About the Corporate Governance in Satyam

8/4/2019 About the Corporate Governance in Satyam

1/31

ABOUT THE CORPORATE GOVERNANCE IN SATYAM

The Satyam episode has sparked a big debate on whether India possesses

adequate laws and guidelines forcorporate governance

Risk

managers say that while India has no dearth of such provisions in various

enactments, the real issue emanates from the ability to follow these provisions in

spirit and the means to monitor and enforce the same.

The law makers in India, they believe, need to ascertain the merits of

encouraging a principle-based approach (like in the case of the combined code in

the UK) to compliance - where the nature, size and complexities of a business

govern compliance and disclosures - instead of a standard rules based approach

for universal compliance (like in the US). Says Monish Chatrath, national markets

leader, Grant Thornton: Companies in India must have the flexibility to ascertain

those aspects which are practical to comply with and others where they can

provide suitable and logical explanations for non compliance. This will enable

them demonstrate their true intend to comply, where practical, and make totransparent disclosures in other cases.

Chatrath also feels there is a need for a clear distinction between corporate

governance norms for publicly listed entities and for other forms ofbusinesses

involving a relatively limited set of stakeholders. According to him, market

capitalisation, size and complexity of a business are other parameters which may

be used to distinguish between various governance requirements.

The Satyam scandal has, ironically, uncovered the second most populated

country in the world, of having a problem with numbers in terms of finding the

requisite number of directors who can exercise their independence while

influencing decisions of the board. The challenge for India Inc, believe industry
http://economictimes.indiatimes.com/articleshow/3961783.cmshttp://economictimes.indiatimes.com/articleshow/3961783.cmshttp://economictimes.indiatimes.com/articleshow/3961783.cmshttp://economictimes.indiatimes.com/articleshow/3961783.cmshttp://economictimes.indiatimes.com/articleshow/3961783.cmshttp://economictimes.indiatimes.com/articleshow/3961783.cmshttp://economictimes.indiatimes.com/articleshow/3961783.cmshttp://economictimes.indiatimes.com/articleshow/3961783.cmshttp://economictimes.indiatimes.com/articleshow/3961783.cms


2/31

experts, is to come out of the mindset that only well known personalities can be

nominated as independent directors.

The entire process through which independent directors are identified,

nominated and recruited needs a careful introspection. The visibility and market

perception or relationships with the promoters should not be the only criteria

while choosing independent directors,

Satyam fraud is symptomatic of the Economy of shock and surprise that we live

in. These frauds have beenintegral part of corporate history. The disclosures

show that our radars have become stronger and societys tolerance of corporatemisdemeanours has reached its limits. Meltdown is a punishment inflicted by

investors on greedy hedge fund managers and private equity manipulators. The

heads of five top investment banks who were active participants in the Wall

Street Ponzi scheme called credit default swaps lost $2.2 billion of their personal

wealth in 2008. The world would never have known about the fraud had a few

shareholder activists not been persistent in opposing the unanimously approved

resolution of 16 December 2008 acquiring the property company owned by the

son of the promoter at an extortionate price.

This was stated by Dr Madhav Mehra, the President of the World Council for

Corporate Governance, UK at the 19th World Congress on Leadership in the

Economy of Surprise, Wrenching Change and Contradiction concluded recently

in Mumbai.

Dr Mehra added , Satyam gives India opportunity to lead the world by better

enforcement of Clause 49 through proper selection, training , evaluation and

monitoring of directors. The main problem of the Indian boards is their sameness.

Same directors find seats on all the boards. That encourages cozy relationship.

We need to encourage dissent, diversity, difference, dialogue and disclosure. To

make it happen we dont need more laws but more training both of directors and


3/31

investors." Dr Mehra lamented "the institution of independent directors is a myth

world over for two reasons: they depend on CEO for their remuneration. The

dependence has only increased with phenomenal rise in their remunerations. It is

difficult for people to understand something when their salary depends on not not

understanding it. Secondly as per a survey conducted by the WCFCG, the

average time spent by independent directors inboard meetings in a year is 14

hours. Better training will ensure that independents engage themselves in

committee work such as audit committee, risk management committee,

nomination committee and remuneration committee."

"Good news is that Satyam fraud has raised the bar on corporate governance.

For the first time corporate governance has become a household world. Marketshave punished companies with poor corporate governance. The fraud exposes

involvement of big names such as Price Water house Coopers. This shows

inadequacy of even draconian legislations like Sarbanes Oxley Act to curb

frauds. The fraud also exposed stock market's worst disease - the insider

trading.Respectable financial institutions profited by offloading Satyam shares

just before Rajus confessions. Satyam has done more to raise the corporate

consciousness than Sarbanes Oxley Act. nsider trading is a worldwide

phenomenon and has been reported by many regulators with little enforcement.

Linda Chapman Thompsen, Enforcement Director of Securities and Exchange

Commission of US, warned last year that insider trading in Wall Street had

become worse than during Ivan Boesky's time. The tippers and tip pees have

been in senior positions of trust and confidence". Warnings made little difference

because western governments themselves play hostage to the big financiers and

are scared of regulating them lest they move their assets to lightly regulated

territories.Wall Street has seen worst destruction of shareholder values since the

depression of 1929.India's intense reaction to Satyam crisis may be a defining

moment to curb this corporate greed, added Dr Mehra.

India's Enron


4/31

Scandal hits Indias flagship industry

SATYAM means truth in Sanskrit, an ancient Indian language. On January 7th

Satyam Computer Services, one of the countrys biggest software and services

companies, revealed some alarming truths about Indian capitalism, even in its

spiffiest industry. The companys founder and chairman, B. Ramalinga Raju,

confessed to a $1.47 billion fraud on its balance sheet, which he and his brother,

Satyams managing director, had disguised from the companys board, senior

managers and auditors for several years. It was like riding a tiger, not knowing

how to get off without being eaten,.

