Case 8-3
Satyam: India’s Enron
Satyam Computer Services, now Mahindra Satyam, is an India-based global business and
information technology services company that specializes in consulting, systems integration, and
outsourcing solutions. The company was the fourth largest software exporter in India until
January 2009, when the CEO and co-founder, Ramalinga Raju confessed to inflating the
company’s profits and cash reserves over an eight-year period. The accounting fraud at Satyam
involved dual accounting books, more than 7,000 forged invoices and dozens of fake bank
statements. The total amount of losses was Rs (Rupees) 50 billion (equal to about $1.04 billion).
This represented about 94 percent of the company’s cash and cash equivalents. The global scope
of Satyam’s fraud led to the labeling of it as “India’s Enron.” Ironically, the name “Satyam” is
derived from the Sanskrit word “satya” which translates to “truth.”
Although headquartered in Hyderabad, India, Satyam’s stock was listed on the New York
Stock Exchange since 2001. When the news of the fraud broke, Satyam’s stock declined almost
90 percent in value on both the U.S. and Indian stock exchanges. Several top managers either
resigned or were fired and jail terms were given to Ramalinga Raju, the co-founder and CEO and
Sirinivas Vadlamani, the CFO. The auditors – PricewaterhouseCoopers (PwC) – were also
implicated in the fraud and investigations against it are continuing by the Securities and
Exchange Board of India (SEBI). As of May 2013 PwC was cooperating with the investigation
in an attempt to fast-track a settlement ahead of protracted legal cases against the firm that are
expected to take years to unravel because Satyam was India’s largest-ever accounting fraud.
Fraudulent Actions by Raju
Raju stepped down in early January 2009, admitting to falsifying financial figures of the
company with respect to non-existent cash and bank balances. Stunning his well-wishers and
investors, Raju revealed the real motive behind the December 16 bid to acquire Maytas
companies for $1.6 billion: to swap the fictitious cash reserves of Satyam built over years with
the Maytas assets. Raju thought the payments to Maytas could be delayed once the Satyam’s
problem was solved. What had started as a marginal gap between actual operating profit and the
one reflected in the books continued to grow over the years. It had attained unmanageable
proportions as the size of the company’s operations grew over the years. One lie led to another.
The problem further worsened as the company had to carry additional resources and assets to
justify higher level of operations, leading to increased costs.
As things went out of hand, Raju was forced to raise Rs 1.23 billion (approximately
$25.58 million) more by pledging the family-owned shares to keep the operations going. His
woes were compounded with amounts due to vendors, fleet operators and construction
companies. The offloading of the pledged shares by IL&FS Trust and others brought down the
promoters’ stake from 8.65 per cent to a fragile 3.6 per cent. By the end of the day, Raju was left
facing charges from several sides. The Ministry of Corporate Affairs, the State Government, and
the market regulator, SEBI, decided to probe the affairs of the company and Raju’s role, as well
as corporate governance issues.
Going by his confessional statement to the board of Satyam in January 2009, what Raju
had done over the years appears to be rather simple manipulation of revenues and earnings to
show a superior performance than what was actually the case. For this, he resorted to the time-
tested practice of creating fictitious billings for services that were never rendered. The offset was
either an inflation of receivables or the cash in bank balance. The following is a summary of the
way financial statement amounts were manipulated:
94 percent (Rs 5.04/approximately $10.5 million) of the cash in bank account balance in
the September 30, 2008 balance sheet was inflated due largely to inflated profits and
fictitious assets.
An accrued interest of Rs 376 million (approximately $7.82 million) was nonexistent.
An understated liability of Rs 1.23 billion (approximately $25.58 million) resulting from
Raju’s infusion of personal funds into the company was recorded as revenue.
Inflated revenues of Rs 588 million (approximately $12.23 million) that went straight to
the bottom line.
Acquisition of Maytas Properties and Maytas Infrastructure
In December 2008, Raju tried to buy two firms owned by his sons, Maytas Properties and
Maytas Infrastructure, (Satyam spelled backwards is Maytas) for $1.6 billion. Raju tried to
justify the purchase stating the company needed to diversify by incorporating the infrastructure
market to augment its software market. However, many investors thought the intended purchases
of two firms were intended to line the pockets of the Raju family. Raju owned less than 10
percent of Satyam whereas Raju’s family owned 100% of the equity in Maytas Properties and
about 40 percent of Maytas Infrastructure. Stock prices plunged dramatically after the
announcement so Raju rescinded his offer to buy the two companies.
With the prices of Satyam stock and the health of the company declining, four members
of the board of directors of Satyam resigned within one month. In his confession, Raju took full
responsibility for the accounting fraud and stated that the board knew nothing about the
manipulation of financial statements. He indicated a willingness to accept the legal consequences
of his actions.
An important question is how independently did the “independent” directors of Satyam
act in the now highly questioned and failed decision to acquire the Maytas companies? One
board member, Prof. M. Rammohan Rao, dean of the prestigious Indian School of Business
(ISB) with campuses in Hyderabad and Mohali, claimed the board had taken an independent
view and raised concerns about the unrelated diversification, valuation and other issues. Two
views emerged. The first was, why not stick to our core competencies and why venture into a
risky proposition? The second issue was related to the valuation of the companies. Maytas
Properties was valued much higher than $1.3 billion, the amount that Satyam’s management
came up with for the acquisition price. When asked whether the fact that the target companies
