THESIS ON

UNFAIR TRADE PRACTICES

Case study on

SATYAM MEGA SCAM

A THESIS SUBMITTED BY

GANESH D. SHINDE

MMS-1 DIV-B

ROLL NO.1098

UNDER THE GUIDANCE OF

Prof. NADIRSHAW DHONDY

SUMMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR QUALIFYING

M.M.S SEMESTER – II (2010-2011)

MUMBAI INSTITUTE OF MANAGEMENT AND RESEARCH

J.K. KNOWLEDGE CENTER,

NADAKARNI PARK,

WADALA-(E), MUMBAI-400037

0

CERTIFICATE

I, Nadirshaw .K. Dhondy, Advocate Supreme court, have examined the thesis of Mr. GANESH D. SHINDE who is enrolled in M.I.M.R.(Mumbai institute of management and research) for the academic years 2010- 2012 in the Masters of Management Studies programme. His unique roll no. is 1098. The Thesis is in part fulfilment of the University programme for the subject LEGAL ASPECTS in Management. He has been rated to receive _____ marks out of 40.

Dated this 4th day of MARCH 2011

Signature Signature

Name: GANESH D. SHINDE MR. NADIRSHAW K. DHONDY

1

Acknowledgement

I sincerely thank Prof. Nadirshaw .K. Dhondy for giving me an opportunity to compile this

project and also for providing me necessary information which helped me in completing this

project in a better manner.

I will be looking for such type of projects in near future and do our best.

I would also like to thank DR. R.K.Singh for support provided.

Last but not the least I would like to thank all my friends whose direct and indirect efforts

helped me to complete this project.

2

Prologue

Satyam Computer Services Ltd was founded in 1987 by B. Ramlinga Raju. The company

offers IT services spanning across various sectors, and is listed in the New York Stock

Exchange and Euronext.The founding promoter of Satyam Computer Services Ltd. resigned

as the company’s chairman, putting out a confessional statement admitting that roughly 1.5

billion US dollars (or the equivalent of 70 billion Indian rupees) of the firm’s past funds were

“non-existent” or fictitious.

What has shocked analysts is that the money, that is now supposed to be fictitious, had been

recorded in Satyam’s balance sheets and books of account that had been audited by the

internationally reputed firm of auditors, PriceWaterhouseCoopers.

Raju, who is politically influential, disclosed details of the fraud in a resignation letter to the

company’s board of directors forwarded to stock exchange authorities as well as the regulator

of the country’s capital markets, the Securities and Exchange Board of India (SEBI). Of the

revenue reported as of Sep.30, 2008, the letter said, almost 1.03 billion dollars, or 95 percent,

never existed. SEBI’s chairman C.B. Bhave described the financial wrongdoing in Satyam as

an event of "horrifying magnitude".

Let us look into the Mega Corporate fraud, Satyam (truth) Vs Asatyam (evil).

3

Case Study Index

TOPIC Page No.

Understanding the Scam 5

Satyam Maytas fiasco 6

Satyam’s justification for Maytas

buyout deal

7

Guilty Parties to the Scam 8

Impact on Clients 9

Impact on Employees 9

Impact on IT Industry 10

Impact on Auditors 11

Impact on INDIA Inc. 12

Impact on Investors 12-13

Charges on Raju & Co. 14

4

Case Study

Understanding the Scam

The scam has dominated the India media and what is ironical is that the Indian word

"Satyam" translates as "truth". A most alarming aspect of the episode was that Raju

acknowledged that his company’s financial records had been fudged and manipulated for the

"last several years". "It was like riding a tiger, not knowing how to get off without being

eaten," wrote the disgraced Raju in his letter. While there were rumours that Raju had fled

India, his lawyer has said he is in Hyderabad, the capital of the southern Indian state of

Andhra Pradesh, where the Satyam is headquartered.

The Balance sheet as on September 30, 2008 showed:

Inflated (non-existent) cash and bank balances of Rs.5040 crores (as against Rs.5312

reflected in the books)

An accrued interest of Rs.376 crore which is non-existent.

An understated liability of Rs.1, 230 crore on accounts of funds arranged by BR Raju.

An overstated debtors position of Rs.490 crore (as against Rs.2651 crore reflected in

the books)

For the second quarter Satyam reported a revenue of Rs.2,700 crore and an operating

margin of Rs.649 crore (24% of revenues)

As against the actual revenues of Rs.2112 crore and an actual operating margin of

Rs.61 crore (3% of revenues)

This has resulted in artificial, cash and bank balances going up by Rs.588 crores in Q2

alone.

