Satyam_and_Sebi

Mastery Project Conduct a study and prepare detailed notes on developments happening in Satyam computer services ltd. The study must contain information on role of SEBI, fluctuation of share prices of concerned companies, Regulatory affairs and your appraisal of the situation. Satyam Computer Services Ltd : And Introduction Satyam Computer Services Ltd. is headquartered at Hyderabad, India. It was founded by B.Ramalinga Raju in 1987, Satyam meaning "truth" in Sanskrit. It offers a variety of IT services spanning across different industry verticals. Satyam's network spans 55 countries, across six continents. The company employs over 52,865 IT professionals across development centers in India, the United States, the United Kingdom, the United Arab Emirates, Canada, Hungary, Singapore, Malaysia, China, Japan and Australia. It serves over 489 global companies, 156 of which are Fortune 500 corporations. Satyam has strategic technology and marketing alliances with over 50 companies. Apart from Hyderabad, it has development centers in India at Chennai, Bangalore, Pune, Mumbai, Nagpur, Delhi, Kolkata, and Bhubaneswar. Time line for Satyam 1987 - Incorporated as a Private Limited Company 1988-1992 – IPO 1993-1996 - Satyam Technology Center established 1997-2000 - Presence in 30+ Countries 2001-2004 - Founded Satyam BPO 2005-2008 - Acquisition of Bridge Strategy, Citisoft, Knowledge Dynamics, Nitor Solutions, S&V Management Consultants. 30+ Global Solution centers. Post 2008: Satyam was linked in scandal involving Maytas properties and Maytas Infra Limited in 2008 in Ramaraju’s last attempt to cover up the gaps in their balance sheet. A brief introduction about Maytas. Maytas Properties is a property development company founded in 2005. The Ernst & Young is the statutory auditor of Maytas Properties. It is run by Mr. Rama Raju, younger son of Mr. B. Ramalinga Raju. This is a privately held company. Maytas Infra Limited is An infrastructure development, construction and project management company which is listed in stock exchange. Maytas Infra was originally run by Teja Raju, the elder son of Satyam Computer Services founder B Ramalinga Raju. It came under the scanner due to its association with B. Ramalinga Raju. Various agencies, including the state Crime Investigation Department, probed the Maytas affair after B Ramalinga Raju admitted to serious financial fraud in Satyam Computer. Also, there were allegations that funds from Satyam were diverted to Maytas, causing the Government agencies to verify the infrastructure company’s records as well. Maytas Infra later requested for an extension of its quarterly results due to these investigations. In August 2009, IL&FS replaced the B Ramalinga Raju family as promoters of Maytas Infra after the merger between Satyam and Tech Mahindra. Maytas had been floundering for a while. Mr. Ravi Parthasarathy who is the chairman of IL&FS will take over as the chairman of Maytas Infra Ltd. Satyam’s’ Maytas Acquisition attempt In 2008, the Satyam board approved a US$ 1.6 billion acquisition of the Maytas Infra ($300 million) and Maytas Properties ($1.3 billion) controlled by the Raju family. The acquisition attempt was seen as an attempt by the Raju family to exploit Satyam's cash resources, as the transaction would have left Satyam in a debt of around $400m. After protests from the institutional shareholders, the deal was abandoned. 2009 - 07 Jan - Chairman Ramalinga Raju declared that the company’s profits had been overstated for several years. In 2009, B Ramalinga Raju resigned as the Satyam CEO, admitting to an accounting fraud to the tune of 7136 crore rupees. Raju stated that the aborted Maytas deal was actually a last attempt to "fill the fictitious assets with real ones". Satyam had engaged PricewaterhouseCoopers as its auditors over past 10 years. This poses a big question over the credibility of auditors. The Chain of Events as it unfolded Satyam Computer Services founder and Chairman B. Ramalinga Raju backed away from a controversial deal to use company funds to buy two of his firms (Maytas properties and Maytas Infrastructure) .This resulted in investor’s anger and as a result Satyam’s share went down almost a third to their lowest in more than four years(28% decline ). Angry fund managers were asking how founders with a 8.6 percent stake in the firm could unilaterally take the decision to strip it of $1.6 billion. Satyam was barred from business for 8 years with World Bank a week since it backed out from the Maytas deal which had angered the investors. The stock shed a further 13.6 percent to its lowest in more than four-and-a-half years on accounts that India's fourth-largest outsourcer had been declared ineligible for direct contracts with the World Bank from September. World Bank ban would directly impact its earnings. The share price ended at Rs 140.40 in Mumbai market. The stock has lost around 69% of its value this year. 4 independent directors had resigned Satyam’s board due to the previous events. The share rise after the firm promised on actions to improve shareholders value and corporate governance. There was growing speculation in market that some other software majors vying for acquisition of Satyam since it has lost its share value to a 5 year low. Speculation of private equity interest and a management change saw Satyam stock jump as much as 9.5 percent around the same time. On Jan 07 2009 Satyam’s chairman resigns disclosing that profits had been falsely inflated for years. Stocks fell by 80 %. The Auditors PricewaterhouseCoopers mentioned that the auditing was carried out adhering to applicable standards. On Jan 09 Government dissolved the Satyam’s board. Satyam’s stock fell to Rs 11.5 from a 2008 high of Rs 544. Chairman Ramalinga Raju and CFO of the company was arrested on accounts of cheating, forgery and mistrust and brought to questioning by government on SEBI (market regulator’s) mandate. Officials of India’s Registrar of companies searched Satyam's offices and seized papers and electronic documents. After government appointed new board members, new board insisted Satyam to restate the accounts and appoint senior people.KPMG and Deloitte was named for restating the accounts. Government appointed 3 new members to the board and promised no bailout plan. The newly formed board went into discussions with financial institutions for overfunding. Satyam was a target of acquisition by firms like iGATE, L&T, Spice Group (offer to buy 51 % stake) etc. The newly formed board approached SEBI to amend its rules to help Satyam to attract suitors. The rule of SEBI was for a buyer, a stake of 15 percent triggers an automatic offer for another 20 percent at a price not