show at least $290 million dollars on books by March 20 th Eligible buyers will gain access to business, financial and legal documents Potential suitors: Larsen & Toubro (has 12% stake) B.K. Modis Spice Group Tech Mahindra iGate IBM and others Fidelity Open offer of at least 20% of shares after acquiring up to 31% through a preferential allotment Group 7 - ET Presentation
  • 17. Thank You ! Group 7 - ET Presentation

Editor's Notes

  1. Euronext N.V. is a pan- European stock exchange based in Paris [1] and with subsidiaries in Belgium , France , Netherlands , Luxembourg , Portugal and the United Kingdom . In addition to equities and derivatives markets, the Euronext group provides clearing and information services. As of 31 January 2006, markets run by Euronext had a market capitalization of US$2.9 trillion, making it the 5th largest exchange on the planet. [2] Euronext merged with NYSE Group to form NYSE Euronext , the "first global stock exchange".