Author: Manvi Tokas of the NorthCap University
INTRODUCTION
Satyam scam was one of the biggest scams of India. It included a massive fraud committed by the founder and the members of a company known as ‘the satyam computers services’, which was an IT company also known by the name of ‘crown jewel’ of the IT industry. The fraud included misappropriating funds and company’s accounts even inflating revenue and profits, it was a scam worth of 7800 crore, being one of the country’s biggest corporate scandal. This fraud eventually came to the light in the year of 2009 when the company’s founder himself confessed to the fraud. The satyam scam shocked the whole country while also impacting India’s corporate governance image worldwide.
BACKGROUND
Ramalinga Raju, the founder of the satyam computers services company, started it in the year 1987 with 20 employees. The year was marked with growth of computers and high need of IT services therefore marking a golden opportunity for the satyam company to grow in less time. Business process outsourcing (BPO) was also provided by the company, which in simple terms is a process in which companies allow smaller companies to work and complete their tasks. In later years, the company participates in the Bombay Stocks Exchange, which allows companies to sell their shares and gain some money to survive in the market of which the Satyam company was a part of. As the satyam company’s reputation during the time was good and decent to the public, people bought their shares at a very high price allowing the company to not only survive in the market but gain a tremendous amount of profit as well. But this was not the main turning point of the company, in later years a virus by the name of Y2K virus was induced in the western world. This cyber virus was estimated, that all the computer systems in the world would be destroyed. To understand it in more detail, in 1900’s the date in the computers included date, month and the year which was written in two digit format, like the year 1998 would written as 98. This was done to allow more storage in the computers during that time. As the 21st year century was about to come nearby there was huge debate among the cyber experts that the computers would not be able to access and understand the year 2000. As a result of which all the computer data and storage like government records, utility software, banking, share market etc. would be destroyed worldwide. This issue was named Y2K virus in which Y means year and 2K would mean 2000. A lot of panic was felt worldwide due to which all the countries collectively invested 300 billion dollars to solve this problem before 1 January 2000. Need for Indian computers experts increased and the BPO by USA and other countries was provided to Indian companies out of which the satyam computers company earned to most profit, becoming the only company of revenue worth of 1 billion dollars to stand in the stock exchange in the year 2001. The compound annual growth rate of the company was by 40%, the operating profit margin was 21%. The same stock of the company which was of 138 rupees in the year 2003 it went to rupees 526 by the year of 2008. By the year 2005 about 53000 employees in the satyam computers. The shock was felt on 7 January 2009, when the chairman and the founder, Ramalinga Raju wrote a letter to its company’s board members describing how the company has for a very long time misrepresenting its records and the fraud that has been for a long time being committed.
UNDERSTANDING THE SATYAM SCAM-
The satyam scam started with the company’s founder, ‘Ramalinga Raju’ starting the fraud in 2003, by falsifying company’s accounts and forging the same. This was mainly done to depict a more well done and reputed image of the company that it was actually. The profit margin was shown to be very high that it was in reality like for example. Overall, large scale misrepresentation was done in the balance sheet, profits, cash deposits, and assets of the company. In the balance sheet of 2007, the actual revenue of 61 crore was shown as 649 crore. The company cash and balance was in reality 341 crore which was shown as 5361 crore. When the reality of the same fraud came into light through the letter by R. Raju, within two days the share of the company fell from 526 rupees to 6.5 rupees.
To very well understand the scam, its impetus needs to be understood which was the Y2K virus, which with the coming up of 2000’s turned out to be a bubble, meaning that it was not actually as harmful and destructive as it was initially thought of. As a result, the large-scale profit earned by satyam computers slowly started degrading due to no BPO service provided by the western companies. Large scale competition also started as the high need and demand of IT companies was required. Thus, global and local competition was to be dealt with to grow in the market. Satyam computers also had other issues as pointed out by Canara Bank chairman T N Manoharan that the bench size of the company was 15-20%. Thus, a large part of the company’s revenue was used to pay employee’s salary. All these issues made the founder R. Raju realize that a diverse approach for the company was required to make it grow. The company was established in real estate sector as well as a result. Maytas Infra. was one such company for the real estate by R. Raju and later another company by the name of Maytas Properties was also opened. R. Raju has close ties with Andhra Pradesh CM C. Naidu, who has intentions of making Hyderabad an IT hub even calling it by the name of Cyberabad making R. Raju the unofficial brand ambassador of the same project. R. Raju’s job was to provide new ideas for the development and the state in return would provide him with land to establish his companies. The idea about development of metro projects was known by known to R Raju through his political ties, taking this opportunity to his favor he made a plan to buy land near the metro. There were though two issues in hand, firstly that according to the rule in AP no company could buy more than 58 acres of land and secondly there was even shortage of finance with the company buy more and more land.