The tiger carried Mr Raju deep into the woods. Quarter after quarter, he inflated

Satyams profits, even as operations expanded and costs grew. The company,

which is listed on both the New York Stock Exchange (NYSE) and the Bombay

Stock Exchange, now claims to have 53,000 employees, and customers in 66

countries, including 185 companies in the Fortune 500. In its books for the third

quarter it reported 50.4 billion rupees ($1.03 billion) of cash and 3.76 billion of

earned interest that do not in fact exist. It also understated its liabilities by 12.3

billion rupees and overstated the money it is owed by 4.9 billion.

The ride took a final turn on December 16th, when Mr Raju tried to buy two firms

owned by his family, Maytas Properties and Maytas Infra, for $1.6 billion.

Satyams supine board approved the proposal but shareholders revolted. They

thought it was a brazen attempt to siphon cash out of Satyam, in which the Raju

family held a small stake, into firms the family held more tightly. In fact, it turns

out, it was Mr Rajus last desperate attempt to plug the hole in Satyams balance

sheet with Maytass assets.

The deal was swiftly aborted. In the aftermath, four non-executive directors quit,

hoping to salvage their own credibility, and Mr Rajus creditors came knocking.

They dumped most of the Satyam shares he had pledged as collateral for the

12.3 billion rupees in loans. The ride was over. The daunting task of rescuing


5/31

Satyam falls to Ram Mynampati, its chief operating officer, who is now interim

chief executive.

The task of rehabilitating corporate India is equally daunting. It has long basked

in the reflected glory of its information-technology firms. Run by cerebral, clean-

living professionals, they employ Indias brightest youngsters and serve the

bluest of blue-chip companies. These digital ambassadors have lent corporate

India a certain mystique, says Sharmila Gopinath of the Asian Corporate

Governance Association (ACGA), based in Hong Kong. But that reputation rests

largely on the efforts of one or two companies, such as Infosys, which are

impeccably run. Investors delude themselves if they think standards in most

Indian technology firms, let alone the rest of its 9,000 listed companies, are closeto those set by Infosys.

The illusion persists because it is not easy to gauge corporate governance

objectively. ACGAs own 2007 ranking of corporate governance placed India third

out of 11 Asian countries, behind Hong Kong and Singapore, but far ahead of

China, in ninth place. Indias financial-reporting standards are high, its principal

regulator, the Securities and Exchange Board of India, is independent of the

government, and its business press is enthusiastic. But enforcement is weak,

loopholes large, and shareholder activism is lacklustre. There is virtually no

voting by poll at AGMs, ACGA notes, and meetings are often held in remote

locations.

The government has introduced a new companys bill, which would allow

shareholders to pursue class-action lawsuits, but it will probably lapse when

elections are called some time before May. Even if a new government passes the

legislation, Indias cumbersome courts tend to delay justice to the point of

denying it.

New laws may matter less than the spirit that animates them. Satyams

independent directors, for example, met the standards set by the NYSE. But they


6/31

did not ask hard questions. Directors in India may sit on as many as 15 boards,

which leaves them little time to do their job properly.

But even an assertive board and reputed auditors will struggle to stop managers

who are determined to hide their dirty laundry from view. About half of the 30

companies in the Sensex, Indias benchmark stockmarket index, are run by

business families, most of who trace their roots back to the closed economy of

Indias past. They dont always understand the new rules, says Ms Gopinath.

Until investors stand up and say these practices are unacceptable, what reason

do companies have to change?

Satyam is Indias fourth largest technology company with 53,000 employees. It

has 49 offices around the world, including eight in the United States, and it

services many of the Fortune 500 companies. Raju admitted to cooking the

books, including a false cash balance of more than $1 billion. He faces arrest and

possibly jail time of seven to 10 years.

The Securities and Exchange Board of India tells ABC News that it has already

begun to investigate Satyams financial records.

Two American law firms -- Izard Nobel LLP and Vianale & Vianale LLP -- have

filed class action lawsuits against Satyam Computer on behalf of shareholders of

the software services firm's American Depository Receipts, according to NDTV.

Todays Times of India reported that amid mounting speculation over his

whereabouts, Satyam management has said that it has no idea where Raju is.

The newspaper suggested the chairman had fled to the United States, but Rajus

lawyer said the chairman is in Hyderabad.

Along with founding Satyam, Raju is known for his philanthropy and commitment

to helping Indias rural poor. He created Indias first emergency response system,

similar to that of 911 in the United States. He reportedly donated more than $50

million of his own money to create the program.


7/31

The Hindustan Times reports that Rajasekhara Reddy, the chief minister in the

state of Andhra Pradesh where Satyam is based, wrote a letter to Prime Minister

Manmohan Singh. Reddy suggested a group of businessmen should manage the

company.

"Our major and immediate concern is about the fate of 53,000 employees of the

company. I have no doubt in my mind that the law will take its own course but as

majority of the clients or customers of Satyam are Fortune 500 companies, they

may be averse to do business with companies having fraudulent managements,"

Reddy said in his letter to the prime minister, according to the Hindustan Times.

The Securities and Exchange Board of India said that it is working with the

American Securities and Exchange Commission to investigate the company.

The founding promoter of Satyam Computer Services Limited, Ramalinga Raju,

resigned as the companys chairman on Wednesday, putting out a confessional

statement admitting that roughly 1.5 billion US dollars (or the equivalent of 70

billion Indian rupees) of the firms past funds were "non-existent"

What has shocked analysts is that the money, that is now supposed to be

fictitious, had been recorded in Satyams balance sheets and books of account

that had been audited by the internationally reputed firm of auditors,

PriceWaterhouseCoopers.

Raju, who is politically influential, disclosed details of the fraud in a resignation

letter to the companys board of directors forwarded to stock exchange

authorities as well as the regulator of the countrys capital markets, the Securities

and Exchange Board of India (SEBI).

Of the revenue reported as of Sep.30, 2008, the letter said, almost 1.03 billion

dollars, or 95 percent, never existed.


8/31

SEBIs chairman C.B. Bhave described the financial wrongdoing in Satyam as an

event of "horrifying magnitude".

