Paper 5 (3) ,Lesson 2

Corporate Governance

09 -JULY-13
Syllabus: ethical concerns and dilemmas in government and private institutions, corporate
governance
[From Ethical Governance in Business and Government, edited by R.K. Arora]
This subject came into prominence in late 1980s and early 1990s.
Problems in India include

Exploitation of minority share holders

Siphoning of funds
Inadequate disclosure
Violation of rules

Kumaramangalam Birla committee gave recommendations in 2000 on good governance.

Oxley Act set new standards for public companies.
Father of corporate governance Sir Adrian Cadbury defined corporate governance as the way
in which companies are directed and controlled.
Stakeholders shareholders, employees, customers, suppliers, government, and public at
large. A company has responsibility towards all.
But human nature cant be altered through regulation and checks.
Too much control can cripple innovation.
In the eyes of the law, the directors are appointed by the shareholders. In reality, this is not
really so.
Management should act in the best interests of 1) boards 2) shareholders 3) employees
The aim is to foster entrepreneurship, investment and growth.
Harshad Mehta scam: huge sums siphoned off from banks. Died in prison in 2002. 4000
crores diverted from banks.
In Satyam scam fictitious assets could not be filled with real assets through Maytas.
Small investors are a big casualty in scams.
Kumar Mangalam committee was set up by SEBI. Its recommendations include increasing the
responsibility of audit committee, increasing financial disclosure, policy on whistle-blower,
role of non-executive directors. Clause 49 was adding in the listing agreements.
Ethical behavior is part of good governance.
Enron scandal
The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of
the Enron Corporation, an American energy company based in Houston, Texas, and the de
facto dissolution of Arthur Andersen, which was one of the five
largest audit and accountancy partnerships in the world. In addition to being the largest

Paper 5 (3) ,Lesson 2

Corporate Governance

09 -JULY-13
bankruptcy reorganization in American history at that time, Enron was attributed as the
biggest audit failure.
Enron was formed in 1985 by Kenneth Lay after merging Houston Natural
Gas and InterNorth. Several years later, when Jeffrey Skilling was hired, he developed a staff
of executives that, by the use of accounting loopholes, special purpose entities, and poor
financial reporting, were able to hide billions of dollars in debt from failed deals and projects.
Chief Financial Officer Andrew Fastow and other executives not only misled Enron's board of
directors and audit committee on high-risk accounting practices, but also pressured
Andersen to ignore the issues.
Enron shareholders filed a $40 billion law suit after the company's stock price, which
achieved a high of US$90 per share in mid-2000, plummeted to less than $1 by the end of
November 2001. The U.S. Securities and Exchange Commission (SEC) began an
investigation, and rival Houston competitorDynegy offered to purchase the company at a
very low price. The deal failed, and on December 2, 2001, Enron filed for bankruptcy
under Chapter 11 of theUnited States Bankruptcy Code. Enron's $63.4 billion in assets made
it the largest corporate bankruptcy in U.S. history until WorldCom's bankruptcy the next year.
Many executives at Enron were indicted for a variety of charges and were later sentenced to
prison. Enron's auditor, Arthur Andersen, was found guilty in a United States District Court,
but by the time the ruling was overturned at the U.S. Supreme Court, the company had lost
the majority of its customers and had closed. Employees and shareholders received limited
returns in lawsuits, despite losing billions in pensions and stock prices. As a consequence of
the scandal, new regulations and legislation were enacted to expand the accuracy of
financial reporting for public companies. One piece of legislation, theSarbanes-Oxley Act,
increased penalties for destroying, altering, or fabricating records in federal investigations or
for attempting to defraud shareholders. The act also increased the accountability of auditing
firms to remain unbiased and independent of their clients.
Satyam scandal
The Satyam Computer Services scandal was a corporate scandal that occurred in India in
2009 where Chairman Ramalinga Raju confessed that the company's accounts had been
falsified. The Global corporate community was shocked and scandalized when the Chairman
of Satyam, Mr. Ramalinga Raju resigned on 7 January 2009 and confessed that he had
manipulated the accounts by $1.47-Billion.
The IT boom in India, was fueled by young, Middle
class and Educated, budding Indian Entrepreneurs and Western firms anxious to outsource to
take advantage of high-skill, low-wage workers. This trend created a new breed
of businessmen for the 21st century and generated many fortunes literally
overnight. Ramalinga Raju- founder and former chairman of Indian IT giant Satyam Computer
Services- was one of these new millionaires. The son of a farmer from a middle-class family
with an American MBA degree and a 1999 Ernst & Young entrepreneur, Raju started Satyam
and worked his way to make the company a top 5 Indian IT firm with clients in 60 countries.
Satyam was listed on the New York Stock Exchange (NYSE) and the Bombay Stock Exchange.
Along the way Raju picked up CNBC's Asian Business leader - Corporate Citizen Award and
1,000 designer suits, 321 pairs of shoes, 310 belts. The Capitalization of Satyam skyrocketed
to $9-billion.[citation needed] It consequently crashed by 78% when Raju confessed in
January that he had falsified accounts for 6-years and inflated the cash account by over $1billion. But after the crisis, the Government started managing Satyam through a new Board.
Satyam had fictitious names that diverted $4-million monthly towards the Raju's "personal
wealth" by inflating the number of Employees of the company from 40,000 to 53,000;
hundreds of acres of land were bought using phony accounts; certificates from HDFC
Bank confirming deposits were false.

