The old aphorism “All that glitters is not gold” finds legitimacy in what came to be known as the Satyam Scam in the late 2000s. A financial chicanery that withered away the trust of global companies in the Indian regulators, periled job security, thrust shareholders into uncertainty, and exposed the hypocrisies of champions of corporate governance.
Background:
In 1987, Satyam Computer Services Ltd. was initially a private limited company, which later became public by launching an initial public offering (IPO) in 1991. During the IPO, the company had diluted 81.22% of its shareholding to the public, with promoters having only 18.78% by 1992.
Satyam had about 3 lakh shareholders and over 50,000 employees. It stood tall among big IT firms such as TCS, Wipro, and Infosys. It had business with 185 Fortune 500 companies in over 60 countries.
Satyam had a net worth of $ 1 billion in 2003, which crossed $ 2 billion in the next 5 years. As of the end of December 2008, it had a market capitalization of about $6.8 billion.
Satyam was the first Indian company listed on the NYSE, Euronext Amsterdam, and the National Stock Exchange (NSE). Further, it was the first global company to use the AFM’s Fast Path application—a speedy method—to cross-list on Euronext Amsterdam.
Whistleblowing: How The Matter Surfaced
In the early 2000s, real estate was a rewarding business. In pursuit of booking gains, Satyam Computer Services Limited’s Managing Director and CEO, B. Ramalinga Raju (hereafter B. Raju), invested a corpus in land in and around Hyderabad. He was acquainted with the fact that land prices would peak in the following years due to exponential industrial development and metro projects.
B. Raju and his kins owned real-estate companies– Maytas Infrastructures and Maytas Properties. Maytas was nothing, but Satyam spelled backward.
In pursuit of his avarice, he started diverting Satyam’s finances to Maytas.
On December 16, 2008, B. Raju announced investing the available $1.6 billion in Maytas companies to supplement profit booking by investors. This announcement met with vehement opposition from the market regulator and investors.
Although the board members were oblivious to the happenings, a person using the pseudonym of Mr. Jose Abraham, who claimed to be a former senior executive at Satyam, blew the whistle.
On December 18, 2008, Mr. Jose wrote an email to the company’s independent director, Krishna G. Palepu, taking the lid off the asset liquidity crunch in Satyam. This mail passed through many hands before reaching Mr. B. Ramalinga Raju. Satyam’s CEO, thence, was inundated with calls from the audit committee and compelled with the only option of letting the cat out of the hat. Shockingly, this cat had gorged down Rs. 7,800 crore.
Confession Came With Resignation:
It was time to let the skeleton in the cupboard out of it. On January 7, 2009, a ‘confessional-cum-resignation letter’ upended the fate of Satyam Computer Services Limited. The company’s chairman and managing director, B. Raju, made a startling revelation that sent shock waves across the board. He blew the gaff on a series of financial discrepancies hidden in the books of accounts of Satyam. He revealed:
As of September 30, 2008, cash and bank balances in the balance sheet were Rs. 5160 crores, while reality showed Rs. 130 crores. Hence, Rs. 5020.55 crores were fictitious.
The balance sheet showed an understated liability of Rs.1230 crores. It had a fictional accrued interest of Rs. 376 crores. The debtors were overstated by Rs. 490 crores, reflecting Rs. 2651 crores in the books.
None of the board members knew of this scandalous budding controversy worth Rs 7800 crore.
Satyam Computers reported, for the 2008 September-ending quarter, a revenue of Rs. 2,700 crores, whereas, in reality, they clocked Rs. 2,112 crores.
Operating margin shot to a fabricated amount of Rs. 649 crore (24% of revenues) from Rs. 61 crore (3% of revenues). Artificial cash and bank balances expanded Rs. 588 crore in a single quarter.
What began as minor financial discrepancies catapulted to mammoth amounts, filling gaps for which became a challenge. Although B. Raju considered putting some profits from Maytas back into Satyam by then, the difference had widened limitlessly.
B. Raju employed practices such as hyper-inflating sales figures by generating false invoices, dumping shares of Satyam Computers on price rises, floating 327 companies and their financial activities and fictional revenues, etc. to deceive board members.
Accomplices: He carried out this conspiracy hand-in-gloves with the internal auditors of the company and some external auditors from the esteemed consulting firm Price WaterHouse, Bangalore.
PWC was the statutory auditor of the computer company from 2000 to 2008.
Subramani Gopalakrishnan, and Srinivas Talluri, partners at auditing firm Price WaterHouse, Lovelock & Lewes Kolkata; V.S Prabhakara Gupta, Head Internal Audit at Satyam Computers; CFO Vadlamani Srinivas were some known alleged accomplices.
Sham companies: B. Ramalinga Raju opened 327 companies which were ostensibly carrying out agricultural and other allied activities.
He used those companies as a parking lot where the proceeds derived from pledging or selling inflated shares of Satyam Computers found space and later invested in real estate.
Out of these companies, some were dubbed as loan companies, while some were investment companies.
Real estate: B. Raju later, during the investigation, admitted to using Satyam’s money to buy prime land in and around Hyderabad.
