Essay: The Satyam scam and corruption in India

Chapter 1: Objectives:

I. An introduction about the scams and corruption.
II. Studying in detail about Satyam scam.
III. Impact of Satyam scam on Indian economy.
IV. Steps for preventing and eradicating corruption in India.

V. Chapter 2: Review of literature:

The studies documenting performance effect of board composition are inconclusive; grounding on the agency theory prescription of board independence, the study of Baysinger and Butler (1985) indicates that board composition in terms of the proportion of outside (independent) directors has a lagged effect on organizational performance. ‘Firms with more independent board in the early periods not only enjoyed better performance later on but seem to have enjoyed an advantage over firms with less independent boards.’ Ira M. Millstein, a stout proponent of ‘independent board’ conducts a study with Paul W. MacAvoy (Millstein and MacAvoy, 1998) which demonstrates a substantial and statistically significant correlation between an active, independent board and superior corporate performance. Rosenstein and Wyatt (1997) research reports that announcement of outside director appointment is associated with a 46Vignettes of Research significant excess return of 0.20% and that announcement of inside director appointment is associated with an insignificant excess return. The literature advocating the inside directors on the board of directors of company on the ground of ‘better’ knowledge about the company and the industry, is equally profuse. Barnhart, (1994) investigate the effect of board composition on overall corporate performance and reported performance to be negatively related to the proportion of outside directors. Similar results of negative correlation between the fraction of outside directors and Tobin’s Q are obtained by Agarwal and Knoeber (1996). The work of Bhagat and Black (2001) is often cited in the literature. The study reports that firms experiencing poor performance tend to appoint more outside directors but that does not lead to an improvement in performance. There are several other studies which find no relationship between board composition and firm performance. Baysinger and Hoskisson (1990) report no link between board composition and performance when both relate to the same year. Hermalin and Weisbach (1991) find no strong relationship between percentage of outside directors and firm performance. The study concludes that ‘if such a relationship does exist, it is small with little economic significance’. Empirical studies on the corporate governance in India are few. This is because despite a long corporate history, corporate governance assumed importance in India only in 1993 with the opening up of the Indian economy. Post liberalization, a few research studies have been conducted investigating the relationship between one or more variable of corporate governance and financial performance of India companies. Most of these studies capture the impact of share ownership (managerial ownwership or institutional shareholding including by the foreign institutional investors) on th performance of firms. Noteworthy among these are the studies of Chhibber and Majumdar, (1996); Khanna and Palepu, (2000); Sarkar and Sarkar,(2000); and Patilbandla, (2006). In short, the extant literature on the subject, mainly US based does not give clear evidence on the performance effect of independent directors. An attempt is made in this study to enrich the literature by documenting evidence from India.
Das-Gupta (2007), Basu (2011), Bardhan (1997, 2005), and Quah (2008) along
bring a compact and virtually comprehensive survey of corruption in Asian country, a subject
on that there’s an awfully restricted tutorial literature. Das-Gupta (2007) makes a
distinction between powerful bribes and voluntary bribes. powerful bribes are what
Basu (2011) calls ‘harassment bribes’, bribes to be obtained what’s AN title or
what a politician is absolute to do as a part of their duties anyway. Voluntary bribes refer
to bribes for favors, like the award of a license or a contract. Powerful bribes
include bribes for refraining from victimization power to cause hurt, as an example, bribes to
the police or to tax officers to urge a refund. Powerful bribes profit bribe-takers solely,
while voluntary bribes create the bribe-taker and bribe-giver partners in crime at the
expense of the pecuniary resource and also the general public, as well as those deprived of equal opportunity to compete for contracts and licenses.
Das-Gupta (2007) cites a Transparency International survey of 2002 that ranks
the following seven government agencies in decreasing order of corruption: police,
judicial services, land administration, education, tax, and health services. Bribes to
the police are paid to avoid harassment. A big finding is that official
corruption payments were paid on to officers and to not middlemen, and
mostly to officer-level employees and to not subordinate employees. Associated with the presence
of official corruption, there’s additionally large-scale corruption in government
recruitment, and postings, and transfers to ‘lucrative’ positions, those during which
coercive bribes may be extracted. The speed of bribes ranges from 10’20 % of
the legal sums concerned for varied services.
It was found that companies tend to know what rate they have to pay in bribes for various favours and this is built into their cost calculations. As for ‘speed money’ promoting efficiency within a regulated economy, Bardhan (1997, 1323) and Banerjee (1994) point out that officials cause administrative delays and red tape to increase their capacity to extract bribes.
A second major form of corruption is large-scale or ‘grand’ corruption in the form of huge bribes on major government contracts, particularly on large imports of arms, an inherently non-transparent area, subject to national security considerations; bulk commodities; large infrastructure contracts; allocations of natural resources, such as minerals; or the telecom spectrum, all of which are controlled by politicians in certain key economic ministries with carefully selected bureaucrats colluding with them.
A third major form of corruption is direct theft of government funds from development programs such as irrigation and roads, from social and anti-poverty programs, from publicly funded loans to the poor, and the diversification of price-controlled goods, that are in short supply, for sales at higher market rates. These involve both bureaucratic and political corruption and overlap with cultivating electoral constituencies. This form of corruption, that is, direct misuse of government funds and materials, take place down to the village-level.
The causes of bureaucratic corruption are a combination of discretionary regulatory powers along with very weak monitoring and accountability mechanisms, the latter being deliberately designed to be weak in many programs.

