Satyam Saga
India’s $60 billion IT industry has been the country pride over the years. IT exports touch $50 billion annually and the sector now contributes approximately 6 per cent of GDP. IT creates 10 million jobs (2 million direct and 8 million indirect). India’s IT companies have been icons of corporate governance, being data driven which is IT forte. In 2002, the then Japanese prime minister on a visit to Bangalore remarked that India was already a developed country if progress in IT is any indication. However, while addressing an Economic Times awards function for corporate excellence in 2009, Prime Minister of India remarked that the Satyam episode involving unethical corporate behaviour is a blot on the country’s corporate image.
Problems relating to Satyam Computer Services came to light when the company board approved a proposal on December 16, 2008 board to invest the shareholders money in acquiring two firms, Maytas Properties and Maytas Infrastructure, in which its part ownership belonged to the former Satyam chairman, Ramalinga Raju. Shareholders were upset with this decision that the Satyam board acted without authorization by minority shareholders in arbitrary fashion prejudicial to their interests.
An IT firm can adopt one of the two approaches for cost accounting of the services rendered, nomination (cost plus) or lump-sum (fixed cost) basis with minimum fixed costs determined on the basis of competitive bidding. In nomination basis, revenue for a project is billed on the basis on man-hours booked, and in case of lump-sum or ‘fixed price contracts’ revenue earned till a particular period is determined on the basis of project completed. Lump-sum approach can be equally rewarding if everything is done efficiently with proper account keeping.
In a manufacturing company, products made are tangible, which can be easily verified/ audited as compared to diverse nature of services rendered by an IT company. Furthermore, a tangible product undergoes several external checks such as excise duty, value-added tax, etc. posing fewer problems for reconciliation. Unlike a manufacturing company, an IT company for the services rendered by it need not pay taxes in several areas such as service tax for exports, etc. As much as 45 per cent of Satyam revenues have been typically coming from enterprise business solutions and package implementation services, which usually offer higher margins.
The proposed aborted deal was soon after withdrawn in wake of shareholders objection. Subsequent confession by the company chairman on January 7 about manipulation of the Satyam accounts over the past several years led to significant downslide in the share price from the moment (December 16, 2008) Satyam-Maytas deal was announced. The stock price crashed by 80 per cent the day (January 7, 2009) the manipulation in accounts was confessed by the then chairman. Satyam’s shares fell sharply from Rs. 544 on Bombay Stock Exchange on May 30, 2008 to Rs. 225.4 on December 15, to Rs. 148 on December 29, 2008, to Rs. 39.95 on January 7, 2008.
This proposed deal which evoked countrywide hue and cry against the promoters was in fact a very desperate attempt by the promoters led by the company chairman, Mr. Raju, to fill the fictitious assets of Satyam with real assets of Maytas Properties and Maytas Infrastructure. Maytas’ investors were convinced that this was a good divestment opportunity and a strategic fit. According to Mr. Raju’s statement on January 7, “we wanted to show more income in the account to avoid others from being involved in the company affairs and any other possible take-over situation, and hence manipulated the balance sheet to attract more business and show unavailable amount as available cash in hand”.
While Maytas Properties is a realty company with ownership of land bank of over 6800 acres, Maytas Infrastructure deals with road, metro, ports, airports and power projects, holding an order book of around Rs. 11,000 crore and Rs. 12,000 metro project. The management of the two companies is controlled and run by Mr. Raju’s two sons. While Maytas Properies is headed by Mr.B. Rama Raju, Mr. Raju’s younger son, his elder son Teja Raju controls Maytas Infrastructure.
Records show fictitious accruals remained on the books of Satyam Computer Services for years. The company’s balance sheet showed reserves and surplus of Rs. 2517 crore in March 2004, which rose to Rs.7221 crore by March 2008. The baffling aspect was how a cash reserve of Rs. 5040 crore on its balance sheet remained without detection that was certified to be correct by its audit firm – Price Waterhouse. Mr. Raju in vide his letter of January 7 admitted that as on September 30, 2008, the balance sheet of the company inflated cash and bank balances of Rs. 5040 crore against a sum of Rs. 5361 crore reflected in the books; accrued interest to the tune of Rs. 376 crore that is non-existent; understated liabilities to the extent of Rs. 1230 crore on accounts of funds arranged by Mr. Raju by pledging all promoter shares; and overstated the debtors position of Rs. 490 crores (The Financial Express, January 8, 2009).
