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FinCoP, The Finance Club of Praxis

SATYAM FIASCO

Pankaj Agarwal - President

Mohit Almal – Secretary

Vineet Sekhani – Treasurer

Kaushambi Ghosh- Co-Secretary

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FinCoP Discussion on:

Satyam Fiasco

Introduction to the company:

Ramalinga Raju initiated a company in the year 1987 which grew from a small IT service provider

with a small number of employees to become the fourth largest IT Company in the country with

around 40000 employees. The magnitude of its operations grew at a huge rate to cross revenue level

of $ 2 bn. Magnitude of its operations can be validated as follows:

It had grown a huge number of clients which was 690, including 185 Fortune 500

firms as of September 30, 2008.

The Backdrop of the case:

The Fourth largest software exporter of the country generated huge revenues which crossed $2 bn

in 2005. Maytas Infrastructure and Maytas Property are two real estate companies owned by

Ramalinga Raju’s two sons. Raju siphoned off funds to these companies and as a result of which he

kept on window dressing the books of Satyam. What started as a marginal gap between the actual

profit and the one reflected in the books attained unmanageable proportions with increase in the

magnitude of operations. This was because the Company had to carry additional resources and

assets to justify higher level of operations – thereby significantly increasing the costs. Raju took a lot

of steps to bridge the gap but to no avail. As a last chance to bridge the gap Raju proposed the

acquisition of Maytas Infra and Maytas Properties by Satyam for $1.6 bn. The break up was as

follows:

Maytas Properties(100% stake) - $1.3 billion

Maytas Infra (51% stake) - $ 300 million

The shareholders and the directors stepped back from this decision and as a result of which the plan

was aborted. After abortion of the plan Raju resigned from his post as a chairman after admitting the

fraud being committed by him. All these incidents had negative impact on the company’s image. The

affects are as follows:

Shareholders lost confidence in the company and a huge number of them sold off their stake

in the company. The share price of the company went as low as Rs. 11.5.

4 out of 6 independent directors resigned.

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Corporate governance not exercised in “true spirit”

Raju owned 25% stake in the company in the year 2005 which dropped to 8.5% in 2008. Even after

being a minor shareholder he went ahead with the plan of acquisition without notifying the other

shareholders and even the directors. According to him “it was not required as per regulations”.

According to the provisions of law a company cannot go ahead with an acquisition of any other

company at a price more than 60% of its own paid up share capital. But the agreed price of $1.6 bn

was way over the limit.

This shows a gap in compliance to the corporate governance rules.

Reasons why the shareholders stepped back:

a. Reason given by the company to go ahead with the acquisition was to “de- risk” its business

model. But to diversify at a time when Satyam’s rivals are hoarding cash to weather a global

slowdown seemed dubious to them.

b. Margins of Maytas Infra and Properties revealed that the margins of the combined entity

would have reduced after the deal.

The letter of Ramalinga Raju to the board of directors and SEBI on the day of resignation revealed

the following:

Inflated ( non- existent) cash and bank balance of Rs. 5040 crores

Accrued Interest of Rs. 376 crores – non- existent

Understated Liability of Rs. 1230 crores on account of funds arranged by Raju

Overstated Debtors position of Rs. 490 crores

For September ’08 a revenue of Rs. 2700 crores and an operating margin of Rs. 649 crores

(24% of revenues) was shown as against actual revenue of Rs. 2112 crores and operating

margin of Rs. 61 crores (3% of revenues). This resulted in artificial cash and bank balances

going up by Rs. 588 crores in Q2 alone.

13000 out of 53000 employees were fake

Some facts about Maytas:

Maytas Infrastructure’s total loans stood at Rs. 934 crores in FY ‘08

Both the companies were highly valued

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Reaction of stakeholders:

Auditors- (PWC) In this case fault in the part of the auditors was noticed thus stringent scrutiny of the loyalty of

auditors towards the shareholders will be tested before appointing them in future by various firms.

Shareholders Shareholders of other companies have become sceptical of their companies even if it has the

slightest resemblance of Satyam. Some of those resemblances can be sighted as follows:

Promoters holding minority of shares

Company going for diversification

Company holding surplus cash

Independent Directors Directors of various companies resigned from their posts after the announcement of the Satyam

scandal.

Steps to be taken to gain back the confidence of the investors: A IT giant taking over all the assets of Satyam and taking up the management of the same

Keeping rotational Auditors

A retiring independent director should not be re-elected

Conclusion

It is impossible to come out with ways of avoiding these kinds of scandals in future thus we can only

take precautionary steps for the same.

Note: After studying the case we can only make intelligent guesses about the happenings because

the validity of the statements passed cannot be tested by us.