Post Graduate Programme in Management

REPORT ON THE CASE

Corporate governance failure at Satyam

Submitted to

PROF. SHIV NATH SINHA

In fulfillment of the requirements of the course

LEGAL ASPECTS OF BUSINESS

By

VISHESH NARWARIA
2014PGP221
SECTION F

DATE: 27MARCH-2015

Narwaria Vishesh | 2014PGP221 | Section F

Table of Contents
1. Overview.............................................................................................................. 3
2. Facts about the scam............................................................................................ 3
3. Analysis................................................................................................................ 4
Actual scenario:....................................................................................................... 4
4. Role of Auditors and directors...............................................................................5
Role of Auditors.................................................................................................... 5
Role of independent directors under the companies act, 2013 [4]......................5
5. Conclusions.......................................................................................................... 6
1. Investors......................................................................................................... 6
2. Board.............................................................................................................. 6
3. Government Regulations, Policies and intervention.......................................7
4. Accounting Standards.................................................................................... 7
5. Ethics of Individuals/Company, Defining and implementing code of conduct 7
6. About Corporate governance [6]..........................................................................7
Abstract:............................................................................................................... 7
Factors influencing corporate governance...........................................................8
Mechanisms of corporate governance.................................................................9
Systemic problems of corporate governance.....................................................10
Getting down to the details of governance, we can focus on five issues...........11
7. References.......................................................................................................... 11

Narwaria Vishesh | 2014PGP221 | Section F

1. Overview
Satyam Computer Consultancy Limited was established on June 24 1987.The founder of the
organization was Mr. Ramalinga Raju. CEO at the time of thescam was Mr. Ram Mynampati
and CFO was Mr. Valdamani Srinivas. Satyam computer consultancy limited has its
headquarter at Hyderabad.
The Satyam Computer Services scandal was a corporate scandal that occurred in India in
2009 where chairman Ramalinga Raju confessed that the company's accounts had been
falsified. This scandal is a big example of corporate governance failure in a company. The
Global corporate community was shocked and scandalised when the chairman of
Satyam, Ramalinga Raju resigned on 7 January 2009 and confessed that he had manipulated
the accounts by US$1.47-Billion.
The case involves violation of various norms of corporate governance. In February 2009,
CBI took over the investigation and filed three charge sheets (on April 7, 2009, November
24, 2009 and January 7, 2010), which were later clubbed into one. The case is still going on
in the Indian court. [1]

2. Facts about the scam

In mid-December 2008, Satyam announced acquisition of two companies - Maytas

Properties and Maytas Infrastructure owned by the family members of Satyams founder
and Chairman Ramalinga Raju (Raju).
It planned to acquire 100% and 50% stakes in Maytas property and infra for $1.6B.
Due to adverse reaction from institutional investors and the stock markets, the deal
waswithdrawn within 12 hours.
Questions were raised on the corporate governance practices of Satyam with analysts and
investors questioning the companys board on the reasons for giving consent for the
acquisition as it was a related party transaction.
After the deal was aborted, four of the prominent independent directors resigned from the
board of the company.
In early January 2009, Raju revealed that the revenue and profit figures of Satyam had
been inflated for past several years. The following were the inflated figures:
o Inflated cash and bank balance Rs.5040cr
o Non existent accrued interest Rs376cr
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o
o
o
o
o

Understated liability of Rs.1230cr

Overstated Debtor position of Rs.490cr
Inflated staff by 12000 (Actual were 40000)
Revenue of Rs.2700cr (Actual were Rs.2112cr)
Operating margin to be 6494 cr (Actual were 61cr) INDIAS LARGEST
FRAUD- Rs.7800crore( now estimated as 14000crore)
[2]

3. Analysis
Corporate governance includes various parties:
o Shareholders
o Employees
o Management
o Bankers
o Government
Governance issue at Satyam arose because of non fulfillment of obligation of the
company towards the various stakeholders. It proved a poor relationship with all the
stakeholders.
It is well known that a shareholder has a right to get information from the organization,
such information could be with respect to the merger and acquisition. Shareholders
expect transparent dealing in an organization. They even have right to getthe financial
reporting and records.
In the case of satyam, the above obligations were never fulfilled. The acquisition of
Maytas infrastructure and properties were announced without the consent of
shareholders. They were even provided with false inflated financial reports. The
shareholders were cheated
Employees were shown with a inflated figure. The excess of employees in the
organization were kept under VIRTUAL POOL who received just 60% of their salaries
and several were removed. The entire scam had its impact on management. Questions
were raised over the credibility of management.
Any organization has its obligation towards the Government by means of timely payment
of taxes and abiding by the rules and laws framed up by the Government. As per the case
with satyam, the company did not pay advance tax for the financial year 2009. As per the
rule, the advance taxis to be paid 4 times a year; such was not fulfilled by them
SCS was blacklisted by world bank over charges of Bribery.
It was declared ineligible for contracts to providing
o Improper benefit to bank staff.
o Failing to maintain documentation to support fees

