Founder of India's Satyam found guilty of fraud – gets seven years in jail

Profile picture for user ddpreez By Derek du Preez April 9, 2015
Summary:
The former head of the software company, along with nine others, were found guilty for one of the largest cases of corporate fraud in India.

 

B Ramalinga Raju
B Ramalinga Raju

Back in 2009 Satyam founder B Ramalinga Raju wrote a letter resigning from one of India's largest software companies, in it which contained an admission that approximately $1 billion on the company's books was falsified.

In his resignation letter, Raju said that the “concern was that poor performance would result in a takeover” and that it was like “riding a tiger, not knowing how to get off without being eaten”.

Raju claimed that he had been manipulating the company's accounts in a bid to remain one of India's top IT companies. And now, this week, he and nine others have now been sentenced to seven years in prison by the courts. Raju has also received a fine of an estimated $800,000.

Raju was also convicted of criminal breach of trust, falsifying documents and the falsification of accounts. The others charged include Raju's brother, six other Satyam executives and two partners of PricewaterhouseCooper's Indian arm.

“All the accused have been convicted of almost all charges,” said one of the prosecutors.

When news of the scandal broke in 2009 it rocked the IT software industry, which up until that point had been seen as a fairly clean business compared to other corporate sectors in the country at the time.

A few months after Raju handed in his resignation and the revelations of the fraud came to light, Federal CBI investigators found that the wrongdoing had been going on for nine years and included the company's bosses forging invoices, creating a large number of fake bank statements and paying unneeded employees large inflated salaries.

As a result of cashing in on a surging share price, Raju and over a dozen other friends and family made approximately $400 million from the scam.

The revelations led to the collapse of Satyam Computers in 2009 and cost shareholders over $2 billion. The company was saved only thanks to the intervention of the Indian government and another Indian IT firm, Tech Mahindra, which bought a controlling stake in the company.

Satyam
The BBC's Theo Leggett compared the scandal to the collapse of Enron in the United States, but with the difference being the intervention of the Indian government to save the India-based firm and it's employees. Leggett said:

It's often described as India's Enron - and certainly the fraud at Satyam had much in common with the scandal that brought down the US energy giant in 2001. In both cases, the men in the boardroom systematically inflated profits in order to make their companies appear much healthier than they actually were.

Enron executives also concealed substantial debts. Both affairs, when they came to light, caused widespread shock and undermined confidence in the corporate sector. But the consequences of the Enron scandal were much greater. It caused the company to collapse. 20,000 employees lost their livelihoods and shareholders lost more than $70bn.

In the case of Satyam, the Indian government intervened to keep the company operating and engineered a takeover by the Mahindra Group. Shareholders still lost money, but the wider fallout from the scandal was much more limited.

Interestingly, the New York Times notes that incidences in corporate fraud are actually rising in India. Vidya Rajaro, a partner at Grant Thornton in India, said that that country had remained low on measures such as the World Bank's Ease of Doing Business ranking, which was in part a reflection of the corruption and lack of transparency in the region. The New York Times states:

One of the causes of fraud, she [Rajaro] said, is “the opportunity to commit the fraud and get away with it because the regulatory mechanism is not consistently enforced,” adding that many cases go unreported in India. The upper house of Parliament passed a bill in 2013 to overhaul auditing practices and impose stricter penalties for fraud.

Other recent corporate fraud cases, none of which reached the caliber of the Satyam case, include a $157 million embezzlement by two executives of the sports apparel maker Reebok India in 2012.

My take
Law theme with gavel scales books © Sebastian Duda - Fotolia.com

Apparently Raju and his cohorts are planning to appeal against the court's decision, but with the admission in his resignation letter, I'm not quite sure what Mr. Raju expects. Ultimately this was corporate fraud of the highest order. Fraud that made Mr. Raju and his friends and family very wealthy at the time. For the sake of India's reputation as a good place to do business, the courts needed to enforce the law and make an example of the former Satyam executives.

Image credit: Bloomberg