Charu singhal | Bharati Vidyapeeth University | 25th October 2019
INTRODUCTION:
Till about two decades ago Corporate Governance was relatively an unknown subject. The subject came into prominence in the late 80’s and early 90’s when the corporate sector in many countries was surrounded with problems of questionable corporate policies or unethical practices. Junk Bond fiasco of USA and failure of Maxwell, BCCI and Poly peck in UK resulted in the beginning of codes and standards on corporate governance. The USA, UK and number of other developed countries reacted strongly to the corporate failures therefore codes & standards on corporate governance came to the centre stage. Enron debacle in 2001 and number of other scandals involving large US companies such as the Tyco, Quest, Global Crossings Com and the exposure of auditing lacunae, which led to the collapse of the Andersen, triggered the reform process and resulted in the passing of the Public Accounting Reform and Investor Protection Act of 2002 known as Sarbanes- Oxley (SOX) Act, 2002 in USA.
Fraudulent financial reporting practices and accounting frauds have occurred in all eras, in all countries, and affected many organizations, regardless of their size, location or industry. It can have significant consequences for organizations and all stakeholders as well as for public confidence in the capital and security markets. In fact comprehensive, accurate and reliable financial reporting is the bedrock upon which our markets are based. It can include the deliberate falsification of underlying accounting records, intentionally breaching an accounting standard, or knowingly omitting transactions or required disclosures in the Financial Statement. Thus, Financial Reporting Fraud- an intentional, material misrepresentation of a company’s financial statements remains a serious concern for investors and other capital market stakeholders.
CORPORATE GOVERNANCE:
It is typically perceived as dealing with the problems that result from the separation of leadership and control. Corporate Governance may be defined as holding a balance between economic and social goals and between individual and commercial goals. Good corporate governance is one where a firm commits and adopts ethical practices across its entire value chain and in all of its dealings with a wide group of stakeholders encompassing employees, customers, vendors, regulators and shareholders in both good and bad times.
BACKGROUND:
On 24th June 1987, Satyam Computer Services Ltd (Popularly known as Satyam) was incorporated by the two brothers, B Rama Raju and B Ramalinga Raju[1], as a private limited company with just 20 employees for providing software development and consultancy services to large corporations (the company got converted into public in 1991). It has its headquarters at Hyderabad. During the year 1996, company promoted four subsidiaries including Satyam Renaissance Consulting Ltd, Satyam Enterprise Solutions Pvt. Ltd., and Satyam Infoway Pvt. Ltd. Satyam Computer Services Ltd in 1997 was selected by the Switzerland-based World Economic Forum and World Link Magazine as one of India’s most remarkable and rapidly growing entrepreneurial companies. Satyam Infoway (Sify), a wholly owned subsidiary of Satyam Computer Services Ltd, was the first Indian Internet Company listed on NASDAQ. Mr. B. Ramalinga Raju, Chairman of Satyam, was awarded the IT Man of the Year 2000 Award by Dataquest.
In 2001, Satyam became world’s first ISO Company to be certified by BVQI. In 2003, Satyam started providing IT services to World Bank and signed up a long term contract with it. In 2005, Satyam was ranked 3rd in Corporate Governance Survey by Global Institutional Investors. But all this fame and growth was short lived as the company discovered a major setback.
SATYAM SCAM:
Scandals are often the “tip of the iceberg”. They represent the ‘visible’ catastrophic failures. An attempt is made in this case study to examine in- depth and analyze India’s Enron, Satyam Computer’s “creative- accounting” scandal. Their scandal/fraud has put a big question mark on the entire corporate governance system in India. In public companies, this type of ‘creative’ accounting leading to fraud and investigations are, therefore, launched by the various governmental oversight agencies.
The Satyam Scam has never been an easy issue to look upon. It has its own complexities as the very issue involves a scam of around 14000 Crore. The Satyam Scam is still regarded as an example for following poor corporate governance practices. The relationship between the shareholders and employees which is the very crux of every corporate organization has never been satisfactory.
So, to throw light on the poor governance policies of one of the major IT giants the need to go through this case study is quite vital. The Satyam Scandal basically highlights the importance of Securities Law and Corporate Governance in emerging markets.
