QUESTION: The Rise and Fall of Raju In Telegu, the Indian regional language of the southern Indian state of Andhra Pradesh, the word raju meant “king”. Ramalinga Raju hailed from an influential land-owning caste in Andhra Pradesh. He was born into a farming family on 16 September 1954 in the village of Garagaparru of West Godavari district. Raju separated from his family’s agricultural operations and went to the US, where he earned his MBA from Ohio University in the late 1970s. He returned to India in 1977 and opened a spinning mill, and soon thereafter began working in the real estate and infrastructure sectors. Creating a Success Story with Satyam In the late 1980s, India’s information technology (“IT”) sector was in its nascent stage. Raju identified IT as an up-and-coming sunrise sector, and on 27 June 1987, with the help of a brother-in-law, he founded Satyam Computer Services and set up business in Hyderabad. The company began with only 20 employees; however, it quickly established itself as a major player in the Indian IT sector, specialising in software outsourcing services. Raju was awarded the Ernst & Young Entrepreneur of the Year award in 2007 for building his IT group into an enterprise employing more than 50,000 people. He was considered one of the pioneers of the Indian IT success story and was acclaimed as a business visionary by many around the world. In November 2008, Raju co-chaired the World Economic Forum summit in New Delhi, India. He proudly proclaimed his company’s excellent performance and stated that he would lead Satyam through the global economic crisis successfully. Satyam had a global presence in 37 countries and Raju was an established star. His company was the fourth-largest IT company in India, just after Tata Consultancy Services, Infosys and Wipro. Raju’s Downfall with Maytas In 1988, Raju and his family founded a group of companies called Maytas (“Satyam” spelt backwards). The Maytas group included Maytas Properties and Maytas Infrastructure Limited. The Maytas group was headed by his sons, Tejas Raju and Rama Raju Jr. Using Raju’s influential political connections, Maytas Infrastructure acquired Indian government projects that included irrigation, power and transportation projects. Maytas Infrastructure also secured the substantial Hyderabad Metro Rail Project. Obsessed with billion-dollar targets, Raju inflated cash and bank balances in Satyam’s financial records. He also pledged promoter shareholdings and raised funds to buy land and, through Maytas Properties, acquired 6,800 acres. Because of these enormous investments and in spite of seemingly negligible cash flows, Satyam was hundreds of millions of dollars in debt. In the realty sector, Maytas group sold land and property at inflated prices without cash or bank balances. On 19 December 2008, the registrar of Indian companies ordered a probe into Satyam’s Maytas acquisition deal. This move was to investigate whether the Maytas acquisition deal was in violation of corporate governance norms or a diversification strategy. Appalling Confessions The Maytas acquisition deal announcement in December 2008 precipitated a rollercoaster of events that called into question the governance procedures and ethical practices at Satyam. On 23 December 2008, the World Bank blacklisted Satyam for eight years on grounds of data theft and bribing bank officials. Next, five independent board directors quit Satyam. New Year’s Eve of 2009 witnessed the nosedive of Satyam’s shares and both the media and investors raised corporate governance concerns. The Raju family stake in Satyam fell to 5.13% as the lenders sold the shares pledged by the Raju family. On 7 January 2009, Satyam’s founder confessed to several years of manipulation and fraud in the accounting books of India’s fourth-largest IT outsourcing services company. Raju sent in his letter of resignation and confession to Satyam’s board, admitting to a US$1.4 billion worth of fraud. Satyam’s balance sheet carried inflated and non-existent cash and bank balances. As a result, US$7.7 million interest earned on this money was also non-existent. He further admitted to an understatement of liability and overstatement of money owned in the records. For the quarter ending September 2008, Satyam reported false operating margins: 24% of revenue as opposed to the actual 3% of revenue. This portrayed misleading cash and bank balances of US$1.03 billion, whereas actual cash and bank balances were US$65 million. Criminal court investigations into the company revealed that Raju had also inflated the size of the workforce by more than 25% and had siphoned off wages of non-existent employees. The number of employees in the company was 40,000, not the 50,000 reported by the company. He had used fictitious names to divert US$4 million every month out of Satyam’s accounts; where this money actually went was never disclosed. Raju appointed PricewaterhouseCoopers—one of the “big four” international accountancy firms—as the company’s auditor, and Merrill Lynch as his deal advisor. All quarterly and annual filings, complied with regulations, were filed on time with the Indian and American regulators. This included financial disclosures per the Indian and US accepted accounting principles. Furthermore, regular filings were done with the Indian stock exchanges, the NYSE and Euronext. Satyam was believed to have the adequate checks and balances required for fraud prevention; however, Raju’s confession letter shattered the myth of good corporate governance in his company. This greatly undermined the credibility of the Indian corporate sector, specifically that of the Indian outsourcing industry. Satyam’s chairman Raju was arrested on 9 January 2009. This was followed by the arrests of his brother, B. Rama Raju, and Satyam’s chief financial officer, Srinivas Vadlamani. They were placed under non-bailable arrest under the Indian Penal Code, which put them behind bars for years. Furthermore, to safeguard the interests of all stakeholders, the Indian government sacked Satyam’s board and appointed new independent directors on 11 January 2009. Indian Prime Minister Manmohan Singh also intervened to push appointment of new independent directors, as the scandal threatened the image of corporate India. Raju, his two brothers, four Satyam employees and two PwC India auditors were in Indian prison on charges of criminal conspiracy, criminal breach of trust, cheating and fraud. Satyam’s true financial state remained unknown. The Satyam fiasco was fraud that occurred in a global company listed in two jurisdictions with presumably great degrees of regulation. How, then, did the fraud occur? There were many concerns regarding the role of Satyam’s independent directors. How much time did the independent directors spend on overseeing Satyam’s affairs? Were they critical enough? What were their relationships with Raju? Were Satyam’s directors and auditors less questioning, less critical and more beholden to Raju? What should have been the role of Satyam’s board and auditors? QUESTIONS: You are required to conform to Harvard referencing style. Please include a bibliography at the end of your document. 1. Establish the facts of the case, the stakeholders affected and their motivations (10 marks) 2. What alternative actions can you propose that would have led to an ethical business approach, explaining the pros and cons and the ethical perspectives and frameworks that seemed to have been applied in the case? Which others could have been, but were not, applied? (10 marks) 3. What, according to you, ought to have been the best course of action? Document the way you will justify your decision, should you be challenged. (10 marks)
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