The scam has dominated the India media and what is ironical is that the Indian

word "Satyam" translates as "truth".

A most alarming aspect of the episode was that Raju acknowledged that his

companys financial records had been fudged and manipulated for the "last

several years".

"It was like riding a tiger, not knowing how to get off without being eaten," wrote

the disgraced Raju in his letter.

While there were rumours that Raju had fled India, his lawyer has said he is in

Hyderabad, the capital of the southern Indian state of Andhra Pradesh, where the

Satyam is headquartered.

On Wednesday, Rajus announcement had knocked the companys stock down a

crippling 78 percent and sent the sensitive index of the stock exchange at

Mumbai, Indias financial capital, plummeting by a substantial 7.3 percent. The

share price came down further on Friday.

This scandal came barely a week after the government in New Delhi announced

an economic stimulus package to revive the markets that have been adversely

impacted by the ongoing worldwide recession.

Until recently, Satyam used to be Indias fourth-largest IT company, specialising

in developing computer software and business process outsourcing.

Satyam's stock is listed on the New York Stock Exchange, it had business

operations in 66 countries and counted 185 companies in the Fortune 500 list as

its clients and customers.


9/31

"Its a wake-up call for the Indian corporate sector," said Ashok Kumar

Bhattacharaya, national managing editor of Business Standard newspaper in an

exclusive interview to IPS. "Companies have to stick to the rule-book," he added.

Investors, along with Indian government agencies, are now demanding answers

to why the value of their stock came down by more than 1.9 billion dollars in one

day on account of a scandal that is being described as "Indias Enron" in

reference to the U.S. energy company that filed for bankruptcy in 2001, leaving

5,000 people jobless and eliminating one billion dollars in employee retirement

funds.

Many of Satyams 53,000 employees are expecting unemployment as the

dimensions of the scandal unfold, investors withdraw and it is discovered how the

companys coffers are almost empty. The 1.5 billion dollar fraud outweighs the

companys entire salary bill for the last year of a little over one billion dollars.

The downfall of Raju, a 54-year old software industry veteran, began nearly one

month ago when Satyam attempted to acquire two companies controlled by his

sons -- Maytas (Satyam spelled backwards) Properties and Maytas Infra -- for

1.6 billion dollars in order to compensate for the holes in his books of account.

The deal was abandoned 12 hours after it was announced when investors

objected, claiming it was an irresponsible misuse of funds and an instance of

nepotism.

The Maytas deals acted as a red flag for international investors, with a host of

companies like Unpaid Systems of Britain accusing Satyam of fraud, forgery and

breach of contract.

Shortly thereafter, on Dec. 23, the World Bank barred Satyam from offering its

computer services for eight years citing a potential trail of corruption -- data theft

and bribery -- that led to Raju.


10/31

The last straw perhaps came on Tuesday when an Indian associate of Merrill

Lynch terminated an agreement on grounds of "material accounting

irregularities".

Satyams worth estimated at seven billion dollars, barely six months ago, is now

worth less thatn 330 million dollars.

In an IPS interview, Arun Kumar, professor of economics at New Delhis

prestigious Jawaharlal Nehru University, said the so-called "independent"

directors on the Satyam board were not truly independent and added that

auditors often acted in collusion with corrupt company managers.

"Im not at all surprised that the auditors played along with the top management

of this company and allowed executives to cook books of account," said Kumar

who has authored a book on Indias illegal -- or "black" -- economy.

"The government is not looking to take over the companies. The corporate world

must respond to this," Kamal Nath, Indias industry and commerce minister was

quoted as saying. "The government should only look at the regulatory part of it,"

he added.

The government has stepped in to investigate all important directors and

employees associated with Satyam who could be involved in the fraud. All those

found guilty could face up to ten years in prison. The auditing licences of the

partners of PricewaterhouseCoopers could also be revoked.

"The system has to be strong, but individuals make the system. The rules were in

place but individuals broke these rules and threatened the system, says

Bhattacharya.


11/31

Though Rajus resignation letter attempts to accept personal responsibility for

themisdemeanours, there is a view that many others were involved and complicit.

Kumar said it was "near-impossibile that those close to the inner workings of

Satyam were completely unaware of what was going on".

Whereas some argue that the Satyam scandal will not have a long-term negative

impact on the working of Indias reputed information technology (IT) industry,

others say it could negatively impact Indias booming IT services which chalked

up overall sales worth 52 billion dollars in 2007-2008.

Anand Mahindra, vice chairman and managing director of M&M, a leading

commercial vehicles manufacturing company, went on record stating: "This

development has resulted in incalculable and unjustifiable damage to Brand India

and Brand IT in particular". He added that the "whole of Indian industry should

not be tarred with the same brush".

But other corporate managers see positive fallouts to the Satyam episode. After

what happened there is bound to better self-regulation among Indian IT

companies, said Puneet Kumar, a top manager at WIPRO, a globally respected,

Bangalore-based IT company.

Satyam was an aberration, Puneet Kumar said. The fact is that the IT industry

thrives on good reputation and every major in the business lays great emphasis

on maintaining global standards of corporate governance.

The $1.6 billion Maytas acquisition deal pushed through by Satyam has raised

questions on the company's corporate governance norms.

Even though the deal was cancelled after shareholders protested, but the IT

giant's image has been tarnished.

In September 2008, Satyam Computer Services had bagged the Golden

Peacock Global Award for excellence in corporate governance.


12/31

But there's definitely nothing award-worthy in December.

Their audacious $1.6-billion acquisition of Maytas Properties and Maytas Infra

Ltd has been lambasted from all fronts.

In fact, leading brokerage CLSA considers it as one of the worst corporate

governance events in India.

Everyone is asking how has a promoter with less than 10 per cent stake made a

call on a huge deal, without approval of those holding the remaining 90 per cent?

But Chairman of Satyam Computers Ramalinga Raju is convinced his moves

were right.

