SATYAM SCAM-CASE STUDY

INTRODUCTION
Satyam Company Services Ltd. was incorporated on
June 24, 1987
Promoters holding of the shares in 1992 was 18.78%
Main business of the company was IT related fields
and it came into prominence after Y2K problem
In 1991, it was in a rented house having 10
Engineers.
Company was listed in Bombay Stock Exchange in
1992
company bags its first fortune 500 client John Deere
& Co


CONTD
Formed the joint venture with Dun & Bradstreet
for IT services
Listing in NASDAQ, USA- 1999
Listed on New York Stock Exchange- 2001
Revenue crossed $1 Billion-2006
Ramalinga Raju got the Ernst & Young
Entrepreneur of the Year Award -2007
Revenue crossed $2 Billion -2008
COMPOSITION OF THE BOARD OF DIRECTORS
B. Ramalinga Raju Born on 16.09.1954 at
Garagaparru village of Andhra Pradesh. He got
commerce degree from Loyola College and headed
to Ohio University, USA for MBA , Vice Chairman,
NASSCOM, Chairman of IT Committee in FICCI,
Awarded Corporate Citizen of the Year Award-2002,
IT Man of the Year Award-2001 and he was the
Chairman of the company
B. Rama Raju He was the Co-founder and MD of the
company. He did a MA(Eco.) from Loyola College,
Chennai and MBA from Loredo State University
Texas, USA and he is the younger brother of
Ramalinga Raju
CONTD
V. P. Rama Rao- He was an IAS officer and he was
a member of Satyams Board from July 1991
Mrs. Mangalam Srinivasan- She was a member of
the Board since July 1991. A senior fellow at Havard
University. Expert in International Financial
Management.
Vinod K. Dham- He was on the Board from
2003.Inventor of Pentium chip
Krishna G. Palepu- He was a member of Board
from January, 2003, Professor of Business
Administration at Harvard School and expert in
Corporate Governance




CONTD
M. Mohan Rao- He was dean of Indian Business School,
Hyderabad and expert in Corporate Finance and
Financial Derivatives. He was appointed to the Board on
July, 2005
Ram Mynampati He was inducted on the Board as whole
time Director in August, 2006. He was in- charge of half of
the Sales Portfolio of the company
V. S. Raju- He was appointed as Directors in April 2007 . He
was Chairman of DRDO and Director of the IIT, Delhi
T.R. Prasad- He was appointed as member of the Board in
April 2007 and was the ex. Cabinet Secretary,
Government of India
BRIEF FACTS

The case was initially registered by CB-CID, Andhra Pradesh on
January 9, 2009 on a complaint received from Smt. Leela
Mangat, a retd. employee of Syndicate Bank stating that she
had invested her retirement benefits for purchase of the
shares of the company on seeing the performance of the
company. She purchased 100 shares for a sum of Rs.
19000. She filed the complaint after the confessional letter of
the chairman made public
The case was handed over to CBI on February 16, 2009 by
Government of India under section 5 of DSPE Act and
notification under 6 of DSPE Act by the Government of
Andhra Pradesh. ACB Hyderabad re-registered the case and
investigation was started
CONFESSION LETTER
The confession letter by B. Ramalinga Raju
was submitted to SEBI/BSE and to the Board
of Directors on January 7, 2009 which stated
that balance sheet as on 30.09.2008, cash
and bank balance, interest accrued on fixed
deposits, debtors were overstated and
liabilities were understated Company
inflated operating profit. The gap in balance
sheet was on account of inflated profits
shown over a period