5

Satyam Maytas Fiasco

Satyam Computers had on December 16, 2008 announced that it will acquire two group firms

– Maytas Properties and Maytas Infra. The Board of Directors of Satyam had approved

the founder’s proposal to buy 51 per cent stake in Maytas Infrastructure and 100% in Maytas

Properties.

The total outflow for both the acquisitions was expected to be US$1.6 billion comprising of

US$ 1.3 billion for the 100% stake Maytas Properties and US$ 0.3 billion for the 51% stake

in Maytas Infra.

This is the move that sparked a row over alleged violation of corporate governance laws.

This deal is not profitable for investors. So after this announcement they started to raise theirvoices against the deal.

Maytas Infra

The company is run by the sons of Ramalinga Raju. It was started in the late 1980s by Ramlinga Raju. The main reason for the debacle of Maytas Infra is due to the debacle of Satyam.

Maytas Properties Ltd.

One of the reasons for the debacle of Maytas Properties Ltd was the ongoing economic slowdown. The company has huge land banks and the prices have dropped down in the real estate significantly.

6

Satyam’s justification for Maytas buyout deal

The founder, Ramlinga Raju felt that this would de-risk the core business. The integrated

organisation would be stronger and more diversified to deal with the uncertainty of the

market feeling that in the recent times it is difficult to make a strategic deal with other IT

companies.

Reaction of Investors

Investment giant Templeton and brokerage house CLSA opposed to this decision. It results

that part of investors succeeded to thwart an attempt by the minority-shareholding promoters

to use the firm’s cash reserves to buy out two companies owned by them — Maytas

Properties and Maytas Infra

That aborted attempt at expansion precipitated a collapse in the price of the company’s stock

and a shocking confession of financial manipulation and fraud from its chairman, B.

Ramalinga Raju.

Impact

The Maytas deals acted as a red flag for international investors, with a host of companies like

Unpaid Systems of Britain accusing Satyam of fraud, forgery and breach of contract. Shortly

thereafter, on Dec. 23, the World Bank barred Satyam from offering its computer services for

eight years citing a potential trail of corruption -- data theft and bribery -- that led to Raju.

The last straw perhaps came on Tuesday when an Indian associate of Merrill Lynch

terminated an agreement on grounds of "material accounting irregularities".

The government has stepped in to investigate all important directors and employees

associated with Satyam who could be involved in the fraud. All those found guilty could face

up to ten years in prison. The auditing licences of the partners of PricewaterhouseCoopers

could also be revoked

7

Two days after shocking the country by admitting to Rs 7,800-crore fraud, Satyam founder

Ramalinga Raju and his brother Ram Raju were arrested on Friday night as part of the

crackdown by state authorities and the central government, which disbanded the tainted IT

firm's board on a day of fast-paced developments. Fifty four-year-old Raju, who stepped

down as Chairman after admitting to the fraud on Wednesday, and Rama Raju, who resigned

as CEO and MD of the company, were arrested by the police on charges of criminal

conspiracy, cheating, and forgery, misappropriation of funds and criminal breach of trust. The

police questioned the two brothers; Director General of Police S S P Yadav said that the

company's Chief Financial Officer Valdamani Srinivasan would be arrested on Saturday.

Guilty Parties to the Scam

To start with the auditors – what were the auditors doing? Rs 5,000 crore of cash not in the

banks and auditors have gone ahead and signed on the balance sheets saying that its there on

the banks. The interest accrued – where is this interest accrued from? It has to be there.

Auditors are supposed to do bank reconciliation to check whether the money has indeed come

or not. They need to check bank statements and certificates.

 The second are bankers of Satyam which are quite a few actually because it is a big

company. You have ICICI Bank, HDFC Bank, BoB and lot of other banks which are bankers.

These banks are supposed to provide bank statements on a quarterly basis and bank

certificates on basis of which auditors go ahead and signed the balance sheet.

 Either the bank statement and certificates are false or auditors haven’t taken cognizance of

the fact that bank statements are showing some other figures and the management is depicting

some other figure.

 The third one – the I-bankers – now what we understand from sources is that Merrill Lynch

withdrew from Satyam mandate yesterday evening. It did not inform the exchanges till today

after Mr. Raju informed the stock exchanges. We want to know why Merrill Lynch after

withdrawing the mandate did not inform the stock exchange or at least public in general or

the shareholders before market hours.

Impact on Clients

8

Does Satyam's loss result in gain for its bigger rivals, TCS, Infosys and Wipro to be specific?

