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Lessons from Satyam – An Agenda for Reforms

Curtains may be said to have been drawn on Chapter, one of the Great Indian Rs.7000 crore
Satyam Fraud Serial making way, for the others dealing with investigations and convictions to
follow. It is time to take a quick look at the core of the Satyam fraud, its sensational revelations,
its offshoots and the lessons it holds for India Inc. at this stage.

SATYAM A GLIMPSE
Thanks to the collective and well coordinated 24x7 efforts of MCA/CLB, SEBI, CBI, SFIO, the
Advocates, the Press, the Judiciary, the Advisers and the Consultants (Goldman Sachs and
Avendus), former SC Chief Justice S P Bharucha who oversaw the selection of strategic investor
(Tech Mahindra), the beleaguered Satyam Computer Services Ltd. (Satyam) has at last been
given a fresh lease of life. Recommended by the Satyam Board and approved by the CLB, Tech
Mahindra group company – Venturbay Consultants- has occupied the driver’s seat at Satyam and
efforts are on to put the company back on its original track.

Satyam was founded in 1987 and was listed on BSE in 1991. Satyam’s revenues crossed 1
billion dollars in 2006 when Ramalinga Raju became Nasscom Chairman followed by the award
of Ernst & Young Entrepreneur of the year in 2007. Satyam bagged the Golden Peacock Award
for Corporate Governance and Compliance in 2008 but it was subsequently withdrawn. There are
over 40,000 employees in Satyam, world-wide.

SENSATIONAL REVELATIONS
Following a whistle blown by a former employee of Satyam- into the ears of Satyam Board the
Satyam Chief B. Ramalinga Raju resigned from the Satyam Board on 7th January 2009 and
issued his sensational confession admitting to the cooking of Satyam’s books for several years
for a Rs.7000-odd crore fraud, bringing Satyam to the brink of an overnight financial collapse.
He also admitted that huge cash balances shown in the balance sheets never existed.
Subsequently, the Auditors –PwC- confirmed that the Balance Sheets of Satyam assured by them
were no more reliable. The case provided excellent examples of the proverbial fence eating its
own crop (right under the nose of the watchdog too) and of killing the goose for all its golden
eggs! It also reiterated the fact that even 50% compliance of Clause 49 in spirit is far more
important than 100% compliance in letter.
The promoter brothers of Satyam and the partners of PwC are currently in Chanchalaguda jail
near Hyderabad, facing the investigators like CBI, SEBI, Serious Fraud Investigation Office,
Income Tax authorities, RBI, ICAI etc. Revelations continue to pour out every day in the press
and TV. Material handed over by AP State CID to CBI includes 200 trunk loads of records.
ICAI’s disciplinary committee is seized of interrogating the PwC partners (Satyam’s former
auditors) in jail. Bail pleas of Raju brothers and Satyam auditors were repeatedly dismissed.
CFO confessed in jail that the sales invoices and bank statements were falsified under
instructions from the Raju brothers.KPMG and Deloitte are still continuing their work of
restating the Satyam’s past audited accounts. Ramalinga Raju’s bank lockers have been sealed.
The Raju brothers offloaded their shares in Satyam and gifted the sale proceeds (over 800 crore)
to their families – reducing their stake in the company from 18 per cent in 1992 to 1.27 per cent
by end-2008. The value of Satyam share hit an all-time low of Rs.11.50. LIC, the single Articles
largest institutional investor in Satyam estimated its value-loss (due to mark to market) at Rs.950
crore. Former Minister of Corporate Affairs ruled out JPC inquiry into Satyam fraud.
Government also ruled out any compensation to investors in the capital market for losses
suffered by them due to fraud at Satyam.
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Tech Mahindra is due to make its open offer shortly (under relaxed Takeover regulations) for
21% of Satyam’s equity (having deposited earnest money for 31% equity with company’s
bankers). Tech Mahindra announced that it will stick to the current Satyam management
(including Ram Mynampati and AS Murty) and that its current priority is to halt customer
attrition, boost employee morale and leverage the practices obtaining at Satyam.
The Satyam Board will be expanded shortly to provide for four nominees of Tech Mahindra
(Vineet Nayyar, CP Gurnani, Sanjay Kalra and Ulhas Yargop). TechMahindra does not want
anyone to see Satyam as a sinking ship – though it may not be a racing cart.

SYNOPSIS OF VARIOUS CHARGES AGAINST SATYAM (AS PER

PRESS AND OTHER SOURCES )
In a very elaborate and extensive charge sheet filed with a Hyderabad Court, the CBI has
charged Satyam Chief as well as MD with the following acts of frauds and forgery.

