Satyam Case and Ethics
Introduction
Mr. Ramalinga Raju , the chairman of Satyam Computers, wrote a letter on 7th January 2009 to the Board members of Satyam Computers and to the SEBI(Securities and Exchange Board of India) in which he confessed falsifying the accounts of the company.
He confessed that the balance sheet of the company dated 30th September 2008 carries:
1. Nonexistent bank balances and cash of Rs. 5040 crores (as against Rs. 5361 crores reflected in the books)
2. An accrued interest of Rs. 376 crores which is nonexistent
3. An understated liability of Rs.1,230 crores on account of funds was arranged by me
4. An overstated debtors position of Rs.490 crores (as against Rs.2,651 crores in the books)
He also stated that neither he nor the Managing Director or their spouses benefitted financially from these inflated results. He also confessed to the fact that none of the board members knew of the inflated figures and that there was no underlying assets to back the figures in the books.
According to him
“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 Rs11,276 crore in the September quarter of 2008 and official reserves of Rs8,392 crore). 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….”
Byrraju Ramalinga Raju
Ramalinga Raju was born in a traditional agricultural family in the village of Garagaparru, Andhra Pradesh. He studied from Andhra Loyola College and did his MBA from Ohio University, USA. He started a host of companies ranging from a construction company to a spinning and weaving mill to the crown of his jewels, Satyam Computer Services.
He has won accolades for his contribution to the field of business most notably among them being:
* Ernst & Young Entrepreneur of the Year Services Award 1999
* Dataquest IT Man of the Year Award 2000
* Asia Business Leader Award 2002
- Apart from them he also received the following awards which were then revoked on account of his disclosure of the scam:
* Ernst & Young Entrepreneur of the Year 2007
* Golden Peacock Award for Corporate Governance 2008 (For Satyam Computers)
The Satyam Scandal
Satyam proposed a deal to buy out Maytas Properties for $1.3bn and 51% stake in Maytas Infra for $300mn. Satyam had $1.1bn cash which would all be consumed by this deal. But the deal was not this simple, Raju and his family held a 35% stake in Maytas properties and 36% in Maytas Infra. This deal would not only use all the cash Satyam had but would leave it in a debt of $400mn.
Satyam defended the deal by claiming it be a move to diversify the group because of bleak outlook of IT industry. But this came at a time when all the rivals were holding cash on account of a global meltdown. Even the financial statement of Maytas showed that the deal would have impacted Satyam negatively.
Despite agitations form the shareholders the promoters of Satyam still went ahead with the deal. Even though there is nothing illegal in doing so but it is believed to be bad corporate governance practice. As shareholders interest should come first in taking any decision about the organisation.
High Valuation:
According to the deal Maytas was being valued at Rs 91.47 lakh per acre. But most of the land was in tier II and tier III cities so the correct valuation of land should have been somewhere around Rs 40-45 lakh per acre. Not only this, Maytas was overvalued on many fronts. Maytas Infra was valued at nearly 1.6 times FY08 revenues even as mid-cap construction stocks on an average are trading at less than half their FY08 revenues. Even on a P/E basis, the valuations were high. See the table below to see how Satyam valued Maytas:
| Rs in crore | Satyam Com | Maytas Infra | ||
| 11403 | FY10E | FY09E | FY10E | |
| Net sales | 2600 | 12633 | 2154 | 3238 |
| EBITDA | 2600 | 2705 | 268 | 450 |
| Net profit | 2267 | 2363 | 112.6 | 149.5 |
| EPS (Rs) | 33.4 | 34.6 | 19.1 | 25.4 |
| P/E (x) | 4.9 | 4.7 | 13.0 | 9.8 |
Some analysts viewed the deal as a way to bail out the two Maytas companies. Maytas had won a lot of projects recently. The company received the Rs 1,590 crore project for the development of a deep water port at Machilipatnam, Andhra Pradesh on a built-own-operate-transfer (BOOT) basis, Rs 12,132-crore Hyderabad metro railway project through a consortium; again on a BOOT basis for a period of 35 years. But to wreak the benefits of the project Maytas needed to raise other Rs 1300 Crores. Raising the money would have been difficult given the situation then. So this was seen as a way to help the companies.
Current Scenario
Although several companies tried to bite into Satyam Computers, the company exists in its original form. It has discontinued some of its businesses and service lines. Satyam’s ability to sign on new clients during 2009 has significantly diminished. It is being challenged to invest in client engagements, staff developments and R&D while still coming to terms with the loss. In a survey representatives of over 30 top Fortune 500 clients of Satyam, 20 top non-Satyam clients, the board of Satyam and CEOs of six tier-I Indian IT firms including TCS, Wipro, Infosys Technologies, Cognizant and HCL many respondents felt that the job of a new chief executive officer or COO or CFO of Satyam is extremely demanding as holding the existing clients is going to be a tough task. Also, with a monthly payroll of more than $125 million and dire cash flow issues, the future does not bode well for the company.
On 5th February 2009, a six-member board appointed by the Government of India named A. S. Murthy as the new CEO of Satyam. Murthy, an electrical engineer, was heading the Global Delivery Section before being appointed as CEO of the company. The board also appointed Homi Khusrokhan (formerly with Tata Chemicals) and Partho Datta, a Chartered Accountant as special advisors to Murthy.
Accepting the recommendation of the Audit Committee, the board has appointed Deloitte Haskins and Sells as the company’s statutory auditor for the financial year ending March 31, 2010. Deloitte is the principal auditor of Tech Mahindra, which owns 43 per cent stake in the company, and Mahindra and Mahindra. Mr Vineet Nayyar, Vice-Chairman of Mahindra Satyam, has been made Chairman of the board of directors.
On 9th December 2009 Mahindra Satyam announced key decisions pertaining to its Board. Mr Vineet Nayyar was appointed as the Chairman of its Board and Mr. M. Damodaran and Mr. Gautam S Kaji were appointed as additional directors, with immediate effect. Consequently the size of the Board has been increased to 8 directors comprising of 4 independent directors, 2 non-executive and 2 full time directors. Mr Nayyar will also continue to operate as a whole-time director.
Current Initiatives
Mahindra Satyam Foundation, the CSR arm of Mahindra Satyam, is a support framework aiding the vulnerable and underprivileged sections in urban areas. The Foundation believes in engaging with the problem and using all core competencies of Mahindra Satyam�Technology, Innovation and Leadership�as change agents, enabling transformation for the deprived in urban areas, wherever required. Volunteering, creating enabling platforms, creating alliances, partnerships are our other strengths to focus and create maximum impact for Social Transformation.
Core Values and Guiding Principles
* Involving People: Volunteers, Community, Civilians, NGOs and Government
* Applying Knowledge: Leveraging the core competencies of Satyam – Technology, Process and Managerial competency
* Making Things Happen: All initiatives are outcome-oriented, scalability driven and capable of execution
Awards and accolades such as the Business World-FICCI-SEDF 2006 award for ‘Best Corporate Citizen’ and the TERI Corporate Award 2006-2007, have been given to Mahindra Satyam Foundation.
Mahindra Satyam Foundation has five chapters in India located at Hyderabad, Pune, Bengaluru, Bhubaneshwar and Chennai. The Foundation focuses its activities in the core areas of Education, Livelihoods, Health, Environment and Empowerment for Persons with Disability.
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