"The manner in which we have gone about valuations, we have followed

meticulous process," says Ramalinga Raju.

Corporate governance is about transparency and raising the trust and confidence

of stakeholders in the way the company is run. But the biggest foreign

shareholder in Satyam believes Raju was way off mark in Maytas case.

"We need to be very clear that as investors we will not tolerate a change inprincipal activity without consultation. When you are changing the principal

activity in such a dramatic fashion minority shareholders should be consulted and

given a say," says Adrian Lim, Aberdeen Asset Management, Singapore.

Experts feel that its shocking for a major software player like Satyam to spend all

that cash in an area of business where it has zero experience. Hinting at

promoter unaccountability, they indicate, that if completed, the deal would surely

set a bad precedent.

"Imagine if this deal had gone through, maybe 50 per cent of the smaller

companies would have done the same saying that overnight, there can be no

better way of taking away cash from the company. But, lets say Satyam was a

more reputed case and they deliberated and have withdrawn it, but what was the


13/31

precedent we were setting if this deal was allowed to go through," asks Madhu

Kela, Head of Equities at Reliance Mutual Fund.

Without doubt, the reputation that Satyam has built over the last decade has

been effectively tarnished overnight. And the deal being called off brings to the

spotlight, the importance of good corporate governance practices in the

functioning of successful companies.

THOUGH UNDER pressure from Mutual Funds and minority stakeholders,

Indias fourth largest software company Satyam Computer has finally called off

the decision to purchase 51 per cent stake in Maytas Infrastructure and 100 per

cent stake in Maytas properties but it has raised serious issues which otherwise

was not seen in Indian Inc. Issues of corporate governance arises due to this

failed attempt of the deal is most serious.

Corporate governance, the word which is probably least understood by retail

investors and which is fine read by top brasses of companies has made its

importance felt less than a decade back when big iconic names like Enron

Corporation and World Com were enmeshed in the history as their top

management has grossly ignored the concept of corporate governance. In simpleterm corporate governance is about promoting corporate fairness, transparency

and accountability. Corporate governance makes the whole structure of the

company more accountable towards each stakeholder, whether it is majority or

minority. Practice of corporate governance is to make the proper disclosure to

the stakeholders about each strategic decision so that stakeholders and market

can reward the good decisions and punish the bad decisions. So in fact if any

company is following the proper corporate governance practices it works as

correcting mechanism for the company in case of wrong decisions and helps the

company to take corrective life saving action within time.


14/31

So how can the attempt of CEO of Satyam computer, Ramalinga Raju, to

purchase the twin company Maytas infra and Maytas properties be regarded as

an attempt to made mockery of the principles of corporate governance?

First of all, the decision was not announced taking into confidence all the

stakeholders of the company. Secondly, the twin Maytas companies are being

the companies run by the family members of Ramalinga Raju only and it was told

that his two sons are major interested party in the twin companies. Thirdly, the

deal would have made the cash reach company Satyam into a debt ridden

company as its entire holding of $1.3 billion cash would have gone to Maytas

Properties (where promoters were 100 per cent holding) and in Maytas

Infrastructures. Fourthly, Ramalinga Raju was holding only 8.5 per cent stake ofSatyam computer so how can he take decisions of transferring its cash to a

company owned by his son without asking the rest of the 91.5 per cent stake

holders? Fifthly, in the name of diversification from software to entirely new area

of reality why has a relatively new company Maytas been chosen when several

other big players are still there? Sixthly, is it really time to go for shopping in a

sector where the economic slowdown is at its severest form?

If you leave the bad performance due to recession, since every industry is

suffering out of which, the failed deal of Satyam-Maytas is the story of how

anybody having a stake of just over 8.5 per cent stake can ignore the interest of

fragmented share holders who account for 91.5 per cent.

So where is the fairness when you are not wanting to bring the resolution in the

EGM as you know that it can not get passed in the EGM and announcing the

decision almost unilaterally on the ground that you are a majority (8. 5 per cent)

stake holder?

So where is the transparency when your action suggests that you are trying to

make a company sitting on cash into a debt ridden company ignoring the interest

of rest of stakeholders?


15/31

And where is accountability when you are not scared of shareholders and dare

to overlook the interest of minority stake holders who actually are majority

shareholders?

In short, the entire episode of attempt to purchase of Maytas by Satyam was

nothing but making mockery of the concept of corporate governance in India, the

very definition of which i.e. fairness, transparency and accountability has failed

here.

Inside Ramalinga Raju's mind

Why did B. Ramalinga Raju do it? No, we are not talking about why and how he

fooled all of us for seven years by presenting blatantly false financials of his

company, Satyam Computer Services. We are more concerned about the timing

of his sensational confession. What really makes a fraudster listen to his

conscience? Or did he do it under duress because of pressure from his family

members, friends and professional colleagues? Did he just wake up on 7

January and decide that he wanted to become the honest gentleman that he was

way back in the 1980s? Or is there a more sinister reason to explain the

revelations?

There are several conspiracy theories to explain the origins of the letter that Raju

wrote to the Satyam board, admitting his guilt. But we will try and separate the

grain from the chaff. He did it for the 'larger good' of everyone he knew, including

himself. In retrospect, it may turn out to be a master stroke. Thanks to his 7

January letter, Raju has possibly saved Satyam, the group firms managed by his

sons, friends and colleagues, and the politicians who helped him in the past. In

an ironical twist to the tale, he may have saved himself from a long term behind

the bars.

The fact is that Satyam as a company was about to collapse under its own

financial weight. With a 3% margin, as Raju claimed, almost non-existent cash


16/31

balances, with no hope of a new pipeline after Raju had pledged most of his

personal shares with institutions, which sold them off, huge liabilities and

receivables, and highly inflated revenues and profits, the company didn't have

the money even to pay salaries in January 2009. Kiran Karnik, one of the six

government-appointed directors on Satyam's board, has publicly said that the

company needs nearly Rs 2,000 crore cash over the next three months.

