SAT PRAKASH

8/7/2019 SAT PRAKASH

1/29

PROJECT ON

RAMALINGA RAJU SCAM

(SATYAM COMPUTERS)


2/29

PROJECT ON RAMALINGA RAJU

SCAM

SUBMITTED BY

PRAKASH GUDUGULA

ROLL NO: 04

T.Y.B.B.I

SUBMITTED TO

PROF. ANANDITA BANERJIE


3/29

INTRODUCTION

"The truth is as old as the hills" opined Mahatma Gandhi, christened the Father of the Nation by

Indians. So a company named "Satyam" (Truth, in Sanskrit) inspired trust. The IT boom in India,

was fuelled by young, middle-class, educated, budding Indian entrepreneurs and Western firms

anxious to outsource to take advantage of high-skill, low-wage worker. This trend created a new

breed of businessmen for the 21st century and generated many fortunes literally overnight.

Byrraju Ramalinga Raju- founder and former chairman of Indian IT giant Satyam Computer

Services- was one of these new millionaires. The son of a farmer from a middle class family with

an American MBA degree and a 1999 Ernst & Young Entrepreneur, Raju started Satyam and

worked his way to make the company a top 5 Indian IT firm with clients in 60 countries. Satyam

is listed on the New York Stock Exchange (NYSE) and the Bombay Stock Exchange.

Along the way Raju picked up CNBC's Asian Business Leader - Corporate Citizen Award and

1,000 designer suits, 321 pairs of shoes, 310 belts. The capitalization of Satyam skyrocketed to

$9-billion. It consequently crashed by 78% when Raju confessed in January that he had falsified

accounts for 6-years and inflated the cash account by over $1-billion.

The Government is now managing Satyam through a new Board. Satyam had fictitious names

that diverted $4-million monthly towards the Raju's "personal wealth" by inflating the number of

employees of the company from 40,000 to 53,000; hundreds of acres of land were bought using

phony accounts; certificates from HDFC bank confirming deposits were false.


4/29

SATYAM FRAUD

The Andhra Pradesh government on Wednesday promised to render all possible assistance to the

Central Bureau of Investigation (CBI) in probing the massive fraud in Satyam Computer

Services after the High Court expressed its displeasure over the lack of cooperation with the

investigating team.

On a direction from the court, the government filed a report within two and half hours, detailing

the steps it would take to extend cooperation with the multi-disciplinary team of the CBI.

After being rapped by the judge for not cooperating with the CBI team, the government informed

the court that it would provide the state-owned Dilkusha Guest House on Raj Bhavan road to the

investigating officials.

It also promised to provide all necessary cooperation to the agency to complete the probe.

Earlier, in an extraordinary move the CBI approached the High Court, complaining that the

government was not extending cooperation in the investigations.

Taking a serious note of the governments attitude, Justice N.V. Ramana directed the state

government to file its reply within two and half hours.

The CBI plea and the courts displeasure have come as major embarrassment to the Congress

government, which was already under fire from the opposition for being soft towards the

disgraced founder and former chairman of Satyam B. Ramalinga Raju and other accused.

The government came under criticism for the delay in recommending to the central government

to order a CBI probe. Opposition parties alleged that the probe by the Crime Investigation

Department (CID) of the state police was aimed at shielding the accused.

The CBI last week took over the investigations into the Rs.70 billion accounting fraud, the

biggest in Indias corporate history.
http://www.satyamscam.in/http://www.satyamscam.in/


5/29

The premier investigating agency formed a multi-disciplinary team to probe the fraud, which

Ramalinga Raju admitted to Jan 7.

The 23-member team comprising officials from CBI, Income-Tax Department, Registrar of

Companies, Securities and Exchange Board of India (SEBI), Serious Fraud Investigation Office

(SFIO), representatives of Institute of Chartered Accountants of India and Institute of Cost and

Works Accountants of India and legal experts landed here Friday.

Though CID handed over all the evidence and material gathered so far to the CBI team, the latter

felt the state authorities were not providing necessary facilities.

Since CBI has only a small office here, the team was facing an accommodation problem and also

had trouble storing and protecting 200 trunk loads of documents handed over by the CID. These

documents were seized from the offices of Satyam and the residence of Ramalinga Raju and

other accused.

