Transcript Satyam Scandal Rocks Outsourcing Industry

Satyam Scam
Rocks
Outsourcing Industry
What was Satyam Before this
Fraud?
 Mr. Raju and B. Ramalinga Raju, were the founders of Satyam Computer .
 Satyam was country's fourth largest IT company - after TCS, Infosys and
Wipro and ahead of HCL.
 Satyam share price was Rs. 139.15.
 Satyam listed on the New York Stock Exchange, and boasted 185 Fortune
500 companies on its client list .
• It had 53,000 employees - that's equal to the combined number of employees of Tata
Steel and Tata Motors (30,000 and 23,000 respectively).
 The company's clients include multinationals such as Nestle, General Motors
(GM), and General Electric (GE).
 Satyam had top-notch clients and was acknowledged as one of the three
best employers in India by both Hewitt (HEW) and Mercer (MERC), the
international human resources firms.
.
 But in September, the World Bank banned Satyam from doing any of its
work after it found Satyam employees had hacked into its system and
gained access to sensitive information. It also did not renew their five-year
contract. Satyam denied any wrongdoing.
SATYAM Meaning
TRUTH.
Now, Satyam :A Rs. 7000 cr
LIE.
On the Morning of 7 January 2009,
Ramalingam Raju, the chairman of troubled Indian IT outsourcing
company Satyam Computer Services (SAY), sent a startling letter to his
board and the Securities & Exchange Board of India (SEBI). Raju
acknowledged : His culpability in hiding news that he had inflated the amount of cash on the
balance sheet of India's fourth-largest IT company by nearly $1 billion;
 Incurring a liability of $253 million on funds arranged by him personally;&
 Overstating Satyam's September 2008 quarterly revenues by 76% and profits by
97%.
After, submitting his resignation Raju ended his letter by apologizing for his
inability to close what began as a "marginal gap between operating profits
and the one reflected in the books of accounts" but grew unmanageable.
Background of the Fraud Case
 Maytas Infra Ltd., Company owned by Two sons of Raju were investing in the real
estate business and recently their real estate business was not in good shape.
 Raju started using the manpower and other resources for the Satyam Company for
the welfare of his sons’ real estate business.
 Four main shareholders of Satyam Company were horrified by the changing
behavior of Raju.
 With Sat yam's management focused elsewhere, business suffered. Clients
complained about lack of attention, and many professional managers began to leave.
 Before the shocking confession from Raju, there was a long list of reported suitors
for Satyam. They included HCL Technologies, Wipro, IBM (IBM), Hewlett-Packard
(HPQ), Larsen & Toubro InfoTech, Cognizant (CTSH), Cap Gemini (CAPP.PA), and
even private equity players KKR and TPG.
• Ramalinga Raju on Dec. 16 proposed that Satyam would buy a 31 percent stake in
Maytas Infra from his family, and an additional 20 percent from minority
shareholders, as well as all of Maytas Properties, for $1.6 billion.
 Satyam ADR’s lost 50% of their value over night.
 Raju was forced to reverse his decision under the shareholder’s pressure.
 But what was widely seen as a move by Raju to bail out his sons was actually aimed
at covering Sat yam's tracks through fictitious cash transfers.
 December also brought news of pending litigation by a former client, online mobile-
payments service Upaid Systems ,which filed a case of intellectual fraud and forgery
against Satyam in 2007; a Texas court is scheduled to conduct a hearing on the case
Jan. 7.
 What triggered the wrongdoing confession was investment banker DSP Merrill
Lynch's letter to the company (followed by another to Sebi this morning) terminating
its 10-day-old agreement with Satyam to advise it on strategic options because of
``material accounting irregularities”. ( One day before confession)
Impact of the Confession
 Satyam had become "India's Enron," said CLSA India analyst Bhavtosh Vajpayee,
calling the case "an accounting fraud beyond imagination [and] an embarrassing
and shocking episode in Indian corporate governance."
 Damaged India's reputation as a reliable provider of IT services.
 Indian rivals will now come under greater scrutiny by regulators, investors, and
customers.
 Tech Mahindra made a public statement that it would not be interested in
acquiring Satyam "in the current environment.
 Price waterhouse cooper, sat yam s official auditors are under scrutiny.
 Raju family’s holding in Satyam falls to 3.64%.
• Infosys, Tata Consultancy Services, Wipro, Accenture, and IBM could benefit
from $500 to $700 million in business from Satyam over the next six months if the
company flounders.
 Satyam Computer crashed by Rs 139.15 or 77.69 per cent to close at Rs 39.95,
after the Chairman announced the company had falsified accounts and assets
for several years.
 Bse Fell 700 points because of this.
 The Sensex, which had gained over 688 points in the last four sessions of 2009,
tumbled below the crucial 10,000 point level, losing 749.05 points to reach
9,586.88. It touched the day's low of 9,510.15 and a high of 10,469.72 points,
showing a wide fluctuation of nearly 960 points.
 The declining Sensex recorded the biggest single-day loss in the past two
months, after Satyam Computers Services, the country's fourth-largest software
developer, plunged around 80 per cent, the highest since getting listed in 1992.
•The 50-share National Stock Exchange index Nifty tumbled by 192.40 points at
2,920.40, after hitting the day's low of 2,888.20 points during the day.