FACTS:
Problems in Satyam begin when on December 16’ 2008; its chairman Mr Ramalinga Raju, in a surprise move announced a $1.6 billion bid for two Maytas companies i.e. Maytas Infrastructure Ltd and Maytas Properties Ltd saying he wanted to deploy the cash available for the benefit of investors. It planned to acquire 100% and 50% stakes in Maytas property and infra for $1.6 Billion. The two companies have been promoted and controlled by Raju’s family. The thumbs down given by investors and the market forced him to retreat within 12 hours[2]. Share prices plunges by 55% on concerns about Satyam’s corporate governance[3]. Questions were raised on the corporate governance practices of Satyam with analysts and investors questioning the company’s board on the reasons for giving consent for the acquisition as it was related to party transaction.
In a surprise move, the World Bank announced on December 23, 2008 that Satyam has been barred from business with World Bank[4] for eight years for providing Bank staff with “improper benefits” and charged with data theft and bribing the staff.[5] Share prices fell another 14% to the lowest in over 4 years.
After the deal was aborted, four of the prominent independent directors resigned from the board of the company. The lone independent director since 1991, US academician Mangalam Srinivasan, announced resignation followed by the resignation of three more independent directors on December 28 i.e. Vinod K Dham (famously known as father of the Pentium and an ex Intel employee), M Rammohan Rao (Dean of the renowned Indian School of Business) and Krishna Palepu (professor at Harvard Business School)[6].
At last, on January 7’ 2009, B. Ramalinga Raju announced confession of over Rs. 7800 crore financial fraud and he resigned as chairman of Satyam. He revealed in his letter that his attempt to buy Maytas companies was his last attempt to “fill fictitious assets with real ones”. He admitted in his letter, “It was like riding a tiger without knowing how to get off without being eaten”.[7]
Satyam’s promoters, two brothers B Ramalinga Raju and B Rama Raju were arrested by the State of Andhra Pradesh police and the Central government took control of the tainted company[8]. The Raju brothers were booked for criminal breach of trust, cheating, criminal conspiracy and forgery under the Indian Penal Code. The Central Government reconstituted Satyam’s board that included three-members, HDFC Chairman Deepak Parekh, Ex Nasscom chairman and IT expert Kiran Karnik and former SEBI member C Achuthan. The Central Government added three more directors to the reconstituted Board i.e., CII chief mentor Tarun Das, former president of the Institute for Chartered Accountants (ICAI) TN Manoharan and LIC’s S Balakrishnan.
A week after Satyam founder B Ramalinga Raju’s scandalous confession, Satyam’s auditors Price Waterhouse finally admitted that its audit report was wrong as it was based on wrong financial statements provided by the Satyam’s management[9]. On January 22, 2009, Satyam’s CFO Srinivas Vadlamani confessed to having inflated the number of employees by 10,000. He told CID officials interrogating him that this helped in drawing around Rs 20 crore per month from the related but 3 fictitious salary accounts.
Andhra Pradesh State CID raided the house of Suryanarayana Raju, the youngest sibling of Ramalinga Raju who owned 4.3 per cent in Maytas Infra, and recovered 112 sale deeds of different land purchases and development agreements[10]. Senior partners S Gopalakrishnan and Srinivas Talluri of the auditing firm Pricewaterhouse Coopers (PwC) were arrested for their alleged role in the Satyam scandal. The State’s CID police booked them, on charges of fraud (Section 420 of the IPC) and criminal conspiracy (Section 120B)[11].
Merely four months after its founder B. Ramalinga Raju admitted to fudging the books, Satyam’s government appointee six-member board managed to salvage the company despite all odds. The board, which kicked off the global competitive bidding process[12] in March 2009, selected Venturbay Consultants, a subsidiary of Tech Mahindra, as it emerged as the highest bidder[13] at rupees 58 per share. The deal got the approval of Company Law Board[14].
Consequently, Tech Mahindra (holding 31% stake in Satyam) bought Satyam renaming it on June 21, 2009, as ‘Mahindra Satyam’[15] and replaced its executive Board by appointing its (Tech Mahindra) CEO and MD Vineet Nayyar as ViceChairman (who in December 2009 was promoted as Chairman), its international operations head CP Gurnani as CEO. The executive Board appointed Deloitte Haskins & Sells as the company’s statutory auditors to restate its accounts.
