Governance Failure at Satyam WMP09040
Issues
December 16, 2008: Satyam board approved a 51% stake acquisition of Maytas Infra, a listed company in the Bombay Stock Exchange for US$1.3 billion and 100% stake in unlisted firm Maytas Properties for US$300 million. Both of these firms were in the construction and real estate business and Satyam’s chairman, Ramalinga Raju family held a 36% stake in Mayta’s Infra and 35% stake in Maytas Properties.
Implication: The deal was seen as a way of diverting cash from Satyam’s shareholder to Satyam’s chairman family. The investors reacted negatively to this news, resulting in 55% decline in Satyam’s ADRs. Following stiff resistance from institutional and general investors and Raju’s family being a minority shareholder (8.75%), Satyam called off the acquisition on December 17, 2008. However this did not pacify the negative sentiments, share prices fell by 30% in India.
December 23, 2008: WorldBank suspended Satyam for eight years from doing any business with itself on grounds that Satyam was offering bribes to World Bank Staff to obtain lucrative contracts.
Implication: Mangalam Srinivasan, independent director since 1991 resigned taking moral responsibility for not opposing the acquisition decision in writing. Three more independent directors’ resignation followed. IL&FS Trust sold 4.41 million Satyam shares at INR 139.83 in open market on 29th December. Raju’s and his family has pledged these shares in lieu of loans obtained from IL&FS, thus diluting their share holding to 5.13% in Satyam. Shares of Satyam continue to fall and marked capitalization eroded by 40% in just two weeks.
January 7, 2009: B. Ramlinga Raju wrote a resignation letter to Securties and Exchange Board of India (SEBI), market regulator in India. In his resignation he admitted that he falsified the financial statements. Bills were overstated to the tune of INR71.36 billion; this falsified amount included INR 50.46 million in non –existing cash and bank balances. Raju confessed that
December 16, 2008: Satyam board approved a 51% stake acquisition of Maytas Infra, a listed company in the Bombay Stock Exchange for US$1.3 billion and 100% stake in unlisted firm Maytas Properties for US$300 million. Both of these firms were in the construction and real estate business and Satyam’s chairman, Ramalinga Raju family held a 36% stake in Mayta’s Infra and 35% stake in Maytas Properties.
Implication: The deal was seen as a way of diverting cash from Satyam’s shareholder to Satyam’s chairman family. The investors reacted negatively to this news, resulting in 55% decline in Satyam’s ADRs. Following stiff resistance from institutional and general investors and Raju’s family being a minority shareholder (8.75%), Satyam called off the acquisition on December 17, 2008. However this did not pacify the negative sentiments, share prices fell by 30% in India.
December 23, 2008: WorldBank suspended Satyam for eight years from doing any business with itself on grounds that Satyam was offering bribes to World Bank Staff to obtain lucrative contracts.
Implication: Mangalam Srinivasan, independent director since 1991 resigned taking moral responsibility for not opposing the acquisition decision in writing. Three more independent directors’ resignation followed. IL&FS Trust sold 4.41 million Satyam shares at INR 139.83 in open market on 29th December. Raju’s and his family has pledged these shares in lieu of loans obtained from IL&FS, thus diluting their share holding to 5.13% in Satyam. Shares of Satyam continue to fall and marked capitalization eroded by 40% in just two weeks.
January 7, 2009: B. Ramlinga Raju wrote a resignation letter to Securties and Exchange Board of India (SEBI), market regulator in India. In his resignation he admitted that he falsified the financial statements. Bills were overstated to the tune of INR71.36 billion; this falsified amount included INR 50.46 million in non –existing cash and bank balances. Raju confessed that