WHY CONFESSION LETTER
Whistle Blower
E-mail dated 18.12.2008 from Joe Abraham to
Mr. Krishna G. Palepu and subsequently
circulated to other Board Members wherein
misdeed of the chairman/company was
narrated
Subsequently, Hemant Kothari, Non
Executive Chairman of DSP, Marril lynch Ltd.
after having discussion with B. Ramalinga
Raju forced him to confess as during the
discussion it was revealed that there was a
big hole in the balance sheet.
CONFESSION LETTER
The brief discretion:
Inflated non-existent cash Rs. 5040 crore
Accrued interest Rs. 376 crore
Understand liability- Rs. 1230 crore
Over stated debtors position - Rs. 490 crore
Operative margin 24% as against actual of 3%
Every attempt made to eliminate the gap failed. It was like riding a
Tiger, not knowing how to get off without being eaten
Aborted MAYTAS acquisition deal was the last attempt to fill the
fictitious assets with real ones
Neither he nor the MD took any money from the company
Board of Directors were not aware of the fraud
AREA COVERED FOR INVESTIGATION
Management Information systems
Manpower Management
Sales
Cash and bank balances
Selling of shares
Role of Statutory Auditors
Role of Internal Auditors
Board of Directors
Purchase of land
Floatation of 327 companies
Acquisitions
Income Tax Liability
MAN POWER MANAGEMENT
There were always excess man power to the extent of 10000
Recruitment was done not in tune with actual sales
Promoters published loading factor which was highly
inflated
Average loading factor off-shore was 62.02 published was
74.88, on-site 94.86 published was 96.76
More then of the expenses of the company was on
manpower
There was concept of distributed leadership and control of
expenses on manpower was found to be lax
MANAGEMENT INFORMATION
SYSTEM
Actual figures not known to business heads
MIS was filtered by the management
No linkage between actual sales with investor link figures
Publishing inflated sales in investor link
Monthly reviews were done on stand alone basis
None of the business leader tried to match the differences
between sales in investors link and actual sales
Targets of the business heads were fixed on stand alone
basis
Oracle Financial system was not used for generation and
analyzing the MIS
FICTITIOUS SALES
There were two methods of generating invoices in the
company
Regular Application Flow The billing advice raised in
PBMS was ported to IMS in the form of
partial/consolidated bill and then the invoice was raised
by the invoice team in IMS. There was a real time and
online connection between PBMS and IMS. This was the
procedure that is to be adopted for generation of invoices
from the date of installation of IMS i.e. April, 2003. If the
invoice was generated through this application , the same
would have accessible and viewed by the Project
Managers, Business Circles, Quality Control Managers,
FICs

Excel Porting This was an option which existed in the
IMS application to port partial/consolidated bills through
the procedure called Excel Porting. This option was put in
place to meet the emergency requirements to raise
invoices bypassing the regular application flow



CONTD...
OPTIMA -Operational Real Time Management
SPR- Satyam Project Repository
ONTIME- Calculation of efforts put in
PBMS Project Billing Management System
IMS- Invoice Management System
SHINE- Satyam Human Resource Information Network
SALES PROCESS




OPTIMA ONTIME PBMS
IMS OF
Excel
Porting
SPR
SHINE

MANIPULATION

Excel Porting facility was provided for
bypassing the regular flow of invoices
generation for emergency case
However, this facility was misused
extensively. The invoices inserted
through excel porting did not contain
any trail up to PBMS




PROCESS
Normal course, whenever a Purchase Order is placed by a customer, the
concerned Business Relation Manager sends the details through the
FIC of a business circle to OPTIMA and the same is sent to Satyam
Projects Repository (SPR), where the FICs and the Associate In-charges
of the Circles approve the project and after approval a unique serial
number called the Project ID gets generated in Satyam Project
Repository (SPR). Then, details regarding associates are provided by
another application called SHINE
CONTD
OPTIMA forwards the details to ONTIME wherein the man-hours required is
calculated and the billing on the customer gets decided. From there, it
moves to next application PBMS. In PBMS, a bill is generated with
unique serial number and details of the associates, their efforts in terms
of man-hours, amount per hour against each associate, total number of
such associates along with the period and finally, a bill is raised in
PBMS
CONTD
Then, this bill is exported to IMS and the same gets consolidated in IMS
and the Consolidated Bill is generated with a unique serial number.
Based on this Consolidated Bill, a final invoice is generated to be sent to
the customer. The invoice contains details of total amount, name of the
customer, project ID, project name, Purchase Order, etc. Then these
invoices are ported to the Oracle Financials and as and when payments
are received, they get adjusted and if the payments are outstanding, then
the same are shown as debtors