Between 2003 and 2008, the fee charged by the Price Waterhouse (PwC) had increased three times though other IT companies did not increase payments to auditors to the same degree. PwC received a consolidated audit fee of Rs. 4.3 crore for the financial year 2007-08 – almost twice as much as what other IT majors – TCS, Infosys and Wipro, pay to their auditors. For the fiscal 2007-08, Infosys, Wipro and TCS paid a total auditor fee of Rs. 1.53 crore, 2.8 crore and Rs. 2.77 crores, respectively, as against 3.73 crores paid by Satyam. Auditor fee depends generally on the complexity of task on hand, number of countries where the company is listed. All IT majors including Satyam are listed in oversees markets that requires compliance with the international accounting practices.
In the quarter ending September 2008, the company operating profits were inflated by a fictional sum of Rs. 588 crore (amounting to 22 per cent of reported revenues and 90 per cent of operating profits) for the quarter ending September 2009. Number of clients was unduly large at 690 at the quarter ending September 2009. This is much higher than Infosys, despite Satyam being half the size in revenue terms. The anomaly could be attributed to a large number of reported small clients, which Satyam has, who are billed over $100 million a year. World Bank’s banning for award of any more jobs to Satyam was a case in point of clients’ poor assessment of the company’s record in this respect.
Based on shareholding pattern on BSE, well-known financial institutions that held Satyam’s stock as on September 30, 2008 included Aberdeen Asset Management, Fidelty, ICICI Prudential, Lazard Asset Management, LIC, JP Morgan, AMC Europe, Government of Singapore, Morgan Stanley Mauritius, Citigroup Global Markets Mauritius, Swiss Finance, etc, ,. Satyam’s main bankers during the Mr. Raju’s time have been ICICI Bank, Bank of Baroda, BNP Paribas, Citibank, HDFC Bank and HSBC.
In the board meeting held on December 16, 2008, four senior company functionaries of Satyam, played major role in convincing the board of directors about the deal. These were Mr. Vadlamani Srinivasan (CFO); Mr. Ram Myanpati (wholetime director); Mr. Srinivas Satti, incharge of mergers and acquisitions; and Mr. G. Jayaraman, company secretary and incharge corporate governance. Concerns were raised by some board members including independent directors but perhaps not strong enough to stop the deal from taking the shape. Raju brothers excused themselves from the deal on the ground that they were interested parties (The Times of India, How Board Cleared Maytas Deal, January 20, 2009).
Several directors though some with reservations had eventually and reportedly agreed to merge the real estate and infrastructure firms with Satyam Computer Services on the ground that margins in the real estate and infrastructure business were higher than software business, and the former is growing at much faster pace than later. In fact, Dr. Rammohan Rao, eminent ISB faculty, had chaired the meeting, which cleared the merger. Dr. M. Ramohan Rao raised apprehensions that acquisition might lead to dilution of the core competence but was later reportedly agreeable that the core competence of Satyam in IT would not be diluted following acquisition of the infrastructure firms. Mr. T.R.Prasad, a former civil servant and one of the independent directors on the board (The Economic Times, January 8, 2009), observed that ‘the independent directors were kept in dark and we had trusted the company auditors.’
Decision to use its $1.6 billion in cash to finance the purchase of two realty firms controlled by its promoters led to resignations by independent directors one after another, who are very eminent persons in their respective fields. Ms. Mangalam Srinivasan, a US based independent director on the board of Satyam since 1992 resigned on December 26, followed by Dr. Krishna Pelepu, Professor of Business Administration at Harvard Business School, Dr. M. Rammohan Rao, ISB, Hyderabad and finally on December 29 by Mr. Vinod Dham, father of the Pentium chip for leading Intel’s Pentium team in the early 1990s.