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Actual scenario:
Despite the shareholders not being taken into confidence, the directors went ahead with
the managements decision.
The government too is equally guilty in not having managed to save the shareholders, the
employees and some clients of the company from losing heavily.
Simple manipulation of revenues and earnings to show superior performance.
Raising fictitious bills for services that were never rendered.
To increase the Cash & bank balance correspondingly.
Operating profits were artificially boosted from the actual Rs 61 crore to Rs 649 crore
Its financial statements for years were totally false, cooked up
Never had Rs 5064 crores (US$ 1.05 Billion) shown as cash for several years.
Its liability was understated by $ 1.23 Billions
The Debtors were overstated by 400 million plus.
The interest accrued and receivable by 376 Millions never existed. So when the case
came in light following are the actions that has been taken:
o Nasscum sets up panel to avoid satyam like case in future- formed a corporate
Governance & ethics committee, chaired by N.R.Narayana Murthy (chairman and
chief mentor of Infosys.)
o Hinduja Global chalks out 100 day plan for satyam.
o 8 Year ban on satyam to be reviewed.
Govt. orders CBI to probe fraud (concerned about 52000 employees)
o Serious fraud investigation office (SFIO)
o Market regulation SEBI
o Institute of chartered accountancy India (ICAI)
o Andhra police
[3]
4. Role of Auditors and directors
Role of Auditors

PricewaterhouseCoopers was the statutory auditor of Satyam Computer Services when

the report of scandal in the account books of Satyam Computer Services broke. The
Indian arm of PwC was fined $6 million by the SEC (US Securities and Exchange
Commission) for not following the code of conduct and auditing standards in the
performance of its duties related to the auditing of the accounts of Satyam Computer
Services.
Role of independent directors under the companies act, 2013 [4]

Section 149 (8) provides that the company and the independent directors shall comply
with the provisions specified in schedule IV. This schedule lays down a Code of
Conduct for Independent Directors. It is stated that the adherence with this code of
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conduct by independent directors and fulfillment of their responsibilities in a professional

and faithful manner will promote confidence of the investment community, minority
shareholders, regulators and companies in the institution of Independent Directors.
Following independent directors were fined for not doing their duty in shareholders
interest:

Krishna G Palepu: A professor in Harvard Business School, Palepu received Rs

87 lakh as fees from Satyam without Govt's approval. Fined the highest at Rs 2.66
crore
Vinod Dham: Well-known as Father of the Pentium, former Intel employee
Dham now runs IndoUS Venture Partners. Fined Rs 20,000

TR Prasad: Former Cabinet Secretary, Prasad is now retired. Fined Rs 20,000

M Rammohan Rao: Former dean of Indian School of Business, Hyderabad, Rao
is now professor emeritus at ISB. Fined Rs 20,000
VS Raju: Former IIT director is now retired. Fined Rs 20,000
Mangalam Srinivasan: Former professor in US universities, Mangalam served
as an advisor to Center for Kennedy School of Government of Harvard
University. Fined Rs 20,000

[5]
5. Conclusions
This is case depicts major failure of corporate governance. Various stakeholders should
take necessary precautions, the company should define proper code of conduct and
accounting standards.
1. Investors

Investors play an important role in detecting financial position of a company.

Investors must ensure that the share value which is listed is genuine and as per its
financial status.
Institutional investors should take more responsibility.
Information about the company should be latest, from trusted source, easily
accessible and correct.
New regulation for information Act.
Investors should take more care before investing.
No risk involved if CEO is the founder of the company

2. Board

Must monitor the ethical policies and the way they are being maintained in the company.
Accountable for the financial information being projected.
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No to inactive board members

Authority to independent board of directors.
Clear understanding of responsibility between the board and next level employees.
Qualified Board members

3. Government Regulations, Policies and intervention

Government should always plays an active role in the company affairs because the
company runs with the public money.
The government must frequently check the companys performance in the market and
take necessary steps in curtailing any malpractices or falsification.
Government is not taking any corrective measures in case of any violations
If the auditor do their work sincerely then any balance sheet and income statements
would show the fair value of the companys financial records.
Government intervention must be increased to have a foolproof mechanism in the
company policy matters

4. Accounting Standards

Auditors main responsibility is to check fairness and trueness of financial statements.