TECHNICAL MANIPULATIONS
IMS application played the various roles
like Admin Role, superior user role, FIC role.
The Admin role was having absolute rights.
IMS application was having superior user
role and with this invoices can be hide and
unhide. The hidden invoices is not visible to
all except few users who have superior user
role. The invoices were divided into two
parts H & S, H stands for hide and S
stands for show. But the fictitious invoices
were generated under S by swapping the
role of H & S. This facility was
incorporated at the instance of G.
Ramakrishna who was a process owner
FICTITIOUS SALES
There were two methods by which fictitious sales were
shown
1. Invoices generated through Excel porting
2. Actual development of the products
Period from 01.04.2003 to 31.12.2008, 7561 invoices were
found to be fake. All these invoices were directly inserted
in IMS through EXCEL porting.
The value of the false invoices was Rs. 5118 crore
It had fraudulently entered 6,631 false invoices into the
receivables module of Oracle Finance amounting to
Rs.4,766.20 crore
These invoices were having the status of S which actual
means should be visible but they got it changed to hide
The false invoices were generated with the help of Super
User facility



CONTD
Particular set of people used to generate the fictitious invoices during the
odd hours towards the end of the month/quarter
The fictitious invoices were not visible to all
Possibility of viewing these invoices by the Key persons chose not to
assess through OF
Key persons were aware of invoices generated without purchase order



CONTD
Actual development of the products
Execution of projects in the name of non existing 7
customers i.e, Mobitel, Cellnet, E care, Synony,
Northsea, Autotech and Hargreaves
M D asked the business heads to develop the products
stating that customers will be introduced subsequently
Without the purchase orders, products were developed and
revenue was recognized. Products after development is
still with the company
Fictitious mails were generated as if it originated from these
customers
The domain was created in rediffmail and mails were sent
63 invoices were raised having value Rs. 430.66 crore
CONTD
The company had booked Rs. 31.18 crore
as exchange profit on account of
fictitious sales during the fraud period

CORPORATE GOVERNANCE
All the directors were sponsored by B. Ramalinga Raju
The Audit Committee members were not serious in
analyzing the financial position of the company
The directors were failed to perform their duties
The Directors got hand-sum remuneration, stock options at
Rs. 2 against the market price of Rs. 500. The directors
acted as a rubber stamp and not even in a single dissent
note was recorded
Meetings were conducted in perfunctory manner
In the meetings the promoters were always present to
influence the decision
There was not open discussions
PURCHASE OF LAND BY COMPANY AND
PROMOTERS
6000 acres of land purchased by 327 front companies
Promoters also purchased land and flats
Land ceiling act was circumvented by floating the companies
Proceed of sale of shares and receipt of the dividends were used
for purchase of the land
Lands were purchased in the names of the close relatives also
Majority of land was agricultural land
Land purchased were spread over AP. TN, Bangalore and Nagpur
CONTD
Number of properties acquired between 10.4.1999
to 30.06.2005 was 425 having 1224.77 acres and
between 1.07.2005 to 31.12.2008 were 444
properties having 4523.3 acres . The consolidated
number of properties acquired during this period was
935 having 5757.30 acres of Rs. 3454.91 crore.
CONTD
On the basis of charge sheet, Directorate of Enforcement has started
attachment of the properties purchased out the proceed of crime under
Prevention of money laundering act, 2002 of the properties acquired
w.e.f 2005. The properties acquired from the date of the crime to 2005
mapping of the properties are going on to attach the properties under
Criminal Law (amendment) Ordinance , 1944. 100 properties having
value of Rs. 3.00 crore has been mapped
LOAN TAKEN FROM VARIOUS BANKS &
COMPANIES
The company had availed short term loans and advances
from Banks and Institutions during the period between
2000 and 2008 on the basis of false and fabricated board
resolutions and majority of the loans were not shown in
the books. They have taken loans from the HDFC, HSBC,
Citi Bank, BNP Paribas, ICICI Bank, Fincity/Higrace and
Elem Investments Pvt. Ltd.
CONTD
The company had paid interest of 37.62 crore
and availed 1493.84 crore loan from banks without
accounted in the books.
MANIPULATION OF BOB NEW YORK
Loan taken from Banks and its companies were not shown in the books.
However, equivalent amount was shown as amount being transferred
from the accounts maintained at BOB New York. The fictitious sales
were reported as realized and shown as deposited in the account of the
company maintained with BOB, New York
ROLE OF EXTERNAL AUDITOR
The auditor did not confirm the bank balances
independently
The various protocols were violated
Two set of Confirmation
No sample checking of invoices
Liability against tax not reported
Extra-ordinary payment of audit fee
Not verifying the accrue interest on fake FDs
Not verifying the TDS on accrued interest
Not doing end to end audit
Systems were found to be lax and same was not taken up
for rectification