Ramalinga Raju, his brother and former managing director B. Rama Raju, former chief financial

officer Vadlamani Srinivas and two former auditors from Price Waterhouse have been arrested

and are lodged in Chanchalguda central jail here.


6/29

Ramalinga Raju

Profile

Born:September16,1954

Achievement:Founder and Chairman of

Satyam Computer Services Ltd; Chosen as

Ernst & Young Entrepreneur of the Year for

Services In 1999

Ramalinga Raju is one of the pioneers of the

Information Technology industry in India. He is the founder and Chairman of Satyam

Computer Services Ltd.

Ramalinga Raju was born on September 16, 1954 in a family of farmers. He did his B. Com

from Andhra Loyola College at Vijayawada and subsequently did his MBA from Ohio

University, USA. Ramalinga Raju had a stint at Harvard too. He attended the Owner /

President course at Harvard.

After returning to India in 1977, Ramalinga Raju moved away from the traditional agriculture

business and set up a spinning and weaving mill named Sri Satyam. . Thereafter he shifted to

the real estate business and started a construction company called Satyam Constructions. In

1987, Ramalinga Raju founded Satyam Computer Services along with one of his brothers-

in-law, DVS Raju. The company went public in 1992. With the launch of Satyam Info way

(Sify) Satyam became one of the first to enter Indian internet service market. Today, Satyam

has a global presence and serves 44 Fortune 500 and over 390 multinational corporations.

Ramalinga Raju has won several awards and honors. These include Ernst & Young Entrepreneur

of the Year for Services in 1999, Dataquest IT Man of the Year in 2000, CNBC's Asian

Business Leader - Corporate Citizen of the Year award in 2002 and E&Y Entrepreneur of the

Year Award in2007.


7/29

Satyam fraud: Full text of Raju's letter to board


8/29


9/29


10/29


11/29


12/29


13/29


14/29

How Satyam pulled off India Inc's biggest fraud

The government vowed to strengthen laws to prevent corporate fraud after Satyam Computer, the

country's fourth-largest software company, shocked investors by revealing profits had been

falsely inflated for years.

Chairman Ramalinga Raju resigned on Wednesday after revealing India's biggest corporate

scandal in memory, sending the company's shares plunging nearly 80 per cent.

The following is an overview of how the fraud escaped detection for so long and what compelled

a soft-spoken man born into a family of farmers to risk all.

ESCAPING DETECTION

On the face of it, New York-listed Satyam did everything by the rulebook, with an international

firm auditing its books, declaration of accounts in accordance with Indian and US standards, and

the requisite number of independent directors with excellent credentials, including a Harvard

business school professor and a former federal cabinet secretary.

Raju, in his now famous 5-page letter outlining the deception, said no other board member -- past

or present -- was aware of the financial irregularities.

Regulators were blindsided, and analysts and experts say there are "systemic flaws" in

accounting and audit practices.

About $1 billion, or 94 per cent of the cash, on the company's books was fictitious, Raju said,and manipulation of the cash flow may be a reason why the fraud was undetected.

"Companies have manipulated P&L (profit and loss) accounts before, but cash flow is the Holy

Grail -- you don't tamper with it," said Saurabh Mukherjea, an analyst at UK-based research firm

Noble Group.


15/29

"Auditors generally assume if there is cash, things are OK. But there are plenty of accounting

and governance loopholes."

India also lacks a culture of dissent, with shareholders and independent directors reluctant to

question company founders.

THE MOTIVE

India's $50-billion information technology industry -- the poster child for India's economic

liberalisation and rapid growth -- expanded at a scorching pace on the back of outsourcing

demand from Western firms.

At the height of the boom, top software firms Tata Consultancy Services, Infosys Technologies,

Wipro and Satyam consistently reported annual 50-per cent increases in profits every quarter.

Pressure to maintain this pace of growth, please investors and shareholders and justify inflated

P/E multiples during a six-year bull run on the stock market have all been cited as reasons why

Satyam cooked the books.

Some news reports say Raju was an aggressive investor in failed dotcoms, and the family also

put money in real estate.