Chapter 3: Introduction:

3.1 Definition of Scam:

Dishonest behavior by those in positions of power, such as managers or government officials. Corruption can include giving or accepting bribes or inappropriate gifts, double dealing, under-the-table transactions, manipulating elections, diverting funds, laundering money and defrauding investors. One example of corruption in the world of finance would be an investment manager who is actually running a Fraud scheme.
The crime of giving or receiving money, gifts, a better job in exchange for doing something dishonest or illegal.
When someone who has the power or authority uses it in a dishonest or illegal way to get money or any advantage.

Prevention of corruption-
To prevent corruption in the financial services industry, Chartered Financial Analysts and other financial professionals are required to adhere to a code of ethics and avoid situations that could create a conflict of interest. Engaging in corrupt behavior could result in job loss and revocation of a professional designation, such as the CFA title. Other penalties for being found guilty of corruption include fines, imprisonment and a damaged reputation.

Top 10 Corruption Scams in India-

1) Indian Coal Allocation Scam ‘ 2012 ‘ Size 1.86L Crore

2) 2G Spectrum Scam ‘ 2008 ‘ 1.76 L Crore

3) Wakf Board Land Scam ‘ 2012 ‘ 1.5-2L Crore

4) Commonwealth Games Scam ‘ 2010 ‘ 70,000 Crore

5) Telgi Scam ‘ 2002 – 20,000 Crore

6) Satyam Scam ‘ 2009 ‘ 14,000 Crore

7) Bofors Scam ‘ 1980s & 90s ‘ 100 to 200 Crore

8) The Fodder Scam ‘ 1990s – 1,000 Crore

9) The Hawala Scandal ‘ 1990-91 ‘ 100 Crore

10) Harshad Mehta & Ketan Parekh Stock Market Scam ‘1992 ‘ 5000 Crore Combined.

Chapter 4: Research methodology

Research Methodology: The process used to collect information and data for the purpose of making business decisions. The methodology may include publication research, interviews, surveys and other research techniques and could include both present and historical information.

Data collection method: The way facts about a program and its outcomes are amassed. Data collection methods often used in program evaluations include literature search, file review, natural observations, surveys, expert opinion, and case studies. There are two types of Data collection methods:-

Primary Data – Data collected by an evaluation team specifically for the evaluation study.
Secondary Data – Data collected and recorded by another (usually earlier) person or
organization, usually for different purposes than the current evaluation.

Hereby, the current research is conducted through the information received from various books, journals, newspapers, magazines and internet sources and the key findings are given below

Chapter 5: Key Findings:
About Satyam scam-

‘ Satyam Computer Services Limited was founded in 1987 by Mr. Ramalinga Raju.
‘ The company offers consulting and information technology services spanning various sectors, including engineering and product development, supply chain management, client relationship management, business process management and business intelligence.
‘ The company was listed with New York stock exchange, National stock exchange, and the Mumbai stock exchange. In June 2009, the company unveiled its new brand identity ‘Mahindra Satyam’