Paper 5 (3) ,Lesson 2

Corporate Governance

09 -JULY-13
PricewaterhouseCoopers was the statutory auditor of Satyam Computer Services when the
report of scandal in the account books of Satyam Computer Services was broke out. The
Indian arm of PwC was fined $6 million by U.S. Securities and Exchange Commission for not
following the code of conduct and auditing standards while pursuing its duties while auditing
the accounts of Satyam Computer Services.
The Companies Acts in India has stringent corporate Governance requirements of Board
members. Yet Raju was able to steer the Fabricated accounts through his board members for
6-years! This has Bewildered the Corporate sector and Regulators. At times, the company
was holding excessive cash, as per the books. This should have invited questions by Board
members. It is fair to expect independent directors, like Harvard Professor Krishna Palepu,
the former non-executive director of Satyam, to be moral guardians of Corporate
governance. The role of independent directors in accountability, transparency and
governance is also determined by common sense and tradition. However, whilst
Independent Directors should steer the company on the right path, ensure compliance,
protect minority Shareholders, they principally depend on information furnished to them by
auditors and Lawyers. It is unfair to expect independent directors, meeting monthly or
quarterly, to be undercover detectives or CoPS!
'Now the critical need is to rejuvenate Satyam, through professional managers and/or
established promoters who will inject fresh capital and Enthusiasm into the business. The
Securities and Exchange Board of India (SEBI) can play a pivotal role in this. Time is of the
essence as customers cannot wait for solutions. We Indians by now are so used to all types
of scandals and frauds by their Political leaders, Celebrities, Businessmen and public figures;
it looks like nothing affects them anymore. There were a lot of passions aroused in the initial
days of the scandals being exposed with questions like How could he do it? And Why did
he do it? Etc. All is forgotten by the end of the day and it is back to square one for the
common man. The fraud done by Ramalinga Raju is one more wake up call to our rather
callous and laid back fellow Indians. The news story, which hit the Headlines a few months
ago, exposed the utter dishonesty and Disregard with which Eminent businessmen deal with
public money.
Notwithstanding the fact that Mr. Raju came out with an admission of his guilt and
wrongdoings by way of a five page letter drafted for his board members, the authorities took
a full 3 days to initiate any legal action against this well connected and powerful individual
.This man has revealed in his letter that he had manipulated the accounts of Satyam
computers of which he was the CEO to a tune of around Rs.7000 Crores and that the money
was non-existent. He further stated that he had boosted the amount of credit interest shown
to the tune of around Rs. 400 Crores is another slap on the face of the easy to fool Investors.
Just to think a man whom thousands trusted by putting their hard earned money into his
business venture could simply write a letter saying he has manipulated his accounts to show
better prospects for investment in his company, this simply shocks our senses .At long last
the AP police have taken action and arrested Ramalinga Raju, Rama Raju his brother, and V.
Srinivas one of the MDs of the company and now it is our job as usual to forget everything
and get on with our boring lives. The coming few days will be however interesting to the
passionate minority of Indians to see how many political and corporate heads role when
more truths come out. In the meantime, it is only wishful thinking for the around 52000
Satyam Employees and the poor Investors.'[citation needed]
Ramalingam Raju along with 2 other accused of the scandal, had been granted bail from
Supreme court on 4 November 2011 as the investigation agency CBI failed to file the
chargesheet even after more than 33 months Raju being arrested.