Raju, in his letter, said he had "not benefited in financial terms" as a result of the inflated

accounts.

ARE THERE MORE SATYAMS OUT THERE

Most certainly, say analysts and industry experts.

While there has been a plea from chief executives across the board against painting all of

corporate India with the same brush, Noble Group estimates at least a fifth of the top 500 listed

companies practice "creative accounting".

"At its most innocent it is not illegal, but account manipulation is very pervasive," said

Mukherjea.


16/29

HOW TO PREVENT ANOTHER SATYAM

Tighter rules for accounting and corporate governance, including appointment of independent

directors by selection committees, and greater oversight from regulatory and government

authorities.

Noble Group also suggests separation of audit and consultancy functions at companies, and

quicker publication of annual reports.


17/29

Sensex sheds 749 pts on Satyam fraud

The Bombay Stock Exchange benchmark Sensex on Wednesday suffered the most this year by

losing 749 points on panic selling by funds after Satyam Computer said profit had been inflated

for years, raising concerns of dim third-quarter earnings by blue-chip companies.

The Sensex, which had gained over 688 points in the last four sessions of 2009, tumbled belowthe crucial 10,000 point level, losing 749.05 points to reach 9,586.88. It touched the day's low of

9,510.15 and a high of 10,469.72 points, showing a wide fluctuation of nearly 960 points.

Satyam Computer crashed by Rs 139.15 or 77.69 per cent to close at Rs 39.95, after the

Chairman announced the company had falsified accounts and assets for several years.

Amazingly, the company ADR on the US stock market -- Nasdaq -- closed higher by four per

cent last night.

The declining Sensex recorded the biggest single-day loss in the past two months, after Satyam

Computers Services, the country's fourth-largest software developer, plunged around 80 per cent,

the highest since getting listed in 1992.

The 50-share National Stock Exchange index Nifty tumbled by 192.40 points at 2,920.40, after

hitting the day's low of 2,888.20 points during the day.

Reliance Industries, with the highest weight in the Sensex, fell 12.52 per cent to Rs 1,196.80, the

most since November 5. ICICI Bank, the second-largest lender, fell 10.53 per cent to Rs 468.05,

the most since October 24.


18/29

With the market sentiment shattered, five of the 30 Sensex stocks were higher on selective

buying. They were Infosys Technologies, Maruti Suzuki, Wipro, Grasim and Hindustan

Unilever.

Mah Satyam billed Rs 570 cr for fraud

The Income Tax Department has raised a demand of about Rs 570 crore on Mahindra Satyam

(earlier Satyam Computer Services) for illegally claiming tax credit on fictitious income during

the 2003-04 to 2008-09 period.

"We have asked the company to pay about Rs 570 crore as tax, as the company claimed the

credit on tax which it did not pay overseas," official sources said.

Satyam Computer Services, which was acquired by Tech Mahindra in April last year after the

software firm got embroiled in a nearly Rs 10,000 crore scam, had claimed credit on tax paid

overseas on interest income.

However, the so-called income was found to be fictitious, and so was the tax payment claim, the

sources said.

As such, no tax credit was due to the company and the department has raised a demand, which

includes interest on the delayed payment as well, they said.

Although the company has asked the department to overlook the income, as it was fictitious,

sources said, "This is not possible, as there is no provision in the law to write off the income."

The Rs 570 crore tax demand will have implications for Mahindra Satyam, which is struggling to

get back on the right track.


19/29

The software company is also trying to overcome the damage to its image caused by the multi-

crore fraud perpetrated by founder chairman B Ramalinga Raju.

Last week, Mahindra Satyam had come out with financial results for 2008-09 and 2009-10,

reporting a net loss of Rs 8,176.8 crore and Rs 124.60 crore, respectively

PwC officials held for Satyam fraud; no proof ofwrongdoing, says auditor

The Andhra Pradesh Police on Saturday arrested two top officials of auditing firm Price

Waterhouse who worked on the Satyam account, in connection with the financial fraud disclosed

by the IT firms founder Ramalinga Raju recently.

The state CID arrested PwCs chief relationship partner S Gopalakrishnan and engagement

leader Srinivas Taluri. The police had earlier questioned Gopalakrishnan.

