The Ruinous Fall of Satyam
Jayakishore Bayadi
Sunday, February 1, 2009
Ramalinga Raju, Chairman, Satyam Computers, was one of the well respected Indian corporate honcho across the globe when his firm, one of the top five flagship Indian IT giants, was at its peak of glory. The company even had received a Golden Peacock Award for Excellence in Corporate Governance. But Raju’s botched attempt to buy two infrastructure firms in which the company's management held stakes caused serious concern about conflict of interests and a lack of transparency. His ultimate confession about ‘cooked up balance sheets’ shattered the aura of top business leader around him and brought immeasurable ignominy to him and the company. Raju admitted to a Rs. 4,000 crore ($823 million) fraud, the largest in the history of corporate India, and resigned from his CEO position and Ram Mynampati was appointed as interim chief executive. Now, Raju and his brother Rama Raju are in jail, facing various charges including forgery. The prestigious Golden Peacock award has also been taken back.

Satyam struck misfortune when it planned to take over the group companies Maytas Infra and Matyas Properties, in which Raju and his brothers and associates own 35 and 36 percent of stakes respectively, at $1.6 billion. But the shareholders' revolt forced the Rajus to abandon the proposed plan within few days. The second blow the company received was a shocker from World Bank. The bank banned Satyam from doing any of its projects for next eight years. The decision came after Satyam was caught for Computer Security Compromisation and bribing bank officials. The unfortunate incidents triggered off a spate of resignations beginning with Mangalam Srinivasan, Fellow of Harvard University, whose exit was quickly followed by three Independent Directors M Rammohan Rao, Dean ISB, and Vinod K. Dham, and Executive Managing Director of NEA-Indo U.S. Ventures and Non-executive Director Krishna G. Palepu, Senior Associate Dean for International Development, all members of the nine-member board. That’s how the brutal saga of Satyam’s disgrace began.

The Calamitous Confession

“I sincerely apologize to all Satyamites and stakeholders, who have made Satyam a special organization, for the current situation. I am now prepared to subject myself to the laws of the land and face consequences thereof,” Ramalinga Raju said in a notice sent to the stock exchanges on January 7. He said that the software services firm had fraudulently incorporated a non-existent cash component and inflated the bank balance to reflect Rs.5,040 crore ($1.04 billion) as against Rs.5,361 crore ($1.1 billion). Shares of Satyam tanked by over 80 percent following Raju’s confession. The BSE reacted by de-listing the scam tainted company with effect from Jan 12. Dow Jones Indexes, a leading global index provider, has removed the scandal-hit Satyam Computers from its 'Dow Jones India Titans 30 Index'.

There were all the signs of the collapse of the giant. However, in a move to resurrect the sinking ship, Indian government sacked the existing board of Satyam and announced a new three member board comprising of Deepak Parekh, the chairman of HDFC Bank, Kiran Karnik, a former head of the Nasscom, and C. Achuthan, a lawyer and former head of the Securities and Exchange Board of India, the Indian stock market regulator. Eventually the government expanded the three member board to six, to include S Balakrishnan of the Life Insurance Corporation, Tarun Das, chief mentor of the Confederation of Indian Industry, and T N Manoharan, former president of the Institute of Chartered Accountants of India.

Certainly, the Satyam scandal came as a shock for everyone who is proud of the glory of the Indian IT sector’s achievements. “The entire incident came as a rude shock to us. This kind of a fiasco is an unprecedented one in the history of Nasscom. Considering the magnitude and implications of the incident, we can even look at banning the company from Nasscom,” says Ganesh Natarajan, Chairman, Nasscom. Ironically, Raju had served as the chairman of Nasscom in 2006-07.

“It is a bad day for corporate India and IT industry. Investors will be extremely worried and this is a critical time for the company and so the management of the company has to be changed to protect careers of their employees,” said Mohandas Pai, Head, HR Administration, Infosys Technologies. He also said that the outsourcing clients will take a more cautious approach now and people having large exposure to outsourcing will consolidate and work to minimize the risk. Suresh Senapathy, CFO, Wipro, assures that Satyam's case is an isolated one and does not reflect on the industry as a whole. He says that Satyam would face both civil and criminal prosecution in the U.S. He further says that as shareholders are more vulnerable, clients would assess the risks now.