Ms. Mangal Srinivasan, was the first independent director to quit after the meeting, who had reportedly raised some queries about the proposed merger relating to both internal and external environment and its timing. She also wanted the board to be fully involved in the process from the very beginning to ‘avoid the impression that the board is used as rubber stamp to affirm the consequent or decisions already reached.’ She was visibly not satisfied with the explanation offered by the top company functionaries that the IT segment was showing downturn and de-risking by linking with growing infrastructure sector would be a sound stategy. (The Times of India, How Board Cleared Maytas Deal, January 20, 2009).
Even as Mr.Vinod Dham through video-conferencing asserted that it was important to demonstrate that the acquisition would indeed benefit the shareholders because it was a related party transaction. Dr. Krishna Pelepu voiced concern that the acquisition move could invite shareholders displeasure, and that in view of both unrelated diversification and related party transactions, it was necessary to make convincing presentation before shareholders as well, in the same manner it was made to the company board (The Times of India, How Board Cleared Maytas Deal, January 20, 2009).
Satyam’s job profile is considerably similar to other major IT companies including onsite-offshore mix but claims that it maintains high resource utilization as compared to other peer IT companies. Accordingly, Satyam’s performance parameters should be more or less in the same range as other IT companies. Given parity in operations as with other IT companies, Satyam should be reporting over 20 per cent of operating margins at par with other IT majors as against 3 per cent profit margin reported vide its September ending quarterly report.
PwC in a statement observed that the accounts of Satyam can no longer be relied upon, which the firm had audited between 2000 to 2008 as Mr. Raju himself accepted that he had been overstating the revenue and profits of the company for several years for reasons given by him. Satyam scam is not the first case of corporate fraud – Enron Corporation, Global Trust Bank, DSQ Software, and now Satyam Computers are all cases in point.
Satyam was having huge workforce of 53000 employees involving payment of substantially large wage bill. When the world was faced with economic turmoil, it was initially doubtful if some company would be interested in takeover of such a large company with enormous financial burden but its subsequent takeover cleared all such doubts. When a company like Satyam fails, it is the employees who are worst hit. In the event of such company declaring bankruptcy, employees for their salary dues are on a par with a company’s creditors in the order of those who have a right to the company’s assets. Even these dues may be settled on a proportionate basis, if the cash realized from selling assets is insufficient. When funds are scarce, variable pay components such as bonus/incentive that were earlier promised may be the first causality. Employees might even miss compensation for the job loss.
As per a Company Law Board provisions, GOI can appoint up to 10 directors on the board of an enterprise in the event of salvaging an organization when it is in the midst of a crisis situation. GOI on January 11, 2008 intervened by appointing Mr. Deepak Parekh, HDFC Chairman, Mr. Kiran Karnik, former Nasscom President, and Mr. C. Achutan, a legal expert, a former SEBI member, and former member of the Securities Appellate Tribunal, to steer tainted software giant Satyam Computer Services out of the present crisis. On January 15, 2009, GOI inducted three more directors on the Satyam board comprising Mr. Tarun Das, CII Chief Mentor; Mr. T.N.Manoharan, former president of Institute of Charted Accountants of India (ICAI), and Mr. Suryakant Balakrishna Mainak, LIC representative. The board has been given free hand to restore company’s credibility and working as a profitable organization, revive customer confidence and enhance employees’ morale, and safeguard stakeholders’ interest.
In past in 2001, it was Enron, a leading energy and a futures trading company in the US that was embroiled in a scam for fraudulent disclosures and accounting. Following declaration of its bankruptcy in 2001, thousands of employees lost their jobs. For Enron employees, it was not mere job loss, but also loss of future security as the company had invested 62 per cent of the retirement corpus in its own stock in the market. In situations, when the company turns bankrupt, one loses not only a job but a good portion of his wealth. It is therefore sensible that husband and wife work in different companies, so that if one company fails income of other spouse remains unaffected.
While in the midst of financial difficulties in ordinary course, a business firm can turnaround with relative ease, but in situations of corporate fraud, task becomes much more daunting following a sharp erosion in brand image, a hit on order book position, and capable employees tending to leave the organization though securing alternative employment may not be easy when the company image is tarnished.
