CORPORATE GOVERNANCE FAILURE AT SATYAM
India has seen corporate scandals in the past, but never one of this magnitude. A software company, touted as a success story, the 4th largest software company in India and one that services around 1/3rd of the Fortune 500 companies, the events of the past one month have been a total shock. They have called into question the entire range of issues related to ethics, corporate governance, fiduciary responsibilities, professional auditing, and so on. There will be a lot more soul-searching that will happen, a lot more inspection and suspicion of other companies, search for more skeletons in the cupboard, and so on.
Mr. Raju brought forward. Starting from the surprise news about Satyam trying to buyout the realty companies, Maytas (run by Mr. Raju’s sons), this is almost like a film story. The news about Satyam using its huge estimated surplus of more than $1.2 billion to buy companies related to the promoter (especially when the promoter held only 8% shareholding in the company) was a huge blow to all norms of corporate governance and met with huge resistance. Seeing this resistance, the company decided to roll back this proposal, but things would not stop from that point onward.
The issue kept on snow-balling, and when a popular issue comes up in the press, they can push at all areas and get more secrets out. So, questions started being asked about respected board members such as Vinod Dham as to whether they asked the right questions and acted in the interests of the shareholders. Other news started disclosing that actually the promoters had already pledged all their shares and effectively could be actually holding no stake in the company. And then the World Bank announced that in continuance of an earlier investigation, Satyam has been found to have a great many security problems with their last work (including probable sniffer tools and a data hole), and hence Satyam has been banned from further World Bank contracts. By now the independent board members had started resigning.
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There was a lot of news about how attractive Satyam could be because of its huge holdings of cash and high book value vs. the value of shares, and then there were even more reports questioning whether Satyam really did hold onto these reserves.
And, finally the CEO of Satyam has revealed all. The company was cooking its books, and once started, there was no going back, and hence the company eventually has declared reserves to be $1.5 billion more than what they actually hold.
All this came as a huge shock to the people of the country; how can such respected promoters actually commit this huge fraud, can one really believe them now when they say that they did not benefit? This was money that was supposed to be coming into the company, how can senior management (besides the promoters) claim that they did not know? There are too many questions, and one wonders as to whether all this will really become clear?
Now what happens? Well, it is not like Satyam is bankrupt – it still has a large number of clients (although some of them would want to bail out), it has a huge number of people on its rolls (50,000), it is a huge part of the reputation of Hyderabad as a big IT city, and there are still institutions who hold a huge amount of the company’s shares. It is difficult to let such a company go out of business, and one expects that there will be pressure to ensure that while the investigation goes on, the company is retained as a going concern.
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SEBI Team Look Into insider trading In Satyam
Though Ramalinga Raju has mentioned in his confession letter, that Satyam’s inflated profit was just to build investor confidence and no profits were made by insider trading by any of Satyam’s promoters, SEBI is still probing into the matter of insider trading.
Market regulator SEBI’s special team, set up to probe into the financial irregularities in Satyam Computers, has set its focus among other things on alleged ‘insider trading’ carried out by top executives in the IT firm in the recent past, sources said today.
“Our major concerns in this case include any insider trading activities that might have occurred in Satyam shares and all aspects of fraud committed in the company’s book,” Sebi sources told reporters here today.
The market regulator formed an investigation team soon after Ramalinga Raju confessed that he cooked the company’s balance sheet for seven years with inflated profit numbers and understated liabilities.
The three-member team, led by senior SEBI official A Sunilkumar, is understood to be progressing with its probe at Satyam headquarters in Hyderabad.
The team is primarily inspecting the irregularities committed by Rajus and other manipulators in stock market.
However, the probe team has not been given any time-frame to submit its findings, sources said.
The Government had scrapped the erstwhile board of Satyam and appointed three new members– HDFC Chairman Deepak Parekh, former Sebi member C Achutan and IT expert Kiran Karnik– to rebuild the struggling computer-giant.
As the first step to resurrect the company, the board today appointed auditing firms, KPMG and Deloitte, to restate the financial statements of the scam-tainted company’s accounts.
The inside story of how Satyam scam unfolded
New Delhi/Hyderabad: The Serious Fraud Investigation Office will probe also Maytas infrastructure as part of the Satyam financial scam probe.
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Corporate affairs minister P C Gupta said on Monday evening that initial investigations suggest a clear nexus between Satyam, Maytas properties and Maytas infrastructure
Earlier, the Andhra High Court dismissed Ramalinga Raju’s revision petition against his police custody. But SEBI still did not get to question Raju on Monday as a court order on the body’s petition to question him was postponed till January 22.
Meanwhile the CID is questioning the Raju brothers and former Satyam CFO Vadlamani Srinivas .
They are also looking into their e-mails and phone records over the last one month.
Meanwhile, Andhra chief minister Y S R Reddy reiterated his government did not flout any rule in awarding the Hyderabad metro rail project to Maytas.
But how deep and how wide is the rot inside India’s fourth largest software company?
Sources tell CNN-IBN the company is facing serious money crunch, and needs Rs 1,110 crore to tide over the crisis and Rs 500 crore to pay the January salary to employees.
Meanwhile a search is also on for a new CEO for the embattled IT firm. Network-18 learns that the board is looking at a 10-day time period to pick someone to head the company. Over 40 applications have come in so far.
There is now also a question mark on the number of employees Satyam has. It is reported that Satyam has 53,000 employees.
How they did it?
Investigators are now reportedly coming across evidence of insider trading by the promoters even before the scandal broke.
The big take away from the Registrar of Companies report is that the top management of Satyam – the directors and senior officials – sold shares ahead of the Big Bang revelation by Raju.
The reports say Satyam books have been overstated by Rs 5,000 to Rs 6,000 crore, leading to an inflated stock price that helped the top management make money.
Who sold what?
Raju has claimed that no one else in the company was privy to the fudging of accounts. But exclusive information with CNN-IBN suggests insider trading.
BSE figures show a number of senior people in the company, including Raju and CFO Vadlamani were reportedly selling Satyam’s shares over the last 22 quarters.
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In June 2001, Raju had nearly 23 per cent shares. By December that year, his share was down to 22.4 per cent.
In September 2002, it fell to 21.6 per cent which fell a year later to just over 19 per cent.
In 2004, Raju’s holding was 16 per cent which fell to 14 per cent in 2005, 11 per cent in 2006. In 2007 it was in single digit.
By September 2008 Raju’s share was just 8.27 per cent.
BSE figure also show Vadlamani sold 92,538 shares while the then CEO Ram Mynampati sold 700,000 shares plus 2,50,000 ADRs.
Apart from these, other senior officials also reportedly sold large number of shares. Sources say they include one Kiran Cavale who reportedly sold 400,000 shares and 10,000 ADRs and one Rajan Nagarajan who reportedly sold 430,000 shares and 70,000 ADRs.