The Satyam Fiasco

How we will go about…Introduction to Satyam and Maytas Utkarsh

The Chronicles and Opening of the Scam (Series of events)

Bhavik

Financial Implication, Fabricated income statements, Maytas Valuation, Satyam-Maytas Nexus, Fake FD receipts cycle.

Nishit

Stock Charting - Satyam and Maytas, Satyam ADR’s, Role of RoC & SEBI, Clause 49, Sarbanes Oxley act

Viral

Legal Implications, Companies Act, SEBI Act, Indian Penal code, The tax angle

Mayur

Role of Auditors, PwC in trouble, Current Board and In the News…

Siddharth

SATYAM• Set up in the year 1987 to provide

services in IT sector • India’s 4th biggest software

company in India• It is listed in BSE, NSE, NYSE and

Euronext (Amsterdam). • BSE IPO oversubscribed 17 times

when made public in 1991• The company employs 53,000 IT

professionals across development centers in 6 continents

First IT Company in the World Certified under ISO9001:2000 Ranked Among India’s Top 10 Best Employers, 2004 and 2003 Top 13 Best-Managed Companies in India Winner, Corporate Citizen I award for Corporate Social Responsibility SAP Pinnacle Award 2008 Satyam Wins golden peacock award for excellence in Corporate Governance on Global level for 2nd time United Kingdom Trade and Investment India Business Award for Corporate Social Responsibility

> Chairman and founder Satyam Computers Services Limited> MBA from Ohio University> IT man of the year award by Data Quest in 2002> Winner of Ernst & Young entrepreneur of the year award in 2007

> He became the Managing Director and Chief Executive Officer in 1991> Mr. Rama Raju holds a Master of Economics degree from Loyola College, Chennai and a MBA degree from Loredo State University, Texas> Before 1997, he was with Maytas Infra Limited as one of its Directors

B. Ramalinga RajuFounder & Chairman, Satyam

Computers Ltd.

B. Rama RajuPromoter & CEO, Satyam Computers

Ltd.

Satyam Clients

A total of 650+ Clients 185 of the top fortune 500

Companies

Satyam Board StructureOther

Independent Directors

Dr/ M. Srinivasan

Prof. Krishna G Palepu

Mr. Vinod K Dham

Prof. M Rammohan

Rao

Mr. T R Prasad

Prof. V S Raju

ISB Dean/Bharat electronics

Sasken Communication/Hellsoft /Montalvo Systems and Newpath

Former CabinetSecretary /GMR Infra/ GVK Taj

GTB/Dr. Reddy’s

Laboratories

B.Ramalinga RajuPromoter & Chairman

B.Rama RajuPromoter & CEO

Ram MynampatiWhole time Executive Director

Srinivas Vadlamani Chief Financial Officer

Satyam – Share holding Pattern

Institutional & Non-Institutional Shareholders

LIC 4.34%L&T 4%LazardAberdeen

13.16%FidelityICICI PrudentialCitigroupJP MorganTotal Market capitalization of Rs.

15,262 Cr (As on Dec 16, 2008 )

Satyam Decade at a Glance

Maytas Infrastructure

• The Raju’s hold 36.64 per cent while institutional holding is 10.92 per cent

• The company had raised Rs 327.45 crore through IPO.

• It had a turnover of Rs 1,660 crore and net profit of Rs 100 crore in the last financial year

• Satyam planned to acquire 51 per cent stake for Rs 1, 440 crore or $0.3 billion

Mr. Teja Raju(VC)

Maytas Properties

• Raju’s family owns 35% of Maytas properties• Founded in 2005, it has a land bank of 6,800

acres• It has clearances for three IT SEZs based on 148

acres• An undisclosed stake is held by Infinite India

Investment Management, a realty fund jointly promoted by JM Financial and US-based SRM Investments, which invested Rs 600 crore in February

B. Rama Raju Jr. (VC)

So, How did it all begun?