SFIO also alleged Satyam of re-routing foreign earnings to tax havens like Mauritius before parking those in Maytas Infrastructure and other ventures of Mr Raju and his relations.
Stock price crash: In 2008, the stock price of Satyam Computers spiked from Rs. 10 to Rs. 544. However, the controversy of the fudging of funds erased a massive market cap of the company, with the company’s shares floating at around Rs 12 apiece.
Irresponsibly responsible firm: Oxymoronically, Satyam Computers was considered a socially responsible company exhibiting world-class corporate governance. It received the Golden Peacock Award for Excellence in Corporate Governance in 2008.
It was also a recipient of the Partner Innovation Award for Anti-Money Laundering Solution by Pegasystems. What is more sardonic is that Satyam’s internal audit team bagged the Recognition of Commitment award (RoC) from the Institute of Internal Auditors, USA.
Complicit PWC Auditors:
The whistle-blower’s letter, warning hyperbolic bank balances could not wake the sleeping lion.
Events like the deferring of the audit report for the year ended December 31, 2008, by the management citing ‘preparedness’; abandoning Maytas Infra Ltd. deal; the resignation of four independent directors during the last week of December 2008; World Bank’s announcement to bar Satyam from doing business with it for eight years, failed to raise red flags.
PWC showed no activeness in seeking loopholes.
Nearly 7,561 invoices were fake. They, albeit, increased the sales revenue. They showed debtors overstated by hundreds of crores, but the auditors relied on their instinct and forgot to see external confirmation about the debtors.
Aftermath: Tech Mahindra Took Over “Orphaned” Satyam
On the date of confession- January 7, 2009, the Securities and Exchange Board of India (SEBI) launched an investigation into the matter. Later, on January 13, the Government of India ordered the Serious Fraud Investigation Office (SFIO) to investigate.
The government acted promptly within 48 hours of the revelation to salvage the company, protect employees’ and shareholders’ interests, and shield the international image.
Satyam’s clients included some of the largest banks, manufacturers, healthcare, and media companies from different countries, taking computer systems and customer services. General Electric, General Motors, Nestlé, and the US government were to name a few.
The Indian government applied to the Ministry of Corporate Affairs (MCA) before the Company Law Board, urging suspending Satyam’s Board of Directors and replacing them with 10 Nominated Directors.
The Company Law Board accepted the request, and the government got the task of constituting a new Board comprising 10 persons of eminence, out of which the government appointed six directors for the ‘time being’.
They included Vinod K Dham (aka father of Pentium), M Rammohan Rao (Dean of Indian School of Business), U S Raju (ex-director of IIT Delhi), TR Prasad (former union cabinet secretary), M Srinivasan (retired professor from US universities) and Krishna Palepu (Professor at the Harvard Business School).
The newly formed Board met within 7 days and submitted time-wise reports to the Central Government, per governmental directions. The Directors convened for the first time on 17th January, followed by 22nd and 23rd January, 2009.
Solution For Cash-Strapped Satyam:
The Board of Directors unraveled that the company was going through an ‘acute liquidity crisis’. It was cash-strapped, hardly able to run day-to-day operations. Therefore, the Board of Directors passed a resolution on January 22 to obtain loans up to Rs.600 crores.
The loans secured were sufficient to meet short-term requirements.
However, to save the doomed company, the Board deemed the induction of an equity partner appropriate for the infusion of fresh capital.
Thereby, acting upon the application received on February 18, 2009, the Company Law Board passed an order directing the Board:
(1) to pass a resolution for amending the capital clause of the Memorandum of Association (MOA) and increasing the authorized equity share capital from Rs.160 crores to Rs.280 crores.
(2) to pass a resolution authorizing itself to make a preferential allotment of equity shares at par or a premium;
(3) to induct a strategic investor, selected through a transparent, open, and competitive price bid auction; overseen by a retired Judge of the Supreme Court or a former Chief Justice of India. [M/S. Satyam Computer Services Ltd vs Directorate Of Enforcement, 2018]
The order made it compulsory for the Board of Directors to obtain prior approval from the Company Law Board before moving ahead with the allotment of shares on a preferential basis.
Tech Mahindra Won Bidding Battle:
On 19 February 2009, BoD passed a Request for Proposal, inviting an Expression of Interest on or before March 20, 2009, for an infusion of Rs.1000 crores.
The retired Chief Justice of India, Shri S.P. Bharucha, was entrusted with overseeing the bidding process.
Finally, on 13 April 2009, Venturebay, a subsidiary of Tech Mahindra Limited, grabbed the deal by winning the bid.
On 16th April, the Company Law Board approved the induction of Venturebay as a strategic investor.
Tech Mahindra deposited Rs.1,756 crores and later infused additional funds worth Rs.1152 crores through an open offer. Hence, with a final sum of Rs.2908 crores.
It was how Satyam Computer Services, a lost child of a greedy father, was adopted by Tech Mahindra with a promise to nurture it with the best corporate governance practices.
The underpinning for this statement is in ‘order’ passed by the Company Law Board on 16th April 2009, which suggested an alternative title for the order by “Adoption of Orphan Satyam” or “Orphan Satyam Adopted”.
Also Read: List of biggest, Top 10 scams in India