Yes, say analysts. According to whom, the debacle may force the clients of beleaguered

Satyam to review their contracts and look at other offshore suppliers.

"Satyam clients will naturally be concerned and many clients will be forced to review their

contracts and talk to the other offshore suppliers in the account about potentially taking over

work from Satyam," said a Forrester Research analyst.

According to a senior executive from a rival IT firm, Australian telecom company Telstra,

which contributes $20-25 million to its revenues, had already decided to split a new contract

worth $200 million among three Indian vendors. “There was intense competition among

Satyam and other offshore vendors earlier but Telstra now seems to be more tilted towards

Infosys and EDS-Mphasis. Satyam seems to have lost the race,” said the official, whose

company was one among the bidders for the contract.

Another partner and customer of the company, Cisco Systems said that a proposed

investment in Satyam subsidiary (Satyam Global Life net) could be in jeopardy.

However, allaying the fears of employees and clients in the Asia-Pacific, Satyam today said it

is committed to its customers in the region. "Satyam as an organization remains committed to

its customers in (the) Asia Pacific, a region which continues to offer promising growth," said

Satyam's Senior Vice-President (Asia Pacific, Middle East, India and Africa) Virender

Agarwal, based in Singapore.

The fourth largest software company's clients include General Electric, Nissan Motors and

General Motors.

Impact on Employees

It is very clearly anxious moments, sleepless nights and heartburns for the over 53,000

employees of Satyam Computers as they conjure up worst case scenarios like non-payment of

salaries, project cancellations , layoffs and equally bleak prospects outside.

As the company's management tries to reassure shocked employees, jobs sites have got

flooded from resumes of hundreds of Satyam employees. "Till Tuesday evening, there were

about 7,800 people from Satyam who had posted their resumes on job sites. By Wednesday

9

afternoon, it has gone up to 14,000. By the end of the day, the numbers may be much higher,"

said Kris Lakshmikanth, CEO of Head-hunters India.

However, job consultants believe that in the current economic climate when the IT industry is

already facing tough time, Satyam employees might have to settle for lower salaries outside.

Also, with most IT companies already announcing a hiring freeze, it is an employers' market.

On its part, the new leadership team is sending out mailers and open letters to its employees

to keep the faith. Earlier, Ram Myampati the interim CEO, had said, "We recognise that our

associates have committed a significant part of their careers to build Satyam. We will pursue

all avenues to secure their future in the company." “Operations are all continuing. We do not

envisage any problems in paying salaries to our employees in future,” a Satyam official told

media.

In a letter to the Centre, Andhra Pradesh chief minister Rajasekhara Reddy too has expressed

concern about the fate of Satyam employees.

Impact on IT industry

The Satyam fraud couldn't have come at a worse time for the IT Inc already reeling under

slowdown. The incident has put the sector in limelight, and for all the wrong reasons. Fears

are being expressed that the scam may affect investors’ confidence in the sector already

facing rough weather.

For years, Satyam and larger rivals such as TCS, Infosys and Wipro were feted as among the

new ambassadors of Indian industry with their corporate governance practices winning

accolades around the world and their strong growth rates luring investors

The shaken apex body of Indian software industry issued a statement expressing "shock" and

at the same time emphasising it to be "a stand-alone case of failure of corporate governance,

and not a systemic failure of corporate governance among Indian IT companies".

Besides Nasscom, Satyam rival and the second-largest IT firm and Nasscom member Infosys

too issued a statement stating "(The) Satyam fraud is an aberration ... I don't think it would

shake clients faith in other Indian IT companies." Suresh Senapaty, executive director and

10

CFO, Wipro said, "Global standards of corporate India are very high and we are confident

that this is an isolated case and not representative of the IT industry."

While the Satyam episode could temporarily cast a cloud over Indian IT firms, IT in India is

unlikely to be as affected. Allaying the fears that India's IT image would be tainted, a

Forrester analyst said, “I look at it as an isolated case and don't think Satyam developments

would have any impact on India's position as an offshore location. But if similar trend of

fraud continues in Indian IT vendors' space, then there is a good enough reason to be

concerned."

Impact on Auditors

The Satyam fiasco has put the spotlight on the role of external auditors in a company. Enron

& WorldCom had changed the world of auditing from ‘Big 5’ to ‘Big 4’. The brazen fraud at

Satyam has the potential to shrink it to ‘Big 3’, at least in India. The falsification of accounts

by Satyam for the past several years has put a question mark on the very survival of its

auditor, PricewaterhouseCoopers (PwC).

