EP 02: Satyam Scam Full Story Explained | Case Study in Hindi

Summary

The Satyam Scam, orchestrated by B Ramalinga Raju, involved massive financial statement manipulation at India's once 4th largest IT company. Raju inflated profits and created fake invoices to boost Satyam's share price, using the proceeds to fund his real estate ventures. As the骗局 unraveled in 2008 amidst a real estate downturn and failed acquisition plans, Raju confessed to a staggering ₹7000 crores discrepancy. The scandal led to arrests, Satyam's acquisition by Tech Mahindra, and regulatory actions against Raju, his family, and auditors PWC, highlighting the importance of corporate governance and investor vigilance.

Takeaways

• 😀 Satyam Computer was founded by B Ramalinga Raju and his brother-in-law in 1987 and became one of India's fastest-growing IT companies.
• 🏢 Satyam Computer was listed on the BSE in 1991-92 and on the New York Stock Exchange in 2001.
• 💼 B Ramalinga Raju's initial ventures included a cotton business, and later, he shifted focus to the booming real estate market.
• 📈 Raju manipulated Satyam's financial statements to inflate profits and show rapid company growth, which in turn increased the share price.
• 🏦 To fund his real estate ventures, Raju sold Satyam shares, took loans against pledged shares, and opened numerous companies to buy properties.
• 🔍 Raju had inside information about Hyderabad's metro route and used it to buy land near the proposed route, anticipating price increases.
• 📉 The real estate market slowdown in 2008 led to Raju's plan to sell properties and fix the financial discrepancies failing.
• 🚫 A plan to acquire Maytas Infra and Maytas Properties was proposed by Raju to fill the financial gap but was met with investor disapproval and eventually canceled.
• 📊 Raju confessed to years of financial statement manipulation, revealing a difference of ₹7000 crores between actual and fake figures.
• 🏛️ The Satyam scandal led to the arrest of Raju and his brother, the appointment of new board members, and the company's eventual acquisition by Tech Mahindra.

Q & A

What was the background of B Ramalinga Raju before starting Satyam Computer?

Before starting Satyam Computer, B Ramalinga Raju had a cotton business.

In which year did Satyam Computer get listed on the New York Stock Exchange?

Satyam Computer got listed on the New York Stock Exchange in 2001.

What was the primary reason for B Ramalinga Raju's shift in focus from Satyam Computer to real estate?

The primary reason was a boom in the real estate market, with rapidly increasing rates in Hyderabad.

How did B Ramalinga Raju manipulate the financial statements of Satyam Computer?

Raju would inflate profits, for example, showing a profit of ₹60 Crores as ₹600 Crores in the financial statements to give the impression of rapid growth.

What was the role of the companies Maytas Infra and Maytas Properties in the Satyam Scam?

Maytas Infra and Maytas Properties, started by Raju in 1988, were used to buy properties in the name of these companies, his family members, and himself.

How many fake sales invoices did Raju create to show fake sales in Satyam Computers?

Raju created 7,500 fake sales invoices to show fake sales.

What was the significance of the proposed metro route in Hyderabad for Raju's real estate investments?

Metro Man Sreedharan claimed Raju had inside information about Hyderabad's proposed metro route, allowing him to buy land near the route, anticipating increased land prices once the metro was operational.

What was the plan to fill the gap between the fake and actual financial figures of Satyam Computer?

Raju planned for Satyam Computer to buy a 51% stake in Maytas Infra and Maytas Properties, which were owned by the Raju family, to show that the companies had been bought using the inflated figures.

What was the reaction of Satyam's investors and the market to the proposed acquisition of Maytas Infra and Maytas Properties?

Satyam's investors, especially institutional investors, did not like the decision, leading to a rapid fall in Satyam's stock and a 55% drop in its NYSE stock value.

What were the consequences for PriceWaterhouseCoopers (PWC), Satyam's auditor, after the scam was exposed?

SEBI banned PWC for two years, and the US stock market regulator, SEC, fined PWC $6 million for not properly checking the financial statements and invoices.

What was the final outcome for B Ramalinga Raju and Satyam Computer after the scam was exposed?

Raju confessed to the manipulation of financial statements, was sentenced to 7 years in jail, and was fined ₹5.5 Crores. Satyam was eventually bought by Tech Mahindra, which changed its name to Mahindra Satyam and later merged with Tech Mahindra.