Proper Audit Tools
Freedom for auditors
Reputation of auditing firm/individual cant avoid scandals.
Most of the companies involved in mega scandals were audited by reputed auditing firms

5. Ethics of Individuals/Company, Defining and implementing code of conduct

Search or Nominations Committee

Proper code of conduct updated on regular basis should be implemented.
Every company should have fraud detection mechanism.
Good Corporate Governance
Good educational background doesnt always mean individual has good ethics.
Whistle blowing policies

6. About Corporate governance [6]

Abstract:

Corporate governance is the set of processes, customs, policies, laws, and institutions
affecting the way a corporation is directed, administered or controlled. Corporate
governance also includes the relationships among the many stakeholders involved and the
goals for which the corporation is governed. The principal stakeholders are the
shareholders, management, and the board of directors. Other stakeholders include
labor(employees), customers, creditors (e.g., banks, bond holders), suppliers, regulators,
and the community at large.

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This article reveals various reasons for failure of Corporate Governance, Corporate
Governance conists of, various examples of Corporate Governance Failures like Enron,
Satyam, Cadbury, Wal-Mart, Xerox and why Corporate Governance failed in such big
organizations. Article also describes various mechanisms of Corporate Governance like
(1) Company's Act (2) Security law (3) Discipline of capital market (4) Nominees on
company board (5) Statutory audit (6) Codes of conduct etc. Some factors that influence
the Corporate Governance like Owernership structure, Structure of company board,
Financial structure, Institutional Environment etc. Various systematic problem in
Corporate Governance and Recent Corporate Governance failures.
Corporate governance is a multi-faceted subject. An important theme of corporate
governance is to ensure the accountability of certain individuals in an organization
through mechanisms that try to reduce or eliminate the principal-agent problem. A related
but separate thread of discussions focuses on the impact of a corporate governance
system in economic efficiency, with a strong emphasis shareholders' welfare. There are
yet other aspects to the corporate governance subject, such as the stakeholder view and
the corporate governance models around the world.
There has been renewed interest in the corporate governance practices of modern
corporations since 2001, particularly due to the high-profile collapses of a number of
large U.S. firms such as Enron Corporation and Worldcom. In 2002, the U.S. federal
government passed the Sarbanes-Oxley Act, intending to restore public confidence in
corporate governance.
Factors influencing corporate governance

1. The ownership structure

The structure of ownership of a company determines, to a considerable extent, how a

Corporation is managed and controlled. The ownership structure can be dispersed among
individual and institutional shareholders as in the US and UK or can be concentrated in
the hands of a few large shareholders as in Germany and Japan. But the pattern of
shareholding is not as simple as the above statement seeks to convey. The pattern varies
the across the globe.
Our corporate sector is characterized by the co-existence of state owned, private and
multinational Enterprises. The shares of these enterprises (except those belonging to a
public sector) are held by institutional as well as small investors. Specifically, the shares
are held by
(1) The term-lending institutions
(2) Institutional investors, comprising government-owned mutual funds, Unit Trust of
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India and the government owned insurance corporations

(3) Corporate bodies
(4) Directors and their relatives and
(5) Foreign investors. Apart from these block holdings, there is a sizable equity holding
by small investors.
2. The structure of company boards

Along with the structure of ownership, the structure of company boards has considerable
influence on the way the companies are managed and controlled. The board of directors is
responsible for establishing corporate objectives, developing broad policies and selecting
top-level executives to carry out those objectives and policies.
3. The financial structure

Along with the notion that the structure of ownership matters in corporate governance is
the notion that the financial structure of the company, that is proportion between debt and
equity, has implications for the quality of governance.
4. The institutional environment

The legal, regulatory, and political environment within which a company operates
determines in large measure the quality of corporate governance. In fact, corporate
governance mechanisms are economic and legal institutions and often the outcome of
political decisions. For example, the extent to which shareholders can control the
management depends on their voting right as defined in the Company Law, the extent to
which creditors will be able to exercise financial claims on a bankrupt unit will depend
on bankruptcy laws and procedures etc.
Mechanisms of corporate governance

In our country, their are six mechanisms to ensure corporate governance:

(1) Companies Act

Companies in our country are regulated by the companies Act, 1956, as amended up to
date. The companies Act is one of the biggest legislations with 658 sections and 14
schedules. The arms of the Act are quite long and touch every aspect of a company's
insistence. But to ensure corporate governance, the Act confers legal rights to
shareholders to
(1) Vote on every resolution placed before an annual general meeting;
(2) To elect directors who are responsible for specifying objectives and laying down
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policies;
(3) Determine remuneration of directors and the CEO;
(4) Removal of directors and
(5) Take active part in the annual general meetings.
(2) Securities law

