Case Study on Corporate Governance: Satyam Scam

Satyam Computers services limited was a consulting and an Information Technology (IT) services company founded by Mr. Ramalingam Raju in 1988. It was India’s fourth largest company in India’s IT industry, offering a variety of IT services to many types of businesses. Its’ networks spanned from 46 countries, across 6 continents and employing over 20,000 IT professionals. On 7th January 2009, Satyam scandal was publicly announced & Mr. Ramalingam confessed and notified SEBI of having falsified the account.

Raju confessed that Satyam’s balance sheet of 30 September 2008 contained:

  • Inflated figures for cash and bank balances of Rs 5,040 crores (US$ 1.04 billion) [as against Rs 5,361 crores (US$ 1.1 billion) reflected in the books].
  • An accrued interest of Rs. 376 crores (US$ 77.46 million) which was non-existent.
  • An understated liability of Rs. 1,230 crores (US$ 253.38 million) on account of funds which were arranged by himself.
  • An overstated debtors’ position of Rs. 490 crores (US$ 100.94 million) [as against Rs. 2,651 crores (US$ 546.11 million) in the books].

The letter by B Ramalinga Raju where he confessed of inflating his company’s revenues contained the following statements:

“What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew significantly [annualised revenue run rate of Rs 11,276 crores (US$ 2.32 billion) in the September quarter of 2008 and official reserves of Rs 8,392 crores (US$ 1.73 billion)]. As the promoters held a small percentage of equity, the concern was that poor performance would result in a takeover, thereby exposing the gap. The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. It was like riding a tiger, not knowing how to get off without being eaten.”

The Scandal:

The scandal all came to light with a successful effort on the part of investor’s to prevent an attempt by the minority shareholding promoters to use the firm’s cash reserves to buy two companies owned by them i.e. Maytas Properties and Maytas Infra. As a result, this aborted an attempt of expansion on Satyam’s part, which in turn led to a collapse in price of company’s stock following with a shocking confession by Raju, The truth was its’ promoters had decided to inflate the revenue and profit figures of Satyam thereby manipulating their balance sheet consisting non-existent assets, cash reserves and liabilities.

The probable reasons:

Deriving high stock values would allow the promoters to enjoy benefits allowing them to buy real wealth outside the company and thereby giving them opportunity to derive money to acquire large stakes in other firms on another hand. There could be the reason as to why Raju’s family build its shareholding and shed it when required.

After the scandal, on 10 January 2009, the Company Law Board decided to bar the current board of Satyam from functioning and appoint 10 nominal directors.  On 5th February 2009, the six-member board appointed by the Government of India named A. S. Murthy as the new CEO of the firm with immediate effect. The board consisted of:

1)      Banker Deepak Parekh.

2)      IT expert Kiran Karnik.

3)      Former SEBI member C Achuthan S Balakrishnan of Life Insurance Corporation.

4)      Tarun Das, chief mentor of the Confederation of Indian Industry and

5)      T N Manoharan, former President of the Institute of Chartered Accountants of India.

About Abey Francis

Abey Francis is the founder of MBAKnol - A Blog about Management Theories and Practices - and he's always happy to share his passion for innovative management practices. You can found him on Google+ and Facebook. If you’d like to reach him, send him an email to: [email protected]
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