21 April 2008

22 Sep 2008

26 Jan 2009

Satyam revenues cross $1 Billion

2006

Satyam becomes first Indian company to

publish IFRS audited financials

Satyam receives the Golden Peacock Award for excellence in

Corporate Governance from World council

16 Dec 2008

Satyam backs out of Maytas deal citing investors protest

17 Dec 2008

26 Jan 2009

Major Clients of Satyam express dissatisfaction.Contracts worth $200 million up for grabs

Satyam gets board approval for

controlling stake in Maytas Infrastructure and Maytas properties

as fully owned subsidiary for $1.6B

(Rs. 8000 Cr.)

Satyam shares plunge 55 percent in NYSE. BSE share plunges over 30%

Board meeting to be held on Dec 29 for proposed buyback of shares

19 Dec

23 Dec

206Jan 2009

British mobile solution provider Upaid files a law suit

against Satyam in a district Court in the US over Maytas deal. May face $1 Billion in

penalties

20 Dec

Centre refers Satyam deal to Registrar of Companies (RoC)

World Bank bans Satyam for 8 years due to inappropriate payments to

staff and inability to provide information sought on invoices

26 Dec

28 Dec

26 Jan 2009

Board announces exploring option for buyback of

shares to restore investor

confidence

1st independent director Dr. Mangalam Srinivasan

resigns from Satyam board

Board meet initially scheduled for 29th postponed to 10th

January

29 Dec

3 more Independent Directors resign. Mendu Rammohan Rao, Krishna G

Palepu and Vinod K Dham

Satyam asks DSP to review board structure

Rumors in market about strategic

takeover by IBM, Accenture

IL&FS sells 44.1 lakh shares pledged shares of

Satyam promoters in 1 day. Promoters equity reduced from 8.6% to aprrox 7%

Satyam objects to world bank statements,

asks to apologies or

face legal action

Promoters disclose that their entire holding in Satyam

pledged with institutional lenders since 2006

30 Dec

02 Jan

26 Jan 2009

Post cancellation of deal, Maytas looks for raising

$500 million through sale of

equities and properties

IL&FS sells further 44.27 Lakh

pledged shares taking the tally to 1.5 crore pledged

shares

03 Jan

Satyam board confirms promoters stake to be

around 5%. Further 3.2% still pledged.

Satyam-Upaid case hearing over the

Maytas deal in Texas court on January 8.

05 Jan

06 Jan

26 Jan 2009

SEBI considers proposal to make it

mandatory for promoters and majority share

holders to disclosed pledged shares to stock exchange

Total pledged shares sold by IL&FS reaches 2.5 Cr. in last

13 days. Promoters stake down to 3.6%. Still a further

1.7% are pledgedPromoters stake in the company down

to 4.5%

Tech Mahindra (Revenues 3766 Cr.) offers to merge with

Satyam (Revenues 8473 Cr.)

The Night Before 7th Jan

Merill Lynch discovers serious irregularities in books of

accounts and approaches regulator SEBI for further

course of action and its inability to investigate further. DSP submits report to SEBI and

Satyam management late night.

07 Jan

26 Jan 2009

09:45 A.M. Satyam Chairman

Ramalinga Raju writes the following letter to the

company board

Adobe Acrobat Document

ADR’s crash 90%Satyam BSE scrip falls

78%

DSP snaps ties with satyam.

Auditing firm PWC under scanner

Govt. instructs RoC to review report

Ram Mynampati takes over as interim CEO according to Raju’s

letter

Hunt for Raju brothers begin. Amid speculation over his whereabouts, Raju is believed to have left for the United States

in connection with a court case.

Satyam stripped of Golden Peacock award

NSE removes Satyam from its benchmark index Nifty. It will be replaced by Reliance Capital with

effect from January 12. It will also be removed from various other indices like CNX 100, S&P CNX

500,CNX IT and the CNX Services sector index

08 Jan

09Jan

26 Jan 2009

Raju brothers arrested by the police on charges of criminal conspiracy,

cheating, forgery, misappropriation of funds and criminal breach of trust.

