KING OF ALL FRAUDS

Black FacesBlack Faces of Indian IT of Indian IT

Dinesh DalmiaDinesh Dalmia

(DSQ Software)(DSQ Software)V Chandrashekharan (Pentamedia group)

Ramalinga Raju(Satyam)

RAMALINGA RAJU: PROFILERAMALINGA RAJU: PROFILE

► Born on September 16, Born on September 16, 1954, Raju was raised in 1954, Raju was raised in Bhimavaram, A.P. Bhimavaram, A.P.

► He did his MBA at Ohio He did his MBA at Ohio University and did a University and did a business ownership course business ownership course at Harvardat Harvard

► Raju is one of the pioneers Raju is one of the pioneers of the IT industry in India.of the IT industry in India.

► In 1987, he founded In 1987, he founded Satyam Computer Services, Satyam Computer Services, which began by taking which began by taking outsourced projects from outsourced projects from US companiesUS companies

DOWN MEMORY LANEDOWN MEMORY LANE► 19871987 : : Incorporated as Pvt. Ltd. CompanyIncorporated as Pvt. Ltd. Company► 1988-19921988-1992 : : IPOIPO► 1993-19961993-1996 : : Satyam Technology Centre establishedSatyam Technology Centre established ► 1997-20001997-2000 : : Presence in 30+ countriesPresence in 30+ countries► 2001-20042001-2004 : : Founded Satyam BPOFounded Satyam BPO► 2005-20082005-2008 : : Acquisition of Bridge Strategy, CitiSoft, Acquisition of Bridge Strategy, CitiSoft,

Knowledge Dynamics, Nitor Solutions, S&V ManagementKnowledge Dynamics, Nitor Solutions, S&V Management► 20092009 : : On 7On 7thth January, erstwhile chairman declared that January, erstwhile chairman declared that

the company’s profit had been overstated for several the company’s profit had been overstated for several yearsyears

► 1313thth April April : : TECH MAHINDRA TECH MAHINDRA acquired majority stake acquired majority stake in Satyamin Satyam

► 2121stst June June : : New brand New brand “MAHINDRA SATYAM”“MAHINDRA SATYAM” launched launched

It should be noted that Satyam was the 1It should be noted that Satyam was the 1stst Indian company to be listed on 3 international Indian company to be listed on 3 international stock exchanges i.e. NYSE, DOW and stock exchanges i.e. NYSE, DOW and EURONEXTEURONEXT

Major Satyam Clients

Promoters' shares had been dwindling over the years

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WHAT WENT WRONG?WHAT WENT WRONG?► Inflated figures for cash and bank balances of Inflated figures for cash and bank balances of

INR 5,040 cr. (as against INR 5,361 crore INR 5,040 cr. (as against INR 5,361 crore reflected in the books).reflected in the books).

► Operating Profit were artificially boosted from Operating Profit were artificially boosted from the actual 61 cr. to 649 cr.the actual 61 cr. to 649 cr.

► Satyam also showed an interest earning ofSatyam also showed an interest earning of Rs. 376 cr. that was fictitious.Rs. 376 cr. that was fictitious.

► An over stated debtors position of Rs. 490 crore An over stated debtors position of Rs. 490 crore (as against Rs. 2651 reflected in the books)(as against Rs. 2651 reflected in the books)

Slippery Slope to DisasterSlippery Slope to Disaster► December’08 brought news of pending litigation by a December’08 brought news of pending litigation by a

former client, online mobile-payments service former client, online mobile-payments service Upaid Upaid SystemsSystems which filed a case of intellectual fraud and which filed a case of intellectual fraud and forgery against Satyam in 2008forgery against Satyam in 2008

► World BankWorld Bank banned Satyam from doing any of its work banned Satyam from doing any of its work after it found Satyam employees had hacked into its after it found Satyam employees had hacked into its system and gained access to sensitive information. It system and gained access to sensitive information. It also did not renew their five-year contractalso did not renew their five-year contract

► On Dec. 16, when Raju announced the company would On Dec. 16, when Raju announced the company would spend $1.6 billion to buy spend $1.6 billion to buy MaytasMaytas only to reverse the only to reverse the decision a few hours later under shareholder pressure. decision a few hours later under shareholder pressure. Satyam ADRs lost 50% of their value overnightSatyam ADRs lost 50% of their value overnight

Satyam’s secret back office – MaytasSatyam’s secret back office – Maytas

► It is not a mere co-incidence that Maytas is Satyam It is not a mere co-incidence that Maytas is Satyam spelt in reverse way. It was an effort to cover up spelt in reverse way. It was an effort to cover up Satyam fiasco.Satyam fiasco.

