History Matters | January 2009: Ramalingam Raju's Satyam Scam

Along with TCS, Infosys, Wipro, and HCL, Satyam was regarded as a superstar of the rapidly growing world of IT.

(This is part one of a four-part 'January' series that revisits significant historical events and policies, and how the lessons learned from them continue to be of relevance in present-day politics and society. Read part two here.)

The Institute of Directors is a hallowed body whose members occupy the boardrooms of the top companies. Apart from other activities, it confers a series of Golden Peacock Awards each year to corporations that a distinguished jury picks up.

In 2008, the chairman of the jury to finalise the Golden Peacock Awards was the retired Chief Justice of India P N Bhagwati. In a press release dated 8 September 2008, the Institute of Directors announced the names of the winners. One of them was Satyam Computer Services, the Hyderabad headquartered information technology giant.

It won the Golden Peacock for Excellence in Corporate Governance in the field of Risk Management and Compliance Issues. In layman’s English, Satyam was rewarded by its peers for successfully navigating risk and also for complying with rules and regulations.

The chairman of Satyam, B Ramalingam Raju, was the toast of the town. Exactly four months after winning the laurel, Satyam Computer Services was toast.

A Brief Recap

In a mea culpa kind of confession on 7 January 2009, Ramalingam Raju revealed that he and his close associates had been cooking the books of Satyam for years. Their goose was cooked because the Global Financial Crash of October 2008 triggered a collapse in valuations in all markets, including real estate.

Ramalingam Raju and his fellow embezzlers had fraudulently diverted Satyam money to invest heavily in real estate in and around Hyderabad. When real estate prices collapsed, Raju realised the game was up and fessed up. The entire corporate world was in shock. It was the biggest corporate scandal to hit India since independence.

Besides, along with TCS, Infosys, Wipro, and HCL, Satyam was widely regarded as a superstar of the rapidly growing world of information technology. Everyone appeared embarrassed. The standard reaction in those days was: how could a seemingly squeaky clean and composed Ramalingam Raju become a corporate crook?

Psychotherapists might disagree, but it probably was just good old-fashioned greed. In any case, since the scam was as clear as daylight, there was little doubt Raju and his cronies would face the music. For him personally, perhaps the least consequential punishment was a red-faced Institute of Directors announcing that it was stripping Satyam of the Golden Peacock Award for Corporate Governance.

In 2008, consulting firm Ernst and Young too had conferred the Entrepreneur of the Year Award on Ramalingam Raju. The authors don’t know what happened to that one. Raju was obviously least concerned over the awards since he was arrested within days of the scam coming out in the open. From a high of Rs 544 or so in 2008, the share price of Satyam collapsed to about Rs 11. The Sensex crashed by more than 7 per cent. All this was going on when the entire world was in financial and economic turmoil in the aftermath of the 2008 Meltdown.

To its credit, the then UPA government did step in and acted swiftly to stem the haemorrhage. The entire board of directors was suspended and well-known banker Deepak Parekh of HDFC was appointed interim chairman. He and some other reputed personalities were given the task of organising an auction to sell of Satyam to save the company.

In April 2009, Tech Mahindra put in the winning bid and snapped up Satyam for one third its value. Since that takeover, there has never been a hint of any hanky pankh as the Mahindra Group has made a success of of it all over again.

What about Ramalingam Raju?

The Central Bureau of Investigation took over the case after he was arrested and discovered a Rs 7,000 crore scam. For years, Raju and his associates had been cooking the books, artificially inflating revenues as well as profits, so that Satyam's stock kept rising in value. Raju would keep selling the stock at high prices and pocketing the cash. But his thievery went beyond that.

It was discovered by the CBI sleuths that about 13,000 of the 53,000 employees of Satyam did not really exist. Fictitious entities had been created and Raju would pay these ghost employees a “salary” of $3 million every month. Naturally, that $3 million went to his pocket. But where did the money really go?

Ramalingam Raju had also launched a real estate company called Maytas (Satyam spelt in reverse). He gambled big time on properties in and around Hyderabad that had already emerged as a thriving IT hub. His hope was skyrocketing real estate prices would fetch such enormous profits that the swindle at Satyam could go on and on, as long as the money kept coming in.

But real estate prices crashed and Raju had no place to hide or run. By end December, speculation about the real health of Satyam finances was already rife as the World Bank had blacklisted Satyam for irregular practices. The whole house of cards came tumbling down in early January even as India was getting ready for the 2009 Lok Sabha elections. Raju and many of his associates were eventually convicted by a court and sentenced to seven years in prison. The irony is that the sentence was suspended by the court within a month and Raju was released to file an appeal. The judicial process is still going on.

The Problem is Systemic

There are two things worth highlighting in this saga of scam and scandal. They are both related to institutions that are supposed to act as gatekeepers. The first is the auditors whose fiduciary responsibility is to examine the account books of a client company minutely and raise red flags without any fear or favour if they are discovered. The firm auditing the books of Satyam was the “prestigious” PricewaterhouseCoopers, a global entity. It is astonishing how the firm failed to find any discrepancy in Satyam books despite such a prolonged period of serial fraud.

PwC was eventually fined by SEBI and barred from auditing any listed Indian company for two years. The problem is systemic. Global giants with gold plated reputations have been found embarrassingly wanting in numerous such cases not just in India, but across the world. They seem to always end up paying a fine, reiterate their “commitment” to corporate governance, and go back to routine.

The second is the role of members of the board of directors who are supposed to ensure all decisions and actions of the company are above the board and meant to benefit stakeholders. The explosion of scams in India (and around the world) after the Satyam fiasco of January 2009 tells a depressing tale. Board members, for whatever reasons, have failed repeatedly to perform their responsibilities. Look at Chanda Kochhar at ICICI, Rana Kapoor at Yes Bank, Vijay Mallya at UB, Mehul Choksi at Gitanjali and a host of others, and you will realise that board members are often turning a blind eye.

In all the cases of scams, bribed bankers and pliable directors have helped greedy entrepreneurs break laws with impunity without getting “caught” for long durations. The so called “assets” would be leveraged multiple times and funds would be diverted, like Raju did with real estate. Interestingly, the party is over not because of “good corporate governance”, but other factors. For instance, it was crashing real estate values in the case of Raju. In the case of Vijay Mallya, it was “innocuous” things like oil companies refusing to supply till old does are cleared. That started the dominoes.

Till these two issues are resolved, there will be no end to scams like Satyam.

(Yashwant Deshmukh & Sutanu Guru work with the CVoter Foundation. This is an opinion piece and the views expressed are the authors' own. The Quint neither endorses nor is responsible for them.)