Satyam’s chairman is arrested, entire board sacked

Satyam’s chairman is arrested, entire board sacked

Within a week of admitting that he falsified company accounts – exaggerating cash reserves by around $1 billion – chairman & CEO Ramalinga Raju and his brother, former managing director Rama Raju, were arrested on charges including criminal conspiracy, breach of trust and forgery.

India's Ministry of Corporate Affairs has appointed three businessmen to a newly formed board of directors for the company:

  • Deepak Parekh, chairman of Housing Development Finance Corporation (HDFC)
  • Kiran Karnik, former president of NASSCOM
  • C. Achuthan, director at the National Stock Exchange, former member of Securities & Exchange Board (SEBI) of India and former chairman of the Securities Appellate Tribunal

On Wednesday last week, Ramalinga Raju admitted to what may well be India's biggest ever corporate fraud – the overstatement of both profits and the amount of money owed to the company. This fraudulent inflation of figures occurred over a period of several years, although Raju insists that he personally never benefited financially from the fraud.

Two days later the Raju brothers were arrested. Satyam also confirmed that chief financial officer Srinivas Vadlamani had submitted his resignation.

Although Raju said no other directors were aware of his fraudulent activities, a number of analysts have suggested that there's no way he could have worked alone – someone must have been in cahoots with him.

Which raises questions as to the reasons behind the resignations of two independent directors, Prof. Mendu Rammohan Rao and Dr. Mangalam Srinivasan, in December.

Furthermore, analysts point out that PricewaterhouseCoopers could find itself fighting off investors determined to sue Satyam's auditors in an effort to recoup billions of dollars in lost equity. After all, the auditor has inspected the company's accounts for the past eight years, and failed to detect that the $1 billion Raju said the company had did not correspond with information in bank statements and the debtors book.

Since Satyam has less than 10% of the cash that its fiddledbalance sheet says it has, investors are more likely to go after the auditor, using the Enron case as a precedent: Arthur Anderson was convicted for its involvement in the massive fraud, and by the time the conviction was overturned about three years later, what had once been a major accounting firm had shrunk to relative insignificance.

Once reported, the Satyam fraud – the extent of which has yet to be established – had investors scrambling, employees wondering if the company had sufficient funds to pay their salaries, and customers reportedly reviewing contracts and considering their options.

Research firm Forrester says that between 35% – 50% of Satyam's clients are expected to walk away, which could be an opportunity for other Indian IT services companies to snatch up that business.

However, those clients whose fingers were burned in the Satyam saga will probably conduct thorough background checks on potential service providers, and are likely to write their own exit clauses into any future contracts.

Meanwhile, industry analysts predict that the cash-less Satyam will be sold.

It's ironic that this should happen to a company that has won numerous industry awards, including:

  • Business Award for corporate social responsibility, awarded byUK Trade & Investment India (UKTI) in 2008
  • Golden Peacock Global Award for excellence in corporate governance, awarded by the World Council for Corporate Governance in 2008
  • Best IR Website in the Asia Pacific & Africa Region award for providing complete, accurate and timely investor relations information, awarded by MZ Consult in 2008
  • Best IT Practices in IT Sector, awarded by the Amity Business School, Noida, India in 2008
  • Partner Innovation Award for Anti-Money Laundering (AML) solution, awarded by Pegasystems in 2007

Raju's arrest is an ignominious end to the career of someone who received a lifetime achievement award from the Hyderabad Management Association in 2005, an Entrepreneur of the Year Award from Ernst & Young in 2007, and a Frost & Sullivan Excellence in Leadership award in 2008.

There goes the credibility of those particular awards, then …

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