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Corporate Governance failures in Satyam Computers
Let's discuss a case study on Satyam Computers:
Satyam Computers- The old-timers would remember this one vividly. The charm surrounding Mr. Ramalinga Raju cannot be simply written off like other perpetrators.
It is ironic that the word 'Satyam' means truth in the Sanskrit language, Satyam Computers was amongst the top four IT companies in the country. At its pinnacle, it had about 50,000 employees spread across 67 nations. The organization was synonymous with India's development & IT sector boom of the early 2000s.
Satyam had a market capitalization of 13,500 crores when the scam broke out in January 2009. The company was a part of both the mainstream Indian indices & was also listed on the New York Stock Exchange.
Satyam is also known as India's Enron. The fraud was a mastermind of Mr. Ramalinga Raju & his brother B. Rama Raju (former Managing Director). Others charged with serious offenses include Satyam's former Chief Financial Officer Vadlamani Srinivas, Three former employees of Satyam, Its chief internal auditor V.S Prabhakar Gupta along with two PricewaterhouseCoopers auditors.
The case against Mr.Raju was that he misled investors over the years by artificially inflating sales & profits to the tune of several thousand crores over the years. Good performance was rewarded & The Satyam brothers minted a profit of more than ₹2,500 crores by selling their stake in the firm at sky-high prices.
Markets got apprehensive about the Corporate Governance standards at Satyam when the board decided to acquire a 100% stake in Maytas Infra & 51% stake in Maytas Properties for a total consideration of $1.6 billion. Markets saw this move as an attempt by the board to swindle the cash resources of Satyam as both these companies were owned by the promoter group. The stock reacted negatively to these developments & ultimately the deal was called off.
This incident caused severe damage to Satyam's reputation as a well-managed company. The very same month, five independent directors resigned from the board of the company citing various reasons.
Finally, on 7th January, 2009, Mr.Raju admitted budgetary extortion of over ₹7,800 crores & resigned from the board. In his confession, Mr.Raju addressed the Maytas deal as his last attempt to "fill the fictitious assets with real ones".
The incident put a big question mark on the role of external auditors. PwC failed terribly in its job to spot the irregularities in the financial statements. There was no verification of invoices & bank statements. Nearly 7,560 fake invoices were created & PwC didn't bat an eye.
The government superseded the board of the company and appointed its own lieutenants. Later, Tech Mahindra stepped up & acquired a majority stake in Satyam Computers for ₹2,900 crores in a government-sponsored auction.
The scandal sent shockwaves across the corporate circles & led to a series of policy changes in India. The SEBI reacted proactively & announced pathbreaking reforms. These included:
a) Disclosure of pledged shares- It became compulsory for promoters to disclose their pledged holdings in listed entities on a periodic as well as event basis.
b) Electronic casting of votes- Listed companies were asked to enable the e-voting facility so that the retail shareholders could participate in the company's decision-making process. Further, the companies were instructed to announce the voting results/patterns on their websites & stock exchanges within 48 hours of concluding the shareholders' meeting.
c) Compulsory dematerialization of promoter holdings- This decision was made with a view to enhance transparency in dealing with shares that are pledged or used as collateral. The company's shares will be permitted to trade in the normal segment only if 100% of the promoter's stake has been dematerialized. Otherwise, the stock will be shifted to the Trade to Trade segment.
d) Peer-reviewed auditor- It was decided that Statutory audit reports for listed entities could be submitted only by those auditors who were subject to the peer-review process of the ICAI & held valid certificates issued by the Peer Review Board
e) Maintenance of website- With an objective to enhance public dissemination of all information about the listed entity, it was mandated to maintain a functional website containing basic information about the company duly updated with the exchange fillings.
A musing anecdote amidst all the gloom- In April 2015, Mr.Ramalinga Raju & his brother were sentenced to seven years in jail by a special court in Hyderabad. His term was cut short to five years & he is currently acquitted of all charges. Mr.Raju also had to pay a hefty fine of ₹5.5 crores for embezzling $1.5 billion. Justice served.