Dubbed “India’s Enron” the Satyam scam has shocked countless Indians. Financial experts claim that this is possibly the biggest fraud in India’s corporate history. B.Ramalinga Raju, founders and Chief Executive Office of Satyam Computers has revealed that his company was fudging its accounts for years. He claimed that the company had over stated revenues and inflated profits by over $1 billion. ‘Satyam’ in Sanskrit means ‘truth’.
In his resignation letter, Raju has revealed that the company’s profits were inflated for several years to “unmanageable proportions” and that it was forced to carry more assets and resources than its real operations justified. He has said that Satyam’s balance sheet included Rs. 7,136 crore (nearly $1.5 billion) in non-existent cash and bank balances, accrued interest and mis-statements.
Its 2008 second quarter revenues were inflated by Rs. 588 crore ($122 million) to Rs. 2,700 crore ($563 million), and actual operating margins were less than a tenth of the stated Rs. 649 crore ($135 million). Immediately following Raju’s confession, Satyam’s shareholders took a heavy beating after share price crashed 77% to Rs. 30 (about 60 cents), against its 52-week high of Rs. 544 ($11.35) last May.
The scam broke into the open when Raju was forced to reveal the fraud after an aborted attempt to have Satyam invest $1.6 billion in Maytas (Satyam spelled backwards) Properties and Maytas Infrastructure. Both these companies are promoted and held by members of his family. On December 16, Satyam’s board cleared the investment, attracting negative reaction by investors. Stung by the investors reactions the board reconvened the same day and called off the proposed investment.
While financial experts are having a field day analysing the fraud, there is growing concern that the scam will adversely impact the work of Satyam’s various foundations. Through its foundations; the Satyam Foundation, the Byrraju Foundation, the Emergency Management Research Institute and Health Management Research Institute (HMRI); the company has earned credos for its community services projects in various parts of the country.
According to the company’s website Satyam believes in aligning its business operations with social values. As a responsible corporate citizen, Satyam is committed to leverage the power of IT to bridge the ‘digital divide’ that limits opportunities for success and prosperity, and thereby, transform lives of the less privileged.
Established in October 2000, Satyam Foundation is committed to transforming the lives of the underprivileged in urban areas. Discouraging mere cheque book charity, and to encourage involvement in CSR activities, Satyam Foundation follows a voluntary model for its operations. Satyam’s associates volunteer to contribute their time and share their knowledge with the underprivileged.
Among the programmes undertaken by the Satyam Foundation is the Emergency Management and Research Institute which has been instrumental in bringing health care to the door steps of several lakh people mostly in the rural areas. EMRI service provides end-to-end emergency services (medical, police and fire) to people in Andhra Pradesh, Gujarat and Uttarakhand. It includes free, quality medical treatment via an ever-growing network of ambulances and hospitals. Operating in the Public Private Partnership (PPP) mode, EMRI is the only professional Emergency Service Provider in India today.
EMRI has been exceptionally successful. It handles more than 1 million calls per year and saves thousands of lives every month. The programme has been replicated in Madhya Pradesh, Tamil Nadu and Rajasthan—three other large Indian states. EMRI covers a population of more than 300 million with more than 2,000 ambulances, making it the world’s largest integrated emergency services provider. EMRI has plans to be available across India by 2010. The EMRI imitative was awarded the 21the Century Achievement Award in the Health Care Category at the 2008 IDG Computerworld Honors Program (CHP)
Each MHU vehicle serves villages with a population of about 1,500 people for four hours every month. Each vehicle is able to visit approximately 56 villages every month. The “fixed-day” approach enables villagers to adjust their schedules to accommodate MHU visits. Residents of the village are informed about the visit through posters and other initiatives The service was targeted to deploy 475 vehicles and cover 50,000 rural villages, about 40 million people, most of whom live below the poverty line.
MHUs consist of paramedics, pharmacists and lab technicians. The modern, state-of-the-art vehicles are equipped to carry drugs and can store blood/urine samples for testing. They even feature a television that can show public health education programs. Services they provide include pre- and post-natal checkups, height and weight monitoring, nutritional supplements for mothers and children, basic blood and urine lab investigations and screening, advice and medicine dispensation for chronic illnesses such as diabetes, hypertension, epilepsy and anemia. When seriously ill patients show up at an MHU, an ambulance is summoned via EMRI (Call 108) and the sick person is brought to an Andhra Pradesh hospital.
The Byrraju Foundation, an NGO floated by the founder’s family members and named after their father, is dedicated to rural transformation and has significantly enhanced the quality of life of over 2 million people in 180 villages in India’s Andhra Pradesh state by offering high quality services such as healthcare, education, livelihoods, sanitation and drinking water. The key differentiators of Byrraju Foundation are application of knowledge and technology, backed up by a metrics driven project management approach. Satyam is a major alliance partner and the technology driver for the Rural BPO initiative.
