Final On Satyam

Presented by : Arvind Kumar Popat , E-mail : [email protected]

In the land of Gandhi, how Satyam became Asatyam!

Awards 1) 1999 – Ramalinga Raju receives Ernst & Young Entrepreneurship award.

2) 2000 - Satyam Chairman Ramalinga Raju named “IT man of the year by Dataquest”

3) 2002- Wins Golden Peacock Award for Excellence in Corporate Governance

Awards Contd… 4) 2002 – Wins CNBC’s Asian Business Leader Corporate Citizen of The Year Award

5) In 2003 – Won prestigious IBM Lotus Award

6) 2008 – Again won the Golden Peacock award for excellence in Corporate Governance.

Achievements and Awards of Satyam Computers

1)First ISO 9001:2001 company in the world 4)Satyam Infoway - First Indian company to be listed on NASDAQ

internet

7)World Economic Forum, Davos - ‘100 most Pioneering Technology Companies’ 10)First to launch Customer Oriented Global Organization Training

• 2001- Satyam listed on New York Stock exchange • 2005 – Satyam acquired Singapore based Knowledge Dynamics • Becomes the official IT provider for the FIFA World Cups, 2010 and 2014

1) Ramalinga Raju born on 16 sep, 1954 in a family of farmers.

5) Completed his B.com degree in 1975 from Andhra Loyola College in Vijayawada.

9) His father was one of the first farmers to start commercial grape production in Hyderabad.

13)His wife’s name is Nandini and they have two sons, Teja and Ramu, both of whom have studied engineering.

Journey Begins •Mr. raju did his MBA from Ohio university, USA. •1977 - Initially developed a Textile industry named Sri Satyam. •Then he ventured into real estate business under the name Satyam Constructions.

Magic that changed his life •On 24th June, 1987 company was incorporated as Satyam private ltd by B Rama Raju and B Ramalinga Raju. 2) On 26th august 1991, it was converted into a Public Company.

1992

•The company debuts in BSE and went in for a Public issue of equity shares. •Initial Public Offer Oversubscribed by 17 times. •Infrastructural facilities at Secundarabad, Hyderabad and Bangalore. •Installation of 64kbits/s satellite link. •Satyam became one of the first to enter the Indian Internet Service Market with SIFY. 1994

5) On 26th January a joint venture company called Dun & Bradstreet Satyam Software (P) ltd was incorporated. 6) It is largest single location software unit for D&B in the world.

SATYAM IRD’S EYE VIEW Operations spread across 63 countries

List of services: Application Services

List of industries served: Automotive

 Business Value Enhancement

 Financial Services

 Consulting and Enterprise Solutions

 Government and Healthcare

 SAP Solutions  Six Sigma Consulting  Supply Chain Management & many more.

 Infrastructure  Media and Entertainment  Retail & Supply Chain Management & many more.

COMPANY COMPOSITION Business process consulting

IT strategy consulting

Quality consulting CONSULTING

ERP

Supply Chain

CRM

Engineering & Embedded solutions Application Mgmt Custom built

Package d

Infrastructu re services

PLM BI

ebusiness EAI

Business Process Outsourcing

SYSTEM INTEGRATION

OUTSOURCING

A Fortnight that undid 21 years of Endeavour Dec 28 – Board meeting 07 Dec Jan 25 16 – Ramalinga – Major Dr. (Mrs) announcement Raju Mangalam sends a Dec 23 – Barred from business 02 06 Dec Jan 18 – Shares Satyam – Announces rose founder’s more than Board stake 7% Dec 19 – UK’s Upaid Systems files Dec 29 –who 3th has more directors rescheduled from DEC 29 to Jan letter Srinivasan, to the Board been of Directors on the Dec 17 – The deals were killed off stating 100% stake in Maytas Meeting on a newspaper on 29 Dec report to consider that with World Bank for 8 yrs for motion to request deposition of fell by a third to 5.13% . Analysts Mr.Krishna Palepu, Mr. Vinod 10 to address issues beyond and Satyam admits Board to since committing July 1991 financial as an Satyam had been approached by providing bank staff with a mere 12 hrs. later, after vicious Properties and 51% in Maytas the share buyback in a bid to said this made the company a top Satyam executives in Dham, Mr. Mendu Rammohan Rao buyback and look at additional independent director, takes a lead smaller rival Tech Mahindra for an “Improper Benefits”. Its shares investor reaction. fraud for many years and submits connection with “Maytas –more Quit. infra . attractive Investors revolt the restore confidence bid target and .and boost and resigns. options , including measures to all share Merger . fall another 14% to their lowest transaction asset-stripping resignation. Ram stock plunges. TheMayanpati ADR listedwas on investor sentiments . strengthen governance . in more than 4 yrs. attempt”. appointed as the interim CEO the NYSE lost 52 per cent in of a Satyam. single day.

