WHITE COLLAR CRIMES WITH SPECIAL REFERENCE TO

“SATYAM SCAM”

“SATYAM COMPUTER SERVICE LIMITED”

•Satyam Computer Services Limited was founded in 1987 by Mr. B Ramalinga Raju. •The company offers consulting and information technology services spanning various sectors, including engineering and product development, supply chain management, client relationship management, business process management and business intelligence.

• The company was listed with New York stock exchange, National stock exchange, and the Mumbai stock exchange. In June 2009, the company unveiled its new brand identity “Mahindra Satyam”

Who is B. Ramalinga Raju?• Ramalinga Raju was born on September 16, 1954. A

traditional agricultural family of the KSHATRIYA (RAJU) Community of Andhra Pradesh.

• He founded Satyam Computers and was its Chairman until January 7, 2009 when he resigned from the Satyam board after admitting to corporate fraud.

• Satyam was until recently perceived to be amongst the top Indian IT vendors.

• Raju has admitted to overstating the company's cash reserves by USD$ 1.5 billion. Later, a person involved in the investigation of the company said that the company's assets were not inflated, but instead siphoned off by Ramalinga Raju.

• Raju is currently held in Hyderabad's Chanchalguda jail on criminal charges including fraud, forgery, cheating, embezzlement and insider trading.

“Career of B. Ramalinga Raju”• He was first businessman in the field of construction

and textiles.• Raju founded Satyam in 1987.• He started an satyam computers with 20 employees

in 1987.• Satyam was listed in INDIAN STOCK EXCHANGE in

1991. • Listed in NEW YORK STOCK EXCHANGE in 2001.• Satyam was listed in UNESCO(amsterdum) in 2008.• There were 52000 employees working in Satyam in

september 2008

“Awards”• Ernst & Young Entrepreneur of the Year Services

Award 1999.• Dataquest IT Man of the Year Award 2000 • Asia Business Leader Award 2002• Ernst & Young Entrepreneur of the Year 2007

(revoked after the fraud was confessed) • Golden Peacock Award for Corporate Governance

2008 (revoked after the fraud was confessed)• Employees spread over many countries

“The Entire Story”

• Ramalinga Raju founded Satyam Computers in 1987 and was its Chairman until January 7, 2009 when he resigned from the Satyam board after admitting to cheating six million shareholders.

• After being held in Hyderabad's Chanchalguda jail on charges including cheating, embezzlement and insider trading,

• Raju was granted bail on 25.3.2011. Raju was granted bail on condition that he should report to the local police station once a day and that he shouldn't attempt to tamper with the current evidence

• A botched acquisition attempt involving Maytas in December 2008 led to a plunge in the share price of Satyam.

• In January 2009, Raju indicated that Satyam's accounts had been falsified over a number of years.

• He admitted to an accounting dupery to the tune of 7000 crore rupees or 1.5 Billion US Dollars and resigned from the Satyam board on January 7, 2009.

What crime he has constituted?1. Raju and his brother, B Rama Raju, were arrested by the

Andhra Pradesh police on charges of breach of trust, conspiracy, cheating, falsification of records.

2. Raju has mislead various investors.3. Raju had also used dummy accounts to trade in Satyam's

shares.4. He has violated the insider trading norm.5. Funds from Satyam were diverted to Maytas6. On 22 January 2009, CID told in court that the actual

number of employees is only 40,000 and not 53,000 as reported earlier and that Mr. Raju had been allegedly withdrawing INR 20 crore rupees every month for paying these 13,000 non-existent employees.

• In Venture Global Engineering vs Satyam Computer Services Ltd 2010 (8) SCC 660 On being questioned by criminal investigation department of the Andhra Pradesh police, Mr. Raju reportedly admitted to using Satyam (respondent no.1) money for buying prime land in and around Hyderabad.

• Ten Imaginary fixed deposits Raju admitted that Satyam’s fixed deposits which supposedly grew from Rs. 3.35 crore in 1998-99 to a massive Rs. 3320.19 crore in 2007-08 are all fake.