► Maytas is actually run by Satyam Family. It includes Maytas is actually run by Satyam Family. It includes Maytas Properties & Maytas Infra Ltd.Maytas Properties & Maytas Infra Ltd.

► Maytas was a 2 decade old company. It had been doing Maytas was a 2 decade old company. It had been doing remarkably well in the past 6-7 years and projects remarkably well in the past 6-7 years and projects worth billions were riding upon them.worth billions were riding upon them.

RAJU’S PROPOSAL FOR MAYTASRAJU’S PROPOSAL FOR MAYTAS

► It all began on 16-12-2008, when Raju thought, buying It all began on 16-12-2008, when Raju thought, buying an infrastructure firm made sense!an infrastructure firm made sense!

► Satyam to buy Maytas Properties for Satyam to buy Maytas Properties for $ 1.3 billion $ 1.3 billion and and 51% stake 51% stake in Maytas Infra for in Maytas Infra for $ 300 million$ 300 million

► Deal to be financed by Satyam’s “surplus” cash.Deal to be financed by Satyam’s “surplus” cash.

► Raju said that the deal was in complete interest of the Raju said that the deal was in complete interest of the investors and informing them was “unnecessary”investors and informing them was “unnecessary”

WHAT WAS THE REALITY?WHAT WAS THE REALITY?

► Raju and family own up to 35% stake in MaytasRaju and family own up to 35% stake in Maytas

► Raju had shown a swollen gross margin in the period of Raju had shown a swollen gross margin in the period of July-December by almost 600 crores (meaning, swollen July-December by almost 600 crores (meaning, swollen records of 1000 crores in a year). So it would take him records of 1000 crores in a year). So it would take him about 5-6 years to show an accumulated wealth of over about 5-6 years to show an accumulated wealth of over 5000 crores (Satyam’s supposed cash reserve)5000 crores (Satyam’s supposed cash reserve)

► Raju was siphoning the money from Satyam to Maytas Raju was siphoning the money from Satyam to Maytas since last 6 years. With Satyam in deep cash crunch, Raju since last 6 years. With Satyam in deep cash crunch, Raju wanted to buy Maytas to cover up Satyam’s inflated cashwanted to buy Maytas to cover up Satyam’s inflated cash

► Raju’s last attempt to fill the fictitious assets with the real Raju’s last attempt to fill the fictitious assets with the real ones failed and he nailed a hole in the sinking ship ones failed and he nailed a hole in the sinking ship ‘Satyam’‘Satyam’

What happened next???

On 7On 7thth January, 2009, Raju wrote a January, 2009, Raju wrote a letter addressing the Board members letter addressing the Board members and SEBI, informing them the inflated and SEBI, informing them the inflated

cash, faked profit margins and cash, faked profit margins and accounting malpractices and also accounting malpractices and also

stated his resignationstated his resignation

FINGERS ON PwC: THE AUDITORSFINGERS ON PwC: THE AUDITORS► Satyam’s auditors since June 2000Satyam’s auditors since June 2000► In the Satyam case, where was the billion of cash In the Satyam case, where was the billion of cash

missing? And if the auditors didn’t catch the missing? And if the auditors didn’t catch the discrepancy then there may be an argument that the discrepancy then there may be an argument that the audit firm was defrauded as well.audit firm was defrauded as well.