CORPORATE GOVERNANCE ISSUES:
On a quarterly basis, Satyam earnings grew. Mr. Raju admitted that the fraud which he committed amounted to nearly $276 million. In the process, Satyam grossly violated all rules of corporate governance[16]. The Satyam scam had been the example for following “poor” Corporate Governance practices. It had failed to show good relation with the shareholders and employees. Corporate Governance issue at Satyam arose because of non-fulfillment of obligation of the company towards the various stakeholders. If we talk specifically the following interests need to be taken care of: distinguishing the roles of board and management; separation of the roles of the CEO and chairman; appointment to the board; directors and executive compensation; protection of shareholders rights and their executives.
- It is well known that a shareholder has a right to get information from the organization; such information could be with respect to the merger and acquisition. Shareholders expect transparent dealing in an organization. They even have right to get the financial reporting and records. In the case of satyam, the above obligations were never fulfilled. The acquisition of maytas infrastructure and properties were announced, without the consent of shareholders. They were even provided with false inflated financial reports. The shareholders were cheated.
- The collapse of any organization’s reputation has adverse impact on the employee’s job. As per the instant case, employees were shown with an inflated figure. The excess of employees in the organization were kept under VIRTUAL POOL who received just 60% of their salaries and several were removed. The entire scam had its impact on management. Questions were raised over the credibility of management.
- Any organization has its obligation towards the Government by means of timely payment of taxes and abiding by the rules and laws framed up by the Government. As per the instant case, the company did not pay advance tax for the financial year 2009. As per the rule, the advance taxes to be paid were 4 times in a year; such was not fulfilled by them.
- Despite the shareholders not being taken into confidence, the directors went ahead with the management’s decision.
- The government too is equally guilty in not having managed to save the shareholders, the employees and some clients of the company from losing heavily.
- Simple manipulation of revenues and earnings.
- Operating profits were artificially boosted from the actual Rs. 61crore to Rs. 649crore. Its financial statements for years were totally false and cooked up.
- Satyam Computer Consultancy Ltd. didn’t have good relationship with the bank too. The company as stated in the facts was blacklisted by World Bank over charges of Bribery. It was declared ineligible for contracts for providing:
- improper benefit to bank staff.
- failing to maintain documentation to support fees.
JUDGEMENT:
Near about six years after the Rs. 7,123crore Satyam Computer Services financial fraud rocked the nation; founder B Ramalinga Raju and his brother Rama Raju (former Managing Director) have been sentenced to seven years jail and fined Rs. 5 crore each.
The special court trying the case imposed a similar sentence on eight others charged by the Central Bureau of Investigation for a number of criminal offences, including criminal breach of trust, fudging, forgery, cheating, impersonation and destruction of evidence. The eight are Vadlamani Srinivas (former CFO), S Gopalakrishnan (Pricewaterhouse Partner), Talluri Srinivas (Pricewaterhouse Partner), B Suryanarayana Raju, G Ramakrishna, G Venkatapathi Raju, Ch Srisailam and VSP Gupta (all former Satyam staff). Following the judgment, all the 10 convicts were shifted to the high-security prison at Cherlapally, outside Hyderabad.
In 2014, capital market regulator Securities and Exchange Board of India had imposed a fine of Rs. 1,850 crore on the Raju’s for making unlawful gains and barred them from entering the financial market for 14 years. A local court’s Economic Offences Wing also fined them Rs. 10 lakh and sentenced them to a jail for a term of six months for financial irregularities.
Additional Chief Metropolitan Judge BVLN Chakravarthi delivered the judgment on Thursday, completing the five-year trial in the special court. The court was formed by the Andhra Pradesh High Court and entrusted with all the cases related to the scam. The media was not allowed inside the court hall. Eventually, the biggest corporate fraud in recent times forced the government and SEBI to bring in a slew of measures to improve corporate governance.
LESSONS LEARNED FORM THE CASE:
The 2009 Satyam scandal in India highlighted the nefarious potential of an improperly governed corporate leader. As the fallout continues, and the effects were felt throughout the global economy, the prevailing hope is that some good can come from the scandal in terms of lessons learned[17].Here are some lessons learned from the Satyam Scandal:
- Investigate all Inaccuracies: The fraud scheme at Satyam started very small, eventually growing into $276 million. Indeed, a lot of fraud schemes initially start out small, with the perpetrator thinking that small changes here and there would not make a big difference, and is less likely to be detected. This sends a message to a lot of companies: if your accounts are not balancing, or if something seems inaccurate (even just a tiny bit), it is worth investigating. Dividing responsibilities across a team of people makes it easier to detect irregularities or misappropriated funds.
