ECONOMICS OF LAW

CIA I

Case Study: Satyam Computers Scam

BSc Economics Honours

Submitted by: Submitted to:

20216001

Adarsh Shanker Mr. Lakshay Sharma

Department of Economics
School of Humanities and Social Sciences
CHRIST (Deemed to be University)
DELHI NCR, INDIA
Introduction

The company Satyam Computer Services Limited was a rising star in the Indian industry for
outsourced IT services. In 1987, Mr. Ramalinga Raju founded the business in Hyderabad. The
business had 20 employees when it first started, but it swiftly grew to have operations in 65 other
nations. The first company in India to be listed on all three major stock markets, including the
New York Stock Exchange (NYSE), Dow Jones, and EURONEXT, was Satyam. It was ranked
as India's fourth-largest software exporter, behind TCS, Infosys, and Wipro.

The 1990s saw a considerable expansion for the company. As a result of

the same, Satyam Renaissance, Satyam Info way, Satyam Spark Solutions, and Satyam
Enterprise Solutions were created. The first Indian internet company to be listed on the
NASDAQ was Satyam Info Way (Sify). In the twenty-first century, Satyam made a number of
acquisitions, expanded its reach internationally, and inked memorandums of understanding with
numerous multinational organizations. Satyam kept adding achievements to its profile by
becoming the first business in the world to launch a Customer-Oriented Global
Organization training programme in May 2000, signing agreements with numerous foreign
companies like Microsoft, Emirates, TRW, i2 Technologies, and Ford, taking the title of being
the first ISO 9001:2001 company in the world to receive BVQI certification, and establishing
a global presence by opening offices in Singapore, Dubai, and Abu Dhabi.

Satyam's total revenues in fiscal year 2003-2004 were Rs. 25,415.4

million. By March 2008, the company's sales revenue had more than tripled. During that time,
the company expanded at a compound annual growth rate of 38%. The average operational
profit, net profit, and operating cash flows were 28, 33, and 35%. Profits per share (EPS)
increased at a compound annual growth rate of 40%, from $0.12 to $0.62. Satyam undoubtedly
contributed significantly to company growth and shareholder value. The corporation was a rising
star and a household name in the global IT industry. Unfortunately, less than five months after
receiving the Global Peacock Award, Satyam became the target of a major accounting fraud. The
Satyam scandal shocked Indian business and exposed several troubling truths about the weak
corporate governance norms in the nation.

Background

Scams stand in for the catastrophic failures that are "visible." This case study makes an effort to
evaluate and analyze the "creative-accounting" incident involving Satyam Computer, India's
equivalent of Enron. Their scandal/fraud has raised serious concerns about India's whole
corporate governance framework. The various governmental oversight bodies thus initiate
investigations into this form of "creative" accounting that results in fraud in publicly traded
corporations. The relationship between shareholders and employees, which is at the heart of any
business, has never been acceptable.

So, in order to shed light on one of the largest IT conglomerates' inadequate governance
procedures, it is critical to read this case study. The Satyam Scandal exemplifies the significance
of securities law and corporate governance in emerging markets.

Important Dates/Facts

Jun, 2000: From June 2000 until the scam was revealed, Satyam's records were examined by
PriceWaterhouseCoopers (PwC), a major international auditing firm. PwC received harsh
criticism from a number of pundits for missing the scandal. PwC was legally responsible for the
numbers because they authorised and signed Satyam's financial statements.

Dec 16th , 2008: When Ramalinga Raju presented a $1.6 billion offer for two Maytas
businesses, Maytas Infrastructure Ltd. , claiming he wished to use the cash on hand for the
benefit of investors, problems started to arise. For $1.6 billion, it intended to buy 100% and 50%
of Mayta's real estate and infrastructure, respectively. Raju's family has promoted and managed
the two businesses. He was compelled to retreat within 12 hours as the market and investors gave
him the cold shoulder. On account of worries regarding Satyam's corporate governance, share
prices fell by 55%. Analysts and investors questioned Satyam's board about why it approved the
acquisition given that it involved a party transaction, raising concerns about the company's
corporate governance processes.

Dec 23rd , 2008: On December 23, 2008, the World Bank unexpectedly stated that Satyam had
been banned from doing business with the World Bank for eight years for giving Bank
employees "improper benefits" and being accused of data theft and paying off the workers.
Shares dropped to the lowest level in more than 4 years i.e. by another 14%.

Jan 7th , 2009:Finally, on January 7, 2009, B. Ramalinga Raju announced that he has admitted
to defrauding the government of more than Rs. 7800 crore and announced his resignation as
chairman of Satyam. The central government took over the tainted company after the two
brothers who were Satyam's promoters were detained by the state of Andhra Pradesh police.
Violations

Following are the specifics of the suspect's conviction in the Satyam Computer Case as reported
by a Special Sessions Court:

According to section 120-B of the IPC (Criminal conspiracy) read with section 420, all 10
defendants, including the former chairman of Satyam Computers Limited B. Ramalinga Raju,
were found guilty (cheating).