In fact, this is the reason why the failed merger with group firms, Maytas

Infrastructure and Maytas Properties, for Rs 8,000 crore was critical for Raju's

survival. In one stroke, it would have cleaned up Satyam's balance sheet. The

deal, which was opposed by institutional shareholders as the two Maytas firms

were controlled by Raju's sons and, therefore, smacked of conflict of interest,would have infused new assets and also ensured new revenue and profit

streams. For example, Maytas Properties possesses a land bank of 6,800 acres,

with the ability to construct 245 million sq ft of built-up space.

At the Satyam's board meeting on 16 December 2008 to discuss the merger,

Ram Mynampati, a former director, disclosed that there was little future in

infotech as accelerated growth was difficult in the current scenario, prices and

margins were under pressure, and there was discomfort about anti-outsourcing

voices emanating from the US, especially from the new President Barack

Obama. Therefore, entry in construction and infrastructure seemed like an ideal

de-risking strategy. If things had gone according to plan, Raju could have easily

jumped off the Satyam tiger without being 'eaten up'.

When this strategy didn't work, Raju had no option. The only way to save Satyam

was to come out in the open, confess to his crimes and hope that the

government would act swiftly to save the future of Satyam's 53,000 employees

as well as restrict the possible negative impact on the Indian IT story. This is

exactly what happened. The future of Satyam, its employees and Indian IT seem

much safer today. When we spoke to a few employees, they sounded a bit

reticent, but confident. All of them said they were "optimistic that things would be


17/31

back to normal soon". Raju's sons were obviously angry. The father had

practically destroyed their future. By not being able to go through with the

merger, he had made sure that the Satyam scandal would become public

knowledge. It could force several state governments, including that of Andhra

Pradesh, to cancel the high-profile infrastructure contracts bagged by Maytas

Infrastructure and Maytas Properties. At present, the two entities are working on

projects worth Rs 30,000 crore, including the prestigious Hyderabad metro rail.

Satyam's truth had the potential to severely tarnish the sons' image. And it did.

However, the sons' anger could have weighed heavily on a desperate Raju,

forcing him to reveal everything.


18/31

There's

another angle

to the familydrama. Maybe

there was a

feeling that if

Raju went

down taking all

The Satyam Saga

1987 Company established

199

IPO over-subscribed by 17 times;

company gets its first Fortune 500customer in John Deere & Co.

1993

Awarded ISO 9001 certification. Signs

joint venture with GE, another Fortune

500 company.

1999

Satyam Infoway (Sify) becomes the first

Indian Internet firm listed on the

Nasdaq.

2000

Company merged with Satyam

Enterprise Solutions (SES) in a way

that benefits Srini Raju of SES.

2001Satyam Computer Services listed on

the NYSE (SAY).

1999-

2001

Its stock was one of the 10 that Ketan

Parekh was rigging.

2002

The Dept of Co Affairs seeks

clarification on alleged violation of the

Companies Act.

2004

Acquires Citisoft and Knowledge

Dynamics. Features in the Forbes Top

Asian Companies.

2005

UK-based IT firm Upaid files case

against Satyam for alleged fraud and

forgery.

2006

Company says 'Revenue exceeds

US$1 b'. Gets award from Institute of

Internal Auditors, US.

2008

Announces acquisition of Maytas Prop

and Maytas Infra. Deal shelved after

outcry.

2009

Raju confesses to Rs 7,000-crore

fraud; arrested. Satyam boardreconstituted.


19/31

the blame, there wouldn't be too much of an impact on the sons' businesses. It is

probable that the nonexistent cash balances that Raju is talking about were

monies that were siphoned out of Satyam to finance his sons' projects. It is

possible that a part of the cash balances has gone into the personal accounts of

family members. Or it could have been partially used to bribe officials in lieu of

government projects awarded to the Maytas companies.

Now, consider what was going on in the minds of Raju's close colleagues before

the founder's letter. They were scared. If Satyam went down, so would they. For

no one would believe that Raju carried out this fraud for so long without the

senior managers being aware of it. In return for their undying loyalty, they

demanded Raju's head. He had to tell the truth and take the blame himself. Thistoo seems to be panning out the right way as until now only the former CFO,

Srinivas Vadlamani, has been arrested by government sleuths, who seem more

worried about finding the extent of the damage.

As Raju got sucked into a financial tornado that he had created in the first place,

he had to take care of the politicians, who had helped him throughout his

entrepreneurial career. Yet again, it seemed like a perfect solution for Raju to

confess after wiping out the tell-tale marks that could have pointed at a nexus

between Satyam and the state's political leaders.

As of now, the media is speculating that former Andhra Pradesh chief minister N.

Chandrababu Naidu of the Telugu Desam Party helped Raju wriggle out of

income-tax cases earlier this decade. It is also being rumoured that the current

Chief Minister, Y.S.R. Reddy of the Congress, helped Raju's sons bag the

prestigious infrastructure projects in the state. Interestingly, both Reddy and

Naidu are accusing each other of helping the Raju family.

More political skeletons are likely to tumble out of Raju's cupboards, but they are

likely to be mere limbs because the crucial evidence may have been carefully


20/31

hidden, or simply made to vanish. Just like the thousands of crores of rupees in

Satyam's bank accounts over the past seven years.

That leaves us with Raju. He had to chalk out his own survival too. After such a

massive scam, possibly the biggest in the history of corporate India, he could

languish in jail for the rest of his life. However, by admitting to cooking up the

accounts, he may successfully divert attention from a far more serious crime

siphoning off money from a public company. Some lawyers feel that his

confession may get him some form of immunity. And he may be let off with minor

penalties. Section 24(B) of the Sebi Act states that if a person has made "full and

true disclosure of the alleged violation", he can be granted immunity from

prosecution for some of the offences.