Outlines

00:00

💻 The Rise and Fall of Satyam Computers

The script details the inception and eventual downfall of Satyam Computer, an IT company started by B Ramalinga Raju in 1987. It narrates how Satyam grew rapidly, listing on the BSE and NYSE, and winning numerous awards. The company's trajectory took a turn when Raju's focus shifted to the booming real estate market, leading him to manipulate Satyam's financials to fund his property ventures. This involved creating numerous companies and using them to buy land, inflating profits, and fabricating financial statements. The script also mentions the insider information Raju allegedly had regarding Hyderabad's metro route, which he used to speculate on land prices. The narrative culminates in the failed attempt to acquire Maytas Infra and Maytas Properties, leading to the resignation of independent directors and the eventual confession of financial manipulation by Raju.

05:03

📉 Satyam Scandal: The Aftermath and Legal Repercussions

This segment delves into the aftermath of the Satyam scandal, focusing on the confession by B Ramalinga Raju that Satyam had been falsifying financial statements for years. It discusses the discrepancies Raju created between reported and actual profits and cash deposits. The script questions the role of Satyam's auditor, PWC, which failed to detect the fraud for many years, leading to its ban by SEBI and a fine by the SEC. The narrative continues with the arrest of Raju and his brother, the government's intervention to save Satyam from collapse, and its eventual acquisition by Tech Mahindra. It also covers the CBI's report on money laundering by Raju, the charges pressed by the Enforcement Directorate, and the penalties imposed by SEBI. The script concludes with the jail sentences and fines imposed on Raju and others, and the impact of the scandal on Satyam's reputation and stock market presence.

Keywords

💡Satyam Scam

The Satyam Scam refers to a major corporate fraud that took place in India involving Satyam Computer Services, once India's fourth-largest IT company. The scam came to light in 2009 when the company's chairman, B. Ramalinga Raju, confessed to inflating the company's revenue and profits for several years. This keyword is central to the video's theme as it encapsulates the entire narrative of corporate deception and financial mismanagement.

💡B Ramalinga Raju

B Ramalinga Raju is the founder of Satyam Computer Services and the mastermind behind the Satyam Scam. His actions of manipulating financial statements to inflate profits and using company funds for personal gain are detailed in the video, highlighting the personal greed that led to the downfall of a major corporation.

💡Financial Manipulation

Financial manipulation in the context of the video refers to the fraudulent activity of altering financial records to misrepresent a company's financial health. Raju is depicted as having inflated profits and cash reserves, which is a key aspect of the scam and a central theme of the video, illustrating the depth of deception involved.

💡Real Estate Boom

The Real Estate Boom mentioned in the video refers to the rapid increase in property values in Hyderabad and surrounding areas during the early 2000s. This boom led Raju to divert Satyam's funds into real estate ventures, which eventually contributed to the financial discrepancies that were part of the scam.

💡Maytas Infra and Maytas Properties

Maytas Infra and Maytas Properties were companies started by Raju to invest in the real estate market. The video explains how these companies were used as vehicles to divert funds from Satyam, showcasing a key strategy in the financial mismanagement that led to the scandal.

💡Insider Trading

Insider Trading, as discussed in the video, involves the buying or selling of a company's stock by individuals with access to non-public, material information about the company. Raju and his family were charged with this crime, which is a significant aspect of the video's narrative on unethical business practices.

💡Money Laundering

Money laundering, as mentioned in the video, is the process of making illegally-gained proceeds appear legal. Raju's alleged involvement in this activity is part of the broader financial crimes that the video explores, highlighting the extent of the illegal activities associated with the scam.

💡PriceWaterhouseCoopers (PWC)

PriceWaterhouseCoopers, referred to in the video as PWC, was Satyam's auditor during the period of the scam. The video questions the role of PWC in the scandal, as auditors are expected to detect and prevent financial irregularities. PWC's failure to uncover the fraud is a critical element in the video's discussion of corporate governance and accountability.

💡Institutional Investors

Institutional investors, such as mutual funds and insurance companies, are significant shareholders in many corporations. In the video, the reaction of Satyam's institutional investors to the proposed acquisition of Maytas companies and the subsequent scandal is highlighted, illustrating the impact of the scam on these large financial entities.

💡Tech Mahindra

Tech Mahindra is the company that eventually acquired Satyam after the scandal. The video discusses this acquisition as part of the resolution to the crisis caused by the scam, showing how the company was salvaged and rebranded post-scandal.

💡CBI and Enforcement Directorate

The Central Bureau of Investigation (CBI) and the Enforcement Directorate are Indian government agencies responsible for investigating serious crimes and financial violations. The video mentions their involvement in the aftermath of the Satyam Scam, emphasizing the legal consequences and the pursuit of justice for the fraudulent activities.

Highlights

B Ramalinga Raju founded Satyam Computer in 1987 with his brother-in-law, starting as a Hyderabad-based IT company.

Satyam Computer was listed on the BSE in 1991-92 and later on the New York Stock Exchange in 2001.