Section 409 (criminal breach of trust by merchant or agent) was used to condemn B.
Ramalinga Raju and his brother B. Rama Raju. Section 406 was used to convict CFO Vadlamani
Srinivas, external auditors S. Gopalakrishnan and Talluri Srinivas, and Vice President (Finance),
G. Ramakrishna (criminal breach of trust).

Additionally found guilty under section 419 were external auditors Gopalakrishnan, Talluri
Srinivas, and Ramakrishna (impersonation).

Sections 467, 468 (forgery), 471 (using forged documents as genuine), and 472-A were used
to condemn B. Ramalinga Raju, V. Srinivas, S. Gopalakrishnan Talluri Srinivas, G.
Ramakrishna, senior manager (finance), D. Venkatapathy Raju, assistant manager (finance), and
Ch. Srisailam (fudging of accounts).

In addition, Section 201 (evidence destruction) convictions were handed down against B.
Ramalinga Raju, B. Rama Raju, V. Srinivas, Gopalakrishnan, Talluri Srinivas, Suryanarayana
Raju, and G. Ramakrishna Rau.

Impact on Victims

Employees at Satyam experienced difficult times and sleepless nights as a result of nonpayment
of salaries, project cancellations, layoffs, and similarly bleak opportunities for outside work.
They were in a number of ways morally, monetarily, legally, and socially stuck.

Clients of Satyam expressed a loss of confidence in the business, reviewed their contracts, and
decided to work with rivals instead. Cisco, Telstra, and the World Bank all terminated Satyam's
contracts.

Investors lost money, and there was doubt over India's revival as a preferred investment
destination.
Bankers were concerned about both the recall of facilities and the recovery of financial and non-
financial exposure.

The Indian government was worried that the country's reputation and the IT industry may
discourage people from making investments or doing business there.

Recommendations

Significant reforms have been made to corporate governance in India after the Satyam
crisis surfaced:

The Indian government immediately opened an investigation, but it only participated minimally
directly. The government appointed a new board of directors for Satyam in an effort to save the
company, with the goal of selling it within a hundred days.

The board met right away to develop a selling strategy with the assistance of bankers,
accountants, lawyers, and government representatives. The company's board of directors hired
Goldman Sachs and Avendus Capital to sell it as soon as possible.

When Satyam reached its maximum market valuation in 2008, it was valued at Rs. 36,600 crore.
A year later, Tech Mahindra paid Rs. 58 per share to acquire the Satyam fraud victim, giving it
a market valuation of Rs. 5600 crore.

A corporate governance and ethics committee was also established by the National Association
of Software and Services Companies. The Audit Committee recommended changes to the
shareholder rights, audit committees, and whistleblower policies.

In response to the fraud, the government overhauled the regulatory system. The new Companies
Act of 2013 fixed the responsibilities of the auditor and independent directors among other
reforms. Clause 49 of the listing requirements was revised in 2014 by market regulator Sebi to
enhance corporate governance.

To prevent and identify fraud, the majority of organizations have digitised their internal controls
and business processes. Additionally, boards have begun tying top executives' pay and incentives
to how effectively they handle mission-critical exposures.

Since April 2017, audit firms have to be changed every ten years. Auditors are under close
scrutiny because, among other things, they have to make sure that every internal financial control
(IFC) outlined in the Companies Act is implemented by a corporation.
The SFIO is given statutory stature under the new Act and just received the authority to make
arrests. The SFIO has been actively looking into cases of business fraud.

Concluding Remarks

The Satyam case emphasises the need for securities regulations and CG in developing countries.
The conversation that has just taken place makes it clear that Satyam's management did not
uphold the rules and code of ethics that guide the accounting industry. To give a misleading
impression of their company's financial performance, they inflated their financial accounts.
Merrill Lynch uncovered the scam after spotting financial discrepancies in Satyam's financial
statements. The Satyam accounting fraud was the result of several years of financial account
manipulation designed to deceive investors and the general public into thinking that Satyam was
operating profitably. Such situations can be prevented by upholding corporate ethics, accounting
ethics, and by encouraging responsibility and openness inside organisations.Hence, The Satyam
case emphasises the need for securities regulations and CG in developing countries.

References

➢ https://economictimes.indiatimes.com/news/company/corporate-trends/
lesson-from-satyam-corporate-governance-evolves-not-execution/
articleshow/50476372.cms?from=mdr

➢ https://www.moneycontrol.com/news/opinion/what-changed-in-the-legal-
landscape-post-satyam-scam-2480623.html

➢ https://lexforti.com/legal-news/satyam-scandal-the-biggest-issue-revolving-
around-corporate-governance/

➢ https://www.thehindu.com/news/cities/Hyderabad/satyam-case-all-10-
convicted-for-criminal-conspiracy-cheating/article7084850.ece

➢ https://blog.ipleaders.in/case-study-satyam-fraud-case/

➢ https://consumer-helpline.com/2022/03/17/case-study-of-the-satyam-fraud-
case/

➢ https://ivypanda.com/essays/satyam-scandal-its-detection-and-aftermath/