Review on Failure of Cg in Satyam

Topics: Corporation, Stock market, Corporate governance Pages: 5 (1334 words) Published: March 27, 2013
Introduction to Satyam Computers Limited
Satyam computers limited established as a private limited company by two brothers B. Rama Raju and B. Ramalinga Raju in 1987. It was converted to a public limited company in August 1991. By 2008, Satyam was established as a fourth largest Indian IT Company in India and US. It had grown upto 53000 employees, 600 plus customers including 185 fortune 500 companies. The company had annual revenues over $2 billion. The company was operated in more than 66 countries across the globe. Satyam had received Global Peacock Award for the excellence in corporate governance in the years 2002 and 2008. The company had the Pricewaterhouse Coopers. In 1999, different subsidiaries of Satyam were merged with Satyam and Satyam was listed in NASDAQ. The bankers of Satyam were Citibank, BNP Paribas, HSBC and HDFC.

This was one of those few companies in India that supposedly had been doing things the right way i.e., the Western way. It allegedly had all the checks and balances a U.S. company would want in an overseas business partner. Its financial statements received repeated clean bills of health from a respected outside auditor, PricewaterhouseCoopers. And still its corporate governance rotted away from the inside.

Appearance of Symptoms to crisis in Satyam
In September 30, 2008, Satyam reported that it had cash reserves of US$ 1.2 billion. In December 16, 2008 Company announced that it planned to use these cash reserves to acquire two companies Maytas Infra and Maytas Properties. Satyam announced acquisition of two companies - Maytas Properties and Maytas Infrastructure for US$ 1.6 billion. Investors questioned the company's board on the reasons forgiving consent for the acquisition as it was a related party transaction. Due to adverse reaction from institutional investors and the stock markets, the deal was withdrawn within 12 hours. However, this action did not pacify the anger of the investors. As a result of which the share price of Satyam fell by 30%. Also, World Bank suspended Satyam for eight years from doing any business with itself because Satyam was trying to bribe the staff of World Bank.

Series of Resignation and Confession:
In December 25, 2008 an independent director of Satyam Mr. Mangalam Srinivasan resigned taking the moral responsibility for not opposing the acquisition decision. In the mid time, someone claiming to be a former senior executive at Satyam wrote an anonymous email to one of the board members which had the details of the financial irregularities and fraud at Satyam. In December 30, 2008, three independent board members at Satyam- M. Rammohan Rao (Dean of Indian School of Business (ISB), Mr. Vinod Dham (inventor of the Pentium chip) and Mr. Krishna Palepu (Professor at the Harvard BS) also resigned.

Jan 07, 2009 B. Ramalinga Raju wrote a resignation letter to Securities Exchange Board of India (SEBI), admitting the falsification made in the financial statements. He also mentioned in his letter that all the falsifications were made to increase the stock price of Satyam in the market. On January10, 2009, Company Law Board barred current board of Satyam from functioning and appointed 10 nominal directors. This scandal had many consequences- Raju was imprisoned along with Managing Director, CEO, CFO, Chief Accountant and two Associates. The share price of Satyam fell from INR 554 to INR 39.95; Company Law Board barred current board of Satyam from functioning and appointed 10 nominal directors.

The confession letter of B. Ramalinga Raju can be summarized in the following points: Chairman Raju’s version

* Inflated billing to customers

* Non-existent Cash & Bank Balances of USD I Billion

* Overstated Debtors - USD 100 Million

* Operating margin shown high at 24% in Q2 (September 2008) as against 3% real profit margin

* Manipulation carried on for previous 6 years (Approx. USD1.2 Billion)

* Increased costs to justify...
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