Case Study: Satyam Computers Scam,
2009
Introduction
The Satyam Computers scam of 2009 stands as one of the most shocking and damaging
financial frauds in India’s corporate history. Often dubbed as ‘India’s Enron’, the scam not
only impacted the credibility of Indian IT companies globally but also shook investor
confidence and raised serious questions about corporate governance practices in India. This
case study delves into the background of the company, the events leading up to the fraud,
how the scam unfolded, its aftermath, and the measures taken post-incident to prevent such
occurrences in the future.
Background of Satyam Computers
Satyam Computer Services Ltd. was established in 1987 by Ramalinga Raju in Hyderabad,
India. It quickly rose to prominence as one of India’s top IT services companies, providing
software development and IT consulting services across the globe. By 2008, Satyam was
among India’s top four IT firms, with a strong presence in the United States, Europe, and
other key markets. The company was listed on the Bombay Stock Exchange (BSE), National
Stock Exchange (NSE), and the New York Stock Exchange (NYSE).
The Scam Unfolds
On January 7, 2009, Ramalinga Raju shocked the corporate world by confessing to a massive
accounting fraud in a letter to the company’s board. He admitted that he had manipulated
the company’s accounts for several years, inflating revenue, profit figures, and cash
balances. At the time of confession, Satyam’s books reflected Rs. 5,040 crore (approximately
$1 billion) in non-existent cash and bank balances. He also admitted to inflating revenues by
Rs. 588 crore and creating fictitious interest income of Rs. 376 crore.
Modus Operandi
The fraud was carried out through a combination of overstatement of revenue, creation of
fake invoices, and falsification of bank statements. Fake bank balances were created to show
inflated cash reserves. The company also used thousands of fictitious employees to generate
salary expenses and divert funds. The auditors, PricewaterhouseCoopers (PwC), failed to
detect these discrepancies, which went unnoticed for years due to the lack of proper checks
and balances.
Motive Behind the Fraud
According to Raju’s confession, the fraud began as a way to cover up poor performance.
Initially, he claimed he intended to correct the books once the company’s performance
improved. However, as the gap widened between actual and reported figures, it became
impossible to rectify without revealing the fraud. In December 2008, when Satyam’s
attempt to acquire Maytas Infra and Maytas Properties—firms owned by Raju’s family—
was rejected by investors, the scam began to unravel.
Role of Auditors and Board of Directors
PwC, Satyam’s external auditors, were heavily criticized for their role in the scam. They
failed to perform proper due diligence and verify bank balances. The board of directors was
also accused of negligence and lack of oversight. Despite being experienced professionals,
they failed to detect or question the company’s unrealistic profit margins and cash reserves.
Legal Proceedings and Convictions
Following the confession, Raju was arrested by the Andhra Pradesh police and later by the
Central Bureau of Investigation (CBI). His brother, Rama Raju, and several others, including
auditors from PwC, were also arrested. In 2015, a special CBI court convicted Ramalinga
Raju and nine others under various sections of the Indian Penal Code for criminal
conspiracy, breach of trust, and falsification of records. Raju was sentenced to seven years
in prison.
Impact of the Scam
The scam had wide-reaching implications. It caused a sharp decline in Satyam’s stock prices
and led to a loss of investor confidence in Indian companies, especially those listed abroad.
The NYSE delisted Satyam, and clients began to pull out. The Indian government quickly
intervened, dissolved the board, and appointed new members to stabilize the company.
Eventually, Tech Mahindra acquired Satyam in 2009 through a government-overseen
bidding process. The company was rebranded as Mahindra Satyam and later merged with
Tech Mahindra.
Regulatory and Governance Reforms
The Satyam scandal prompted the Indian government and regulatory bodies to introduce
stricter corporate governance norms. The Ministry of Corporate Affairs issued new
guidelines for the functioning of audit committees, internal controls, and the role of
independent directors. The Companies Act, 2013 included several provisions for improving
transparency and accountability. The role of auditors came under greater scrutiny, and
steps were taken to ensure independence and accountability in auditing practices.
Lessons Learned
The Satyam scam highlighted the importance of robust corporate governance, ethical
leadership, and the need for independent and competent auditors. It also demonstrated
how unchecked power in the hands of promoters can lead to massive financial and
reputational damage. Investors, regulators, and other stakeholders became more vigilant
post-Satyam, leading to improved compliance and risk management practices in corporate
India.
Conclusion
The Satyam Computers scam was a watershed moment in the history of Indian corporate
governance. While it caused massive disruption, it also served as a wake-up call and led to
significant reforms in corporate practices and regulatory frameworks. Today, the legacy of
the Satyam scandal serves as a powerful reminder of the need for integrity, transparency,
and accountability in business operations.
