GLG 101 Lecture Notes - Byrraju Ramalinga Raju, Satyam Scandal, Raju
Assignment 3.1.1
Case Study: “Governance Failure at Satyam”
Introduction:
Satyam Computer Services Limited was founded in 1087 by B. Ramalinga Raju
and his brother B. Rama Raju. Ramalinga Raju was the Chairman of the Board and a
software entrepreneur. Despite Ramalinga Raju genius global technology, he will
ultimately be remembered for the biggest corporate fraud in India. What is ironic is that
Satyam means “truth” in the English language. It is apparent that in spite of what the
name means this did not transcend into the business practices nor the business ethics at
this company.
In the beginning years of the company’s existence things appeared fine and
growth continued. Satyam went from being a privately owned company to being publicly
traded. It also obtained ISO9001 certification along with other awards which later was
striped due to the scandal. In 2008, Satyam employed approximately 53,000 IT
professionals in over 67 countries. It also stated that the company’s revenue was 2.1
billion dollars.
1. Discuss the circumstances under which Satyam’s fraud was exposed. What do you
think were the reasons for the fraud?
World Bank was a big client for Satyam for a few years before the scandal broke.
World Bank alleged that two employees of Satyam broke into World Bank’s system and
gained access to privileged information. In addition to that there was alleged bribery of
bank staff. Satyam never admitted or denied any wrong doing; however, World Bank
stopped all business with Satyam. Another client by the name of Upaid also alleged that
Satyam committed fraud and forgery. Upaid made a claim in the amount of one billion
dollars.
Ramalinga Raju and his brother Rama Raju had two sets of books as do many
individuals who are defrauding the system. “Ramalinga admits that he and his brother
inflated revenue and the receivables. Also there were artificial head counts and inflation
of expenditure cash.” (https://xa.yimg.com) Raju’s reasoning for overstating the profits
was to maintain the share price level and prevent a hostile take over. (Ajai S. Gaur and
Nisha Kohli)
Over the years Raju’s ownership of Satyam went from 20.74% to 8.74%. In
Raju’s resignation letter he stated “that the company’s balance sheet for the quarter
ending September 30, 2007 included inflated cash and bank balances of up to $1.44
billion, understated liabilities worth $300 million and non-existent accrued income of $86
million.” (Journal of Forensic & Investigative Accounting, pg 145).
The unfolding of this scandal began December 16, 2008. “The board approved a
51% stake acquisition of Maytas Infra, a listed company in the Bombay Stock Exchange
for US $1.3 billion and a 100% stake in the unlisted firm Maytas Properties for US $300
million” (Ravi Kant). The issue here is that Raju’s hands were not clean is the deal. His
friends and immediate family held more than one third of Maytas Infra and Maytas
Properties. When the board questioned him about this venture he justified the decision
but what he did not anticipate was that Satyam’s stock dropped dramatically. Ultimately
Raju brought Satyam down to its knees. The investors of Satyam forced Raju’s hands and
he resigned. When World Bank came out publicly stating than the ties with Satyam were
broken, Satyam stock dropped again. However, Raju was not alone in resigning - the
following resigned as well:
Mangalan Srinivasan (US Academician)
Vinod K. Dham (father of Pentium & ex employee of Intel)
M. Rammohan Rao (Dean of renowned Indian School of Business)
Kristna Palepu (Professor at Harvard Business School)
2. Critically evaluate the control environment that was in place at Satyam. In your
