THE SATYAM SCANDAL
ANATOMY OF A FRAUD , A 7000 CR LIE
Sneha Bhardwaj, Researcher
SATYAM SCAM, OR SATYAM COMPUTER SERVICES Up till 2010, SCANDAL was one of India's largest corporate fraud cases. Up till 2010, the biggest corporate fraud in India. It was an outsourcing business with an Indian base called Satyam Computer Services. The company's founder and directors misrepresented the finances, artificially inflated the share price, and embezzled substantial sums of money. All of the money taken from this place was used to buy real estate. When the real estate market in Hyderabad crashed in late 2008, Satyam was left in its wake. The fraud was only then revealed.
When chairman Byrraju Ramalinga Raju admitted that the company's finances were fabricated, the matter was made public in 2009. The crisis made it clear how crucial good corporate governance is to developing audit committee requirements and board member duties. The Satyam affair shocked Satyam's investors in addition to damaging the company's reputation in the global market. In September 2008, Satyam won the Golden Peacock Award for the bestgoverned company, which it again won in 2007 and 2009. Raju and his brother, Mr. B. Rama Raju, the company's managing director, are accused of hiding the truth from the board, senior management, and auditors.
An overview of the Satyam fraud case's history
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.
After TCS, Infosys, and Wipro, it was ranked as India's fourth-largest software exporter. The firm had substantial growth in the 1990s. 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 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.
Victims of the satyam firmware case
1. The Satyam employees experienced stressful times and sleepless nights due to non-payment of salaries, the cancellation of their projects, layoffs, and equally bleak employment prospects outside of Satyam. They were not only morally and financially trapped but also socially and financially trapped.
2. After reevaluating their contracts, Satyam's clients decided to work with their competitors. Cisco, Telstra, and the World Bank all terminated Satyam's contracts. The project's lack of continuity, secrecy, and cost overrun surprised customers.
3. Investors lost their money and had doubts about India's resurgence as a top destination for investments. the incident had "inflicted incalculable and unjustifiable damage to Brand India and Brand IT in particular," according to a statement from Mahindra's VC and MD.
4. Bankers were concerned about the recall of facilities as well as the recovery of financial and non-financial exposure. There were various factors involved in the Satyam fraud case. A number of factors contributed to the Satyam fraud. None of the Satyam's independent board members, including the dean of the Indian School of Business, a professor at Harvard Business School, and a former Intel executive, the institutional investor community, SEBI, retail investors, the external auditor, or professional investors with access to detailed information and models, found the wrongdoing.
A list of the following elements can be seen as contributing to the fraud:
2. Bold corporate expansion.
3. False reporting procedures and a lack of transparency.
4. An excessive focus on keeping stock prices steady.
5. Rewards for executives.
6. Expectations for the stock market.
7. The character of accounting laws.
8. ESOPs were given to those who created fake currency.
9. High-risk transactions that failed.
10. Auditing blunders (both Internal & External).
11. The aggressiveness of commercial and investment banks.
12. Investors and rating companies.
The effects of the Satyam fraud
1. The Indian government immediately opened an investigation, but it only took a minimal amount of direct involvement. 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.
2. As soon as possible, the board assembled with bankers, accountants, lawyers, and government representatives to develop a selling strategy. The company's board of directors hired Goldman Sachs and Avendus Capital to sell it as soon as possible.
3. Satyam's market capitalization peaked in 2008 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.
4. Satyam's stock hit a high of 544 rupees in 2008 before falling to 11.50 rupees on January 10, 2009, its lowest level since March 1998. On the New York Shares Exchange, Satyam's stock reached a high of US$29.10 in 2008; by March 2009, it was trading at about US$1.80. Satyam stockholders suffered a $2.82 billion loss as a result.
5. Among other things, Mr. Raju was accused of criminal conspiracy, breach of trust, and forgery. Following the Satyam scandal and PwC's involvement, investors lost trust in PwC's clients, which led to a 5% to 15% decline in the share prices of almost 100 companies. Concerns were raised after the scam's disclosure (which was soon connected to Enron's bankruptcy), with the benchmark Sensex falling.
Investigation in the Satyam Scandel case
A probe into the Satyam fraud case -
1. The Satyam scam has drawn attention to the involvement of numerous authorities, courts, and laws in a serious infraction committed by an Indian publicly traded company. Following the investigation that followed the fraud's discovery, charges were brought against multiple distinct groups of people associated to Satyam.
2. Indian authorities detained Mr. Raju, Mr. Raju's brother, B. Ramu Raju, the former managing director of the company, Srinivas Vdlamani, the head of internal audit for the company, and the company's CFO on charges of fraud. 3. Indian authorities also detained and filed fraud charges against several of the company's auditors (PwC). The Institute of Chartered Accountants of India found the CFO and the auditor guilty of professional misconduct (ICAI 2009).
4. In the United States, the owners of Satyam's ADRs have brought numerous civil lawsuits against the business. In the investigation, a number of Indian politicians were also named. In addition to legal litigation in the United States, criminal and civil lawsuits are still proceeding in India. Regulation and corporate governance changes in India The Satyam affair shed light on the financial system of the nascent democracy while also highlighting the various shortcomings of the Indian legal system.
Following are the reforms that were implemented following the well-known scandal:
1. Following the Satyam crisis, investors and authorities called for a tighter regulatory framework in the securities markets. In response to the Satyam affair, the SEBI raised the requirements for corporate governance (CG) and financial reporting for publicly traded companies listed in the country. Additionally, the SEBI underlined its dedication to putting International Financial Accounting Reporting Standards into practise (IFRS). In order to make it easier for shareholders to bring class-action lawsuits, the Ministry of Corporate Affairs (MCA) has also prepared a new Corporate Code and is thinking about changing the securities laws. Some of India's most recent CG reforms include the following:
The appointment of independent directors, the disclosure of pledged securities, and the expansion of financial accounting disclosures.
• The IFRS,
• A new corporate code has been developed by the Ministry of Corporate Affairs.
2. Satyam flagrantly disregarded all rules governing corporate governance. The Satyam fiasco acted as a red flag for bad CG procedures. It has failed to uphold a good rapport with both its stockholders and employees. The company's failure to uphold its duties to numerous stakeholders led to Satyam's CG issue. Separating the roles of the board and management, separating the tasks of the CEO and chairman, appointing board members, separating the pay of directors and executives, and protecting the interests of shareholders and their executives are all of particular significance.
3. Scandals like the Enron scandal and the current financial crisis have repeatedly shown the need for moral behaviour based on strong ethics. That such tricks can be pulled at any time, anywhere in the globe, is not surprising. To stop future scams like the Satyam scandal, the Indian government strengthened its CG regulations. To safeguard the interests of investors and maintain India's standing and reputation abroad, the government moved swiftly.
Recommendations and ideas to prevent future fraud of this nature
The board-dominated culture of Satyam exemplified an immoral culture. Contrary to Enron, which failed due to an agency problem, the tunnelling effect brought Satyam to its knees. Scams of many stripes have shown how important having outstanding behaviour based on solid ethics is. Some important suggestions have been made below, keeping in mind the management's way of operation in the Satyam fraud:
1. Businesses must promote the moral, ethical, and social values of their CEOs.
2. Board members must be proactive and watchful in defending the interests of owners. They must recognise the seriousness of the trust entrusted to them.
3. There was a lack of precise and timely information in Satyam's case.
4. Shareholder activism is a powerful tool for reining in a company's management.
5. Institutional investors and block holders can also contribute to ensuring that the board and management are held responsible. Finally, both the letter and the spirit of the CG framework must be respected