Reasons for Satyam Scam:-

1. Raju wanted to take over his MAYTAS INFRA and MAYTAS PROPERTIES.(company of his sons).

2. He was blamed that he was using the funds of the investors for the family business.

3. World bank had banned the satyam to take any services for 8 years (due to illegal profit and lack of essential document).

“Society’s Reaction”• The people of his native village, Garagaparru, hail the

development works undertaken by the Raju Foundation, the charitable arm of Satyam.

• The Citizens for a Better Public Transport in Hyderabad (CBPTH) demanded a CBI inquiry into the process of how Maytas bagged the Hyderabad Metro Rail project.

• Analysts in India have termed the Satyam scandal India's own Enron scandal.

• Some social commentators see it more as a part of a broader problem relating to India's caste-based, family-owned corporate environment.

HOW THIS SCAM HAS RELATION WITH “MAYTAS”

• Maytas refers to a group of companies founded by B. Ramalinga Raju. It includes Maytas Properties and Maytas Infra Limited.

• A property development company founded in 2005.• Maytas Infra Limited: An infrastructure

development, construction and project management company. Maytas Infra was originally run by 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 scam in Satyam Computer.

• There were allegations that funds from Satyam were diverted to Maytas, causing the Government agencies to verify the infrastructure company’s records as well. .

• In August 2009, Infrastructure Leasing & Financial Services replaced B Ramalinga Raju as promoter of Maytas Infra.

• Turning point:- In wake of the Satyam scam, the Citizens for a Better Public Transport in Hyderabad (CBPTH) demanded a CBI inquiry into the process of how Maytas bagged the Hyderabad Metro Rail project.

• The CBPTH convener C Ramachandraiah alleged that the state government had been favouring Maytas for infrastructure projects.

• The Andhra Pradesh government has had paid Rs. 1,800 crore to Maytas Infra towards works under the irrigation department's Jalayagnam project.

• On 8.7.2009 the state government of Andhra Pradesh forced to end its unprecedented generosity and cancel the concession agreement with the group on the Rs 12,132-crore Hyderabad Metro Rail project.

• On July 21, 2009, a case was registered against the promoters of the company by the Hyderabad police under Section 406 (breach of trust) and Section 420 (cheating) of the Indian Penal Code

“CONSEQUENCES”

• Before the scandal it’s share price was Rs 300 in oct 2008. Just after this scandal the share price go down to Rs 6.30.

• On 10 January 2009, the Company Law Board decided to bar the current board of Satyam from functioning.

• Bank of America and State Farm Insurance terminated its engagement with the company.

• Credit Suisse suspended its coverage of Satyam. The Credit Suisse Group AG (SIX: CSGN, NYSE: CS) is a Swiss multinational financial services company headquartered in Zurich, Switzerland.

• SEBI, the stock market regulator, also said that, if found guilty, its license to work in India may be revoked.

• The New York Stock Exchange has halted trading in Satyam stock

• India's National Stock Exchange has announced that it will remove Satyam from its S&P CNX Nifty 50-share index.

• Satyam's shares fell to 11.50 rupees on 10 January 2009, their lowest level since March 1998, compared to a high of 544 rupees in 2008.

• Satyam was the 2008 winner of the coveted Golden Peacock Award for Corporate Governance under Risk Management and Compliance Issues, which was stripped from them in the aftermath of the scandal.

• Present time it’s share price is 107.89. Mahendra Satyam’s market growth is 7,800crore.

• Before the scandal Satyam was the 4th ranked among IT companies of India and on 9th jan2009 it became least valuable IT company in India.

“IMPACT OF SATYAM SCAM ON INDIAN ECONOMY”

• Although several companies are trying to have a bite into Satyam Computers, according to Gartner study, the company is likely to exist in its current form. It is expected to discontinue some of its businesses, service lines or cease to exist in certain geographies.