The ‘Satya’ and the ‘Asatya’ of the Balance Sheet BEFORE AFTER DIFFERENC (in crores)

(in Crores)

(a) Share Capital

134.70

134.70

(b) Share Application money pending allotment (c) Reserves and Surplus

2.76

2.76

8392.23

(415.47)

8807.7

TOTAL

8529.69

(278.01)

8807.7

(I) SOURCES OF FUNDS

E (in crores)

1. Shareholder’s Funds

BEFORE (in crores)

AFTER (in Crores)

(a) Secured Loans

30.49

30.49

(b) Unsecured Loansothers

234.80

1464.80

(1230)

TOTAL

8794.98

1217.28

7577.7

(I) SOURCES OF FUNDS

DIFFERENC E (in crores)

2. Loan Funds

BEFORE (in crores)

AFTER (in Crores)

(a) Gross Block

2173.91

2173.91

(b)Less: Depreciation/Amortiz ation

1158.13

1158.13

(c) Net Block

1015.78

1015.78

(d) Capital Work in Progress

365.32

365.32

TOTAL

1381.10

1381.10

(II) APPLICATION OF FUNDS 1. Fixed Assets

DIFFERENC E (in crores)

BEFORE (in crores)

AFTER (in Crores)

2. Investments

618.64

618.64

3. Deferred Tax Assets (net)

118.75

118.75

DIFFERENC E (in crores)

BEFORE (in crores)

AFTER (in Crores)

DIFFERENC E (in crores)

2651.36

490.00

2161.36

(b) Cash and Bank Balances

5312.62

272.62

5040

(c) Other Current Assets: Interest Accrued on Fixed Assets (d) Loans and

376.34

0

376.34

502.22

502.22

8842.54

1264.84

4. Current Assets, Loans and Advances (a) Sundry Debtors

Advances TOTAL

7577.7

BEFORE (in crores)

AFTER (in Crores)

DIFFERENC E (in crores)

Less: Current Liabilities and Provisions (a) Liabilities

1669.26

1669.26

(b) Provisions

496.79

496.79

TOTAL

2166.05

2166.05

Net Current Assets

6676.49

(901.21)

7577.7

TOTAL

8794.98

1217.28

7577.7

CURRENT ASSETS 2651.6 5312.62

ACTUAL CASH IN BANK IS 321 INFLATED 5040cr

376 ACTUAL DEBT IS 2161 OVERSTATED 490 Cr

NO ACCRUED INTEREST 376 Cr

LIABILITIES

REVENUE

2700

OPERATING MARGIN

690

ARTIFICIALLY ADDED 588 OPERATING PROFIT ADDED 588 INCREASING THE CASH RESERVE ONLY FOR Q2 ALONE TO 588

UNDERSTATED LIABILITY 1230 Cr which is arranged by Mr.Raju 5040+376+1 230+ 490= 7136

‘An auditor is a watchdog, not a bloodhound’- but what is a watchdog’s duty? How can the Auditor’s Remain Mute When-

AThe sumjob of of Rs verification 5000 crores was are not so It is normal practice of the There Auditors is usually are even arequired provision to for normally held in Savings or simple that ordinary Auditors to verify the Bank “Continuous prepare and Audit” verify the for “Cash such Current accounts. They are Commerce graduate could have Balance by writing to the large Flow” company. statement The for relevant auditors usually placed in short term or found out glaring discrepancy concerned bank officially and would period from havewhere known deficiency any long term Time deposits in seconds. How could then directly without any copy to the irregularity could haveissued in been routine found manner. out. physically by the bank.In Professional CPA miss this company. that case, Auditors could have symptom? seen and checked the Time

Taxation as a hint? Adjusted PBT

Tax Charges Adjusted PAT

1964.3

1560.48

1186.07 887.39

675.31

Mar-08

Mar-07

Mar-06

Mar-05

Mar-04

226.12

150

206.14

116.74

106.15

1,738.18 1,410.48

979.93

770.65

569.16

-22.44

12.75

259.82

-20.86

-15.27

0

0

0

0.47

1.9

Reported Net Profit

1,715.74 1,423.23 1,239.75

750.26

555.79

Earnings Before Appropriation

5,564.06 4,260.04 3,222.39 2,238.23

1,690.93

NON Recurring Items Other Non Cash Adjustments

Equity Dividend Preference Dividend Dividend Tax Retained Earnings

234.89

231.85

229.56

159.63

126.72

0

0

0

0

0

39.86

37.55

32.02

20.86

16.24

5,289.31 3,990.64 2,960.81 2,057.74

1,547.97

Satyam was a heavy tax payer. They would not be paying taxes if the profit was bogus one.

The company paid during 07-08: •Income Tax running into Rs crores •Dividend of Rs 235 crores •Dividend tax of Rs 40 crores

226

The Auditors would have certainly seen physical receipts of such payment while auditing.

If that was so, it would mean that the cash holding was genuine and present admission of fraud by its Chairman is misleading with some ulterior motive.

