Background of Satyam:
Satyam Computer Services Ltd., founded in 1987 by Ramalinga Raju, was one of
India's leading IT service providers. It offered IT consulting, enterprise solutions,
and business process outsourcing services. The company expanded rapidly,
securing contracts with over 270 companies globally, including Fortune 500
firms. It was listed on NSE, BSE, NYSE, and Euronext, and even won corporate
governance awards. However, behind this success, financial fraud was brewing,
which ultimately led to India's biggest corporate scandal, often referred to as
"India’s Enron."
Overview of the Case:
The Satyam scam came to light in January 2009 when Ramalinga Raju confessed
to falsifying the company’s accounts for several years. The fraud involved
inflating revenue and profits to maintain high stock prices and attract investors.
The scam, estimated at $1.47 billion (Rs. 7,800 crore), was a systematic
manipulation of financial statements. The downfall began when Satyam
attempted to acquire two firms—Maytas Infrastructure and Maytas Properties—
both owned by Raju’s family. This move raised investor suspicion, leading to
further scrutiny and, eventually, Raju’s public confession.
Main Method of Fraud:
1. Falsification of Financial Statements
o Satyam’s founder, Ramalinga Raju, inflated revenue, profit, and
cash balances for several years to show higher growth and
profitability than actually existed.
o Fake invoices and bank statements were created to show inflated
cash reserves.
o Overstated sales and revenue (₹5,040 crore was falsely added).
2. Fake Bank Deposits & Cash Reserves
o Raju falsely claimed that Satyam had ₹5,040 crore ($1 billion) in
bank accounts.
o In reality, the company had only ₹320 crore ($66 million).
3. Manipulated Operating Margins
o The profit margins were shown as 24%, while in reality, it was only
3%.
4. Ghost Employees & Salary Payments
o Fake employee records were created to siphon off money.
5. Insider Trading & Stock Manipulation
o The fraud kept Satyam’s stock price artificially high, allowing
promoters to sell shares at inflated prices.
o Raju and his associates sold Satyam shares before the fraud was
exposed.
6. Failed Maytas Acquisition Attempt (2008)
o In 2008, Raju tried to divert funds by acquiring Maytas Infra (owned
by his family).
o Shareholders opposed the deal, triggering investigations.
How It Was Exposed:
In January 2009, Ramalinga Raju confessed in a letter to SEBI, admitting
that he had manipulated accounts for years.
PwC (Satyam’s auditor) failed to detect the fraud, raising questions about
corporate governance.
The scandal led to the downfall of Satyam Computers, which was later
acquired by Tech Mahindra.
Impact:
₹14,000 crore investor loss.
Ramalinga Raju and top executives were arrested.
The case led to stricter corporate governance norms in India.
Consequences of the Scam:
1. Company Collapse: Satyam’s stock price crashed by over 77% within
days of the revelation.
2. Legal Actions: Raju and several executives were arrested, facing charges
under the Indian Penal Code for fraud, forgery, and breach of trust.
3. Impact on Shareholders & Employees: Thousands of investors lost
their savings, and employees faced an uncertain future.
4. Government Intervention: The Indian government dissolved Satyam’s
board and appointed new directors to salvage the company.
5. Acquisition by Tech Mahindra: In April 2009, Tech Mahindra acquired a
46% stake in Satyam, rebranding it as Mahindra Satyam, later merging it
with Tech Mahindra in 2013.
6. Regulatory Reforms: The scandal prompted stronger corporate
governance norms, mandatory auditor rotation, and stricter SEBI
regulations.
Closing Note :
The Satyam scam serves as a cautionary tale of how unethical leadership and
poor corporate governance can lead to catastrophic consequences. While the
case led to stringent reforms in corporate governance and financial transparency
in India, it also underscored the need for constant vigilance against white-collar
crimes. Lessons learned from Satyam emphasize the importance of independent
audits, robust regulatory frameworks, and ethical leadership in sustaining
investor confidence and economic stability.
