Satyam scam in India and the importance of corporate governance
Nov. 10, 2023 • Priyanshi Lekhwar
Satyam Service Limited was a software company founded by Ramalinga Raju in 1987. This company was listed among one of the fastest-growing companies, generating 2.1 billion dollars in revenue and having 9% of total market share. It was the 4th largest growing IT company in India and also the first company to be listed on the 3 international exchanges, which are NYSE, DOW, and EURONEXT. Suddenly, in 2009, Satyam unexpectedly collapsed due to financial fraud by its founder, which was one of the major frauds that also harmed the Indian reputation on the global market.
The company began with 20 workers and very quickly expanded to become a worldwide company within a few years. It extended to many countries and signed MOUs with international corporations. In the fiscal year 2004, Satyam's total revenue was worth $25,000,000. By 2008, the company's revenue had boosted by more than 300%. It was growing at a compound annual growth rate of 38%. It had significant growth and shareholder value. Satyam also got the Global Peacock Award in September 2008.
Satyam Computer Services Limited, which was one of the largest companies in India, was engaged in financial fraud. In January 2009, Ramalinga Raju resigned after confessing his fraud and taking sole responsibility for it. He confessed that documents of the company were forged and the balance sheet had 7136 crore, which was non-existent cash. They just showed inflation in their revenue, whereas in reality, there was no actual crash present. Their actual operating margin was 649 crore, which was shown to be 2700 crore. He also tried to replace assets with real ones by indicating to buy the Maytas firm by offering $1.6 million for the Maytas firm, which was owned by his family members, but investors didn’t allow it and forced him to withdraw, which resulted in a 55% drop in the share value of the company. He also mentioned that not any of the managing directors of family members had any idea about the issue. His final attempt to replace the fictional asset was the purchase of the Maytas firm. According to him “it was like riding the tigers and not knowing how to get off without getting devoured”.
Results and Effects of the Scandal
The Satyam scam was one of the biggest scams in the country. Citibank froze Satyam's 30 accounts. Ramlinga Raju and his brother B. Rama Raju were arrested. Satyam was an international company that expanded to many countries, and the government could not dispose of one of the most dealing companies in the country; it also affected the image of the country globally, so the central government appointed 17 directors for the Satyam board. In June 2009, Tech Mahindra Ltd. purchased and merged with Satyam Computer Service Ltd. to create Mahindra Satyam.
This case went to the CBI for investigation in February 2009. A criminal complaint was filed against 47 people and 166 corporate entities headed by Ramalinga Raju by the Enforcement Directorate in 2013. In 2015, the CBI special court held 10 people guilty who were accused of criminal conspiracy and cheating others and awarded them 7 years imprisonment, and the trial court imposed a 5.5 crore fine on Ramalinga Raju and his brother. This scandal led to major reforms in corporate governance.
What is corporate governance?
Corporate governments are setting rules and regulations on which companies will govern. Some principles and guidelines are set in a manner that controls the company and fulfills its main objective and aim, which also adds value to the company and makes a profit out of it in a legitimate manner in the long term for all the stakeholders of the company, from directors to managers to all customers and employees. Corporate governance ensures the transparency of business and conducts it in a fair and legal manner. There are four major principles that help in making good corporate governments: accountability, transparency fairness, and responsibility There should be accountability to shareholders in a righteous and understandable manner. Fairness and responsibility also play a vital role in good corporate governance, and every shareholder should be treated equally, which will increase their interest and encourage them. Also, make sure every stakeholder gets to express their views in meetings and is allowed to take part. Even non-shareholders should be taken care of.
Reforms on corporate governance before the Satyam scandal
Primarily, corporate governance reforms were focused on the powerful supervision of management, aiding shareholders and investors, and making audit committees and boards more independent.
It was the first initiative to take a step on corporate governance by Indian industry with the aim of developing and promoting a code for companies for all corporate entities and promoting and encouraging transparency with industry and business. This step was taken to address the public concern of investors, especially small investors.
- Report of the committee on corporate governance (Kumar Mangalam Birla committee report)
Mr. Kumar Mangalam Birla was chairman of the committee. It was concerned with insider trading and secured the rights of several investors, like companies, to show their annual report on the steps taken by the company on the reform recommendation of the committee. The main purpose of the committee was to provide information about the company to the shareholders, like where the company stands and where they have invested.