1. Misappropriation of company’s funds of the order of over Rs.7000 crore by the Founder-
Chairman and his cohorts, by fudging the Company’s accounts for several years and by money-
laundering (diversion of foreign inward remittances to tax havens like Mauritius before routing
them to related parties like Maytas Infra & Maytas Properties in India through Mauritius-based
SRS Orion Investment firm owned by Ramalinga Raju and his family)

2. Major breakdown of corporate governance machinery in Satyam evidenced by the following:-

(a) Failure of Satyam Board, its Audit Committee and the Independent Directors, in discharging
their statutory functions of overall superintendence, control and direction of the Satyam’s affairs
resulting in a mammoth financial fraud ( including diversion of company’s funds to outside
related parties) by the Chairman and MD with active connivance of senior managerial personnel
like the CEO, CFO, Internal Auditor etc.

(b) Failure of the Satyam’s statutory (external) Auditors PwC in not detecting the fraud brewing
in the company for several years as also the gross misuse of powers by the Satyam Chief in
respect of company’s bank accounts and cash balances (which were operated by him exclusively
ignoring the CFO and CEO) and providing their assurance to the false and unreliable financial
statements of Satyam.

(c) Failure of the Satyam Board, the Audit Committee and the Auditors (including internal
auditors) to check the disproportionate powers usurped and exercised by the Founder-Chairman
Ramalinga Raju to execute his criminal game-plan of building a huge real estate empire through
as many as 327 private outfits created by him for the purpose.

3. Failure of Professional management in Satyam with functionaries like the CEO, CFO, and
Internal Auditor failing to discharge their professional duties and responsibilities truly and
honestly – by surrendering to the dictates of the Satyam’s Chief and his brother Rama Raju.

4. Criminal conspiracy to rig the stock market prices for making undue personal gains through
falsification of company’s accounts followed by rampant unlawful insider trading Seventeen
trusted lieutenants of Ramalinga Raju and his family were made to open demat accounts to
fraudulently trade in shares of the promoters way back in 1999. The Promoters and their families
offloaded their shares to these seventeen persons by endorsing their names on the physical share
certificates which were subsequently de-materialized. The 17 individuals sold the shares through
five investment companies after jacking up the market prices artificially. The money was
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transferred to the individual accounts of the 17 persons and their families who, in turn,
transferred the funds to the promoters. From 2006, the promoters held their shares in a corporate
entity SRSR Holdings which raised funds by pledging the holdings with NBFCs, on behalf of
327 constituent front-companies floated by the Raju brothers.

Some beneficial off-shoots of the Satyam episode

1. The Satyam-fraud episode has implored the authorities to take a relook at some of the
fundamental tenets of corporate organization and the company law including certain aspects of
corporate governance such as the basic prerequisite of divorce between ownership and
management, a company’s socioeconomic purpose as distinct from its business objects,
distribution and balance of power within the company, role of ethics in corporate affairs, role of
the State including the Legislature and the Judiciary in company law administration, Roles of the
stock markets and the Regulators, need for legally backed whistle-blowing mechanism ( with
insurance protection on the lines of ‘retaliation cover’ provided by HDFC Ergo & Tata AIG) and
the like. The Government has realized the need to provide more teeth to SEBI and the Courts
including the proposed NCLT to deal with extraordinary (crisis) situations like that of Satyam
more effectively in future. The Companies Bill, 2008 pending before the Parliament needs to be
revised suitably.

2. SEBI has relaxed the requirements of open offer to be made in the case of takeovers. It has
also taken some measures for improving corporate governance – such as trimming the notice
period time for intimations regarding Record date for dividend, bonus, rights, etc., and Board
meetings to 7 days and 2 days Lessons from Satyam – An Agenda for Reforms Articles
respectively. Also unclaimed shares or shares that could not be allotted due to insufficient
information against public issues are to be credited to a demat suspense account now – to be
retransferred to the rightful applicant as and when he submits full proof and particulars. Also,
dividend declaration henceforth to be in terms of ‘per share’ and not as a percentage.

3. SEBI and RBI propose to allow company auditors to seek directly from banks, requisite
information about the bank accounts and banking arrangements of their clients; the auditors may
then verify the bank statements and fixed deposit certificates held by their client-companies
directly with the banks concerned.

4. Special peer review of the working papers of auditors of a cross-section of Sensex and Nifty
companies by a committee of auditors chosen by SEBI – designed to list out areas where greater
and better disclosures are to be mandated.

5. MCA to consider reduction of number of companies ( of which a person can be director) from
the current 15 to say five or six with a view to tap the reservoir of talent now available for
positions of directors and also to enable the directors to provide more time and attention than
now for each of the companies.