► The role of PwC comes under the spotlight and amid The role of PwC comes under the spotlight and amid allegations that large Indian companies regularly use allegations that large Indian companies regularly use misleading accounting techniques and bully analysts, misleading accounting techniques and bully analysts, accountants and auditors to stay quietaccountants and auditors to stay quiet

► It may be easy to blame Price Waterhouse, that they It may be easy to blame Price Waterhouse, that they did not perform their duties as auditors correctly. We did not perform their duties as auditors correctly. We must accept that there would be many very large audit must accept that there would be many very large audit firms, who may also be routinely turning a blind eye to firms, who may also be routinely turning a blind eye to the accounts statements produced by the companiesthe accounts statements produced by the companies..

IMPACTIMPACT

► Impact on Indian IT IndustryImpact on Indian IT Industry

► Role of Independent DirectorsRole of Independent Directors

► Satyam & Investment DecisionSatyam & Investment Decision

► The FalloutThe Fallout

Impact on Indian IT IndustryImpact on Indian IT Industry

► It is surely going to be difficult for other Indian IT It is surely going to be difficult for other Indian IT service players to win businessservice players to win business

► Undoubtedly, this is going to hurt the prospects of Undoubtedly, this is going to hurt the prospects of foreign money flowing in the countryforeign money flowing in the country

► Global perception about Indian IT companies would Global perception about Indian IT companies would changechange

Role of Independent DirectorsRole of Independent Directors► The role of independent directors is now under close The role of independent directors is now under close

scrutiny.scrutiny.

► Approval of Satyam’s directors of buying out two promoter-Approval of Satyam’s directors of buying out two promoter-related companies failed to be independent in ‘spirit’related companies failed to be independent in ‘spirit’

► Independent directors need to be more active and Independent directors need to be more active and corporate governance should be a “principle-based” corporate governance should be a “principle-based” system rather than “rule-based”system rather than “rule-based”

► Independent directors need to be vigilant in protecting Independent directors need to be vigilant in protecting minority interest and be brave enough to take adequate minority interest and be brave enough to take adequate stepssteps

► Hopefully, the boards, in the future will be composed more Hopefully, the boards, in the future will be composed more of business-specific relevant competence rather than of business-specific relevant competence rather than “retirement-eve” titles“retirement-eve” titles

Satyam & Investment DecisionSatyam & Investment Decision

► Investors were furious about the way Satyam founders Investors were furious about the way Satyam founders undertook the move to invest in a promoter-related undertook the move to invest in a promoter-related company and wanted to know why the management company and wanted to know why the management failed to obtain prior consent of shareholders before failed to obtain prior consent of shareholders before deciding to invest, which amounted to change of ‘object deciding to invest, which amounted to change of ‘object clause’ of the companyclause’ of the company

► The investors' activism after Satyam's decision is The investors' activism after Satyam's decision is appreciativeappreciative

► It is hoped, that, after this incident most of the It is hoped, that, after this incident most of the corporate India will behave in a reasonable fashioncorporate India will behave in a reasonable fashion

The FalloutThe Fallout► Two class action suit filed in US by Satyam’s shareholders Two class action suit filed in US by Satyam’s shareholders

of ADRsof ADRs► ICAI:ICAI:

-Issued two revised accounting standards SA 500 and SA -Issued two revised accounting standards SA 500 and SA 720 720

-Scheme of -Scheme of rotation rotation of auditorsof auditors

-Planning to set up -Planning to set up rating systemrating system for corporate for corporate governance governance

-Planning to set up serious fraud detection cell-Planning to set up serious fraud detection cell ► GOVERNMENTGOVERNMENT::

-Reviewing The Chartered Accountant Act, 1949 and The -Reviewing The Chartered Accountant Act, 1949 and The Accountant Regulations Act, 1988 to plug Accountant Regulations Act, 1988 to plug loopholesloopholes

► SEBI:SEBI:

-Asks promoters of listed companies to disclose whether -Asks promoters of listed companies to disclose whether they have pledged sharesthey have pledged shares

Raju Raju sat on the wall,Raju Raju had a great fall,

Balance sheet died,Shareholders cried,

Raju Raju made a fraud.

Raju RajuYes Baba,

Cheating usNo Baba,

Telling LiesNo Baba,

Open the balance sheetHA! HA! HA!

CONCLUSION

SATYAM: ASATYAM!!