Introduction

The Satyam Computers scam, one of the most notorious corporate frauds in India, shook the business world and had far-reaching consequences. This comprehensive overview delves into the intricacies of the scandal, providing step-by-step insights into the events leading up to the revelation, its impact on stakeholders, and the aftermath that reshaped the corporate governance landscape.

He who wishes to grow rich in a day will be hanged in a year – Leonardo Da Vinci.

A line so true to its core and relevant to the topic to be discussed which talks about the greed of becoming rich faster and faster and thus ending in no where. Today we are going to discuss one of the biggest Accounting and Corporate Fraud that shattered common man and investors in India in 2009.

The article details about the Satyam Fraud of Rs. 7000 Crores that was neatly executed by the man who was once considered the IT czar and the Bill Gates of Andhra Pradesh. The man who founded and built Satyam into one of the top IT companies in India, which was very often referred to as the IT Crown Jewel of India.

Yes we are talking about the Promoter Founder and the Chairman of the Satyam Computers, Mr. Ramalinga Raju. This fraud or scam brought to the light the role of corporate governance in shaping the protocols related to the working of audit committees and the duties of the board members.

Now lets see how it started and got executed.

Background

Byrraju Ramalinga Raju was born on 16 September, 1954 to a farming family in Andhra Pradesh. He was the eldest child in his family. B Ramalinga Raju did his Bachelors in Commerce from the Andhra Loyola college at Vijayawada, and later completed his Masters in Business Administration (MBA) from Ohio University in the United States.

He ventured into many businesses including Dhanunjaya Hotels, Cotton Spinning Mill named Sri Satyam Spinning funded by Andhra Pradesh Industrial Development Corporation (APIDC). As the businesses failed Raju moved into real estate and started a construction company named Maytas Infra Limited.

The Founding of Satyam Computers

On June 24th, 1987, Ramalinga Raju formed Satyam Company Services Limited as a private company in Hyderabad with almost 20 employees. The company was formed along with his brother in law D.V. Satyanarayan Raju. They both were the promoters of the company and the company later became public in the year 1992 by getting listed on the Bombay Stock Exchange (BSE).

Satyam Computer offered a full range of IT consulting services spanning various sectors and it also served business process outsourcing (BPO) services. The company got listed on the New York Stock Exchange (NYSE) in 2001. The company got its big break by getting a Fortune 500 company as its client, John Deere and Co.

The business was growing rapidly and soon it became one of the top IT players of the market. Satyam became the fourth largest IT company after TCS, Wipro and Infosys. The company spread itself to more than 60 + countries with 50,000 plus employees all across the globe. Now let us see how Raju got engrossed in the fraud.

The Rise 

Satyam Computers was growing and flourishing with every passing day and was also acquiring new clients which increased its market reputation as well.

Satyam allied with Dun & Bradstreet Corp. in 1994 was declared as one of the 100 most pioneering technology companies by the World Economic Forum. Even Mr. Ramalinga Raju was awarded the Dataquest IT Man of the Year award in 2000. Both, Satyam and Ramalinga Raju were awarded with various titles and accolades for their performances.

The 1990s marked a period of significant development for the organization. It also caused the development of various backup organizations such as Satyam Renaissance, Satyam Info way, Satyam Spark Solutions and Satyam Enterprise Arrangements, Satyam Info way (Sify) by chance turned into the primary Indian web organization to be recorded on the NASDAQ. Satyam gained a great deal of organizations and extended its tasks to numerous nations and marked MoUs with numerous worldwide organizations in the upcoming years.

Satyam also turned into a primary organization to begin a program known as the Customer-Oriented Global Organization program in 2000, marking contracts with various global players for example, Microsoft, Emirates, Advancements and Ford, asserting the benefit of being the first organization in the world affirmed by BVQI. And thus acquiring the name as a worldwide organization by opening offices in Singapore, Dubai and Sydney. In 2005, it procured a 100 percent stake in Singapore-based Learning Dynamix and 75 percent stake in London based Citisoft Plc. Satyam was considered among the top IT Consulting services companies by then.

During 1999, the company was declared as the fastest growing IT company in India. Few years later, Mr. Raju was awarded as the “Entrepreneur of the year” by E&Y in 2007. It was also awarded the “Global Peacock Award” by the World Council for corporate governance in September 2008. Just after 5 months of being awarded the Global Peacock award, the Satyam scam unfolded.