Soon after Raju’s catastrophic confession, the fifty-four-year-old IT leader, who had stepped down as Chairman after admitting the fraud, and Rama Raju, who resigned as CEO and MD of the company, were arrested by the police on charges of criminal conspiracy, cheating, forgery, misappropriation of funds, and criminal breach of trust. Soon, CFO Vadlamani Srinivas resigned from the IT bellwether and the 6th Metropolitan Magistrate, Hyderabad, remanded him to judicial custody. He was later shifted to the Chanchalguda central jail, where Raju brothers have also been lodged. The corporate affairs ministry also ordered an investigation by the Serious Fraud Investigation Office (SFIO), which has been given three months time to submit its report.

As soon as the confession saga unfolded, PricewaterhouseCoopers, external auditors of the the Hyderabad-based software services firm, came out with the statement that its audit reports should not be relied upon. In a carefully worded letter to the company and regulators, the audit firm denied knowledge of any wrongdoings in Satyam, but said it had relied on information and explanations provided by the management. PricewaterhouseCoopers had been Satyam's statutory auditors from June 2000 until the quarter ending September 2008. In the meantime, the new three-member government-appointed board had retained two audit firms, Deloitte and KPMG, to assist the company in restating the financial statements to reflect the actual position.

Meanwhile, PricewaterhouseCoopers auditors S Gopalakrishnan and Srinivas Talluri were also arrested for facilitating the accused and other directors in committing a brazen fraud. The duo is charged with colluding with Raju brothers and ex-CFO Vadlamani Srinivas in window-dressing the company's accounts, according to the remand case diary filed by the Economic Offences Wing of the Andhra Pradesh CID.

We are With You

Satyam let out a sigh of relief even in the midst of uncertainty as big clients of the firm such as GE have said they are continuing their existing contracts with the firm. Another client, Malaysia Airlines, also said that it would continue its relationship with Satyam as usual.

Moreover, many overseas and domestic IT companies have approached the Hyderabad-based firm for a possible takeover. “Satyam has got enormous fixed assets, human resource, and technology assets. So, it is a very strong company. The board has not yet discussed the issue of looking out for a buyer... But I have to truthfully say we have been approached by potential buyers,” said Satyam's government-appointed Director Tarun Das. In fact L&T is a front runner in the bid for buying Satyam. Institutional shareholders such as Life Insurance Corporation of India, ICICI, and Prudential Life Insurance are supporting the engineering behemoth L&T’s move to acquire the troubled company. However, L&T maintained that some corporate action would take place in the near future, and the company’s chairman declined to comment on taking over Satyam as of now.

However, nothing seems to be safe for the 51,000 employees of the trembling Satyam Computers. There are possibilities of layoffs, salary cuts, and moreover there is a threat of the current projects being either postponed or cancelled. There is crisis in everything about Satyam, where employees seriously ponder over how it would impact on them.

But Satyam’s new leadership is striving hard to keep the employees confident and insists them to put faith on the company. “Operations are all continuing. We do not envisage any problems in paying salaries to our employees in future,” says a Satyam senior official. Despite the optimistic words of the company, employees are doubtful about whether the company would be merged with a new player, whether it would be broken into verticals and sold separately, and so on. Candidates who got offer letters recently are also worried about their future. They are afraid of a possible stigma of disrepute when they approach other companies for jobs. The board is also working on the funding arrangements to ensure scheduled payments, including salaries and vendor fees, for the next two months, till the end of March 2009. The news is just in that the employees of Satyam would be paid salaries for January from internal accruals and receivables.

Meanwhile, the government-appointed six-member Satyam board met on January 27 in Hyderabad, and is discussing about having a strategic partner to steer the company off the present hazardous path. Though the newly appointed board has met several times during the last week of January it could not decide on the question of next CEO of the paralyzed company. Satyam is still waiting (till this article went to print) for a James Bond CEO, who has the ability to rescue the sinking ship. Meanwhile, the board is expected to find a new strategic investor to run the software giant within two months from now. All suitors, including L&T, will take part in the bidding process, which will be overseen by the new board. Corporate India is keenly watching the every development hoping for a revival of its tarnished image.
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