ROLE OF INTERNAL AUDITOR
The auditor did not do beginning to end transactions
verification
Cash and bank balances were not verified
Fake invoices were ignored
The matter was not reported to Audit Committee
The audit plans were prepared on the basis of the approval
of the promoters
Serious findings of the auditing team were ignored by the
audit team leader
CONTD...
The Auditors did not follow the minimum protocols. The
connection to OF was disconnected and it was not taken up for
connectivity. Mr. V.P.S. Gupta was given stock option and off-loaded
the shares and received Rs. 5.30 crore. The company switched to
process audit from the transaction base audit . However end to end
verification was not done even for sample selected on the basis of
random sampling. The auditors were more faithful to promoters
rather than to the company.

FLOATING 327 COMPANIES
The companies were divided into three groups.
Group 1 owned by B. Ramalinga Raju and his family.
Group 2 owned by B. Suryanarayana Raju and his
family. Group 3 owned by B. Ramanraju and his family.
There were 12 addresses of 327 companies. The
relatives and loyal employees were Directors
in these companies. By these companies the promoters
had purchased land, layered funds, borrowed the
money against the share for Satyam.
CONT.
The company had taken Rs. 1230 crore
loan from the front companies and these
were not shown in the books. The loan
amounts were used for payment of
salaries, acquisition and payment of
dividends. The amount of loan were
raised against the shares of the
promoters

MISAPPROPRIATION OF FUNDS
In India- Money was diverted to customers not having
dealings with them
In Overseas- The amounts were paid to the companies who
were not having dealings with the company and the
amounts were diverted to British Virgin Islands
An amount of USD 0.666 million was paid to Medbiquitous
on two occasions of USD 0.333 million each. The stock
worth USD 0.001 per share was purchased at a premium
of USD 1.00 which was almost thousand times more than
The face value.
CONT.
The company has diverted Rs. 154.40 crore to
global networking solutions, Infotech solutions,
Alpha software and Tech. consultant Ltd. during 1999
to 2002 and was not accounted in the books. All
the companies were not having commercial deals with
the companies. Rs 390 crore out of the proceeds of
ADRs used for repayment of loans not reflected in
the books
PROPOSE ACQUISITION OF MIL AND MPL
Company tried to purchase MPL and MIL to fill the gap of
hole in the balance sheet
Valuation was not done properly
Amount arrived at was almost equivalent to the fictitious
amounts
Valuation was done even for the properties not owned by
MPL
The liabilities were not factored into
Due diligence report was not taken into accounts
Valuation was done for different purpose
Valuation was done on unsigned financial position of MPL

CONT.
Out of the sources of funds of Rs. 10,961.03 crore, an amount of Rs. 8,842.54
crore (Sundry debtors Rs. 2651.36 crore, cash and bank balances Rs. 5312.62
crore and other current assets Rs. 878.56 crore) were liquid assets which
could be immediately utilized for the purpose of acquisition. Only after using
the available reserves and raising a loan of 25% of the acquisition cost, the
company was suppose to acquire 51% of MIL and 100% of MPL by having the
minimum balance . The company was having only Rs. 2,944.50 crore (after
removing fake amount of Rs. 5899 crore )of liquid assets and after
considering the proposed borrowing of Rs. 1979.52 crore there would still be
a shortfall of Rs. 2991.58 crore
VALUATION OF MPL BY E&Y
Valuation of MPL was done by E&Y
Excess FSI taken
Some of the projects were only on paper
Valuation was done in one day
Valuation done not as per the guidelines prescribed by RBI
Equity value as on 30.9.2008 was assessed at Rs. 6525.30
crore

CASH AND BANK BALANCES
The cash and bank balances shown in
various banks in the form of current
account and Fixed Deposit ws Rs.
5160.34 crores for the period 2002 to
2008. While actual balances was only
139.78 crore. Thus, there was a
difference of Rs. 5020.55 crore. The
company was having account with 36
banks in India and 7 banks overseas.
The certificate shown to the auditors did
not carry details of Fixed Deposit
number