 The timing of what is being called `India's Enron' could not have come
at a worse time - just when the stock market was showing signs of
responding positively to the Centre and RBI's moves to stimulate the
economy through interest rate cuts, duty reductions and accelerated
government spending. A day after the sensex crossed the 10,000-mark,
it plunged by 749 points, wiping out almost Rs 1.3 lakh crore (or
trillion) of market capitalization.
Satyam Stock Chart
OPEN
--
PREVIOUS CLOSE
38.85
DAY HIGH
--
DAY LOW
--
52 WEEK HIGH
05/30/08 - 544.00
52 WEEK LOW
01/9/09 - 11.50
MARKET CAP
26.2B
AVERAGE VOLUME 3 mo
42.5M
DILUTED EPS TTM
29.94
SHARES OUTSTANDING
673.9M
EX-DATE
10/29/08
P/E TTM
1.3x
DIVIDEND
7.00
DIVIDEND YIELD
18.02%
K = Thousands M = Millions B = Billions
Actions Taken
 Chartered accountants body ICAI constituted a six-member special committee to
look into the auditing of crisis-hit Satyam Computer and will submit its auditing
report on February, 11.
 The special committee will headed by ICAI Vice-President Uttam Prakash
Aggarwal .
 ICAI council members –
S L Dogra, Amarjeet Chopra;
Subodh Aggarwal ;
Akshay Gupta ;&
K R Maheshwari, a banker and chartered accountant.
• Government asked the Serious Frauds Investigation Office (SFIO)-- a body set up to
crack complex white collar crimes-- to probe the financial irregularities in Satyam
Computer Services and report its findings in three months.
 This decision to refer Satyam to SFIO is based on the recommendation of the
Registrar of Companies (RoC) in Hyderabad, who inspected the books of Satyam
which were being fudged for the past 7 years.
 Raju was arrested on charges of cheating, fraud and and other criminal charges
under various sections of Indian Penal Code (IPC).
 The Securities and Exchange Board of India (SEBI) officials came to Hyderabad to
investigate the entire scam, but they could not do so as Raju was in the custody of
CID.
 The former chief executive officer (CEO) of Satyam Computers, Raju and his
younger brother Rama Raju were remanded to judicial custody by sixth additional
Metropolitan magistrate for 14 days (ie till January 23) and both were shifted to
Chanchalguda Central Jail near the city.
Satyam's New Board
Government of India announced a new board for Satyam. Three “eminent persons”
were selected to serve on Satyam’s board, the minimum number of directors
required under Indian law. The three are : Deepak Parekh, the chairman of the Housing Development Finance Corp;
 Kiran Karnik, a former head of the National Association of Software and Services
Companies;&
 C. Achuthan, a lawyer and former member of the Securities and Exchange Board of
India, the country’s market regulator.
 T.N. MANOHARAN IS THE NEW CHAIRMAN ( Former President of ICAI).
 Amarchand & Mangaldas, Suresh A Shroff and Co have been appointed legal
advisers to Satyam board. Where as Chartered accountants Brahmayya and Co of
Chennai have been named internal auditors with immediate effect.
Satyam’s New Boards Main Area’s
of Concern
 "The most important issue is funding.... I do think that if we can tie up some
funding then it will give great comfort to the employees and to the
customers...," Karnik told a TV channel Deepak Parekh, a senior banker and
 Satyam board member, said it had Rs 17 billion (USD 348 million) in
receivables and may not need new funding if the money came in on time.
 Satyam board can also think for loans, if required.
 Also, to arrange for enough money to support the salaries of the existing
employees.
 How to keep the client’s intact and keep the business running.

Satyam Board Announces
Key
Actions
Satyam is in the final stages of arranging additional funding to help cover
operational expenses, including salaries and vendor payments, through March.
 The Board announced that the company's fixed assets, including all campuses it
owns, are free of encumbrance, and that collections from receivables have been
robust.
 The Board and leadership team discussed ways to expedite collections due from
customers, and to also execute prudent cost-optimization measures.
 Also, the Board announced that it has narrowed its list of candidates for
chief executive officer and chief financial officer to three each, and will
announce appointments to these positions next week.
 On customer Level , Satyam Board members have spoken and assured the
customers.
• On the employee front, Satyam leaders have increased and enhanced interactions
with Associates at all levels to understand their concerns and update them about
developments. Associate attrition also remains well under control.
 Recently, the Board held a conference call with Satyam's global business
leaders globally to understand field-level realities. The Board will also
reach out to associates all over the world through a video that will be
webcast today and be made available on http://www.satyam.com/ shortly
thereafter.
Recent Developments
 It has been said that companies employees have been inflated in the books.
Actual Employees of Satyam are 40,000 which were shown as 53,000.
 Raju, was signing off 20 crore rs of the company in the name of fictitious
employees.
 L & T stake in Satyam have been increased to 12%.
 Raju admits of diverting funds to Mayta s properties and Maytas Infra.
 Two pricewaterhouse Coopers officials have been arrested in this fraud case.
 Raju s jail custody has been extended till 31 st Jan.
 Satyam 3rd chief financial officer has been arrested.
Satyam School Poems
Raju Raju sat on the wall
Raju Raju had a great fall
Balance sheet died
Shareholders cried
Raju Raju made a fraud
__________________
What's considered as enough
money... Just a lil' bit more....
“In this market, the person who
makes money will be he who
knows when to do nothing."