April 2005 – UK based Citisoft Plc million paid in trenches July 2005 – Singapore based Knowledge Dynamics $3.3 million cash Oct 2007 – Nitor Global Solutions $5.5 million cash Jan 2008 – Bridge Strategy Group $35 million cash April 2008 – Caterpillar Inc & S&V Man. Cons. $95.5 million cash

$38

34.33 % 23.66 %

20.13 %

3% Figures are in percentage for

Nitor Global Solutions

Satyam Venture engineering Services

CA Satyam

Prof. Krishna G Palepu (Prof. of HBS)

Prof. Mendu Rammohan Rao (ISB Dean)

Dr. (Mrs.) Mangalam Srinivasan

Vinod K. Dham

Probable motives Satyam Case:-

behind

the

• Increase the share price of Satyam. • Increase compensation to directors & ESOPS. • Eligibility for contract criteria like sales, net worth etc. This would have helped to achieve more sales. • Siphoning small amount for promoting other companies.

investing

&

• Diluting of Satyam shares promote other companies.

slowly

to

• Purchase shares of Satyam when the price is down or through preferential allotment. • Legitimate the cooking by either bringing cash from the other promoted companies or investment in other promoted companies.

Satyam’s Corporate Social Responsibility 3)Byrraju Foundation – Aims to catalyze rural transformation by providing 54 different services in the areas of: a) Health b) Education c) Adult literacy 2) EMRI (Emergency Management and Research Institute) – NENA-National Emergency Number Authority AAPI-American Association of Physicians of Indian Origin AAEMI-American Association for

• The whole perception of Corporate Governance was shaken to the very roots. • Those companies who had already a question mark over their Corporate Governance were very badly hit. • The realty sector, with its complex land bank valuations had been the worst hit. • The BSE realty index fell by 16.95%.

• The firms with Satyam in their portfolios are trying to sell other stocks they held creating a situation in which short sellers reveled and rumors flew. • The premium that is attached Corporate Governance is rising companies are getting their dues.

with good and these

• Companies like HDIL, Indiabulls Real Estate ltd, Unitech ltd, DLF ltd, Suzlon Energy ltd, Aptech ltd, Lanco Infratech ltd are only some of the names who of those that has been affected.

• SEBI announced special norms for takeover of distressed companies. • The ICAI is favoring 3 year rotation of auditors. • ICAI to seek information from the CA concerned and not from the firm in case of anomalies. • ICAI is planning to set up a rating system for Corporate Governance.

• Auditors to be given power to refuse signing a company’s accounts if disorder found. • RBI should recommend the auditors of a company and not the directors. •The Pledging of Shares must be declared before the SEBI.

Regulators action:

in

• Department of Company Affairs(DCA): Scanning for further misappropriations in the balance sheet. • CLB(Company Law Board): Looking into the violations of the Securities Act. •SEBI: Investigating trading of shares.

matters

•

Investigation

Serious

Frauds

relating

to

Office:

• Enforcement Directorate: Looking into possible violations of rules governing foreign exchange transactions. • CID/CBI: Investigating the criminal aspects of the fraud.

Why is Satyam still being sought after? 1)Though Satyam is down, it is still not out. Companies still see promise in its core business. 2) Satyam won 15 new clients last month, despite the scandal from places like US, Europe, Japan and Middle East. 3) Sectors like insurance and pharmaceuticals still recognize its ability to provide business solutions to them.

1)Local projects from Indian Railway, BSNL, Vizag Steel Plant and India Mint are in the offing.

4)International clients like GE, Canadian Conglomerate Bombardier and UK’s Birds Eye Iglo have promised Satyam with continuing projects.

7)It has about 690 clients and 28 development centres around the world. It’s backbone is

Companies interested acquiring Satyam:  L&T

 Spice Group Hinduja Group Tech Mahindra iGate IBM

in

Risks associated withSatyam:  Loss of goodwill

 Change in Management  Deal with obstructions

lawsuits

&

legal

 Impact on relationship with other clients  Maintaining service quality

Gains to be had from Satyam:

 Intellectual capital in the form of employees  National & International clients Recovery funds

of

possible

siphoned

Continuity of business deals

1)The myth of clean competition created by liberlisation has been shattered. 2) Our market needs better quarterly reporting and more timely reports at the year end. 3)Free financial regulation from individual political agenda and govt. priorities. 4)Promoters

should

be

prohibited

from

• Whistleblowers should be encouraged & they should be protected by the law. • Investors and analysts need to emphasize on the quality of earnings, rather than quantity in the current scenario. • Employee feedback and staff surveys must lay emphasis on the organization's core values. • Independent directors should have challenging, skilled ID’s, who have time to

• A robust audit committee should be chaired by a financially competent independent director to be effective. • Core assets of a company are its employees ,a business should always bank on them in the long run. • A company is not just the promoters and the directors ,it is the employees who creates the true value. •

Imbibe values in our business culture that promote good corporate governance.

• The media, which proclaims itself as the fourth state, has to come out of its myopic shell. • Limit the amount of consulting work accounting firms can do for their clients. • The institutions responsible for the integrity of the system have to go through rigorous self examination.