PwC in major trouble. Stocks of PwC clients take a major beating at the BSE and NSE

BSE to replace Satyam Computer with Sun

Pharmaceutical in its benchmark index Sensex with effect from January 12.

PwC shot back at Satyam, saying in a media statement that the

auditing was based on the audit evidence provided by Satyam and in was accordance with applicable

standards.

10Jan

CFO Valdamani Srinivas, who is the

financial custodian of the company resigns

Market Capitalization of satyam falls to Rs. 1,607 Cr from Rs.15,262 Cr. on Dec

16 in 19 trading sessions.

Former CFO Valdamani Srinivas

remanded to judicial custody

13 Jan

14Jan

26 Jan 2009

The newly appointed 3 member board appoints auditing firm KPMG and Delloitte to assist it in cleaning

the mess in the scam tainted company’s accounts

Government hands satyam case to SFIO

15Jan

Maytas stocks hit the lower circuit for 7th consecutive

trading session

23 year old employee of

satyam commits suicide in Chennai

16Jan

The government expanded the three-member Satyam board to six to include S

Balakrishnan of Life Insurance Corporation, Tarun Das, chief mentor of the

Confederation of Indian Industry and T N Manoharan, former president of the

Institute of Chartered Accountants of India

Why on 7Why on 7thth Jan 2009? Jan 2009?

• DSP Merrill Lynch informed SEBI about Material irregularities in Accounts on 6th Jan

• Minutes of Meeting of 16th December,2008 were not submitted to RoC-(This created some doubts)

• Hearing of Upaid- satyam case on 8th Jan at the US court

Raju ban gaya conman……How?

• Proposing High risk Maytas acquisition

• Overvaluing the proposed acquisition

• Promoter pledging their holdings (decrease in

holding)

• Refusing to resign

• Fudging Income statement

Maytas Acquisition • Valuation of Maytas duo was done at $1.6 bn as against actual $ 225 mn

• Violation of Section 372A of the Companies act

Fabricated Income Statements ‘Creative Account Practice’

• Details of cash balances with Scheduled banks are not there in the Annual report

• Question raised by Equity analyst Kawaljeet Saluja -$500 mn cash parked in current account

Overstated cash balances, Income receivables

Understated LiabilitiesFraud Amount

Why and How How ????

• Stake decreased from 21.6% to 3.6%• Money raised through 4 Front run Co. by

offloading pledged shares (under investigation)

0 50 100 150 200

Bangar Agro

Amravati Greenlands

Narayandri Greenfields

Harangi Agro

Amount (In Rs. Cr)

Amount (In Rs. Cr)

Share Pledging

Fake FD receipts and Employee Nos.??

Repeat the procedure

Parallel Finance Department ???

Satyam-Maytas Nexus Contd…..

• Cash raised & siphoned off funds used to buy several thousands of acres of land across AP through several benami accounts

• Helped Maytas in getting major contract

Some Comments

• If the first fraud is for Rs100, the next time add another zero. It (accounting fraud) grows exponentially – Anil Roy, Grant Thornton India

• It was like riding a tiger, not knowing how to get off without being eaten- Raju Ramalinga while admitting the fraud

• On Wikipedia, for the first time, India has been put on to the list of largest corporate scandals in the world, all thanks to Satyam – a blogger

STOCK CHARTING

Comparison – Satyam and Maytas share prices

The Inside News

• Satyam's CFO Srinivas Wadlamani has sold around 8,00,000 shares & even Satyam's interim CEO, Maynampati has sold 4,00,000 shares in past 6 months above Rs 300 per share.

• Satyam’s top 40 officials collectively sold shares worth more than Rs 300 crores in the past 6 months

Allegations by ROC• Violation of sect 372A of the Companies Act regarding

acquisition of shares in another company

• Violation of sec 293 of the Companies Act regarding the nature and proposed acquisition of stakes in Maytas Infrastructure and Maytas Properties.

