Canbro Case

Background

The company was incorporated as private limited company on June 24, 1987. It was established by two brothers named Rama Raju and Ramalinga Raju. The Raju’s planned to turn Satyam into a leading software development and consultancy services provider but they did not have enough capital to do so. In 1991, Satyam went public and in 1992, the company issued shares to the public to raise the necessary funds. With the money raised, they built a software technology park and opened offices in India and abroad. Moreover, the owners promoted Satyam’s new subsidiaries, opened IT schools, and entered into long term contracts with multi-national corporations and global bodies. By 2008, they were making US $2billion revenues, serving one third of the Fortune 500 companies, and were listed on several stock markets throughout the world. They also received national and international awards for outstanding performance, corporate governance, and innovation. Even though Satyam was all about serving the customers and creating value for them and the shareholders, everything started to go downhill by the beginning of 2009 after the chairman confessed to committing fraud of about INR50 billion

Issues

Firstly, we can look at the composition and competency of the board (5 independent members, 4 internal members). From this, we can derive that the division of roles (Chairman and CEO) were a threat to independence. Despite their former status, they were still promoters of the company and involved in management. On December 16 2008 we can observe the acquisition of Matyas Infra and Matyas Properties. There was board approval of 51% of Maytas Ifra and 100% of Maytas Properties however the acquisition was completely unrelated line of business to Satyam. It was also owned by Raju family and the sheer size of the $1.6bn investment should’ve raised a red flag. Moreover, CBI charge sheet revealed evidence of Raju family defrauding an additional Rs. 4,739 through the pledging of shares, offloading of shares, forging board resolutions to secure loans and advances, dividends on highly inflated profits etc. Evidently the board failed their fiduciary duty by not fulfilling their obligations