Institute of Chartered Accountants of India (ICAI) has decided to issue a show cause notice

to PwC. ICAI President Ved Jain said, "We have set the ball rolling. On the basis of

statements made by Ramalinga Raju, ICAI has already initiated proceedings against the

concerned auditor."

PwC had audited about 139 companies in India in the last fiscal. Of this, 97 are listed and 45

are part of BSE 500 Index. A few of these companies are already reviewing their relationship.

For instance, Glen mark Pharma has said its board will decide on January 27 on whether to

propose a change in the auditor.

Some other large companies audited by PwC include Maruti Suzuki, United Breweries,

United Spirits, GMR Infra, Piramal Healthcare and Marico.

11

Impact on India Inc.

The incident has hurt public perception of Corporate India. Howsoever one-off incident one

may term it, it is likely to hurt shareholders' confidence in India Inc. No doubt, India Inc

reacted with shock and dismay to the scam. The VC and MD of Mahindra and Mahindra,

Anand Mahindra in a statement said that the development had "resulted in incalculable and

unjustifiable damage to Brand India and Brand IT in particular.

He however, reiterated that the whole of the Indian industry, "should not be tarred with the

same brush" as most companies "uphold the highest standards of corporate governance and

this will help us mitigate the damage done to India’s image.

Impact on Investors

An accounting fraud was the last thing investors in India would have imagined as a trigger for

a reversal in investor sentiment. The Satyam accounting fiasco has come at a time when the

sentiment is already brittle and is likely to affect the image of Indian companies among

foreign portfolio investors.

Fund managers said the revival of India’s position as a preferred investment destination

would depend on the speed of regulatory action to salvage the situation. “The regulators

would have to take drastic measures to regain the confidence of foreign investors in Indian

companies as frauds like these will have greater implications on emerging markets than

developed markets,” said a CIO with a leading private mutual fund.

National Association of Small Investors (NASI), a registered NGO, has said that it will file a

complaint against scam-hit software exporter Satyam Computer Services for "cheating

shareholders and investors".

"This is a financial attack on the country. We are filing a complaint against Satyam, with the

Economic Offences Department (EOD), for cheating the shareholders and investors," NASI

president Pradeep Bhavnani told PTI.

Law firms in the US have begun filing class-action complaints against Satyam Computer

Services and its executives for securities fraud. The lawsuit has been filed on behalf of all

buyers of Satyam ADS between January 6, 2004 and January 6, 2009.

12

On Wednesday, Satyam's ADS fell $8.42, or 90%, before opening of the New York Stock

Exchange. The exchange suspended trading in the ADS after the disclosure by Satyam.

13

Charges on Raju & Co.

Although Ramalinga Raju has gone out of his way to make out that none of the other board

members and senior executives of Satyam were aware of the fraud, the law of the land is

expected to take its course and Raju and any other director/executive found to be involved in

the scam are liable to be prosecuted on charges punishable with imprisonment up to 10 years.

Some of the more serious penalties that Raju and others are likely to face under various laws

are:

* Section 23 of the securities contract regulation Act 1956, that imposes a penalty of

imprisonment up to 10 years and fine up to Rs 25 crore. The adjudicating officer of SEBI

(Securities and Exchange Board of India) is empowered to award such punishment to

directors and management executives for violating the listing agreement by making false and

inaccurate disclosures in the company's quarterly and annual results. The penalty is severe

because of the enormous damage that the investors are liable to suffer on account of false

disclosures.

* Section 24 of the SEBI Act 1992 that imposes a penalty of imprisonment up to one year

for infringement of any provisions of the law or rules and regulations, including fraudulent

and unfair trade practices (FUTP).

* Section 477-A of the Indian Penal Code, that imposes a penalty of imprisonment up to

seven years. The police may, on their own or on the recommendation of the serious fraud

investigation office (SFIO) invoke this IPC provision meant to punish those found to have

falsified accounts "wilfully and with intent to defraud."

* Section 211 of the Companies Act that imposes a penalty of imprisonment up to six

months. The company law board is empowered to punish those who are found to have

"wilfully" failed to comply with the requirements of law relating to the annual financial

statement.

14

Comments

Because, the Chairman of Satyam, Ramalinga Raju decided to make a confession of

sorts as he was unable to keep his conscience quite for very long.  We don’t know how

long he was trying to keep his conscience shut before he decided to listen to conscience. 

But, in his confession letter, he has told for several quarters he was repeatedly fudging

the books to overstate profits and assets.

