Review Of Governance Failure At Satyam

Satyam Computer Service Ltd (1987), the company that won the Golden Peacock Global Award in 2008, Golden Peacock National Award in 2002 for excellence in Corporate Governance and rated as having the best corporate governance practices by the Investor Relations Global Rankings (IRGR) for 2006 and 2007 was involved in one of the largest scandals in the history of the Indian Corporate World. The chairman of the corporation, B. Ramalinga Raju wrote a letter to the company board on January 7, 2009, taking responsibility for fraud of about 50 billion Indian rupees (INR). History of Satyam Satyam Computers Ltd was Indias 4th largest software development information technology (IT) consulting company based on 2008 figure. It became the first Indian company to receive Information Technology Association of America (ITAA) certification for Y2K solutions in 1997. It was listed in NASDAQ in 1999. It entered into several alliances and long term contracts with global bodies and corporations such as World Bank, Microsoft, Yahoo!, SEEC Inc, etc and started operating its branches nationally and internationally. As of 2008, Satyam had revenue of more than US $2 billion, more than 60 nationalities, 654 customers which included one-third of the Fortune Global and US 500 companies, a presence in 63 countries and 31 global solution centers. It was listed on the New York Stock Exchange in the United States, Euronext in Amsterdam and Bombay Stock Exchange and the National Stock Exchange in India. The company and its employees also won national and international awards and recognition that reflected its prestige amongst its clients, employees and society. Governance at Satyam Satyam had relatively small promoter holding and 40 to 50 percent of foreign institutional investors holding. Other important groups of investors were Indian Public, banks and financial institutions as well as mutual funds. The composition of the board and different committees were in total compliance with Indian rules and regulations and the company seemed to follow good governance standard. Financial Health Satyam was the first Indian Company to post its audited results for the 2007/08 financial year in accordance with the International Financial Reporting Standards (IFRS). Its balance sheet implied all the signs of a healthy company showing increase in turnover, profit and growth rate. The Unfolding Of The Crisis Satyams board approved the acquisition of Maytas Infra, a listed company in the Bombay Stock Exchange for US $1.3 billion and a 100 percent stake in the unlisted firm Maytas properties for

US $300 million. Both companies were in the construction and real estate business and promoted by CEOs two sons. The news was not perceived favorably by investors though Satyam justified the diversification on the grounds that real estate was a rising industry in India. This resulted in decline in Satyams share. Further, World Bank suspended Satyam for eight years from doing any business with itself as it was offering bribes to World Bank staff for obtaining lucrative contracts, this declined share price even more. Satyams market capitalization was eroded by 40 percent in just two weeks. Meanwhile, former senior executive in Satyam wrote a anonymous email with the details about financial irregularities and fraud at Satyam and was forwarded to all the board members along with the CEO, B. Ramalinga Raju. This led him to write a resignation letter to the Securities and Exchange Board of India (SEBI) admitting the falsification of the financial statements to the tune of INR 71.36 billion that included INR 50.46 billion in non-existing cash and bank balances. Raju confessed that because of the low profit margins of almost 3 percent, he was forced to overstate profit to maintain share price level so as to avoid Satyams hostile takeover. Investigation The Central Bureau of Investigation (CBS) found that the amount of manipulated profits was more than INR 96 billion. The true financial information was hidden since several years by bribing auditors at all three levels. The audit fee that Satyam paid was about twice as much as what its peers in the IT industry paid their auditors. The Aftermath Of The Crisis The fraud resulted in the decline of more than 78 percent in Satyams market capitalization. The major challenge faced by government appointed board then was to protect the interest of shareholders and employees by making sure that the firm survived. Therefore bidding process was followed for sale of 51 percent stake of Satyam which was won by Tech Mahindra, a Mahindra and Mahindra group company at INR 58 per share. It planned to rum Satyam as an independent company with separate liability.