Raju, his brother Rama Raju and Satyams former CFO Vadlamani Srinivas are already in

judicial custody awaiting charges to be filed in connection with the Rs 7,800 crore accounting

fraud in the IT company.

PwC had earlier said that its auditing of Satyam accounts may not be reliable given Rajus

disclosure of falsifying profits.

Meanwhile, regretting the detention of two of its partners by the police, PwC said it has not seen

any evidence of any wrongdoing by them and promised to work actively to secure their

release.

We regret that two of our partners have been detained. We have not seen any evidence of any

wrongdoing by them, a PwC spokesperson said.
http://en.wikipedia.org/wiki/File:Pwc_logo.svg


20/29

We will actively work to secure the release of the two partners, the spokesperson added.

Over the last fortnight, the firm and its related team have fully cooperated with the investigating

agencies to provide all the documents called for. Under the circumstances, detention is

unfortunate, PwC said.

We continue to share the regulators concern in undestanding the full extent of the fraud and

how it was accomplished, as quickly as possible.

As everyone else, we were shocked by the massive fraud at Satyam and by the elaborate efforts

undertaken to conceal the fraud from the board of directors, shareholders and the auditors, the

spokesperson further added.

In another development, the human resources department of Satyam Computer Services has

started verification to ascertain the companys headcount, following the Andhra Pradesh CIDs

claim that there were 13,000 ghost employees on the rolls of the IT firm. Our HR department is

now verifying the employee details, the companys spokesperson said on Saturday.

As of now, we believe there are 53,000 employees, which is subject to verification and

auditing, a Satyam spokesperson said on Friday , adding the board has confirmed that prima

facie there appears to be no basis to doubt the same.

The Andhra Pradesh CID had told the local court that Satyams founder B Ramalinga Raju had

admitted that the number of employees was inflated by over 12,000, by which he (Raju) drew

over Rs 20 crore a month towards staff cost.


21/29

Case against Satyam under Money Laundering Act

The Enforcement Directorate will register a case against Satyam Computer and its tainted

founder-chairman B Ramalinga Raju for alleged money laundering.

The ED stepped into the multi-crore rupee fraud in Satyam after it claimed to have found prima

facie evidence against Raju and others of violating the Prevention of Money Laundering Act.

The CBI will file the charge sheet against B Ramalinga Raju and others accused in the Satyamscam on April 9.

The ED sources alleged that Raju had diverted funds of Satyam into purchasing nearly 50 plots

in Medchal and Qutbullahpur near Hyderabad.

The ED alleged that several hundred crore rupees had been diverted from the Satyam Computer

accounts and had been invested in purchasing land and other infrastructure for Maytas.

The Directorate will go through deals of the IT company and ascertain their genuineness

including payments made to acquire companies abroad.

The ED will also send a team to a few countries to investigate and get documents of bank

accounts opened in violation of Indian laws.


22/29

Satyam had a whistle-blower policy since 2005

Five years after the Securities Exchange Board of India (Sebi) dropped a move to mandate listed

companies to install a whistle-blower policy, Tata Sons director JJ Irani has said its essential

for companies to put in place a confidential whistle-blower system to avoid frauds like the one

at Satyam Computer Services. Ironically, Satyam is one of the few Indian companies to have a

whistle-blower policy in place since 2005.

A whistle-blower system entails establishing a mechanism for employees to report concerns

about unethical behaviour, actual or suspected fraud or violations, directly to the audit committee

of the board of directors.

Satyam had adopted a Whistle Blower Policy during the financial year 2005-06 after its then

audit committee, headed by former Andhra Pradesh chief secretary late VP Rama Rao, approved

it. The companys annual reports since that year affirm that no personnel has been denied access

to the audit committee under the whistle-blower policy.

Speaking on the lessons from Satyam, Irani said, If the CEO and CFO of a firm get together to

do a fraud, there is nothing an independent director can do to detect or prevent it, even if they are

professors of corporate governance. Companies must install a confidential whistle-blower system

(to avoid such frauds). In our group, one of the major frauds was uncovered at Tata Steel through

this system.

While the Satyam episode should re-ignite a debate on better corporate governance norms for

India Inc, the fact that the company had a whistle-blower policy in place should be useful

information for the embattled firms suitors in the midst of a limited due diligence exercise.


