Satyam Scandal 1987: An Overview Of The Corporate Fraud

The Satyam Scandal, one of India’s biggest corporate frauds, unfolded in 2009. It involved the manipulation of financial accounts, amounting to Rs. 7,000 crores. Have we ever wondered how this massive scam started? Let’s take a look at the timeline from “Satyam Computer Services” to “Mahindra Satyam”. check grammar and add Satyam Scandal

Introduction

In 1987, B. Ramalinga Raju started Satyam Computers with his brother. It was an IT company based in Hyderabad. Before founding Satyam Computers, Ramalinga Raju operated a cotton business. In 1991-1992, Satyam Computers was listed on the Bombay Stock Exchange (BSE), and in 2001, it was listed on the New York Stock Exchange (NYSE).

Satyam Computers was one of India’s fastest-growing companies. Satyam Computer and B Ramalinga Raju received many awards for it.

However, real estate was rapidly growing in Hyderabad, which led Raju to shift his focus toward it. He began aggressively purchasing land in the names of his family members and himself in Hyderabad and its surrounding areas. In 1988, Raju founded Maytas Infra and Maytas Properties. When he needed more money, he started manipulating the financial statements of Satyam Computers. With the growth and strong financials of Satyam Computers, there was a sudden increase in its share price.

Due to the high share price, B. Ramalinga Raju and B. Rama Raju began selling their shares while keeping the remaining shares as collateral to secure loans. Raju established around 365 companies to facilitate his property acquisitions. He appointed workers from his farm as directors of these companies and also designated some of his friends as directors. This strategy enabled him to purchase properties in the names of the workers.

Ramalinga Raju had Inside Information about Hyderabad’s proposed metro route

Metroman Sreedharan stated, “Raju had inside information about Hyderabad’s proposed metro route.” Raju aggressively began buying land near the metro route, anticipating that the prices of those lands would increase once the metro was constructed. Additionally, he planned to adjust the profits from real estate into Satyam, allowing him to manipulate the false financial figures—such as sales and profits—to reduce the actual loss gap.

Fake Sales Invoices In Satyam Scandal

To inflate sales figures at Satyam Computers, Raju began creating fake sales invoices. He produced nearly 7,500 fraudulent invoices, along with fake bank statements, to portray that profits were being managed in the bank. Raju continued generating these counterfeit documents until 2008 in an effort to attract more investors to his businesses. As a result, Satyam’s share price increased, allowing its promoters to sell their shares at higher prices. In 1999, the promoters held 24% of Satyam’s shares, but this stake dropped to 2% by 2008.

In 2008, the real estate market slowed down due to the recession, causing Raju’s plan to sell properties and bridge the financial gap to fail. Raju devised a new strategy in response: Satyam Computer would acquire a 51% stake in Maytas Infra and Maytas Properties. He believed this deal would allow him to present a façade of legitimacy, using both actual and fabricated figures to show that the companies had been successfully purchased.

On December 16, 2008, Satyam Computer’s Board of Directors approved a plan that Raju sanctioned without obtaining permission from shareholders. However, Satyam’s investors, particularly its institutional investors, disagreed with this decision. Following this announcement, Satyam’s stock experienced a sudden decline, and a U.S. investor filed a lawsuit against the company, resulting in a 55% drop in Satyam’s stock on the NYSE.

Due to this pressure, Satyam decided to cancel the acquisition plans for Maytas Infra and Maytas Properties. As a consequence, four independent directors of Satyam resigned immediately. This failure marked the end of Raju’s last attempt to fill the financial gap.

Raju’s Confession In Satyam Scandal

On January 7, 2009 Raju confessed that the Satyam Computer has been manipulating financial statements for years now.

Let’s take a look at how Raju inflated the figures for the financial year 2008-09s second quarter.

Raju revealed that there is a difference of Rs. 7000 Crore between the actual and the fake figures. After this, along with Raju, the independent directors and auditors of Satyam were being questioned, that the company has been manipulating the financial statements for so long and, the independent directors and auditors are not aware of this. How is this possible?

Satyam’s Auditor was PWC, PriceWaterhouseCoopers. So, figures kept inflating and PWC didn’t bother to check the invoices and statements for so many years? SEBI banned PWC for two years and the US stock market regulator, SEC has fined PWC $6 million. Later, it was identified that Satyam used to pay PWC double the fees that any other IT company gave their auditor.

Ramalinga Raju & B Rama Raju Arrested in Satyam Scandal

On January 9, 2009, Ramalinga Raju and B. Rama Raju were arrested. Following the Satyam Scandal, the government quickly appointed 10 new board members at Satyam and began efforts to prevent the company from collapsing. The government planned to sell the company as soon as possible, and eventually, Tech Mahindra acquired Satyam.

Tech Mahindra, in April 2009 acquired a 31% stake in Satyam. Later, name of Satyam Computer was changed to “The Mahindra Satyam” on June 21, 2009.

CBI Statements

CBI filed three partial charge sheets dated 7 April, 24 November, and 7 January 2010) regarding the Satyam Scandal.

According to the CBI report, Raju was involved in money laundering. He would first send money to Europe and then route it back to India. He used this money to buy numerous anonymous properties. The Enforcement Directorate pressed charges against Raju and 47 others, as well as his 166 companies, for money laundering, and seized properties belonging to Raju and his family.

SEBI also charged Raju and his family with insider trading, ordering them to return the Rs. 1,850 crore profit they made through trading, along with 12% interest. Additionally, they were banned from dealing in the securities market for 14 years.

On April 10, 2015 the special CBI court sentenced Raju, his brother B. Rama Raju, their CFO Srinivas Vadlamani, two PwC partners, and five others to 7 years in jail.

Ramalinga Raju and B Rama Raju were fined Rs. 5.5 Crores

Before the Satyam Scandal was exposed, Satyam had a big name; it was the 4th largest IT company in India. Satyam’s stock was listed on both the NIFTY and Sensex. However, on January 9, 2009, Satyam’s stock was removed from both NIFTY and Sensex.

In September 2008, the World Council for Corporate, Governance presented Satyam with the Global Peacock Award and just 4 months later, Satyam’s accounting fraud was exposed. Satyam’s CFO at that time, Srinivas Vadlamani, and some executives, sold their Satyam shares before Raju confessed to the Satyam Scandal.

Just a few days after the confession, Satyam’s share price fell from Rs. 170 to Rs. 6.50. Following the scam, Satyam’s investors incurred a loss of Rs. 14,162 crore. LIC, an institutional investor in Satyam, faced a loss of Rs. 950 crore.