Initially, bankruptcy began primarily as relief for investors but later on it was also viewed as a remedy for minimizing employees financial distress also. In the event of bankruptcy, amount realized from liquidation of assets will determine whether employees can be made full or partial payment of their dues. In an IT company, fixed assets such as land, plant and machinery or facilities do not constitute the large potion of the balance sheet. Sale of physical assets may not be sufficient to clear dues of all employees, particularly when workforce is huge as in the case of Satyam.
On January 16, the new interim board on set-up a three member audit committee, appointing an internal auditor, legal advisors but left the appointment of CEO and CFO to the government. All efforts were made by the revamped new board to ensure that the employees were paid their salary on time. The new board met before its acquisition met on weekly basis to address ongoing issues. The new board announced three member audit committee comprising Mr. T.N.Manoharan (Chairman), Mr. C. Achutan and Mr. S.B. Mainak as members. It also appointed Brahmaya & Co, Charted Accountants, Chennai, as internal auditors with immediate effect. Amarchand & Mangaldas, and Suresh A. Shroff & Co have been named as legal advisors to the board.
Satyam’s new board following scam detection on January 14, 2009 appointed two global auditing majors KPMG and Deloitte to restate the account and assess the financial condition of the company, though this decision remains yet to be ratified in the next general body meeting of the shareholders. The immediate job of the firms was to assess the status of receivables and liability in the next three months, with a view to enable Satyam secure working capital from banks. Initially, the new board was more concerned for maintaining confidentiality of client data, particularly of firms based in US (Company’s 62 per cent of all business comes from the US), given confidential nature of business transactions, processes and data they deal with globally.
There were some silver linings in Satyam fiasco before acquisition such as the firm had a healthy receivable of Rs.1700 crores in January (2009) which were expected to come out on time which would ease out problem of huge salary payment to employees from running income. According to Mr. Deepak Parekh, then interim board chairman who along with the other reconstituted board members kept the revival roadmap ready, if receivables and expected loans from financial institutions came on time, the company could minimize present difficulties, without demanding a bailout from the government. The company can also raise funds by mortgaging its assets. However, for a better cushion, the company is on look out for ‘strategic investors’ as part of its blueprint to revive the company on sustained basis.
Ministry of Corporate Affairs, GOI, acted as a facilitator though all the decisions were taken by the board, including the appointment of CEO and CFO. Board was free to select CEO and CFO, from within to fill the positions following exit of Mr. B.Rama Raju (former CEO) and Mr. V.Srinivas (former CFO). Till such time a Chairman was appointed in line with the provisions of the Company Law Board, it was decided that one of the members of the board will chair the meeting by rotation.
Multiple agencies have been involved in the investigation process including the Criminal Investigation Department (CID) of the Andhra Pradesh Police, Securities and Exchange Board of India (SEBI), Serious Fraud Investigation Office (SFIO), Enforcement Directorate (ED), Income Tax authorities, Institute of Chartered Accountants of India, and CBI – and that the investigations had to be started afresh after CBI took over from the CID on February 18, 2009 on a state government request. On October 12, 2009, Government of India, set up an inter-departmental committee to monitor the progress of investigations being carried out by multiple agencies, with representatives from Ministry of Corporate Affairs, CBI, and ED. SFIO was first to submit its report in April, 2009, with regard to diversion of funds by its former chairman and the second report with more revelations is expected soon. Once the investigation process is over, legal process will begin (The Economic Times, October 15, 2009).
In June 2009, the beleaguered Satyam Computer Services was acquired by Tech Mahindra and the Company became Mahindra Satyam. In the aftermath of the Satyam scam, Maytas lost several projects, including the prestigious Rs. 12,132 crore Hyderabad Metro Rail Project in July, 2009. Maytas Infrastructure achieved a turnover of Rs. 490 crores during 2008-09 as against 1637 crores during 2007-08. In September 2009, Maytas Infrastructure was taken over by Infrastructure Leasing and Financial Services to provide both liquidity and direction to the acquired firm, which controls 37 per cent of the equity in the company. Share price of Maytas Infrastructure declined from Rs. 485 on December 16, 2009 to Rs. 31 in March 2009.