CONT.
No actual physical Fixed Deposit existed , balance
conformation letter did not tally the amount
actually maintained with banks, balance did not
contained account number, no mention about
signatories name and employment number etc.
INTEREST ON FIXED DEPOSIT
The company has shown accrued
Interest on fictitious FDRs.
The amount shown as on Sept., 2008
was Rs. 375.53 crore wherein actual
interest was only 7.42 lakh
ACQUISITIONS
The Satyam had gone for many
acquisitions like Citi soft Knowledge
dynamics, Nitor Global Solutions, Bridge
Strategy S & V Management consultant,
Nipuna and Medbiquitous services Ltd.
The Nipuna now Satyam BPO was
acquired by the company at very adverse
conditions. The shares of Olympus and
Intel who invested in Nipuna were
purchased by Satyam at high rate
SELLING OF SHARES
The promoters were holding 2.18% of total
shares as on Dec., 2008 which was 18.78% in 1991
The shares were sold through various brokers and some
were benami transaction and amounts received by the
promoters was Rs. 767.73 crore.
The promoters in planned way sold the shares when
the price of the share was high. They resorted to inside
trading.
The promoters also borrowed the money from NBFCS
by pledging the shares of the company. The loans were
to the extent of Rs. 1951.46 crore were raised
against pledging of 100941592 shares.
CONT.
The shares were unloaded through margin
calls .The un loading of the shares was
done at the instance of B. Ramalinga
Raju
The promoters and their families
wrongfully gain to the extent of Rs. 2743
crore (767 crore + 1951 crore+25.80 crore
dividend payment)
V.Srinivas Rs. 32 crore
G.Ramakrishan Rs. 11.27 crore
D. Ventapathi Rs. 1.76 crore
CONT.
The promoters received dividend to
the extent of Rs. 27.08 crore for the year
2007-08 and 2008-09 where the actual profit
after adjustment of fake revenue was Rs.
176.12 crore in 2007-08 and 269.16 crore
in 2008-09. They were not eligible to
get the dividend as per company law section 205.
CONT.
37 companies out of 327 companies had given advances to Satyam to the
extent of Rs. 1425 crore between November 2006 to October 2008.
194.60 crore was returned back to 15 companies between October 2008 to
December 2008
Net amount of Rs. 1230 crore still outstanding
The borrowing and returning was not reflected in the books while out of the
amount salary, dividend and acquisitions have been made.

QUANTUM OF LOSS SUFFERED BY THE
INVESTORS
The quantum of law suffered by various
institutions and the investors was 14162.25 crore
on the basis of actual law suffered by various
institutional investors, loss suffered on account of
slide in share price was average price. As on
01/09/2009 price was Rs. 19.76 and average price
as on 16.12.2008 was Rs. 227.55.
FALSE INCOME TAX LIABILITY


The sales were inflated and in order to
get the benefit the tax paid overseas were
shown and deductions were obtained in India.
The tax assessment was made without
actual verification of the records
CONT.
Fake TDS Rs. 60.84 crore
Actual TDS Rs. 20 crore
Actual interest Rs. 1 crore
Fake interest Rs. 269.01 crore
Fictitious sales were shown as off shore exports
Other income as a part of income of USA but actually not included
False claim in overseas tax payments Rs. 329.59 crore
KEY ACCUSED PERSONS
B. Ramalinga Raju.
B. Ramaraju
V. Srinivas
Gopalakrishnan
T. Srinivas
B. Suryanarayana Raju
G. Ramakrishna
D. Venkatapathi Raju
Srisailam Chetkuru
VS P Gupta


CHARGES
120-B -Criminal conspiracy to commit an offence
409 -Criminal breach of trust
420 -Cheating
467 -Forgery of a valuable security
468 -Forgery for the purpose of cheating
471- Using as genuine a forged documents which is known to be forged
477 A- Falsification of accounts
CHARGE SHEET
First charge sheet was filed on April 7, 2009
Supplementary charge sheet filed on November 22, 2009
Additional Charge sheet filed on January 7, 2010
All charge sheet have been clubbed together for faster trail
The case is with Additional Chief Metropolitan Magistrate which has been
approved by High Court of AP on 17 February 2010
Thanks