Page 103 - DCAP307_PLANNING_AND_MANAGING_IT_INFRASTRUCTURE

Unit 5: Corporate Governance and IT

1. An accrued interest of 3.76 billion rupees which is non-existent. Notes
2. An understated liability of 12.30 billion rupees on account of funds arranged by me.
3. An overstated debtors’ position of 4.90 billion rupees (as against 26.51 billion reflected
in the books).
4. For the September quarter reported a revenue of 27.00 billion rupees and an operating
margin of 6.49 billion rupees (24 pct of revenues) as against the actual revenues of
21.12 billion rupees and an actual operating margin of 610 million rupees (3 percent
of revenues).

This has resulted in artificial cash and bank balances going up by 5.88 billion rupees in
quarter-II alone.
The gap in the Balance Sheet has arisen purely on account of inflated profits over a period
of last several years (limited only to Satyam standalone, books of subsidiaries reflecting
true performance). What started as a marginal gap between actual operating profit and the
one reflected in the books of accounts continued to grow over the years. It has attained
unmanageable proportions as the size of company operations grew significantly
(annualized revenue run rate of 112.76 billion rupees in the September quarter, 2008, and
official reserves of 83.92 billion rupees). The differential in the real profits and the one
reflected in the books was further accentuated by the fact that the company had to carry
additional resources and assets to justify higher level of operations thereby significantly
increasing the costs. Every attempt made to eliminate the gap failed. As the promoters
held a small percentage of equity, the concern was that poor performance would result in
a takeover, thereby exposing the gap. It was like riding a tiger, not knowing how to get off
without being eaten. (Excerpt from the resignation letter of B. Ramalinga Raju (Chairman
of Satyam Computer Services of India) released by the Bombay Stock Exchange on
7 January 2009).

As Mr. B. Ramalinga Raju, Chairman and founder of Satyam Computer Services resigned
after confessing to falsifying accounting records and inflating accounting profits, Satyam
shares plummeted 77.69% on the Mumbai Stock Exchange. Analysts and journalists were
quick to draw similarities between Enron and Satyam - India’s 4th largest software
consultancy, system integration and outsourcing firm, listed on the New York Stock
Exchange, with network operations in 66 countries across six continents, employing over
50,000 IT professionals and serving over 654 global companies including a large number
of Fortune 500 companies. Satyam, the 2008 winner of the coveted Golden Peacock Award
for Corporate Governance have faced government and stakeholder’s pressure ever since
its plan to acquire two infrastructure companies owned by Mr. Ramalinga Raju’s sons –
Maytas infrastructure and Maytas properties for $1.6 billion was rejected by investors last
December. The failed acquisition plan resulted in panic selling by investors causing loss
worth millions to investors in India. In the New York Stock Exchange, Satyam’s share
price plunged by 55%. Mr. Raju in his resignation statement confessed that the acquisition
plan was “the last attempt to fill fictitious assets with the real ones.” When it failed Mr.
Raju had no other option but to resign taking entire responsibility for the accounting
fraud but hoping that the company would bounce back. Analysts however have expressed
scepticism at Satyam’s ability to bounce back. “Satyam was always seen as one of the top
Indian IT companies and often represented as shining example of Indian liberalisations
and entrepreneurship.
1. In spite of several provisions in Indian constitution and many clauses under UN,
still corporate governance is a contemporary issue not only in India but all around
the world.
Contd....

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