- Ruined Reputations: Fraud does not just look bad on a company; it looks bad on the whole industry as well as the country. “India’s biggest corporate scandal in memory threatens future foreign investment flows into Asia’s third largest economy and casts a cloud over growth in its once-booming outsourcing sector. The news sent Indian equity markets into a tail-spin, with Bombay’s main benchmark index tumbling 7.3% and the Indian rupee fell”. Now, because of the Satyam scandal, Indian rivals will come under greater scrutiny by the regulators, investors and customers.
- Corporate Governance Needs to Be Stronger: The Satyam case is just another example supporting the need for stronger Corporate Governance. All public-companies must be careful when selecting executives and top-level managers. These are the people who set the tone for the company: if there is corruption at the top, it is bound to trickle-down. Also, separate the role of CEO and Chairman of the Board. Splitting up the roles, thus, helps avoid situations like the one at Satyam. The fraud committed by the founders of Satyam is a testament to the fact that “the science of conduct” is swayed in large by human greed, ambition, and hunger for power, money, fame and glory.
CONCLUSION:
Recent corporate frauds and the outcry for transparency and honesty in reporting have given rise to two outcomes. First, forensic accounting skills have become very crucial in untangling the complicated accounting maneuvers that have obfuscated financial statements. Second, public demand for change and subsequent regulatory action has transformed Corporate Governance scenario across the globe.
The Satyam fraud has shattered the dreams of different categories of investors, shocked the government and regulators alike and led to questioning of the accounting practices of statutory auditors and corporate governance norms in India. Severe corporate governance problems emerge out of the above-mentioned corporate wreckage. Many of these governance problems were noticed in several other such corporate failures in USA, UK and Europe. These countries reacted strongly to the corporate failures and codes & standards on corporate governance came to the centre stage.
In addition, the Corporate Governance framework needs to be first of all strengthened and then implemented in “letter as well as in right spirit”. Even though corporate governance mechanisms cannot prevent unethical activity by top management completely, but they can at least act as a means of detecting such activity before it is too late. When an apple is rotten there is no cure, but at least the rotten apple can be removed before the infection spreads and infects the whole basket.[18] This is really what effective governance is about.
[1] India Today (New Delhi), January 26’ 2009, p 43
[2] The Pioneer (New Delhi), January 11’2009, p 1
[3] India Today (New Delhi), January 26’2009, p 43
[4] The World Bank is now having a relook at the ban imposed on the Mahindra Satyam when it was under the Raju’s family. Satyam requested for lifting the ban. (Economic Times, New Delhi, May 06’ 2010, P 21)
[5] Economic Times (New Delhi) , December 24, 2009, p1
[6] Economic Times (New Delhi), December 30, 2009, p1
[7] Economic Times (New Delhi), January 8’ 2009, p 1.
[8]http://economictimes.indiatimes.com/Satyams_Raju_brothers_arrested_by_AP_Police/rssarticleshow/3957655.cms
[9] Times of India (New Delhi), January 25’ 2009, p 1
[10] http://economictimes.indiatimes.com/articleshow/4084919.cms
[11] Times Of India (Delhi), January 25’ 2009, p 1
[12] On February 19’ 2009, the Company Law Board (CLB) had given nod to Satyam board to get a new owner through the process of open auction and authorized it to make a preferential allotment of shares at par or at premium without the need of calling an AGM. (Pioneer, February 20, 2009, p 10)
[13] The marquee list of bidders included engineering firm L&T, billionaire investor Wilbur Ross, IT services firm Tech Mahindra, B.K. Modi promoted Spice Group and IT services firm Cognizant Technologies. (Economic Times (New Delhi), August 31, 2009, p 6)
[14] India Today, April 27, 2009, p 46
[15] Mahindra Satyam is the new name given to Satyam Computer Services Ltd having its registered office at 1st floor Mayfair Centre, S.P. Road, Secunderabad, Hyderabad, India.
[16] R. Chakrabarti, W. Megginson and P. K. Yadav, “Corporate Governance in India,” Journal of Applied Corporate Finance, Vol. 20, 2008, p 59-78
[17] B. Behan, “Governance Lessons from India’s Satyam,” Business Week, 16 January 2009.
[18] Jim Solomon and Aris Solomon (2004), “Corporate Governance and Accountability”, John Wiley & Sons Ltd, England, page 42
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