6. Price Waterhouse India (PW)- Satyam’s former auditors- is reported to have set up an
advisory board consisting of eminent persons like Naresh Chandra (former Union Cabinet
Secretary), VK Shunglu ( former CAG) and BB Tandon ( former GoI Secretary & CEC) to help
the audit firm reflect on the voice of external stakeholders in its strategic decision making. The
Advisory Board will focus on four key areas – quality, business strategy, governance and ethics,
leadership development and mentoring.
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7. The episode has raised some fundamental age-old questions for public debate, like “to whom
does a company belong?” “What should be the purpose and role of Independent Directors as well
as Audit Committee? “What further reforms need to be made for improving future corporate
governance?” and the like. Answering these questions in an article published in ET recently,
Sudhakar Ram of Mastek Ltd. said as follows : “A company is governed on behalf of all
stakeholders….It does not belong to anyone…A company is a unique and distinct individual
with its own DNA and destiny. The role of Governance is three fold:
(a) ensuring the long-term health and viability of the company;
(b) stewarding the company to fulfill its potential and to become as great as it can be and
(c) adherence to the highest standards of ethics, statutory compliance and social responsibility”.

8. ICAI is said to be considering a move to empower the Company Auditors. If, in the opinion of
the Company Auditors, mere qualifying their report does not serve the purpose of rendering the
presentation of a ‘true and fair’ view of the audited accounts, the auditors should have the power
to ask the company concerned to restate the Accounts to reflect a ‘true and fair’ state of affairs of
the company and of its working results for the year under review. It goes without saying that, in
such a situation, the resultant delay in holding the AGM and filing of the relevant documents
should ipso facto stand condoned based on the Auditors’ report which should contain the reasons
for seeking restatement of accounts.

Lessons from Satyam - suggestions for reforms

1. Corporate Governance measures -
(a) Revamping the Corporate Governance Code (Clause 49 and others);
(b) Ensuring that the codes are implemented in letter and spirit;
(c) Undertaking a systematic review of company’s quarterly performance on all fronts and across
all stakeholders;
(d) Independent Directors to be made more responsible by entrusting them with powers to take
charge of the judicial role of the Board by adopting a proactive approach by seeking stakeholder
feedback on crucial issues facilitated by external agencies like SEBI. This would include strict
surveillance on matters like protection of company’s long term interest, strict scrutiny of related
party transactions, fixation of reasonable remuneration for working directors, screening private
placements of capital with promoters/ major equity holders, regulating voting rights
appropriately in respect of subjects like inter corporate loans and investments including mergers
and takeovers (especially when promoters, their families and relatives are interested directly),
maintaining proper balance of power within the company at various levels of management
hierarchy, objective evaluation of company’s performance in terms of its vision and mission etc.
The Independent Directors may also be utilized for evaluating and controlling any radical or
disruptive innovations (especially in the IT Sector) which get paraded as great beneficiaries of
the company but oftentimes, and unfortunately, end up as equilibrium shattering or as
sustainability-killers. They should allow widespread debate in the organization to promote only
such innovations as are required for the company to maintain its business leadership by
developing dynamic capabilities to seamlessly reconfigure the assets. Otherwise, greedy persons
may camouflage their greed under the pretext of innovative strategies.
The global economy is already reeling under the catastrophic consequences of such ‘innovations’
in the financial sector. Implementation of corporate governance norms should no more prove a
paradox for the companies and a paradigm for the Regulators.

2. Developing more and more company-specific governance models of corporate governance in

lieu of the current straight-jacket and standard type applicable to all listed companies Clause 49
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would then have to become a guideline, not a mandatory straight-jacket. Companies which
develop their own models of governance – based on Clause 49 and other such codes abroad–
should incorporate the one adopted by them in their company’s Articles of Association so as to
bind the Board, its Committees and others involved. Any violation of such an adopted code will
become ultra-vires Articles with attendant serious consequences including punishment, delisting
etc. The Regulator SEBI may act as an arbitrator for dispute resolution.

3. Maintaining a judicious mix or balance of power in the management of a company this is a

core issue. Effective governance requires equitable distribution of power in any organization.
While, in the case of a State, power is distributed between the legislature, the executive and the
judiciary, in the case of a company it is distributed between the shareholders and the Board
primarily and next between them together and the Lenders, Government Agencies, Regulators
and the Judiciary. In the case of Satyam, there was undue concentration of power with the
founder-promoter and his family quite disproportionate to their shareholding. The Board became
far less independent than required. This can be corrected by choosing the right persons – persons
of character and integrity first and eminent next- as Directors.

4. Risk Management must be assessed and strengthened in all companies of a given asset-size or
other magnitude this is required to provide them with a hedge against uncertain situations. It
should be made mandatory for all listed companies to buy Directors and Officers (D&O) liability
insurance to shield them from the risk of huge liabilities in the event of misleading financial
statements and mismanagement of funds. It also guards companies in case of litigation payments
made on behalf of its directors or officers (in respect of their genuine actions taken in the course
of discharge of their duties and responsibilities). The Companies Bill 2008 has provision for
introduction of Class Action Suits in India, like in the West. Once the Bill gets enacted, it could
expose companies and their directors to expensive litigation. Given the fact that over 500
Independent Directors resigned from various Boards following the Satyam scam, the protection
of a D&O Policy should lure them back. The premium for a D & O policy is quite low, at 0.5%
of the total cover.