The Foundation’s award winning programme the GramIT initiative leverages the capabilities of educated, unemployed villagers. They are given special training by Byrraju Foundation and hired to work in rural business process. They are engaged in outsourcing facilities, where they manage a broad range of critical business processes for numerous clients, including Satyam.
The GramIT initiative, which won the prestigious Asian CSR Award for poverty alleviation, focuses on continuous improvement. Apart from Computer and English training, the rural BPO employees are also given Six Sigma training. The program prevents rural migration to cities and gives a major economic boost to the villages by creating many livelihoods. In a very short time, three rural BPO centres have been set up employing more than 300 villagers whose productivity levels have surpassed the city BPO norms.
Byrraju Foundation has been honoured for its program to deliver electrocardiograms and tele-cardiology consulting to Indian citizens in rural areas of the country via videoconferencing. This new initiative, which has also won the 2008 21th Century Achievement Award in the not-for-profit category at the 2008 IDG Computerworld Honors Program (CHP), has already provided thousands of people with fast, high-quality EKG services and cardiology consulting, costing less than $1 per patient. Without this innovation, similar services would cost approximately $25, prohibitive for most rural Indians. Moreover, that does not take into account lost wages and expenses due to travel, which is usually necessary, considering that only 2% of Indian doctors are in rural areas.
Satyam and its partners including the Byrraju Foundation and the EMRI have won a number of awards for their CSR practices. Just three months ago Satyam was awarded the Golden Peacock Global Award for Excellence in Corporate Governance 2008 by the World Council for Corporate Governance. Within days of the unfolding of the scam the World Council withdrew the award claiming that the company had not disclosed all relevant facts.
The question now agitating the minds of the people is whether the scam will impact on the work of Satyam’s foundations. The Andhra Pradesh Chief Minister’s office has clarified the 108 and 104 services would continue without any hindrance. Similarly Verghese K. Jacob, Chief Integrator, Byrraju Foundation, said the organisation was least affected by the Satyam developments as it was entirely funded by the family members of Mr. Ramalinga Raju. He said Mr. Raju had assured him that the support would continue
The Former SEBI Chairman M Damodaran has said the case of Satyam Computer is neither the first nor the last corporate fraud to have hit India. He said, “People have been in a bit too much of a hurry to give both rating and corporate governance awards”.
Without doubt the citations and awards helped the company to acquire an excellent brand image. Company insiders have revealed that clients were attracted to the company because of its reputation of a good corporate citizen. The unfolding scam brings into questions the selection criterion for CSR awards. It is obvious that these awards were being handed out only on the basis of the company’s social investments ignoring issues like corporate governance, and some aspects of stakeholder responsibility.
It is now evident that the company was way down in the area of corporate governance. Directors of the company failed to live up to their responsibilities and are now deserting the sinking ship. Within 48 hours, non-executive director and Harvard professor of business administration Krishna Palepu and three independent directors – Mangalam Srinivasan, a management consultant and advisor to Harvard’s Kennedy School of Government; Vinod Dham, called the “father of the Pentium chip” and now executive managing director of NEA Indo-US Ventures in Santa Clara, California ; and M. Rammohan Rao, the Dean of the Indian School of Business in Hyderabad (ISB) put in their papers. Rao had chaired both December 16 board meetings.
The Satyam episode brings into sharp focus the role and efficacy of independent directors. SEBI rules require Indian publicly held companies to ensure that independent directors make up at least half their board strength. Clause 49 of the Listing Agreement of the Stock Exchanges sets down the guidelines for the composition of boards, including the number and qualities of independent directors, remuneration of board members, code of conduct and the constitution of the various committees, disclosures and suggested contents of the annual reports.
The appointment of independent directors has not helped in better implementation of good corporate governance. Raju’s statement strengthens the belief that almost all the directors on his board were just passive onlookers. They willingly believed what the chairman wanted them to believe. The promoter, with just about 5% stake in a company, was able to run it as his personal fiefdom making a complete mockery of corporate governance.
It also exposes a major weakness in Indian corporate governance — that is allowing the appointment of purportedly independent directors who are old friends or associates of management or of controlling shareholders. Most independent directors on company boards do not express dissent very forcefully, since they are intimidated or unsure of how their criticism will be taken. A recent study also revealed that 90% of companies appointed independent directors using referrals from the CEO or chairman.
The question haunting the mind is whether these problems were unique to Satyam. The government of India has already swung into action dissolving the Board. Investigators from SEBI are going through the book to determine the extent of the fraud. There is already discussion about the government re-examining its corporate government framework, with changes being made to strengthen it or at least to ensure the existing frameworks are robustly implemented
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