The company experienced rapid growth, earning numerous awards for its performance.

Raju's interest in real estate led to the aggressive purchase of properties in Hyderabad.

Maytas Infra and Maytas Properties were used as vehicles for Raju's real estate investments.

Financial statement manipulation began to fund Raju's real estate ventures, inflating profits.

Raju and his brother sold Satyam shares and used the proceeds to buy properties, leveraging high share prices.

Nearly 365 companies were opened by Raju to facilitate property purchases.

Raju used inside information about Hyderabad's metro route to strategically buy land.

To show inflated sales, Raju created 7,500 fake sales invoices.

Fake bank statements were used to show non-existent cash reserves.

The 2008 recession exposed the gap between Raju's fake and actual financial figures.

Raju's plan to acquire Maytas Infra and Maytas Properties to fill the financial gap was rejected by investors.

On 7 January 2009, Raju confessed to years of financial statement manipulation.

The confession revealed a staggering ₹7000 crores difference between actual and fake figures.

Satyam's auditor, PWC, faced scrutiny and penalties for failing to detect the fraud.

Raju and his brother were arrested on 9 January 2009, following the scam's exposure.

Tech Mahindra acquired Satyam, renaming it Mahindra Satyam and later merging it into Tech Mahindra.

Raju was involved in money laundering, using anonymous buildings to hide illicit funds.

SEBI charged Raju and his family with Insider Trading, ordering the return of ill-gotten profits.

The Satyam scam resulted in investor losses of ₹14,162 Crores, with LIC alone facing a loss of ₹950 crores.

The irony of Satyam's name, meaning 'Truth' in Sanskrit, contrasted with the company's fraudulent activities.

Transcripts

Hello! Today we will talk about Satyam Scam.

In 1987, B Ramalinga Raju started Satyam Computer with his brother-in-law.

It was a Hyderabad based IT company.

Before starting Satyam Computer, B Ramalinga Raju had a cotton business.

In 1991-92 Satyam Computer got listed in the BSE.

In 2001, it got listed on the New York Stock Exchange.

Satyam Computer was one of India's fastest-growing companies,

For which Satyam Computer and B Ramalinga Raju had received many awards.

Satyam was on a good growth track but, there was a boom in Real Estate,

And Raju's focus shifted towards that. Real Estate rates were going up fast in Hyderabad,

So Raju quickly started buying land properties in Hyderabad and areas around it.

Maytas Infra and Maytas Properties that Raju started in 1988, he started

to buy properties in the name of these companies, his family members and himself.

Raju started to buy properties aggressively and, when he needed more money,

He started to manipulate the financial statements of Satyam Computers.

That means he began foul play. For example, if the company had a profit of ₹60 Crores,

Raju would show that as ₹600 Crores in the financial statements.

And by doing this, he tried to show that Satyam was rapidly growing.

With Satyam Computer's constant growth and strong financials, its share price went up.

And on that high share price B Ramalinga Raju and his brother B Rama Raju,

Began to sell their shares and kept their other shares as collateral and took a loan,

And used that money to buy properties.

To buy properties, Raju had opened nearly 365 companies.

Raju used to buy land in the name of his family, friends and relatives.

The people working on his farm, whose salary was ₹4000-₹5000,

Raju had made some of them the directors of a few companies out of the 365 and

Bought land in their names.

He made a lot of his friends' the director of some companies too.

Metro Man Sreedharan said Raju had inside information about Hyderabad's proposed metro route.

That means Raju already knew the route of that metro line.

Raju aggressively started to buy land near the proposed metro route,

Assuming when the metro comes, the prices of those lands will go up.

And the profit he gets from Real Estate, some of it could go into Satyam,

And Raju could show fake financial figures such as sales, profit etc.

And could easily fill the gap between the actual sales and profits Satyam made.

To show more sales in Satyam Computers, Raju started making fake sales invoices.

Raju made 7,500 fake sales invoices. Using the fake invoice he showed fake sales,

But where is the profit? Where is the profit made from the fake sales?

So for that, Raju made fake bank statements to show that the money from profits is the bank.

That meant he showed a lot of cash reserve that did not exist.

For many years, Raju kept faking the sales, profits and other figures.

Showing good growth in the company, Raju kept attracting investors,

Because of which Satyam Computer's share price kept on increasing, and

Its promoters kept selling their shares at higher prices.

In 1999, the promoters shareholding in Satyam was 24%. It dropped to 2% by the end of 2008.

And he used this money to buy properties.

The more Satyam grew, the gap between Raju's the fake figure and the actual figure increased too.

And this gap became a huge amount.

In 2008, Real Estate slowed down because of the recession.