• Huge losses to investors aside, the Satyam scandal has caused “serious damage” to India Inc’s reputation as well as the country’s regulatory authorities outside.

• The Government certainly cannot remain aloof and allow Satyam to die off especially when it provides occupation to 53,000 odd people and indirectly supports more than a million Indians.

• The Satyam scam effect has started its infectious presence. U.S. listed stocks of other Indian companies have started taken a severe beating.

• Indian firms are looking into methods to avoid scenarios of such scams within their companies.

Who is Auditor? An Auditor, first and foremost has to be a Chartered Accountant

under the Chartered Accountants Act, 1949. He is the person appointed to examine the books of account and

the accounts of a company registered under the Companies Act, and to report upon them to the company’s shareholders.

Audit means the examination or assessment of a company’s annual accounts, i.e. a balance sheet, profit and loss account and other financial statements as required by law.

Under the Companies Act, an auditor is required to express an opinion as to whether the annual accounts give a true and fair view of the company’s state of affairs and financial position. To formulate such an opinion, the auditor needs to examine the company’s internal accounting system, inspect its assets, test-check of accounting transactions.

Role of auditors, in light of Satyam scam This fraud was not committed overnight; it was

building up continuously from over years. The role of Satyam’s auditors is under scanner. They ignored some of the obvious indications of embezzlement and thus failed to catch on the massive scam, which could have been caught much before it acquired the ‘massive’ status.

“Decrease in holdings”

1. The holdings of Raju and his family decreased from 15.67% in 2005-06 to 8.61% in September 2008 and finally, early this year to a meagre 2.3% without anybody noticing. Further, in 2006, he transferred these shares to his family’s company, SRSR Holdings Pvt. Ltd. from which he took out loan using his shares as collateral.

2. Further, an enormous amount of Rs.4462 crore was lying unused in its current account. This amount was neither distributed among shareholders in the shape of dividend, nor was it used to earn valuable interest, as it is usually done. But neither independent board members, nor the auditors seemed to question this.

3. Ten Imaginary fixed deposits Raju admitted that Satyam’s fixed deposits which supposedly grew from Rs. 3.35 crore in 1998-99 to a massive Rs. 3320.19 crore in 2007-08 are all fake.

The auditors are supposed to have an independent bank confirmation of such things in the form of a bank statement and should have obtained certificates from the banks on the tax deducted on the interest accruing on the fixed deposits.

Undisclosed pledges

• Satyam also procured a loan of about Rs. 1230 crore without appropriate disclosure. It wasn’t as if no one was ever suspicious of Satyam’s dodgy numbers. It was accused of tax fraud and insider trading back in 2003. However, the company police- including the auditors seemed to ignore the accusations.

HOW THESE SCAMS CAN BE CONTROLLED

• In addition to the present statutory requirement, companies should be required to institute sufficient internal management controls.

• Management should ensure that the internal audit staffs are able to prevent and detect financial statement fraud.

• Companies whose shares are publicly traded should be required to have audit committees to monitor the internal control system and provide important links to the internal audit staff.

• Sanctions against the perpetrators of financial statement fraud should be increased by imposing fines and other deterrent measures like barring from corporate office. However, in this case, there is a need to prevent innocent managers from being too risk averse.

• There is a need to clarify the duties of external auditors.

• The management should formulate appropriate policies and procedures which would reduce such risks.

• The audit report should include ‘a letter from the Chairman of the audit committee discussing the committee's responsibilities and activities during the year.

Suggestions towards Auditors

• Evaluate the potential for fraud in a given audit engagement.

• Be obliged to utilise tests that provide reasonable assurance of detection of fraud

• Evaluate the strength of the overall control environment• Facilitate the identification of areas of high audit risk by

reviewing the procedure analytically• Communicate their role and responsibilities to all those

who rely on their work (ie nature and limitation of audit)• Report directly to the public any material irregularities

and illegal acts discovered during an audit.