The Beginning of the Fall

Now let’s go back and see how the scam started and got executed.

During the 2000s period, the real estate industry was in its boom in Hyderabad, and it diverted Raju’s mind for investing in the growing real estate and making money. He then started buying properties in Hyderabad and the near areas.

He established two companies named Maytas Properties and Maytas Infrastructures in 1988 and started buying properties aggressively. These companies were on names of his family members only and he started buying properties on names of his family members and on himself too.

He was so engrossed and fascinated by the real estate that time, that he even didn’t mind manipulating the financials of Satyam Computer to buy more properties in Hyderabad.

Whenever he found he was short of funds to buy more properties he would manipulate and falsify Satyam’s financial and accounts. This he did by showing false growth and revenue. For instance if Satyam had a revenue of 60 crores, he would manipulate it to 600 crores and he would even manipulate the share prices of Satyam.

By this growth indicator Satyam share prices were always rising high. The share price of Satyam Computers was always inflated and attracted more and more investors buying in it. And soon when the share prices would go it’s high he would sell them to make profits and use those profits to buy properties in Hyderabad.

He along with his brother would also take loans on the rest of his shares. It was also said that he had knowledge of the proposed metro plan in Hyderabad and frequently bought properties near the proposed metro plan to make big profits. He started misleading the market and his shareholders by lying about the company’s financial health. Even basic facts such as revenues, operating profits, interest liabilities and cash balances were grossly inflated to show the company in good health.

Ramalinga Raju created almost 365 companies to buy properties, he even used his friends and family members’ names and made them the directors for those companies. He planned to use the profits earned through real estate to justify the falsified sales, growth and profits of Satyam Computers and easily fill the actual gap in the sales and profits.

Step 1: Background and Genesis Corporate Behemoth Unraveled: Begin by exploring the background of Satyam Computers and its rise as a prominent IT services company in India. Understanding the trajectory of its growth sets the stage for the subsequent events that led to the scandal.

Step 2: Emergence of Discrepancies* Falsified Financial Statements: Delve into the discovery of financial discrepancies within Satyam Computers. The company’s founder and then-chairman, Ramalinga Raju, admitted to inflating profits and fabricating assets, revealing a staggering gap between the reported and actual financial health of the organization.

Step 3: Impact on Stakeholders* Shareholders, Employees, and Clients: Chart the impact of the Satyam scandal on various stakeholders, including shareholders who faced significant financial losses, employees confronted with job insecurity, and clients grappling with the sudden erosion of trust. This step involves understanding the ripple effect on the broader business ecosystem.

Step 4: Corporate Governance Reforms* Repercussions and Legal Actions: Explore the repercussions of the Satyam scam, including legal actions against those involved and the subsequent overhaul of corporate governance mechanisms in India. The scandal prompted regulatory authorities to tighten oversight and enact reforms to prevent such incidents in the future.

Charting the Financial Impact

Visualizing the financial impact of the Satyam Computers scam can be represented through a chart:

• Market Capitalization Plunge: Illustrating the decline in Satyam’s market capitalization during the revelation of the scam.
• Investor Losses: Showing the financial losses incurred by investors as a result of the fraudulent activities.
• Recovery and Revaluation: Displaying the financial rebound and revaluation of Satyam post the scam resolution.

Additional Information

• Techniques Employed in Fraud: Investigate the methods and techniques employed by the perpetrators to manipulate financial statements. This may include fictitious revenues, inflated profits, and forged documents that went undetected for a considerable period.
• Role of Auditors and Regulatory Oversight: Analyze the role of auditors and regulatory oversight in the Satyam scam. Understanding how these mechanisms failed to detect the fraudulent activities highlights the vulnerabilities in the system.
• Global Ramifications: Examine the global ramifications of the Satyam scandal, including its impact on outsourcing perceptions, investor confidence in Indian companies, and the scrutiny faced by other corporations.
• Post-Scam Restructuring: Explore the restructuring efforts undertaken by Satyam post the scandal, including its acquisition by Tech Mahindra. This phase marked a crucial turning point in the company’s attempt to rebuild its reputation.

