The Satyam Scandal

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THE SATYAM SCANDAL

1. Introduction

        Byrraju Ramalinga Raju, a Harvard graduate, founded Satyam Computer Services Limited in 1987 with 20 employees. The company grew rapidly over the years and eventually became a globally recognized entity. Satyam was engaged in IT and outsourced IT services that covered various sectors in the business environment. In the year 2000, the company earned the reputation of “The Rising Star” by providing excellent IT services, troubleshooting, and computer services. From 2003 to 2008, Satyam outperformed in its industry and boosted the confidence in all respect. Share prices had even increased by 300%. Everything seemed to be going well for the company on the outside all up until January 7, 2009 when CEO Raju released a confession letter. Inside the letter, Raju confessed that the companies account books had been fabricated thus making the company appear as if it had $1.1 billion more than it actually did. The new entity has become known as Mahindra Satyam today. A scandal of such a scale in a company that was considered the pillar of the Indian IT industry seemed unimaginable. Consequently, the scandal shook investors, clients, and shareholders across the globe.

Satyam Background Facts

•  Satyam debuted in the Indian markets in 1991, which was followed by a listing in New York Stock Exchange in 2001.
• Overall, the company managed to generate sales of $467 million between the years of 2003-2008.
• Satyam was the provider of IT services FIFA World Cup in 2010 and 2014. It also obtained ISO 9001 certification and many awards.

• Satyam, whose clients included global companies like; General Electric, Nestle, Qantas, and many more, specialized in business software. The company also offered back-office outsourcing and consulting services.
•  In March 2008, Satyam posted a 46.3% rise in revenue to $2.1 billion under US accounting standards, while net income rose 39.7% to $417 million.
•  The company had 13,120 business associates serving over 300 clients worldwide and their employees numbered at 52,865 before the scandal. It competed against other top Indian companies for deals with Tata Consultancy Services and Infosys Technologies as well as global majors such as IBM and Accenture.

1. Scandal Analysis- What Went “Wrong”

The unfolding of the Satyam began in December 2008, six years after Satyam announced acquisition of two companies - Maytas Properties and Maytas Infrastructure that were owned by the family members of Raju. About 2005-2008, Raju purchased 325 properties; 300 of which were related to his family and relatives.  These properties were purchased with funds that were diverted from Satyam. Raju did not disclose these non-arm-length transactions in Satyam's books, which ultimately led to the manipulation of the company's financial statements. 

 He planned to acquire 100% and 51% stakes in Maytas Properties and Maytas Infra for $1.6billion to cover up the fraud (other fraudulent transactions) but due to disapproval from shareholders and investors, his plan failed to move forward.

On January 7, 2009, Ramalinga Raju suddenly disclosed in a letter to the Board of Directors of Satyam Computer Limited that he had been manipulating the company’s accounting records for years, which are estimated to range from 2003-08. Mr. Raju claimed that he overstated assets on

Satyam’s balance sheet by $1.47 billion. Nearly $1.04 billion in bank loans and cash that the company claimed to own was non-existent. Satyam also underreported its liabilities. This was done to make it appear to be a far bigger enterprise than it actually was. They also sewed up deals with fictitious clients and introduced over 7,000 fake invoices to record sales that simply did not exist. Its operating profit margins were shown at 24% when they were actually at 3% and its handsome profits on paper covered up for real-life losses.

1. Impact of the Satyam Scandal

1. Impact on the Business of Satyam

Immediately after news broke on the scandal, Satyam lost 77% of its shares. Their shares had peaked at Rs.544 (1.80 US) each in 2008 but then fell to a mere Rs.11.50 (29.10 US) on January 10, 2009. During same time of economic downturn, investors had lost everything they had invested into Satyam. The company’s investors sued Satyam after the company’s share prices had plummeted. Satyam ended up paying $125 million to settle the lawsuit due to the company’s fraud.

Satyam lost its reputation as a dependable Indian IT company. Many of its clients, international and domestic, terminated their contracts with Satyam. Furthermore, almost a quarter of Satyam’s employees also walked out, numbering at around 13,000.

Satyam was consequently auctioned off to Tech Mahindra. It became Mahindra Satyam, the fifth largest IT Company in India. Slowly but surely, the new management was able to persuade Satyam’s clients who were on the brink of leaving to continue business with the company.  

1. Impact on its Business Sector

        Since the Satyam, fraud was one of the biggest and perhaps only Indian corporate fraud to make global headlines; other Indian IT companies in the same business sector were painted with

 the brush in the short-term. This was evident when the stocks of competing Indian companies fell in addition to Satyam’s stocks. For example, HCL Technologies stocks plummeted by nearly 15%.

International companies became increasingly cautious when dealing with Indian companies as their credibility was put into question in the short-term. The Satyam scandal resulted in other competing Indian IT companies to experience greater uncertainties and examinations by its clients, the public, and investors.

1. Impact on Overall Economy

India’s economy was not exempt from experiencing negative effects after news broke on the Satyam fraud. The company’s impact on India’s economy was immediately apparent when the India’s stock market plummeted by nearly 7% on the same day that the Satyam scandal made headlines. Furthermore, the Satyam case caused foreign investors to lose trust and question Indian businesses, thus leading to decreased in business dealings in the short-term. The impact on the economy was short-lived and eventually it recovered.