less than the average of the previous six months. I.e. SEBI was requested to relax the open offer rules for Satyam, for e.g. basing the offer price on a shorter period. The fact of the matter behind this was that whoever is going to bid for Satyam will do so only on terms that are favorable to them, whether it is the open offer price or the provision to reduce the from liabilities that may arise from the merger . The change in takeover rules of SEBI would make it easier to Satyam to find a buyer and speed up the process. Certain conditions where posed SEBI • The new directors have plan which provides for transparent, open and competitive process for the continued operation of the company in the interest of all stakeholders and does not favor a particular acquirer. • The competitive process is reasonable and fair. • The process to provide for details on timing and completion of the public offer, and the manner in which the change of control would take place. SEBI also said it would not allow further competitive bids once an acquirer makes a public offer under the relaxed rules. By March 2009, SEBI gave approval to Satyam to sell 51% stake in itself to potential suitors. As a result stock grew 19.9 % at Rs 42.1, boosting the company’s market value to $550 million. After relaxation of SEBI’s rules as mentioned above, there were at least 8 to 10 bids on acquiring Satyam. The primary concern of the buyers was the valuations of the company due to uncertainty in its accounts and liabilities. Satyam changed its bidding process to include a second round open auction to find new owner. If there were bids that were at least 90 percent of the highest offer, then there would be an open auction among those bidders, with the highest bid set as the floor price. The price was about the current market value of $530 million (which had slid from about $7 billion last May). The current bidders were L&T, Tech Mahindra, and U.S. private equity WL Ross & Co and others. In the Bidding that ensued, Tech Mahindra (Midsized - tech outsourcing company) won the bid over L&T and WL Ross . Tech Mahindra agreed to pay more than $550 Million to get a 51 % controlling stake in Satyam.Tech Mahindra is a 31 percent owned by Britain’s British Telecom (BT) head quartered at Mumbai and is a unit of tractor and utility vehicle maker Mahindra & Mahindra. Assets Tech Mahindra will gain from acquiring Satyam include: A large client base including Fortune 500 organizations, many of whom have been very satisfied with the quality of services provided Land assets and premises, with large campuses in Tier 1 cities About 43,000 employees globally. The uncertainties facing Tech Mahindra include: Satyam's financial situation: its accounts are in the process of being restated. In his letter of resignation in January, B Ramalinga Raju stated that in its fiscal quarter ended September 30, 2008 the balance sheet carried inflated cash and bank balances of c. $1Bn, revenues were exaggerated by 22% and the reported 24% operating was nearer to 3% The extent of legal liabilities arising from class action lawsuits by U.S. investors and a law case with Unpaid from 2007 the extent to which Satyam's clients will remain loyal to the new entity. In addition to these, Tech Mahindra faces a number of major challenges. It will be acquiring a company: With much larger operations globally (comparing employee numbers only, TM's headcount at end 20008 was 25,429) whose capabilities are far broader than Tech Mahindra’s own background of providing telecoms sector-specific IT services' Where some major clients have transferred work to competitors. The bid was approved by the Company Law Board. The Take over process was completed by June 2009. Tech Mahindra offered to buy 199 million shares at Rs 58 each which is$351 million for 31 % stake and a fully subscribed open offer would take its stake in Satyam to 51 percent. After this acquisition, steps were taken to control costs and deal with 10,000 excess staff of Satyam. And the company was renamed as Mahindra Satyam. Tech Mahindra stock price gradually from Rs 210 to Rs 971 from Jan to Till date after the acquisition. Satyam released figures on June showing it stayed profitable even after being hit by India's biggest corporate scandal, sending its shares and those of its new parent ( Tech Mahindra )surging.But an element of uncertainty is till surrounding around it pending liabilities and absence of its complete audited statements. But as of now its encouraging to see that even during economic slowdown a company like Satyam did not close down impacting its 50,000 employees , clients and crores of investor’s money due to appropriate government intervention and relaxation of rules speeding up the bidding acquisition process of the software major. Appraisal of the Situation: Security and Exchange Board of India (SEBI ) and other regulators such as Insurance Regulatory Development Authority (IRDA) needs to be put under scrutiny of the Comptroller and Auditor General (CAG) for their failure to detect and warn of irregularities in corporate governance as discovered in Satyam Computers. It seems that SEBI had been maintaining funds outside government accounts. And after the Satyam fiasco SEBI lost a lot of money (running into hundreds of crores).T he CAG, has suggested that the money held outside government account by regulators like SEBI should be credited to the government account. The Entire episode is a black mark on Indian industry. The trust of clients and foreign investors were at stake when this happened. This also shows poor corporate governance on part of Satyam and lack of transparency in its business and accounting practices. This shows that there are environmental influences of corporate governances should be taken seriously. If one of the top 5 companies in India is under the spot light for malpractice, imagine how many other listed companies and other non listed companies in India would be already doing malpractices. This will impact the confidence of clients in engaging with business with Indian companies. Corporate Governance is combinations of the fundamental value systems of those who promote and run the organization. So if the values are flawed, it is only a matter of time that this will come out in the open. The Auditors, Regulators, Role of Management, Board of directors, Government t policies and business environment, Problems of Legislating Value Systems, Environmental Influence and cultural influences on Indian Companies Corporate governance needs to be relooked at .Fraud is a trade mark of human race. As long as our race exists, greed exits there will be fraud. What matters is how we deal with it and carry on with the learning’s from it.