The fraud was committed not once.  The confession only reveals about the peak level of

the fraud.  It was being perpetrated on a continuous basis over many quarters or

several years.  If the Company needed growth in revenues and profits, they got it; the

desired profit was just few book entries away. They most likely made these entries

during the last week of the reporting period so that the invented profits filled the blanks

perfectly.

It is all well if they were a small company, audited by another small firm of auditors.

Let us first understand that scams happen worldwide - Enron, Barrings, and Madoff

and now Satyam is one more. I feel regulators need to show to the world that decisive

action is taken against the culprits. Price Waterhouse Coopers were their auditors; they

need to be punished more than anyone else. Satyam was listed in the US too, what US

regulators and PWC US were doing. I feel the Auditors and regulators in the US and

India need to be pulled up along with the board and the independent Directors of

Satyam.

Satyam was a big and strong company (till yesterday, I want to stress, because, they are

now in distress) and audited by one of the big four as already told.  It is required to

strictly adhere to the stricter IFRS (International Financial Report Standards) and

GAAP (Generally Accepted Accounting Practices) norms before the accounts were

certified.

Hence, it was bemusing to me how Satyam could have indulged in accounts fudging

without getting detected by the auditors.

15

So Mr. Raju did his master stroke.  He booked bogus income, most likely with fictitious

companies and cleared off the debtor balances by showing collections and thereby

increasing the cash and bank balances.

Huge losses to investors aside, the Satyam scandal has caused “serious damage” to India

Inc’s reputation as well as the country’s regulatory authorities outside.

The admission of fraudulent manipulation of the financial affairs has created an

adverse impression in the minds of the trade, business and industry across the world.

This has also resulted in serious damage to the reputation of Indian Corporate sector

and the regulatory mechanism in the eyes of the world.

The Satyam scam showed its deathly effects, almost literally. Apparently fearing that he

may lose his job, a 23-year-old employee of scam-ravaged Satyam Computer allegedly

committed suicide in Chennai. Can we charge Mr.Raju for murder as well?

The impact, however, on the IT industry is short-term and will pass quickly unless there

is another scandal involving another IT services firm. I believe the negative publicity is

largely media hype amid a political backlash against off shoring of US jobs in the

current economic slump. International corporations will continue to make the right

decisions for their business models to remain competitive.

Satyam does not decide the course of economy or the stock market. Surely the impact

will be bad in terms of corporate governance image of India and we may see some

negative sentiment in terms of foreign investment into India, long term the markets will

behave keeping in mind the macro-economic factors. Regulators and Auditors will

become more vigilant and companies who are still cooking their balance sheets will get

shut or will correct their balance sheet. Companies whose stock prices are up due to

wrong balance sheets would be affected most as they will now try to get them to order

and which may show a grim picture.

16

Bibliography:

The Economic Times. Aug 27, 2010.

The Business Standard. January 25, 2011.

The Hindu. Jan 14, 2009.

The Financial Express. 4 March, 2011.

http://www.livemint.com/2009/01/07223603/Satyam-fraud-a-blow-to-Indian.html

http://satyamscam.in/

http://www.slideshare.net/rishu18/satyam-scam

http://www.thaindian.com/newsportal/business/satyam-fraud-shocks-investors-employees-

lead_100139365.html

http://www.itejas.com/index.php/2009/01/08/satyam-fraud-story

http://www.shvoong.com/business-management/management/1864878-satyam-scam/

http://ipsnews.net/news.asp?idnews=45347

http://www.nytimes.com/2009/01/08/business/worldbusiness/08satyam.html?_r=1

http://www.paperarticles.com/2009/01/more-regulation-is-not-answer-to-satyam.html

http://www.karmayog.org/newspaperarticles/newspaperarticles_23191.htm

17

Epilogue

It is not quite clear why Raju decided to come clean eventually, but let’s for now accept it

was a brave decision. Corporate accountability, ethics and transparency became the biggest

casualties of a multi-billion dollar Satyam fraud. India must "reflect on ways to

demonstrate its quality of governance and enhance the confidence of stakeholders".

To end with, We can one ask one question; it’s all related to political or at corporate level?

What we can do for those issues?

We have to take all these issues as awareness. We have to reduce all of the dishonesty

activities at our level! We have to do our responsibility on time! 

18

Cross Reference Index

TOPIC Page No.

Certificate 1

Acknowledgement 2

Prologue 3

Case Study Index 4

Case Study 5-14

Comments 15-16

Bibliography 17

Epilogue 18

19