We hope this doesn't happen in this case. Raju's conviction has to act as a

deterrent to other optimistic and over-confident owners, who may think that they

too can get away with such frauds. Or else, India Inc. will witness the birth of

more Rajus who, as detailed out in a recent study by Wharton School, would

believe that their firms were experiencing "only a bad quarter or patch of bad

luck" and that it was "in the interest of everyone involved to cover up the

problem". But when things don't improve, the promoter is forced to continue his

"fraudulent behaviour and he has to do more" in the subsequent quarters.

Therefore, it is imperative for the government to financially reboot India Inc.

the text of the letter Raju wrote to the Satyam board:

"It is with deep regret and tremendous burden that I am carrying on my

conscience, that I would like to bring the following facts to your notice:

1. The Balance Sheet carries as of September 30, 2008,


21/31

a) Inflated (non-existent) cash and bank balances of Rs 5,040 crore (as against

Rs 5,361 crore reflected in the books);

b) An accrued interest of Rs 376 crore, which is non-existent

c) An understated liability of Rs 1,230 crore on account of funds arranged by me;

d) An overstated debtors' position of Rs 490 crore (as against Rs 2,651 reflected

in the books);

2. For the September quarter(Q2) we reported a revenue of Rs 2,700 crore and

an operating margin of Rs 649 crore(24 per cent of revenue) as against the

actual revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore(3 per cent of revenues). This has resulted in artificial cash and bank balances

going up by Rs 588 crore in Q2 alone.

The gap in the balance sheet has arisen purely on account of inflated profits over

several years (limited only to Satyam standalone, books of subsidiaries reflecting

true performance).

What started as a marginal gap between actual operating profit and the onereflected in the books of accounts continued to grow over the years.

It has attained unmanageable proportions as the size of the company operations

grew significantly (annualised revenue run rate of Rs 11,276 crore in the

September quarter, 2008, and official reserves of Rs 8,392 crore).

The differential in the real profits and the one reflected in the books was further

accentuated by the fact that the company had to carry additional resources andassets to justify a higher level of operations thereby significantly increasing the

costs.

Every attempt made to eliminate the gap failed. As the promoters held a small

percentage of equity, the concern was that poor performance would result in the


22/31

takeover, thereby exposing the gap. It was like riding a tiger, not knowing how to

get off without being eaten.

The aborted Maytas acquisition deal was the last attempt to fill the fictitious

assets with real ones. Maytas' investors were convinced that this is a good

divestment opportunity and a strategic fit.

One Satyam's problem was solved, it was hoped that Maytas' payments can be

delayed. But that was not to be. What followed in the last several days is

common knowledge.

I would like the board to know:

1. That neither myself, nor the Managing Director (including our spouses) sold

any shares in the last eight years - excepting for a small proportion declared and

sold for philanthropic purposes.

2. That in the last two years a net amount of Rs 1,230 crore was arranged to

Satyam (not reflected in the books of Satyam) to keep the operations going by

resorting to pledging all the promoter shares and raising funds from known

sources by giving all kinds of assurances (statement enclosed only to the

members of the board).

Significant dividend payments, acquisitions, capital expenditure to provide for

growth did not help matters. Every attempt was made to keep the wheel moving

and to ensure prompt payment of salaries to the associates. The last straw was

the selling of most of the pledged shares by the lenders on account of margin

triggers.

3. That neither me nor the managing director took even one rupee/dollar from the

company and have not benefited in financial terms on account of the inflated

results.


23/31

4. None of the board members, past or present, had any knowledge of the

situation in which the company is placed.

Even business leaders and senior executives in the company, such as, Ram

Mynampati, Subu D, T R Anand, Keshab Panda, Virender Agarwal, A S Murthy,

Hari T, S V Krishnan, Vijay Prasad, Manish Mehta, Murli V, Shriram Papani,

Kiran Kavale, Joe Lagioia, Ravindra Penumetsa, Jayaraman and Prabhakar

Gupta are unaware of the real situation as against the books of accounts. None

of my or managing directors' immediate or extended family members has any

idea about these issues.

Having put these facts before you, I leave it to the wisdom of the board to take

the matters forward. However, I am also taking the liberty to recommend the

following steps:

1. A task force has been formed in the last few days to address the situation

arising out of the failed Maytas acquisition attempt.

This consists of some of the most accomplished leaders of Satyam: Subu D, T.R.

Anand, Keshab Panda and Virendra Agarwal, representing business functions,

and A S Murthy, Hari T and Murali V representing support functions.

I suggest that Ram Mynampati be made the chairman of this Task Force to

immediately address some of the operational matters on hand. Ram can also act

as an interim CEO reporting to the board.

2. Merrill Lynch can be entrusted with the task of quickly exploring some merger

opportunities.

3. You may have a 'restatement of accounts' prepared by the auditors in light of

the facts that I have placed before you.

I have promoted and have been associated with Satyam for well over 20 years

now. I have seen it grow from few people to 53,000 people, with 185 Fortune 500


24/31

companies as customers and operations in 66 countries. Satyam has established

an excellent leadership and competency base at all levels.

I sincerely apologise to all Satyamites and stakeholders, who have made Satyam

a special organisation, for the current situation. I am confident they will stand by

the company in this hour of crisis.

In light of the above, I fervently appeal to the board to hold together to take some

important steps. TR Prasad is well placed to mobilise a support from the

government at this crucial time.

With the hope that members of the Task Force and the financial advisor, Merrill

Lynch (now Bank of America), will stand by the company at this crucial hour, I am

marking copies of the statement to them as well.

Under the circumstances, I am tendering the resignation as the chairman of

Satyam and shall continue in this position only till such time the current board is

expanded. My continuance is just to ensure enhancement of the board over the

next several days or as early as possible.