And Raju's plan of selling properties and fixing the gap between the figures had failed.

After this, Raju made a new plan to fill this gap. According to this plan,

Satyam Computer would buy a 51% stake in Maytas Infra and Maytas Properties.

And Raju said this money would go to the promoters of Maytas.

Maytas Infra and Maytas Properties were owned by the Raju family.

Satyam spelt backwards is Maytas.

Raju thought this deal would help him show that the companies have been bought,

Using the gap between the actual figures and the fake figures.

But in reality, there was no cash transaction because those were Raju Family's businesses.

This way, the gap between the fake figures and the actual figures will get filled.

On 16 December 2008, Satyam Computer's Board of Directors approved this plan.

Raju sanctioned this deal without taking permission from the shareholders.

But Satyam's investors didn't like this decision, especially Satyam's institutional investors.

After this decision, Satyam's stock fell rapidly.

A US investor even filed a lawsuit against Satyam and there was a 55% drop in Satyam's stock in NYSE.

Due to this pressure, Satyam decided to cancel the plan of acquiring Maytas Infra and Maytas Properties.

As soon as this plan failed, the four independent Directors of Satyam resigned.

Watching his last plan fail for filling the gap, on 7 January 2009,

Raju confessed that Satyam Computer has been manipulating financial statements for years now.

So let's take a look at how Raju inflated the figures for the financial year 2008-09s second quarter.

As you can see here, the profit shown by Raju is a lot more than the actual profit.

Similarly, there is a lot of difference between the real cash deposit and the one shown by Raju.

This way, Raju kept manipulating Satyam's financial statements for many years.

Raju revealed that there is a difference of ₹7000 crores between the actual and the fake figures.

After this, along with Raju, the independent directors and auditors of Satyam were being questioned,

That the company has been manipulating the financial statements for so long and,

The Independent Directors and Auditors are not aware of this. How is it possible?

Satyam's auditor was PWC, PriceWaterhouseCoopers.

So figures kept inflating and, PWC didn't bother to check the invoices and statements for so many years?

An Auditors job is to check a company's financial statement and their reliability and accuracy.

In a way, an Auditor is a representative of the shareholders but here, the auditor cheated them too.

Recently, SEBI banned PWC for two years and the US stock market regulator,

SEC has fined PWC $6 million.

Later, it was that Satyam used to pay PWC double the fee as any other IT company gave their auditor.

On 9 January 2009, Raju and his brother B Rama Raju got arrested.

After this scam, the government immediately appointed new Board Members in Satyam,

And began preparing to save Satyam from collapsing.

The government planned to sell the company as soon as possible.

Finally, Tech Mahindra bought Satyam.

Tech Mahindra, in April 2009, bought 51% stakes in Satyam.

And changed the company's name to Mahindra Satyam.

Later, in June 2013, Mahindra Satyam merged with Tech Mahindra.

According to the CBI report, Raju was into money laundering.

And he first used to send money to Europe and would then reroute it to India.

And with this money, Raju would buy lots of anonymous buildings.

The Enforcement Directorate pressed charges on Raju and 47 people along with him and

On his 166 companies for money laundering and seized Raju and his family's property.

SEBI charged Raju and his family with Insider Trading and ordered them to return,

₹1850 crores of profit they made through insider trading, with an interest of 12%.

They also banned them from dealing in the securities market for 14 years.

On 10 April 2015, the special CBI court sentenced Raju, his brother B Rama Raju,

The then CFO, Srinivas Vadlamani, two PWC partners and five other people, to 7 years of jail.

And Raju and his brother were fined ₹5.5Crores.

Before this scam got exposed, Satyam had a big name. It was India's 4th largest IT company.

Satyam's stock was in NIFTY and Sensex too.

On 9 January 2009, Satyam Computer's stock got removed from NIFTY and Sensex.

In September 2008, the World Council for Corporate Governance presented

Satyam Computer with the Global Peacock Award and,

Just four months later, Satyam's accounting fraud got exposed.

Satyam's CFO at the time, Srinivas Vadlamani and some executives,

Few months before Raju confessed, had sold their Satyam shares.

Just a few days after confessing, Satyam's share price fell from ₹170 to ₹6.50

After the scam, the investors of Satyam incurred a loss of ₹14,162 Crores.

LIC, which was an institutional investor of Satyam, faced a loss of ₹950 crores.

The meaning of Satyam in Sanskrit is Truth.

But what Satyam's promoters did, it did not have an ounce of Truth. They were all lies.

Raju just wanted to make money and for that, he committed crimes such as,

Money Laundering, Insider Trading and Accounting fraud.

Always keep in mind that when a company's promoters sell their shares,

It is your duty to check why they are selling them.

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