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SATYAM FIASCO

“SINKING SHIP OR TIP OF ICEBERG”


Somya Mukherjee
Manpreet Singh
Company Profile
Founded by Mr. Ramalinga Raju & Mr. B. Rama Raju
on 24th June,1987

Fourth largest IT Outsourcing Company of India

Employees more than 40,000 in India

High Global reputation

Offers services to more than 550 MNC’s


The Biggest Corporate Fraud

Motive Behind the Scam:


- To maintain the pace of growth
- To please investors and shareholders
- To justify the inflated P/E multiples.
Unveiling the truth
• On 8th Jan,2009 the truth was relieved to the world.

• It was in the form of a 5-page letter given by Mr.


Ramalinga Raju to the Board of Directors.

• Various confessions were made in this letter.


Confessions Made
• Neither myself, nor the managing Director (including our
spouses) sold any shares in the last eight years-excepting for a
small portion declared and sold for philanthropic purpose.

• That neither me, nor the Managing Director took even one
rupee / dollar from the company and have benefitted in
financial terms on account of the inflated results.

• Non of the board members, past or present, have any


knowledge of the situation in which the company is placed.
None of my or Managing Director’s immediate or extended
family members has any idea about these issues.
Bridging the Gap
SATYAM MAYTAS
• It all started on 16.12.2008, when Ramalinga Raju thought,
buying an infrastructure firm .

• Raju and his immediate family members own up to 35%


stakes in Maytas.

• Satyam intended to buy 100% stakes in Maytas Properties for


$1.3 Billion and 51% stakes in Maytas Infra for another $300
Million.

• Non of the investors & fund managers were aware of the bid.
Violation of the Companies Act
• Violation of Section 372A of Companies Act.
-Acquiring shares in another corporate for an amount not
exceeding 60% of the acquiring company’s share capital &
free reserves.
-Passing resolution through a postal ballot & giving advance
intimation to the RoC (Hyderabad)

• Violation of Section 293 of Companies Act.


- Failed to pass resolution regarding the proposed acquisition of
stakes in Matyas Infra. & Matyas Properties.
Satyam's path to disaster
• Following is the chronological summary of the events which send IT
major Satyam Computer Services, founded in 1987, to disaster:

1. December 16: Satyam gets board's approval for acquisition of Maytas


Infrastructure and Maytas Properties for $1.6 billion
2. December 18: British mobile solution provider Upaid files a suit
against Satyam in a district Court in the US over Maytas deal.
3. December 25: Mangalam Srinivasan, non-executive and independent
director resigns from board.
4. December 27: Promoters disclose that their entire holding in Satyam
pledged with institutional lenders since 2006.
5. January 1: Satyam-Upaid case hearing over the Maytas deal in Texas
court on January 7.
7. January 2: Promoter holding in Satyam drops to 5.31 per cent from
8.27 per cent after sale of pledged shares by lenders.

8. January 6: Raju family holding in Satyam falls to 3.16 per cent after
sale of pledged share by lenders

9. January 7: Satyam Chairman Ramalinga Raju sends letter to board


tendering his resignation and admitting to fraud in accounting books.

10. January 7: Satyam Managing Director B Rama Raju also resigns

11. January 7: DSP Merrill Lynch terminated its advisory engagement


with company
SATYAM CASE IN VIEW OF
CORPORATE GOVERNANCE
• The whole perception of Corporate Governance was shaken
to the very roots.

• Those companies who had already a question mark over their


Corporate Governance were very badly hit.

• The realty sector, with its complex land bank valuations had
been the worst hit.

• The firms with Satyam in their portfolios are trying to sell


other stocks they held creating a situation in which short
sellers reveled and rumors flew.
CURRENT ASSESTS ACTUAL CASH IN
BANK IS
321
2651.6 INFLATED 5040cr
5312.62
376
ACTUAL DEBT IS 2161
OVERSTATED 490 Cr

LIABILITIES NO ACCURRED
INTEREST
376 Cr

REVENUE 2700
UNDERSTATED
OPERATING 690
LIABILITY 1230 Cr
MARGIN
ARTIFICIALLY ADDED 588 which is arranged
OPERATING PROFIT ADDED by Mr.Raju
588
INCREASING THE CASH
5040+376+1230+
RESERVE ONLY FOR Q2 ALONE 490= 7136
TO 588
ACTUAL OPERATING MARGIN 61 Cr (
CREATED AN ARTIFICIAL REVENUE OF 588)

Operating Profit

800
Operatin Profit ( IN

648.61 649.27
CRORES)

600
545.49
468.72
400 401.61

200

0
Sep '07 Dec '07 Mar '08 Jun '08 Sep '08

Series1 401.61 468.72 545.49 648.61 649.27


Quarter

GROWTH IN THE OPERATING PROFIT


ADJUSTED BALANCE SHEET
RATIO ANALYSIS
CURRENT RATIO : CURRENT ASSESTS/CURRENT LIABILITY

BEFORE ADJUSTMENT AFTER ADJUSTMENT

= 8788.2 = 2882.2
1603.07 2833.07
= 5.48 : 1 = 1.01 : 1

CASH RATIO : CASH & BANK BALANCE + CURRENT INVT / CURRENT


LIABILITIES

BEFORE ADJUSTMENT AFTER ADJUSTMENT

= 5854.8 = 814.8
1603.7 2833.07
= 3.65 : 1 = 0.28 : 1
RATIO ANALYSIS (cont…)
OPERATING PROFIT RATIO : OPERATING PROFIT / SALES X 100