A day before the curtain went up on the Satyam tragedyrewind to the board

proposing two acquisitions of real estate and infrastructure firms promoted by the

Raju family another hushed board meeting with a not-too-dissimilar agenda

sailed through peacefully on the outskirts of Delhi. A 10-member board of a

textiles major assembled at the companys headquarters to approve the

acquisition of two businesses of a group company. The board duly approved the

deal. Unlike in the case of the Satyam-Maytas proposal, the news didnt hit the

headlines nor did marketmen publicly vent their ire. That may be because not

many foreign or institutional investors hold shares of these companies; also this

transaction is small beer compared to Satyams $1.6-billion buyout proposal. Yet,

the market made its displeasure clear, hammering the stock for days after the

deal was announced. The uncomfortable questions asked on Dalal Street: One,

why was the company writing out a cheque running into hundreds of crores to


25/31

buy a group venture whose market cap is less than half the offer price? Two, why

was it paying so much for two businesses of a loss making company?

The promoters defend the deal as they see synergies with the acquired

businesses. They may be right, but investors werent quite convinced. That may

be because theyre not confident that the proceeds will be used to generate value

for shareholders. In fact, they may not even be clear where that money is going.

Cut to Hyderabad, where the auditors of a technology company made a

qualification on an investment in a loss-making subsidiary on the companys

2007-08 accounts. The auditors felt that the diminution in the value of

investments was not taken into account while computing the net profit or loss forfiscal 2008. This company had some years ago made an investment in a wholly-

owned unlisted subsidiary in the US. The Indian parent company has yet to get

any returns in its investment as the US subsidiary has been continuously making

losses. The milliondollar question: Did the promoters expect any return on this

investment, in the first place?

Whilst nobodys accusing these two companies of hanky-panky, fact is that the

antennae of marketmen quickly go up when promoters invest huge sums of

money from a company in either familyowned businesses or unrelated

businesses. Many such firms are unlisted and outside the territory of India.

There is also no statutory obligation for them to disclose details, says an auditor

on condition of anonymity.

At a time when investigations are under way into whether Satyam has gone

broke because its promoters siphoned money out of the company, the spotlight

has turned squarely on India Inc. Is Satyam an exception, or the norm, in

corporate India? And are external auditors keeping a tight check on the

numbers? Its the promoters who call the shots... period, says a Partner at a Big

Four auditing firm.


26/31

Over the years, promoters have manufactured innovative ways to siphon off

funds raised from bank borrowings or the public or the companys profits and

reserves (see How Funds Are Siphoned). That may not be true for all Indian

corporates, but the practice is quite rampant in mid-sized companies, believes a

Senior Director of a rating agency. A banker adds that the boom period of the last

4-5 years was exploited by many companies to swindle funds. In fact, the most

commonly used route to siphon off money was by inflating project costs, adds the

banker on condition of anonymity. The project cost is generally inflated by 20-30

per cent by conniving with vendors or suppliers of plant and machineries to take

the money out from the company.

Mid-sized companies often exploit the working capital route by inflating stock intrade bills and receivables to take money out from the company. The big boys

use sophisticated methods like routing funds to subsidiaries or group companies

or companies of relatives as capital or loans and advances. Similarly, there are

many instances of companies buying a business at an unreasonable valuation or

investing in the equity capital of large unlisted companies. These investments or

the returns never come back to the parent company, say experts.

That no financial scandals came to light during the years when India was shining

is an inaccurate barometer of the integrity of Indian promoters. After all, such

scams more often than not occur when the tide is rising and taking all boats

along with it. Its only when the tide goes out, to paraphrase Warren Buffett, that

fraud and fraudsters get exposed. Raju will agree.


27/31

How funds are siphoned

Bank funds route

Working Capital Funds Method:

Inflate stock in trade & receivables bills

Term Loan

Inflate the value of fixed assets

Project Loan

Inflate cost by conniving with suppliers and vendors

Issues debentures against assets

Revalue assets arbitrarily

Normal business route

Pump capital into subsidiaries & group companies

This may seem noble, but not when theres zero expectation of returns

Buy fixed assets like plant & machinery and other equipment


28/31

Again, a perfectly sincere intention on the surface, but not when the value

of assets as well as bills is inflated

Loans & advances to relatives and related parties

Of course, there wont be any recourse to get it back

Inflate outsourcing, sales & distribution, consultancy & advisory

payments

Its a well-tested expenses route

Investment route

Buy a company or a business at an unreasonable valuation

Without doing an independent valuation, of course

Invest in equity/debentures of a large number of unlisted companies

These firms would be invariably connected to the promoters, directly or

indirectly

auditors and chartered accountants with a black brush

The Satyam fiasco has called into question the sanctity of its auditors. Although

its still early days to speculate whether Satyams auditors were party to the

fraud or merely failed to perform their duties, it is beyond doubt that the whole

incident threatens to paint the fraternity of auditors and chartered accountants

with a black brush.

On the issue, an ICAI council member, who declined to be named said: 'As

auditors, we definitely have a role to play. This incident gives the entire CA

fraternity a bad name. If we unravel any wrong doings on the part of the auditors,

the institute will initiate action against the concerned auditor.' KPMG head of

markets Pradip Kanakia said: 'Audit professionals globally were just about
http://c/Documents%20and%20Settings/jyoti%20maheshwari/Desktop/auditors_and_chartered_accountants_with_a_black_brush.htmlhttp://click.xxx.adbrite.com/mb/click.php?sid=698684&banner_id=12137464&variation_id=1089995&uts=1233471562&cpc=302e3235303030303030&keyword_id=21462&inline=y&zk_id=33658552&ab=168297046&sscup=e0183029dbb8dd63d92a0ebfb9bca8f4&sscra=cdf9ddb89d2d3f09e6ec36d0a5279d36&ub=1975956479&guid=da87262b30cf9b2a7cd092bb33ab0f2d&rs=&r=http://click.xxx.adbrite.com/mb/click.php?sid=698684&banner_id=12372111&variation_id=1253640&uts=1233474660&cpc=302e3130303030303030&keyword_id=21698&inline=y&zk_id=33658552&ab=168297019&sscup=8c94ef7ba35faf5090f3014dc9ab4543&sscra=cdf9ddb89d2d3f09e6ec36d0a5279d36&ub=1975956479&guid=6f6e33ab402d0f9ce8d1fae093f0d0b6&rs=&r=http://c/Documents%20and%20Settings/jyoti%20maheshwari/Desktop/auditors_and_chartered_accountants_with_a_black_brush.htmlhttp://click.xxx.adbrite.com/mb/click.php?sid=698684&banner_id=12137464&variation_id=1089995&uts=1233471562&cpc=302e3235303030303030&keyword_id=21462&inline=y&zk_id=33658552&ab=168297046&sscup=e0183029dbb8dd63d92a0ebfb9bca8f4&sscra=cdf9ddb89d2d3f09e6ec36d0a5279d36&ub=1975956479&guid=da87262b30cf9b2a7cd092bb33ab0f2d&rs=&r=http://click.xxx.adbrite.com/mb/click.php?sid=698684&banner_id=12372111&variation_id=1253640&uts=1233474660&cpc=302e3130303030303030&keyword_id=21698&inline=y&zk_id=33658552&ab=168297019&sscup=8c94ef7ba35faf5090f3014dc9ab4543&sscra=cdf9ddb89d2d3f09e6ec36d0a5279d36&ub=1975956479&guid=6f6e33ab402d0f9ce8d1fae093f0d0b6&rs=&r=