23/29

Restating Satyams accounts would take at least six-12 months; its client and employee base is

fast depleting; liabilities from law suits in the US could be no less than $1 billion while its

current market valuation is $600 million. So buying Satyam on the basis of limited financial

information is like searching for a black cat in a dark alley, as iGate and Spice Group found,

says a consultant close to the developments.

In this scenario, the whistle-blower policy can help bidders who remain in the race as they

could ask Satyams board to share any disclosures made under it with the Audit Committee. Fake

employees on its rolls, Rajus claim of a 3% margin, forged invoices it is possible that some

conscientious Satyamites blew the whistle on these issues and it constitutes material

information, the consultant stressed.

Attempts to get in touch with members of the audit committee, who had approved the

whistleblower policyMangalam Srinivasan and former ISB dean M Rammohan Rao were

unsuccessful. Corporate governance professor at Harvard, Krishna G Palepu, whom Irani alluded

to in his remarks about independent directors failure to detect fraud, had resigned from the audit

committee in July 2005.

Iranis call for a whistle-blower system assumes significance as he chaired the expert panel on

the new law to replace the Companies Act of 1956. Though the Companies Bill of 2003 required

firms to create such a system, the Companies Bill of 2008 floated by the UPA has no such

requirement.

The Narayana Murthy panel on corporate governance, set up by Sebi around the time when IIT

engineer Satyendra Dubey was murdered for blowing the whistle on corruption in national

highway projects, had also mooted that listed companies be made to enforce a whistle-blower

policy. Accepting the idea, Sebi had asked firms to create adequate safeguards so as to prevent

the victimisation of whistle-blowers, under Clause-49 of the Listing Agreement.

In October 2003, stiff opposition from India Inc. on the proposed corporate governance norms

resulted in the government withdrawing the Companies Bill 2003. The Centre also asked Sebi to


24/29

review Clause-49 Sebi relented within months and made the whistle-blower policy

requirement non-mandatory.

I firmly believe that all companies should have a whistle-blower policy as its the first line of

defence for a Board, especially if senior management is involved in a fraud. Independent

directors have no way of telling if a CEO is committing a fraud so its a serious weakness not to

have such a system in place, former Sebi member and IIM-Ahmedabad professor, Jayanth

Varma, told FE .

In Satyams case, I wouldnt be surprised if no whistle-blower disclosures were made to the

audit committee, Varma said. If the CEO and CFO are part of the fraud, lower-level employees

may simply not be aware or wouldnt have the courage to complain.

Moreover, if the audit committee is awestruck by the promoter (as Satyams legal advisor

Shardul Shroff described Satyams high-profile independent directors in a recent interview), then

it is difficult to expect tough scrutiny be it whistle-blower disclosures or related-party

transactions.


25/29

PwC suspends two partners

The toll of the Satyam Computers imbroglio goes up as Price Waterhouse, the auditors of

Satyam, on Tuesday said they have suspended two of their officials, S Gopalakrishnan and

Srinivas Talluri, who worked on the accounts of scam-hit Satyam Computer and were arrested

last week.

The firm, which had earlier said it did not know the basis on which these partners were beingdetained by the police, said in a statement that in light of recent allegations, the two have

been suspended of all of their duties and functions as partners of Price Waterhouse. The

statement added, While they are suspended, neither partner will play any part in client matters.

They willundertake no activities on behalf of PW and have been advised to cooperate fully with

the ongoing inquiries regarding Satyam. As the investigations proceed, PW will continue to

evaluate the situation.

On January 24, following the arrest of the two partners, Price Waterhouse had said, We greatly

regret that two Price Waterhouse partners have been detained today for further questioning. We

do not know the basis for them being detained. Over the last fortnight, the firm has fully

cooperated in all inquiries and has provided the documents called for by the Indian authorities.

We share the regulators concern in understanding the full extent of the fraud andhow it was

accomplished. Like everyone else, we were shocked by the massive fraud at Satyam and by the

steps undertaken to conceal it. PW-India will continue to co-operate fully with the authorities.