This was the exact moment when the famous satyam scam was born, as due to shortage of actual capital within the company, R. Raju made a practical plan which firstly involved misrepresenting company’s profit which in actual were very less. By showing more and more revenue and profit earned by the company the amount of its share increased making people interested in buying the shares. As they bought the shares more and more capital came to the company which was further used to buy land for the company. To make the fraud plan successful R. Raju smartly thought of selling the bought land in the future and using the money to fill revenue and profit gaps in the company records to avoid being caught. The issue of maximum cap of 58 acre of land was filled by R. Raju by making shell companies and buying land through these shell companies. These shell companies are in a way not real companies and are used for many purposes like hiding the real identity of the owner or avoiding taxes etc. These shell companies by R. Raju were opened through the names of the relatives and friends; and would send the Satyam company fake invoices and bills in return of the money send sent by R. Raju. All this was done in the name of inter-state investment ad by 2008 around 365 shell companies were opened by R. Raju and about 5000 crores of land were bought. These shell companies were even used to buy loans from banks by faking their records on paper. The complex fraud plan was done very cleverly and mostly done alone by R. Raju. The Management Information System is a branch in every company which is responsible for looking at the company’s overall growth by knowing in detail from where the company’s is gaining or losing profit, in a way the whole balance sheet is accessed by this department. R. Raju to deceive this department of the company, injected many flaws in the system which included showing fake invoices for the companies to make it look believable that the company is actually earning huge sums of profit. The real invoices were marker ‘S’ which means to show to everyone and the fake ones were marker ‘H’ which meant to hide it from outsiders. R. Raju had a help f approx. 10 employees form different departments to help him in this fraud. Thus, from April 2003 to December 2008 about 74,625 fake invoices were created by the company. a lot of lies and fraud was committed to hide the actuality of the company as the revenue of 5000 crore was not even 300 crore in reality and to make the shown revenue believable fake clients were shown, fake bank deposits were shown, making fake invoices etc. Even fake employees were shown to be about 5300 while in reality they were around 4300. Talking about the liability the company had, there was once again a massive fraud, as in reality the company had 1230 crore of unpaid dues while the shown figure was none. This scam worked very well for the company for about 5-8 years.
EXPOSE OF THE SCAM-
The scam as can be very understood through the approach, methodologies and the smart work done by the R. Raju worked extremely well for many years. There was a practical plan at work which ensured how the fraud would have never been caught. R. Raju believed that real estate only brings profit. Thus, in the future when enough land would have been bought for the company to expand, the same land could be sold, and out of that money, the fake revenue initially shown could be adjusted well. This was the plan. What lead to the fall of this fraud plan is the fall of prices of property in the country. The company by the name of Leyman Brothers, went bankrupt which caused recession worldwide, leading to a significant drop in prices of real estates. This came as a bad luck for the satyam computers as now it was impossible for the company to fill the revenue gaps as well to even survive in the market. The actual revenue and the forged revenue gap widened which caused great problems for the company as the operational cost was even hard for the company to fulfill. Now, as the situation grew tense R. Raju made another plan and on 16 December 2008, decided to bought the two real estate company that is Maytas Infra. and Maytas properties that were in the name of his sons. The purpose was once again to issue fake bills to show revenue and try to fill the gaps. As the news of this was known to the shareholders of the company a large-scale protest against R. Raju was done, the claimers protested how R. Raju is violating the Companies act 1956, according to which no company can buy any corporate entity without the permission of 60% of its shareholders, and here the said permission was not taken only the approval of the company’s board members was there. Therefore, this plan of R. Raju fails due to this protest. The first shock was experienced by the satyam computers on 23 December 2008 when the World Bank barres satyam company from business with it for 8 years due to data theft and paying bribes to its stuff. The shares of the company falls by 13% after this news. On 25 December, R. Raju writes an official apology to the World Bank, claiming how after this news the confidence of its shareholders has reduced and the company is facing tremendous losses. But this was of no positive use to the company and on 26 December, Mangalam Srinivasan, the independent director of the satyam computers resigns. With seemingly no way-out R. Raju goes to Hemendra Kothari, to help him find a buyer of satyam company. But Mr. Kothari also refuses to help R. Raju in the same.
At the end, to avoid further degradation of image and avoiding whistleblower to expose the company R. Raju himself on 7 January 2009, confesses to the scam that has been conducted for so many years.
REPERCUSSIONS
R. Raju confessed to the scam via a letter that was written to the company’s board members where in detail it was expressed how much the figures were misrepresented.
Only 2 days after the letter the satyam company was removed from NSE’s CNX 100 and CNX 500 indices.thirdMAds, and the share fell by 78%. In the New York exchange the same share of satyam that was initially of 29 dollars became of 1 dollar. In total of year the people who had invested their money in the company had to lose about 1400 crore. Within two days the share of the company fell from 526 rupees to 6.5 rupees.
More details as who was with R. Raju in the scam also came into light which was no other than the independent members and auditors who co-operated in the operating of the scam. A lot of efforts to save India’s marketing reputation was practiced by the government. On 12 January, PM Manmohan Singh announced the selling of the company in auction. For the purposes of auction three people were selected HDFC Chairman Deepak Parekh, NSE director C. Achuthan and NASSCOM former president Kiran Karnik. The aim was to sell the company within 100 days. Finally on 13 April 2009, Tech Mahindra bought the company at 1.13 dollar per share. As far of Ramalinga Raju is concerned he was immediately arrested as he issues the letter disclosing the fraud. Inquiry on him was launched by serious fraud committee, securities and exchange board of India and the central bureau of investigation for about 6 years. More than a thousand-page chargesheet was filed against him and about 250 witnesses were heard. Finally on 9 April 2015, Raju and his associates were charged with money laundering, breach of trust, criminal conspiracy, insider trading etc. and was given imprisonment of 7 years with a 5 crore fine.
CONCLUSION
The satyam scam of 2009 was a big shock for the country exposing high scale money laundering and breach of trust. Investors lost about 1400 crore due to the scam and even effected India reputation worldwide, with the foreign investors judging and investing less in Indian companies. Overall, the scam was a huge shocker and turned out to be an eye opener exposing various evils degrading India’s economy and people’s trust.
FAQS
When was the Satyam scam exposed?
The satyam scam was exposed through the founder Ramalinga Raju himself through his letter he wrote on 7 January 2009.
Who bought the Satyam company?
Tech Mahindra bought the satyam company on 13 April 2009.
What was the punishment given to Ramalinga Raju?
7 years of imprisonment with 5 crore of fine was the punishment given to R. Raju and his associates in the scam.