The committee recommended and suggested the composition of the board audit committee. SEBI revised it and included the recommendations. These rules and regulations were listed in clause 49, which came into force in 2000 and 2003.
- The report of the Advisory Group on Corporate Governance, “Standing Committee on International Financial Standards and Code," compares the corporate governance of India with international levels and advises improvement standards for India.
- Report of the consultative group of bank directors
- Report of the committee on corporate audit and governance (Naresh Chandra)
- SEBI report on corporate governance (Narayan Murthy)
- Report of the committee on regulation of private companies and partnerships
Reforms in corporate governance after the Satyam scandal
In 2009, India’s corporate community got a huge shock from the financial fraud of Satyam. This scam forced the government to rethink corporate governance and its accountability and enforcement mechanisms. CII began to examine the issue of corporate governance arising after the Satyam scandal in 2009 and recommended corporate governance reform. Major reforms are
- Introducing the Companies Act 2013
This act mandates the appointment of an independent director and separates the roles of chairman and CEO. To overcome the problem of corporate governance, an audit committee must also be established in companies.
- Security and Exchange Board of India (SEBI)
It was introduced as a regulator of listed companies to take measures for improvement in transparency and accountability by following stricter enforcement of corporate government norms and following other rules and regulations strictly, like disclosure of financial statements and regulation of audits. Penalties for those who do not follow these rules
Legal provisions on corporate governance
1.The Companies Act 2013
This act concerns independent directors, separate rules for CEO and chairman, audit committees, disclosure of financial statements, board meetings, etc.
SEBI was introduced as a governing authority having jurisdiction and power over listed companies. It ensures the protection of investors by giving strict instructions to be followed by the company and also imposing penalties if it does not do so.
3.Standard listing agreement of stock exchange
It is for the company that has shared a stock exchange listing agreement that it is an employment contract as the seller is the higher broker to represent himself, but property is not transferred between them.
4.Accounting standards issued by the Institute of Chartered Accountants of India
ICAI is an independent body that provides guidelines for financial information disclosure. Section 129 of the Company Act 2013 states that financial statements give a fair view of a company's affairs, and Section 133 of the Act gives an accounting standard that should match the financial statements.
5.Secretarial standards issued by the Institute of Company Secretaries of India (ICAI)
ICSI issued the secretarial standards for “meetings of the board of directors” and "general meetings.” Section 118(10) of the Company Act 2013 states that every company shall follow the secretarial standard given by ICSI.
Landmark cases of failure of corporate governance
It was somewhere similar to the Satyam case, where a few managers committed accounting fraud and increased stock prices. It came to light in 2015 when they failed to submit financial results.
Kingfisher Airlines and United Spirits case
Illegal internal corporate fund to parties and share false accounts assets of USL (United States Limited) were tampered with and transferred to the Kingfisher subsidies Even the United Breweries were used in order to generate funding and loans, which were later given to smaller groups of Kingfisher Limited in the same way as USL assets were transferred. All transfers were illegal and were made stealthy without catching the eye of board members. Fake reviews and account tempering were done along the illegal transfer with the soul benefit of owning and drowning the company in the pit of hell.
Fraud is common in the corporate world. It not only affects the image of a country but also breaks the trust of shareholders. With time, the government takes measures and includes more rules and regulations for the company to be safe from corporate fraud. It also affects the economy, no matter how big or small the scandal. The Satyam scam highlights the importance of corporate governance. There were rules for corporate governments before, but they forced the government to take the reforms.
- Satyam scamhttps://www.srcc.edu/sites/default/files/Satyam%20scam%20of%20corporate%20governance.pdf
- Evolution of corporate governancehttps://www.scconline.com/blog/post/2019/11/13/evolution-of-corporate-governance-in-india/
- Legal provision on corporate governancehttps://www.mondaq.com/india/shareholders/456460/corporate-governance-framework-in-india
- Landmark judgmenthttps://indianexpress.com/article/business/companies/kingfisher-airlines-case-vijay-mallya-sues-banks-for-selling-united-spirits-shares/
Disclaimer: This article is an original submission by the author.