Paper 5 (3) ,Lesson 2

Corporate Governance

09 -JULY-13
Raju had appointed a task force to address the Maytas situation in the last few days before
revealing the news of the accounting fraud. After the scandal broke, the then-board members
elected Ram Mynampati to be Satyam's interim CEO. Mynampati's statement on Satyam's
website said:
"We are obviously shocked by the contents of the letter. The senior leaders of Satyam stand
united in their commitment to customers, associates, suppliers and all shareholders. We
have gathered together at Hyderabad to strategize the way forward in light of this startling
revelation."
On 10 January 2009, the Company Law Board decided to bar the current board of Satyam
from functioning and appoint 10 nominal directors. "The current board has failed to do what
they are supposed to do. The credibility of the IT industry should not be allowed to suffer."
said Corporate Affairs Minister Prem Chand Gupta. Chartered accountants regulator ICAI
issued show-cause notice to Satyam's auditor PricewaterhouseCoopers (PwC) on the
accounts fudging. "We have asked PwC to reply within 21 days," ICAI President Ved Jain said.
On the same day, the Crime Investigation Department (CID) team picked up Vadlamani
Srinivas, Satyam's then-CFO, for questioning. He was arrested later and kept in judicial
custody.
On 11 January 2009, the government nominated noted banker Deepak Parekh,
former NASSCOM chief Kiran Karnik and former SEBI member C Achuthan to Satyam's board.
Analysts in India have termed the Satyam scandal India's own Enron scandal.[3] Some social
commentators see it more as a part of a broader problem relating to India's caste-based,
family-owned corporate environment.
Immediately following the news, Merrill Lynch (now a part of Bank of America) and State
Farm Insurance terminated its engagement with the company. Also,Credit Suisse suspended
its coverage of Satyam.[citation needed]. It was also reported that Satyam's auditing firm
PricewaterhouseCoopers will be scrutinized for complicity in this scandal. SEBI, the stock
market regulator, also said that, if found guilty, its license to work in India may be
revoked. Satyam was the 2008 winner of the coveted Golden Peacock Award for Corporate
Governance under Risk Management and Compliance Issues,[10] which was stripped from
them in the aftermath of the scandal. The New York Stock Exchange has halted trading in
Satyam stock as of 7 January 2009. India's National Stock Exchange has announced that it
will remove Satyam from its S&P CNX Nifty 50-share index on 12 January. The founder of
Satyam was arrested two days after he admitted to falsifying the firm's accounts. Ramalinga
Raju is charged with several offences, including criminal conspiracy, breach of trust, and
forgery.
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.[14] In New York Stock Exchange Satyam
shares peaked in 2008 at US$ 29.10; by March 2009 they were trading around US $1.80.
The Indian Government has stated that it may provide temporary direct or indirect liquidity
support to the company. However, whether employment will continue at pre-crisis levels,
particularly for new recruits, is questionable .
On 14 January 2009, Price Waterhouse, the Indian division of PricewaterhouseCoopers,
announced that its reliance on potentially false information provided by the management of
Satyam may have rendered its audit reports "inaccurate and unreliable". Such reply was
disappointment for the general public at large as The Chartered Accountants Act,
1949 clearly states that an auditor is responsible towards the information provided to him by
the management and shall be grossly negligent on affairs.

Paper 5 (3) ,Lesson 2

Corporate Governance

09 -JULY-13
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
20 crore (US$3 million) every month for paying these 13,000 non-existent employees.
On 5 February 2009, the six-member board appointed by the Government of India named A.
S. Murthy as the new CEO of the firm with immediate effect. Murthy, an electrical engineer,
has been with Satyam since January 1994 and was heading the Global Delivery Section
before being appointed as CEO of the company. The two-day-long board meeting also
appointed Homi Khusrokhan (formerly with Tata Chemicals) and Partho Datta, a Chartered
Accountant as special advisors.
On 13 April 2009, via a formal public auction process, a 46% stake in Satyam was purchased
by Mahindra & Mahindra owned company Tech Mahindra, as part of its diversification
strategy. Effective July 2009, Satyam rebranded its services under the new Mahindra
management as "Mahindra Satyam" with a new corporate website
www.MahindraSatyam.com.
C.P Gurnani is the current CEO.
As a result of the scandal, under the directions of the new Mahindra management team,
Satyam Computer Services restated its financial results for the period 2002 to 2008. These
restated results were published in September 2009.