29/31

recovering from the scam in the US and Europe. Now, auditors role will be

questioned in India too. If negligence on the auditors part is proved, there will be

huge dent on the confidence on auditors in general. Although, PwC is our

competitor, this is not the time to rejoice.'

Mr Kanakia felt that given the magnitude and complexity of the fraud, role of

everybody concerned would be questioned. 'This needs deep investigation and it

would require months to unravel the whole story.' Mr AK Doshi, partner of Doshi,

Chatterjee, Bagri & Co, also observed that it was a collective failure of the

Satyam management, its board of directors, and senior executives, audit

committee and its internal and external auditors. 'This seems to be a one-off

incident and we need some more clarity to term this a systemic failure. So farwhat has come to the media glare may not be the whole story. This may have a

negative impact on the confidence on CAs in general,' said Mr Doshi.

Satyam is listed in the US and accordingly may face penal action by the US

Securities and Exchange Commission. 'Under Sarbanes-Oxley Act 2002 of the

US, the Satyam management and its auditors may face penalty as well as

criminal proceedings for wilful mis-representation of financial statement,' said

Arijit Chakraborty, vice president Inkwest Management Consultant, a business

advisory firm.

Another accountant said: 'Auditing as a profession may go down as a result of

the incident. But unlike the Enron case in the US, no nexus has yet been proven

between the auditors and Satyam. Also, auditors be in Big 4 or Big 20 get

very little time to go through the information provide by the company given the

pressure of quarterly audits. Having said that I must also say since cash was

involved in this case, there must have been some lapse on the part of the

auditors.

After all, auditors are required to go through reconciliation ofbank accounts and

obtain confirmation from bankers. They also need to check the fixed deposits.'
http://click.xxx.adbrite.com/mb/click.php?sid=698684&banner_id=12321019&variation_id=1225276&uts=1233471483&cpc=302e3230303030303030&keyword_id=14210&inline=y&zk_id=33658552&ab=168297027&sscup=e1244e58746f9659d8c78f008f723e98&sscra=cdf9ddb89d2d3f09e6ec36d0a5279d36&ub=1975956479&guid=636d4f35d1f14f85fb45fae5eacb1895&rs=&r=http://click.xxx.adbrite.com/mb/click.php?sid=698684&banner_id=12321019&variation_id=1225276&uts=1233471483&cpc=302e3230303030303030&keyword_id=14210&inline=y&zk_id=33658552&ab=168297027&sscup=e1244e58746f9659d8c78f008f723e98&sscra=cdf9ddb89d2d3f09e6ec36d0a5279d36&ub=1975956479&guid=636d4f35d1f14f85fb45fae5eacb1895&rs=&r=


30/31

In 1999, five accountants, working independently, tried to figure out if the Enron

lie could not have been caught before it blew up. The basic question before the

five accountants was: where did Enron hide its muck. They asked if there were

lessons to be learnt from the Enron saga that would improve disclosure.

Thus was born eXtensible Business Reporting Language or XBRL as it is called.

As the language for the electronic communication of business and financial data,

it is revolutionising business reporting around the world. The XML properties of

XBRL make the information machine-readable. The addition of business rules to

XML creates XBRL, creating an information set that is more easily deciphered.

XBRL greatly increases the speed of handling of financial data, reduces the

chance of error and permits automatic checking of information.

More than 100 countries have embraced XBRLthe list includes China, Korea,

Japan, the US and most recently, India.

At IRIS, our exercise to develop Indias first XBRL database of listed companies

threw up some startling findings. We were stunned that for several companies,

the financial statements for financial year 2008 lacked internal consistency in the

sense that the numbers reported in the schedules did not tally with the number inthe main financial statement. The variations ranged from as high as 40 per cent

in some elements in some companies to less than 1 per cent in others.

We also found a company that has been reporting the same cash flow statement

for three years running, word for word, number for number, decimal place for

decimal place.

It is still early days but the benefits are self-evident. The outgoing US SEC

Chairman Christopher Cox calls it the new Information Revolution. All companies

listed on US exchanges have two years to move to XBRL-based reporting, the

investment companies have until 2009 to do so and the rating agencies have

been asked to comply soon.


31/31

India, a late adopter, is slowly but surely moving in the same direction, XBRL

implementation is happening at BSE, NSE, SEBI, RBI and MCA, with each of

them working to their own schedule. The Institute of Chartered Accountants of

India has taken the leadership to form an XBRL jurisdiction in India.

But could the adoption of XBRL have helped in the early detection of the Satyam

fraud? The answer is no. However, the use of XBRL can now help investigators

unravel the Satyam story quickly.

Also, the implementation of XBRL can help the board see the information tabled

before it with greater clarity, knowing fully well that if there is a footprint anywhere

that is out of place, it will be visible. With the implementation of XBRL, you cant

hide, the trail will show up somewhere on the radar.