BEFORE ADJUSTMENT AFTER ADJUSTMENT


= 649.27 X 100 = 61.00 X 100
2700.52 2700.52
= 24.04 % = 2.25 %

EARNING PER SHARE : NPAT – PREF DIVIDEND/ NO OF EQUITY


SHARE HOLDERS

BEFORE ADJUSTMENT AFTER ADJUSTMENT


= 597.43 = 9.430
67.35 67.35
= 8.87 RS = 0.14 RS
IMPACT ON STAYAM
SHARE PRICES PLUNGES

JAN 7
IMPACT ON STOCK MATKET:

shares fell to 6.00 rupees on 10 January 2009, compared to a


high of 544 rupees in 2008.
 The sensex fell from its closing peak of 20,837 on January 8,
2008 to less than 10,000 by October 17, 2008.
Sensex on Wednesday tumbled over 340 points at noon to dip
below
India's National Stock Exchange has announced that it will
remove Satyam from its S&P CNX Nifty 50-share index on
January 12 and added Sun Pharma
In New York Stock Exchange Satyam shares peaked in 2008 at
US$ 29.10; by March 2009 they were trading around US
$1.80.
The New York Stock Exchange has halted trading in Satyam
stock as of 7 January 2009.
Withdrawal of FII of actual $66.5 billion at the beginning of
2008 to pull out of $ 11.1billion during the first nine and a half
months of 2008 triggered a collapse in the stock market.
Withdrawals in FII also led to sharp depreciation in rupees.
Regulators in action:
• Department of Company Affairs(DCA): Scanning for further
misappropriations in the balance sheet.

• CLB(Company Law Board): Looking into the violations of the


Securities Act.

• SEBI: Investigating matters relating to trading of shares.

• Serious Frauds Investigation Office: Constituted with


members from SEBI, RBI, CBI etc for investigating under
DCA.

• Enforcement Directorate: Looking into possible violations of


rules governing foreign exchange transactions.

• CID/CBI: Investigating the criminal aspects of the fraud.


Tech Mahindra acquires Satyam

+
ABOUT TECH MAHINDRA

• Tech Mahindra is India’s 6th largest software exporter, and


serves telecom service providers, equipment manufacturers,
software vendors and systems integrators

• Operations over 25 countries

• Around 25,000 professionals across the globe

• Strong presence in Europe and Germany


BITTER SWEET DEAL

● The potential bidders were Larsen & Turbo, Tech Mahindra


and Wilbur Ross.
• Tech Mahindra = 58/share
• Larsen & turbo = 45.9/share
• Wilbur Ross = 20/share

● Tech. Mahindra will Buy 31 percent of Satyams equity share,


followed by a further acquisition of 20% through an open offer

● Tech Mahindra will pay Rs 2,900 crores for 51% stake.


Highlights of Tech Mahindra Bid
• Tech Mahindra emerged as the highest bidder. The bid as
made by the company’s 100% subsidiary venturbay
consultants.

• Management plans to raise debt through SPV.

• A company claims to have largest support from its largest


client BT.

• The management intends to meet key clients of the company


personally to restore their faith and confidence in satyam’s
service delivery and governance.

• Tech Mahindra has acquired 475 acres of land assets of


Satyam.
Impact of Acquisition

• Satyam is completely complimentary to Tech Mahindra


with negotiable business overlap.
• Spresence in Europe.atyam has strong presence in US
and Tech M has strong
• The stock price of Tech Mahindra has raised appreciably
from of Rs.200 to Rs.365 in a short span of 1 month.
• Employee satisfaction
• Customer Retention
Satyam & PWC
• The audits were conducted by Price Waterhouse Cooper in
accordance with applicable auditing standards.

• As per Satyam's accounts, vetted by Price Waterhouse,


auditors were paid Rs 3.73 crore during 2007-08 as against Rs
3.67 crore in the previous fiscal.

• Credibility of audit firms has come into question as the


amount was too big for any audit firm not to notice. If the
audit firm claims that they didn’t know about then their
capabilities would come under the scanner,
• A fallout of the Satyam case is the issue of delays involved in
enforcement of Indian corporate laws.

• Shareholders should ensure that the composition of Board of


Directors is a balanced mix of independent directors and
management appointees.

• Ties between the company management and auditors and


independent directors need to be cut.
• Securities and Exchange Board of India (SEBI), has called for
peer reviews of audits among the companies that are part of
the Nifty and Sensex indices.

• Regulation and transparency can only serve to lower the


incidences of fraud.
``Investing in Corporate Governance

• Companies need to invest in good governance


▫ Corporate governance has a direct bearing on business
performance and thereby ROI

• A study reveals that-

On an average, businesses with superior governance


practices generate 20 percent greater profits than other
companies
IMPACT ON 'BRAND INDIA
• Damage to India's appeal for foreign investors and the IT
services industry.

• IMPACT ON IT INDUSTRIES:
It greatly affected the Indian IT sector.
The impact is short-term.
The bluest of blue-chip reputations [such as] Infosys and TCS"
could actually gain in the current environment, because of a
potential "flight to quality" among client companies. The
third-tier and weaker companies will probably undergo a lot
more.

• IMPACT ON INDIAN ECONOMY:


Minimal effect on Indian economy as it was an isolated
incident.
Thank You!