The gem in the crown of the Indian information technology (IT) sector previously belonged to Satyam Computers, but its founders' financial malfeasance drove it to its knees in 2009. A discussion on the Chief Executive Officer's (CEO) role in boosting a company to new levels of success, as well as the CEO's relationship with the Board of Directors and the creation of important committees, was triggered by Satyam's unexpected collapse. The crisis made it clear how crucial corporate governance (CG) is to developing audit committee requirements and board member duties. The Satyam crisis shocked the market, especially Satyam investors, and it also damaged India's standing on the international stage.
Background story of the Satyam fraud case:
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 organisations.
Satyam kept adding achievements to its resume by becoming the first business in the world to launch a Customer-Oriented Global Organisation 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.
Total revenues for Satyam during the fiscal year 2003–2004 were Rs. 25,415.4 million. The company's sales revenue had more than tripled by March 2008. The company expanded at a compound annual growth rate of 38% over that time. Operating profit margins, net profit margins, and operating cash flows all averaged 28, 33, and 35%, respectively. Profits per share (EPS), which increased from $0.12 to $0.62 at a compound annual growth rate of 40%, also increased. It is evident that Satyam significantly increased business value and shareholder value. The business was a household name and a rising star in the global IT industry. Unfortunately, less than five months after winning the Global Peacock Award, Satyam found itself in the centre of a significant accounting fraud.
What led to the fraud in Satyam:
- In order to utilise the available capital for the advantage of investors, Satyam's chairman, Mr. Ramalinga Raju, announced a $1.6 billion offer for two Maytas companies, namely, Maytas Infrastructure Ltd. and Maytas Properties Ltd., on December 16th, 2008. This is when Satyam's issues started. The two companies have been promoted and managed by Raju's family. He received negative feedback from investors and the market, which compelled him to make a withdrawal within 12 hours. The value of Satyam's stock dropped by 55% as a result of worries about its corporate governance. On December 23, 2008, Satyam was banned from doing business with the World Bank for eight years after the international organisation accused it of stealing its data and corrupting its workers.
- On December 28, 2008, the company's sole independent director, US academic Mangalam Srinivasan, announced his resignation. He was followed by three additional independent directors, Vinod K. Dham (known as the inventor of the Pentium and a former employee of Intel), M. Rammohan Rao, and Krishna Palepu, a professor at Harvard Business School.
- On January 7, 2009, B. Ramalinga Raju resigned from his position as chairman of Satyam after confessing to a financial fraud totaling more than Rs. 7800 crore. He claimed in his letter that the acquisition of the Maytas companies was his last effort to convert fictitious assets into real ones. He wrote in his letter that it was like riding a tiger and not knowing how to get off without being eaten. The owners of Satyam, B Ramalinga Raju and B Rama Raju, were detained by Andhra Pradesh state police, and the company was taken over by the Central Government.
- The Raju brothers were accused of criminal breach of trust, forgery, cheating, and criminal conspiracy under the Indian Penal Code, 1860. The Central Government reconstituted Satyam's board, and three members—HDFC Chairman Deepak Parekh, former Nasscom Chairman and IT expert Kiran Karnik, and former SEBI member C Achuthan—were appointed. The Central Government appointed three individuals to the newly reconstituted Board: CII Chief Mentor Tarun Das, TN Manoharan, a former president of the Institute for Chartered Accountants (ICAI), and S Balakrishnan, a representative of LIC. A week after Satyam founder B Ramalinga Raju's shocking confession, Satyam's auditors PricewaterhouseCoopers (PwC) ultimately declared that their audit report was wrong because it was based on erroneous financial statements presented by Satyam's management.
- On January 22, 2009, Srinivas Vadlamani, CFO of Satyam, acknowledged inflating the workforce by 10,000. He told the CID investigators that doing this allowed him to take out around Rs 20 crore from the related but bogus salary accounts each month. Suryanarayana Raju, the younger brother of Ramalinga Raju and the owner of 4.3 percent of Maytas Infra, had his home raided by the Andhra Pradesh State CB-CID, and 112 sale deeds for various property purchases and development agreements were found there. S Gopalakrishnan and Srinivas Talluri, senior partners at PricewaterhouseCoopers (PwC), were imprisoned for their alleged involvement in the Satyam fraud. On charges of fraud (Section 420) and criminal conspiracy (Section 120B), they were detained by the state's CID police
The silent role played by Satyam’s auditors
- There were nine people on the Satyam Board of Directors. The Board was composed of five independent members, as required by Indian listing regulations. In regulatory filings with the SEC, Satyam declared that in 2008, its board of directors was without a financial expert. Following then, questions regarding the Board of Directors' lack of independence also surfaced.
- The Board came under fire on December 16, 2008, for sanctioning Satyam's acquisition of real estate businesses in which Mr. Raju held a major stake. The Board of Directors rescinded the authorisation in response to a shareholder revolt. Vinod Dham, Rommohan Rao, and Krishna Palepu all left the Board two days after the deal was scrapped. Investors had the impression after the botched transaction that Satyam was not being closely watched by the Board of Directors. Additionally, the auditor PwC missed key red flags that the Board of Directors should have seen.
- Furthermore, the Board of Directors ought to have been concerned by the fact that Mr. Raju significantly decreased his Satyam shares in the three years before to the fraud's detection. Mr. Raju's ownership interest in the business decreased from 15.67% in 2005–2006 to 2.3% in 2009.
Conclusion:
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. The stock, which had hit an all-time high of Rs. 542 in 2008, crashed to an unbelievable Rs. 6.30 on January 9, 2009, the day Raju made his confession.
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