• Maytas properties and Maytas Infrastructure made investments and advances in group companies far in excess of the limits laid down by sec 372, at a rate of interest lower than prevailing bank rate.

SEBI Investigation• Regulation 7 of the SEBI (Prohibition of Fraudulent Unfair

Trade Practices relating to the Securities Markets) Regulations, 2003

• Sub-regulation (1) of Regulation 5 of the SEBI (Prohibition of Insider Trading) Regulations, 1992

• Sub-regulation (1) of Regulation 29 of the SEBI (Merchant Bankers) Regulations, 1992

• Regulation 38 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

• Section 24(Contravening provisions of the Act or any rules or regulations) - Imprisonment up to 10 years and/or fine of up to Rs 25 crore

Share Pledging• SEBI Board has decided to make it mandatory for promoters of

companies to make full disclosures if they pledge shares

• The move, follows Satyam Computer Services Ltd promoter B Ramalinga Raju’s admission that he clandestinely raised funds upto Rs. 1200 crores by pledging his shares in the company.

• Promoters are required to inform their company of any pledge; the company would then inform the public through the stock exchanges.

• On 22 jan, Unites Spirits Ltd. share prices lost 23% on news that the promoters had pledged 18.6 million USL shares with financial institutions to raise Rs 2,800 crore to fund the Whyte & Mackay acquisition. On 23, the USL scrip lost another 16% to close at Rs 478.

Clause 49• The clause speaks about complying to various

corporate governance policies regarding directors, disclosures, transparency, accountability etc.

• Satyam managed to pull off a fraud of such magnitude despite formally complying with all the requirements under Clause 49

• Following the Satyam Saga, SEBI has already initiated steps towards strengthening the laws pertaining to Corporate Governance with the SEBI Committee on Disclosures and Accounting Standards (SCODA)

Sarbanes Oxley Act-2002• Satyam has ADRs listed on the NYSE, so they have to follow

American rules similar to those of American publicly traded companies. That includes having audited financial statements, using US GAAP, complying to SOX Act; still they managed to report cash more than $1 bn which does not exist at all

• “Some things can slip through the cracks.“- an attorney• Satyam is listed in the US and accordingly may face penal

action by the US Securities and Exchange Commission(SEC)• A lawsuit has already been filed against Satyam by a law firm

to check the compliance• Investigation under Sec 302 of SOX Act.

THE SATYAM FIASCO

THE LEGAL ANGLE…..

THE ETERNAL TRUTH WHEN IT POURS ,IT RAINS

IDHAR AAG.. UDHAR KHAI..

U.S. INDIA

CLASS ACTION COMPANIES ACT 1956

ANTI FRAUD PROVISION SECTION 10 B OF S.E.A

SECURITIES CONTRACT REGULATION ACT

SEBI ACT , 1992

INDIAN PENAL CODE

COMPANIES ACT , 1956

• SECTION 209:

Inspection of books of account, etc., of companies

• SECTION 388 B:

Reference to Tribunal of cases against managerial personnel.

• SECTION 388C:

Interim order by Tribunal.

• SECTION 408:

Appointment a completely new board or appointment of additional directors

once approved by the Company Law Board (CLB)

SECURITIES CONTRACT REGULATION ACT

• Non-compliance with the listing agreement invites sanctions under the

Securities Contracts (Regulation) Act (SCRA) which include imprisonment

and fines.

• The SCRA independently imposes an obligation to maintain books of

accounts or records as per the terms of the listing agreement.

• Violation of these terms may lead to a penalty of Rs 1 lakh for each day of

violation or Rs 1 crore whichever is lesser.

• The SCRA also provides that if a company fails to comply with the listing

conditions or commits a breach thereof, it shall be liable to a penalty up

to Rs 25 crore.

SEBI ACT ,1992-15G. PENALTY FOR INSIDER TRADING.