5. Audit and assurance quality needs to be disciplined and improved It is reported that Satyam
auditors did not physically verify the Bank Statements provided by the Company with the banks
concerned and that they relied on the statements provided by the cost accountant of the company
and that communication between the auditors and the banks was through the Raju brothers which
is both strange and undesirable. Confirming the veracity of bank statements independently is one
of the basic tests and tenets of audit and any negligence in this regard should be dealt with by the
concerned professional regulatory body first and by the courts next. This process must not only
be transparent but quick and stringent too if it should prove convincing to the public at large who
are the victims of wrong certification or reporting by the professionals.

6. Cost Audit must be made timely and useful to the Government and the investing public apart
from the customers of companies The President of ICWAI has recently urged the Union
Government to make Cost Audit mandatory in a number of situations. To start with, it may be
implemented in all listed companies. Malpractices that escape a statutory financial audit are sure
to be detected by the cost audit radar. The non-existent cash balances and fraudulent invoices
raised in Satyam would have been easily detected by cost audit in time.

7. Organizational and man-power quality control audit should be conducted on the professional
firms that provide assurances to the investing public and others in respect of corporate
documents such as accounts, compliance reports etc.
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These assurance-providers must be subjected to periodic quality control checks or tests by
independent peer-review committees constituted jointly by the professional bodies concerned
and the Regulators like SEBI, IRDA, RBI, and CAG along with nominees of apex Chambers of
Commerce or other such Associations. The professional bodies, on their part, must maintain
adequate proof of conducting their own peer reviews of their members in public practice. They
should maintain a convincing track record of strict professional disciplinary action of their
members in service to defend the professional bodies from any criticism by authorities like
MCA, SEBI etc.
The crisis of confidence facing the audit profession- post Satyam’s sought to be overcome by
supporting MCA and SEBI to have a joint Peer Review conducted on a cross section of listed
companies and the professional firms that provided assurance to public documents of those
companies. Special focus may be kept on those companies where over 500 Independent
Directors have quit the Boards recently. Such fire-fighting exercises should be replaced by
carefully planned and regularly conducted exercises in future. To start with, SEBI should
undertake a Clause-49 audit by competent professionals in respect of randomly selected
companies with their reports being presented directly to the Boards of the respective companies
and copies sent simultaneously to RoC and SEBI.

8.Few other suggestions

(a) Professional assurance-providers like the Chartered Accountants and Company Secretaries
and Cost Accountants in public practice should be empowered suitably to maintain their
independence without fear of loss of opportunities and thus reduce the ‘expectation gap’ between
what the society expects from them and their real-life performance.

(b) Some reasonable safeguards for the existing staff may be enshrined in the management and
control transfer agreement as a measure of fair HR policy. Such safeguards need not be liberal
either since employees must also realize that, in good times when the fraud was in operation,
they did not blow the whistle. The Union Finance Minister may consider a suitable cess on the
corporate sector for providing a suitable corpus Fund, on the lines of the Investors Education &
Protection Fund, to fund the wages & salaries bill of the fraud-hit companies for a maximum
duration of six months during which some measures may have been finalized for putting the
fraud-hit company back on its track or merged with another company.

(c) The Union Government should consider some measures to exempt – on short term or long-
term basis – capital gains in respect of shares sold in the open offer made under takeover
regulations (which is an off-market transaction).In the case of Satyam, domestic shareholders
who sell the Satyam shares (sold in the proposed open offer) Tech Mahindra will have to pay
capital gains tax since it is an off-market transaction. Tax will be charged irrespective of the
period for which shares have been held.

(d) MCA, CLB/NCLT, SEBI should endeavour to cut red tape as has been done in the case of
Satyam, in all other cases both current and future – whether Satyam-like or others where owing
to mismanagement the companies get landed in difficult situations involving take-over, merger
or winding-up. There are thousands of such companies languishing in the labyrinths of MCA,
CLB, BIFR and the Courts all over the country having been affected by fraud, bankruptcy,
mismanagement, oppression of minority shareholders or violation of trade practices and the like.
Justice delayed is often justice denied. Winding up cases are known to take as much as two
decades which is unfortunate as their productive assets remain locked up during the long-drawn
legal battles.

(e) Hefty penalties should be levied under the Companies Act for
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 improper constitution of Listed Companies’ Boards,

 for improper or unwarranted or unjustified delegation of powers by Boards to Chairman,
MD, WTD and others and
 for board meetings held improperly (often with inadequate notice and transaction of
business without quorum, actions taken that are ultra-vires Memorandum and/or Articles
etc).