The primary securities law in our country is the SEBI Act. Since its setting up in 1992,
the board has taken a number of initiatives towards investor protection. One such
initiative is to mandate information disclosure both in prospectus and in annual accounts.
While the companies Act it self mandates certain standards of information disclosure,
SEBI Act has added substantially to these requirements in an attempt to make these
documents more meaningful.
(3) Discipline of the capital market

Capital market itself has considerable impact on corporate governance. Here in lies the
role the minority shareholders can play effectively. They can refuse to subscribe to the
capital of a company in the primary market and in the secondary market; they can sell
their shares, thus depressing the share prices. A depressed share price makes the company
an attractive takeover target.
(4) Nominees on company boards

Development banks hold large blocks of shares in companies. These are equally big debt
holders too. Being equity holders, these investors have their nominees in the boards of
companies. These nominees can effectively block resolutions, which may be detrimental
to their interests. Unfortunately, the role of nominee directors has been passive, as has
been pointed out by several committees including the Bhagwati Committee on takeovers
and the Omkar Goswami committee on corporate governance.
(5) Statutory audit

Statutory audit is yet another mechanism directed to ensure good corporate governance.
Auditors are the conscious-keepers of shareholders, lenders and others who have
financial stakes in companies.
Auditing enhances the credibility of financial reports prepared by any enterprise. The
auditing process ensures that financial statements are accurate and complete, thereby
enhancing their reliability and usefulness for making investment decisions.

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(6) Codes of conduct

The mechanisms discussed till now are regulatory in approach. The are mandated by law
and violation of any provision invite penal action. But legal rules alone cannot ensure
good corporate governance. What is needed is self-regulation on the part of directors,
besides of course, the mandatory provisions.
Systemic problems of corporate governance

Demand for information: A barrier to shareholders using good information is the

cost of processing it, especially to a small shareholder. The traditional answer to
this problem is the efficient market hypothesis (in finance, the efficient market
hypothesis (EMH) asserts that financial markets are efficient), which suggests that
the shareholder will free ride on the judgements of larger professional investors.

Monitoring costs: In order to influence the directors, the shareholders must

combine with others to form a significant voting group which can pose a real
threat of carrying resolutions or appointing directors at a general meeting.

Supply of accounting information: Financial accounts form a crucial link in

enabling providers of finance to monitor directors. Imperfections in the financial
reporting process will cause imperfections in the effectiveness of corporate
governance. This should, ideally, be corrected by the working of the external
auditing process

Getting down to the details of governance, we can focus on five

issues

o Chairman and CEO: It is considered good practice to separate the roles of the
Chairman of the Board and that of the CEO. The Chairman is head of the Board
and the CEO heads the management. If the same individual occupies both the
positions, there is too much concentration of power, and the possibility of the
board supervising the management gets diluted.
o Audit Committee: Boards work through sub-committees and the audit committee
is one of the most important. It not only oversees the work of the auditors but is
also expected to independently inquire into the workings of the organisation and
bring lapse to the attention of the full board.
o Independence and conflicts of interest: Good governance requires that outside
directors maintain their independence and do not benefit from their board
membership other than remuneration. Otherwise, it can create conflicts of interest.
By having a majority of outside directors on its Board.
o Flow of information: A board needs to be provided with important information in
a timely manner to enable it to perform its roles. A governance guideline of
General Motors, for instance, specifically allows directors to contact individuals
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in the management if they feel the need to know more about operations than what
they are being told.
o Too many directorships: Being a director of a company takes time and effort.
Although a board might meet only four or five times a year, the director needs to
have the time to read and reflect over all the material provided and make informed
decisions. Good governance, therefore, suggests that an individual sitting on too
many boards looks upon it only as a sinecure for he or she will not have the time
to do a good job.

7. References
1. http://en.wikipedia.org/wiki/Satyam_scandal
2. http://www.iodonline.com/Articles/Inst%20of%20Directors-WCFCG%20Global
%20Covention-Paper%20Prof%20J%20P%20Sharma-What%20Went%20Wrong
%20With%20Satyam.pdf
3. http://www.iodonline.com/Articles/Inst%20of%20Directors-WCFCG%20Global
%20Covention-Paper%20Prof%20J%20P%20Sharma-What%20Went%20Wrong
%20With%20Satyam.pdf
4. http://www.msglobal.co.in/downloads/Role%20of%20Independent%20Directors.pdf
5. http://www.business-standard.com/article/companies/satyam-fine-sends-signals-toall-independent-directors-114120900792_1.html
6. http://www.indianmba.com/Faculty_Column/FC974/fc974.html

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