• If any insider who, -• (i) either on his own behalf or on behalf of any other person, deals

in securities of a body corporate listed on any stock exchange on the basis of any unpublished price-sensitive information; or

• (ii) communicates any unpublished price-sensitive information to any person, with or without his request for such information except as required in the ordinary course of business or under any law; or

• (iii) counsels, or procures for any other person to deal in any securities of any body corporate on the basis of unpublished price-sensitive information,

• Shall be liable to a penalty not exceeding five lakh rupees.

INDIAN PENAL CODE

• SECTION 120 B :

Punishment of criminal conspiracy

• SECTION 409 :

Criminal breach of trust by public servant, or by banker, merchant or agent

• SECTION 420:

Cheating and dishonestly inducing delivery of property

• SECTION 468:

Forgery for purpose of cheating

• SECTION 471:

Using as genuine a forged document or electronic record

Criminal Prosecution

• Failure to comply with Adjudication Officer’s orders attracts penalty

of:

– Imprisonment of at least one month, and upto ten years; or

– Fine of upto another Rs. 25 crores; or

– Both

• New concept of private prosecution in the SCRA

• Sessions Court alone may try offences

49

Immunity Power

• GOI may provide immunity from any penalty or prosecution .

• Immunity may be issued only on recommendation by SEBI.

• Raju can turn approver

CLASS ACTION

• Class action is a law suit brought on behalf of a class

or group of people who are harmed in similar

manner by an individual , group or body.

• Useful for people with economic losses small

enough to hire a lawyer individually

• Lawyers don’t charge but get a share of

compensation.

THE TAX ANGLE

• Till 2005 , satyam enjoyed complete exemption of

taxes under 80 HHC.

• Tax exemption to IT under sec 10 A- Software

technology park scheme.

• Hence satyam needs to repay and resettle the

deduction unduly enjoyed.

However the dark cloud is with a silver lining……

THE MANAGEMENT PERSPECTIVE

• Corporate governance

• Comparison with similar cases

Role of Auditor

• According to law there should be an external and an internal auditor(can be outsourced)

• Job is to check whether processes are being followed and are accurate and adequate

• One of the key audit test is to validate firm’s cash and bank balances(what was PwC doing)

• Dec 05 - RBI bars PwC from bank audits after it found that the firm under-provided for non-performing assets of Global Trust Bank

• Mar 06 - Out of court settlement with shareholders of Internet Company E-district

• Mar 07 - Raid by Russian Ministry in criminal cases related to oil firm OAO Yukos

• July 07 - Paid $225 million to shareholders of Tyco international after proved guilty of accounting fraud

• July 08 - Facing a probe at Scottish Mineral water subsidiary for inability to spot $90 m fraud

And Now the Satyam Fiasco

In the trap..PwC

• One of the big four Auditors world wide ( Revenues of $28 Bn)

• Arthur Andersen(child of PwC) & Enron -Year 2001-02• Evading Income tax & Service tax in at least two cases

of tax evasion.• Imp thing to note that How could PwC have no clue

of inflation of Balance sheet to 5,040 crores since yrs and DSP ML realizing it in less than 2 weeks

Wary Investors exit PwC Clients

• Investors brought shares of other companies in the same sector

• Out of 100 clients of PwC, most companies share fell by 5-15%.

• Risk of Reputation• The ICAI & RBI stand on this

What’s on currently….• CA ministry dissolved the Satyam Board and

announced new members• 3 more members-chief mentor of CII Tarun

Das, ex-president of ICAI T N Manoharan and S Balkrishna Mainak of LIC

Deepak Parekh

Former HDFC Chairmam

Kiran karnik

Former NASSCOM Chairmam

C Achutan

Former SEBI Member

What after that:

• Board says No to financial Bailout package

• Lazard sold its 5.3 % stake

• KPMG and Deloitte appointed as auditors but will be working through Indian subsidiaries

Other Options for the Government

• Satyam to be broken up into pieces BPO, Verticals, Service Lines• Stabilize Satyam and merge with bigger IT firm

( as L & T hike in its stake)• The new team may fight back to retain the

existing clients and once everything settled may emerge again

In the News..

Thankyou