Satyam’s Rise and Fall: A Tale of Two Decades

Satyam Computer Services, established in 1987, rose to prominence as a leading Indian IT company, garnering accolades for its growth and innovation. Its success story mirrored India’s economic resurgence in the 1990s, becoming a symbol of the nation’s technological prowess and aspirations. However, beneath the veneer of success lay a dark secret: a meticulously crafted web of deceit woven by Raju and his accomplices. For years, they systematically inflated the company’s accounts, creating a mirage of profitability and growth that deceived investors and regulators alike.

The House of Cards Crumbles: A Confession Shatters Illusion

In January 2009, the façade of Satyam’s fabricated success crumbled. Raju, in a shocking confession letter, admitted to perpetrating a massive accounting fraud. He revealed that the company’s profits, assets, and bank balances were grossly inflated, amounting to a staggering Rs. 7,800 crore (approximately $1.47 billion at the time). Raju’s confession triggered a chain reaction of events, exposing the intricate web of deception that had ensnared Satyam. Investigations revealed that Raju and his accomplices had created fictitious invoices, inflated revenue figures, and cooked the books to maintain the illusion of prosperity. They siphoned off funds for personal gains, living a life of opulence while the company’s financial health deteriorated.

Unveiling the Labyrinth of Fraud: A Trail of Deception

The Satyam scam exposed a labyrinth of fraud that spanned over a decade. Raju and his accomplices had orchestrated a systematic scheme, creating fake accounts, forging documents, and manipulating financial records to conceal the company’s true financial state. They enlisted the help of auditors and company officials to perpetuate the deception, ensuring that their fabricated figures remained undetected. The audacity of their actions and the extent of their deceit left investigators and the corporate world reeling in shock.

The Devastating Fallout: A Shockwave Through the Economy

The Satyam scam sent shockwaves through the Indian economy, eroding investor confidence and shattering the image of India’s corporate sector. The company’s stock price plummeted, wiping out billions of dollars in shareholder value. The scandal also had a ripple effect on the global IT industry, tarnishing India’s reputation as a trusted outsourcing destination. The Satyam scam not only caused financial losses but also damaged the trust and integrity of India’s corporate world.

We are covering corporate India’s biggest fraud, lessons and red flag to avoid such companies in future. In this series we are starting with Satyam Scam. Corporate India’s biggest financial fraud.

• Satyam was incorporated by Ramalinga Raju in 1987, Company listed on stock exchanges in in 1991, IPO was subscribed over 17 times then. It was a fast-growing IT software company with peers such as Infosys, TCS and Wipro.
• The Satyam scandal was corporate India’s biggest fraud of Rs 7,000-crore
• Chairman Ramalinga Raju confessed that the company’s accounts had been falsified.
• On January 7, 2009, Ramalinga Raju sent off an email to SEBI & stock exchanges, wherein he admitted and confessed to inflating the cash and bank balances of the company
• At peak Mcap of Satyam was over 40000 crore. While the date when promoter reported fraud share price of satyam touched intraday low of Rs. 6.3 i.e. market cap of just Rs. 404 crore
• Later Tech Mahindra acquired the 51% stake in Satyam for INR 2890 crore valuing the entire company for INR 5600 Crore

Modus Operandi-

• The key behind Satyam’s fraud appears to be its promoter’s keen interest in real estate and holding control over satyam
• Ramalinga Raju even inflated the payroll and embezzled money out of the company by way of salaries to fictitious employees.
• All the while, he also inflated the company’s cash balances which were visible in the system.
• By 2008, the “cash balance” had ballooned to over a billion US dollars. (INR 48/USD in 2009)
• That’s when Raju sought to merge the group’s real estate business into the company, so that there may be real assets created against the fictitious cash. However, that deal did not go through, forcing Raju to do the confession on 7th Jan 2009

Financial summary of Satyam-

• This fraud was so managed that left no trail for investigator off course both internal and external auditor was involved

Conclusion

The Satyam Computers scam remains a cautionary tale in the corporate world, emphasizing the importance of robust governance, transparency, and ethical practices. By navigating through the scandal’s genesis, impact, and aftermath, one gains insights into the vulnerabilities that can plague even seemingly successful organizations. The legacy of the Satyam scam serves as a catalyst for continuous improvement in corporate governance standards globally.