Meanwhile, Price Waterhouses assurance leader, Thomas Mathew, has announced that he will

step down from this role with immediate effect. Mathew had no connection with the audit of

Satyam. In light of the present situation, however, he believes it would be appropriate for him to

relinquish his management position.


26/29

Mathew will remain a PW partner. PW will appoint a new assurance leader in the near future,

said a Price Waterhouse statement.

Now, Satyam Computer becomes Mahindra Satyam

After its consolidation in terms of infrastructure cost and people cost, fraud-hit Satyam

Computers finally goes for a name change. Unveiling its new brand identity, Mahindra Satyam,

the new makeover is aimed to pave way for emergence of a better brand image, which draws

from the core values of the Mahindra group and the inherent strength of the Satyam brand. The

logo will be adopted from the Mahindra Group.

In the month of January, FE had reported and cautioned about the need for a brand makeover as

the tainted name Satyam Computers cannot go overseas to offer its services due to bad brand

problem. The name is associated with the Rs 7,800-crore financial scam done by its founder

chairman B Ramalinga Raju, his brother Rama Raju and former CFO Vadlamani Srinivas which

made people call Satyam as Asatyam.

Analysts point out that corporate brand reputation is considered as an intangible asset. A survey

by World Economic Forum states corporate brand reputation outranks financial performancewhich is an important measure of success. It is also reliably learnt that international clients have

advised the Mahindra group to go in for an immediate brand name changeover after the cost

cutting exercise called the virtual pool programme.

Speaking on the rebranding initiative, Anand Mahindra, vice chairman & managing director,

Mahindra Group, said, Customer centricity, high standards of corporate governance,

unimpeachable ethics form the cornerstones of the Mahindra Group. This rebranding exercise

symbolises an amalgamation of the Mahindra Groups values with Satyams fabled expertise,

even as it retains that part of Satyams identity which signifies commitment, purpose and

proficiency of the organisation and its people.

This is a significant milestone towards the recovery of the company. We are optimistic that this

new brand will re-energise the organisation and will be well received by all our stakeholders.


27/29

With this initiative, we will witness steps by the management to adopt and inculcate the values of

performance and customer first, good corporate governance and citizenship, which are drawn

from the Mahindra Group, said Vineet Nayyar, executive vice chairman, Satyam Board,

Mahindra Satyam would focus on certain core values such as good corporate citizenship,

professionalism, customer first, quality focus, dignity of the individual. Through its actions, the

brand aims to nurture fairness, trust and transparency. Mahindra group has decided to work out

on strategies for realignment of teams in both the companies and would be going together for

new market initiatives, sources said. However, decisions towards this are expected to be taken in

a week's time.


28/29

Mahindra Satyam doing well: CEO

Asserting that the company is "doing well", Mahindra Satyam CEO C P Gurnani said it isreceiving many new contracts, especially from entities in Australia and New Zealand.

"The company is doing well and is getting many new contracts. The company has added 44 new

accounts till March, 2010, and particularly Australia and New Zealand are doing extremely

well... Let's focus on these regions today and I promise you a lot more of business coming from

these regions," Gurnani said.

The company has customers from diverse sectors such as insurance, banking, BPO, retail,manufacturing and aviation.

"The company has about 1,000 employees in the Australia and New Zealand region, while

around 2,000 people provide support (to these operations) from India," Mahindra Satyam Head

(Sales and New Business Development in Australia and New Zealand) Bobby Gupta said.

Mahindra Satyam recorded a net loss of Rs 125 crore on revenue of Rs 5,481 crore in the year

ended 2009-10.

On September 29, the company reported its yearly financial numbers for the first time since

founder-chairman Ramalinga Raju admitted to cooking up the company's account books in

January, 2009.

Formerly Satyam Computer Services, the name was changed after the takeover by Tech

Mahindra last year. Gurnani said the company will announce its first and second quarter results

on November 15.

As of March 31, the company's cash and bank balance stood at Rs 2,176.8 crore and its loan

balance was Rs 422 crore.


29/29

Mahindra Satyam, which boasts of many Fortune 500 companies as clients, has development and

delivery centres in the US, Canada, the UK, Egypt, UAE, China and Singapore, among other

countries.

Documents

SAT PRAKASH