The Satyam scam, which emerged in 2009, is often regarded as ‘India’s Enron’ and stands as a stark reminder of the potential for corporate malfeasance. This scandal not only shook the Indian business landscape but also had far-reaching implications for corporate governance and accounting practices worldwide.
This scam was one of the largest in this growing economy. According to estimates, it was worth $1.5 billion.
How did the scam come to light? What happened to its perpetrators? And what steps did the Indian government take after the scam? In this article, we’ll answer all these questions.
Here’s what we will cover:
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The genesis
Satyam Computer Services Ltd. was founded in 1987 and became a rising star in the Indian IT sector. By the early 2000s, it had become India’s fourth-largest software services firm, boasting clients from the Fortune 500 list and operations in over 60 countries.
The company’s success story was unique, and at that time, it was understood that the company, headed by Mr. Ramalinga Raju, its CEO, had seemingly impeccable financial health.
The revelation
The facade began to crumble in late 2008 when Satyam’s founder, Byrraju Ramalinga Raju, attempted to divert funds from the company to acquire Maytas Infra and Maytas Properties, real estate firms owned by his sons.
The move was met with intense shareholder backlash and marked the beginning of the end of Satyam’s fraudulent practices.
On January 7, 2009, Raju confessed in a letter to the Securities and Exchange Board of India (SEBI) and the company’s board of directors that Satyam’s profits had been overstated for years. He admitted to inflating the cash and bank balances of the company by about Rs. 7,000 crores, equivalent to nearly $1.5 billion at that time.
Mr. Raju also took out a salary of about $3 million per month in the name of employees who never existed.
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The mechanics of the scam
Here’s how the fraud was orchestrated for many years without anyone noticing: It began in 1999 when Mr Raju started small inflation in the company’s quarterly profits.
The CEO also stored the company’s accounts and meeting minutes digitally. In the last years (2008-2009), they were stored on a computer server named ‘My Home Hub’.
He stored the fake invoices which he used to generate from his PC on two separate IP addresses. A secret program was also planted in the company’s invoice management system. This program created a super user ID that anyone can easily use to change invoices.
Furthermore, Raju created an intricate web of more than 300 companies to divert funds from the main company, Satyam. These companies engaged in investment and business among themselves to further layer the money. The companies also advanced loans and gave interest to each other to confuse the government.
But how did all this happen for so long? You may ask this question, and it deserves merit. Were there no regulators and auditors who saw through the web of lies? The answer is yes. There were auditors from PricewaterhouseCoopers (PwC), a respected firm, but they failed to detect the fraud. Later investigations by SEBI found that the auditors were complicit in the scam.
The United States Securities and Exchange Commission (SEC) fined the Indian arm of PwC $6 million. Later, the SEBI barred PwC from auditing listed companies in India for two years starting in 2018.
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The aftermath
After this massive scandal broke out, the Hyderabad housing markets collapsed. Hyderabad was Satyam’s headquarters and suffered the maximum damage.
As expected, the company’s stocks fell by over 80%, and Raju resigned. “It was like riding a tiger, not knowing how to get off without being eaten,” he wrote in his resignation.
Raju also insisted that no other board member was involved or knew about the impending doom. After the scandal, Merill Lynch terminated all business and deals with Satyam.
Later, the Income Tax department, which has been investigating Raju since 2002, found out that he had opened multiple benami accounts under the name of his relatives and friends.
The Government of Andhra sprung into action and attached several properties of the Raju family and promoters.
Raju suffered a heart attack and was admitted to the hospital. Citing the health, the lawyers argued for the lower court to grant him bail, to which the court obliged. However, the Supreme Court of India rejected the bail and ordered Raju to surrender. Meanwhile, the Central Bureau of Investigation (CBI) started their own probe into the matter.
However, the CBI failed to file charges within 90 days, and Raju was released on bail in 2011. In 2013, the Enforcement Directorate (ED) filed a chargesheet against Raju and 212 others.
The matter was fought, and eventually, in 2015, Raju and his brothers were sentenced to seven years in prison and fined Rs. 5.5 crore. Ultimately, they were later granted bail by the metropolitan sessions court in Hyderabad.
After the initial merger in 2009, Mahindra Tech completely took over Satyam Computers in 2013. Erstwhile Satyam Computers is now divided into three units at Mahindra Tech: Telecom, Enterprise, and Business Process Outsourcing (BPO).
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