A business failure can also make a company vulnerable to takeover or acquisition. This precisely happened in the Satyam case when the company later on became Mahindra Satyam. In the event of company takeovers, employees’ layoffs are quite common, especially when the acquiring firm is fairly knowledgeable about its business. Apart from layoffs, employees of the acquired company, who continue in the merged company, may not be treated with the same fairness as those of the acquiring firms.
It will be incorrect to infer that the Satyam Computer Services only indulged in unethical practices. In fact, it is credited with some very commendable work done in CSR area. EMRI (Emergency Medicine and Research Institute) is a comprehensive emergency response ambulance service provider, which was largely set up with the initiative of former Satyam Chairman, Ramalinga Raju. Initially, the service was provided in Andhra Pradesh, but gradually it was extended to other states such as Gujarat, Uttarkhand, Goa and Meghalaya. Plans are underway to extend the facility to other states comprising Rajasthan, Karnataka, Assam, Madhya Pradesh, and Tamil Nadu.
In fact, EMRI has grown into an organization with significant workforce of over 12000 employees located in different states but with greater concentration in Andhra Pradesh, Gujarat, Uttarkhand where the scheme is fully operational. EMRI plans to increase its fleet to 4000 ambulances in 11 states eventually, which is planned to go up to 10000 in by 2010.
EMRI in Gujarat handles about 2000 emergencies a day. The emergency medical service is absolutely free and the ambulances take patients only to hospitals, which have signed an MOU with EMRI for receiving patients and handling emergencies. Cost of an ambulance varies from Rs. 10 lakh to Rs. 16 lakh depending on whether the ambulance is equipped with Basic Life Support (BLS) or Advanced Life Support (ALS) equipment.
When there is a medical emergency in a village, the villagers call 108, which is a toll free number. The call center directs the nearest ambulance to reach the village. It has an Automatic Vehicle Location and Tracking System (AVLTS). The call centre physician decides whether to dispatch a BLS or an ALS to site. On reaching the site, the ambulance crew gets down to their task. Whenever necessary, the EMT calls the call centre, gets on line with a doctor and seeks his advice. He also arranges a conference call of a friend or relative of the patient with the doctor, so that everybody is in loop with regard to the nature of the emergency and the course of treatment suggested by the doctor.
The running cost for the fleet in Gujarat is around Rs. 60 crore a year based on running cost expenditure norm of Rs. 1.25 lakh per ambulance per month. BLS ambulances have oxygen cylinders, suction pumps, cervical collars for immobilization of the patient, drips and measuring instruments to analyze oxygen level in the blood, blood sugar, etc. In Gujarat in 2008 EMRI handled 4.25 lakh cases, out of which 1.21 lakh cases related to pregnant women, who were required to be rushed to the hospital.
EMRI is functioning in partnership with several agencies. There is provision under the National Rural Health Mission (NHRM) for financing such schemes, for which the states are availing this option. In Andhra Pradesh, EMRI is linked with Arrogyasri, the health insurance scheme. EMRI is currently functioning in value chain partnership with Piramal Healthcare, which also provides R&D support (The Times of India, Hyderabad, May 21, 2009).
EMRI ambulance is well-equipped with several emergency facilities. It has disposable syringes and anti-snake venom, and equipment to deal with emergencies like drowning and poisoning.
Ambulance crew is provided with digital camera for obtaining photographic evidence in medico-legal cases. This information is often required to be passed on to police. All calls to the crew and from them are recorded and made available in medico-legal cases to investigators and courts.
ALS ambulances on the other hand have ventilators and defibrillators fitted to it. They can take an ECG and transmit the same to the call centre where physicians work round the clock and advise the Emergency Medical Technician (EMT) in the hospital on pre-hospitalization medication to be given to the patient. Medical opinion of the doctor in call centre and the patient’s ECG are dispatched to the hospital in advance so that treatment and procedures can begin soon after on arrival.
Ambulances are serviced regularly and the tyres changed after the mandatory mileage. EMRI has helped bring down Infant Mortality Rate (IMR) and Maternal Mortality Rate (MMR) in Gujarat where this facility is linked with the Janani Suraksha Yojana (JSY), which incentivizes expectant mothers to deliver their babies in civil hospitals or primary health centers.
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