‘ Satyam Scam ‘ 2008 – 14000 crores
B Ramalinga Raju, the disgraced chairman of Satyam Computers Services Ltd, along with 13 individuals and entities including Chintalapati Srinivasa Raju of iLabs, made Rs 2,000 crore in illegal wealth in the Satyam scam. As financial frauds go, the one perpetrated by Raju & Co was quite uncomplicated. Satyam’s top management simply cooked the company’s books by overstating its revenues, profit margins and profits for every single quarter over a period of five years, from 2003 to 2008. Not for them complex methods like derivatives accounting or off-balance sheet transactions that were used by Enron’s executives.
Keen to project a perpetually rosy picture of the company to investors, employees and analysts, the Rajus manipulated Satyam’s books so that it appeared to be a far bigger enterprise than it actually was. To achieve this, they sewed up deals with fictitious clients, had large teams working on these pet ‘projects’ of the chairman, and introduced over 7,000 fake invoices into the company’s computer systems to record sales that simply didn’t exist. For good measure, profits too were padded up to show healthy margins.
Over the years, these ghostly clients understandably never paid their bills, leading to a big hole in Satyam’s balance sheet. The hole was plugged by inflating the debtors (dues from clients) in the balance sheet and forging bank statements to show a mountain of cash and bank balances.
After several years of such manipulation, Satyam was reporting sales of over ‘5200 crore in 2008-09, when it was in reality making about ‘4100 crore. Its operating profit margins were shown at 24 per cent when they were actually at 3 per cent and its handsome profits on paper covered up for real-life losses. It was when the company ran out of cash (of the real variety) to pay salaries that Ramalinga Raju decided that he couldn’t ride the tiger any longer and made his confession.
Full story
‘ Ramalinga Raju founded Satyam Computers in 1987 and was its Chairman until January 7, 2009 when he resigned from the Satyam board after admitting to cheating six million shareholders.
‘ After being held in Hyderabad’s Chanchalguda jail on charges including cheating, embezzlement and insider trading,
‘ Raju was granted bail on 25.3.2011. Raju was granted bail on condition that he should report to the local police station once a day and that he shouldn’t attempt to tamper with the current evidence
‘ A botched acquisition attempt involving Maytas in December 2008 led to a plunge in the share price of Satyam.
‘ In January 2009, Raju indicated that Satyam’s accounts had been falsified over a number of years.
‘ He admitted to an accounting dupery to the tune of 7000 crore rupees or 1.5 Billion US Dollars and resigned from the Satyam board on January 7, 2009.

What crime he has constituted( Ramalinga Raju)?
1. Raju and his brother, B Rama Raju, were arrested by the Andhra Pradesh police on charges of breach of trust, conspiracy, cheating, falsification of records.
2. Raju has mislead various investors.
3. Raju had also used dummy accounts to trade in Satyam’s shares.
4. He has violated the insider trading norm.
5. Funds from Satyam were diverted to Maytas
6. 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 INR 20 crore rupees every month for paying these 13,000 non-existent employees.
7. In Venture Global Engineering vs Satyam Computer Services Ltd 2010 (8) SCC 660 On being questioned by criminal investigation department of the Andhra Pradesh police, Mr. Raju reportedly admitted to using Satyam (respondent no.1) money for buying prime land in and around Hyderabad.
8. Ten Imaginary fixed deposits Raju admitted that Satyam’s fixed deposits which supposedly grew from Rs. 3.35 crore in 1998-99 to a massive Rs. 3320.19 crore in 2007-08 are all fake.

Reasons for Satyam Scam-
1. Raju wanted to take over his MAYTAS INFRA and MAYTAS PROPERTIES.(company of his sons).
2. He was blamed that he was using the funds of the investors for the family business.
3. World bank had banned the satyam to take any services for 8 years (due to illegal profit and lack of essential document).

‘ Maytas refers to a group of companies founded by B. Ramalinga Raju. It includes Maytas Properties and Maytas Infra Limited.
‘ A property development company founded in 2005.
‘ Maytas Infra Limited: An infrastructure development, construction and project management company. Maytas Infra was originally run by Satyam Computer Services founder B Ramalinga Raju.
‘ It came under the scanner due to its association with B. Ramalinga Raju.
‘ Various agencies, including the state Crime Investigation Department, probed the Maytas affair after B Ramalinga Raju admitted to serious financial scam in Satyam Computer.
‘ There were allegations that funds from Satyam were diverted to Maytas, causing the Government agencies to verify the infrastructure company’s records as well.
‘ In August 2009, Infrastructure Leasing & Financial Services replaced B Ramalinga Raju as promoter of Maytas Infra.

‘Society’s Reaction’-
‘ The people of his native village, Garagaparru, hail the development works undertaken by the Raju Foundation, the charitable arm of Satyam.
‘ The Citizens for a Better Public Transport in Hyderabad (CBPTH) demanded a CBI inquiry into the process of how Maytas bagged the Hyderabad Metro Rail project.
‘ Analysts in India have termed the Satyam scandal India’s own Enron scandal.
‘ Some social commentators see it more as a part of a broader problem relating to India’s caste-based, family-owned corporate environment.

Role of auditors, in light of Satyam scam-
This fraud was not committed overnight; it was building up continuously from over years. The role of Satyam’s auditors is under scanner. They ignored some of the obvious indications of embezzlement and thus failed to catch on the massive scam, which could have been caught much before it acquired the ‘massive’ status.

‘ Before the scandal its share price was Rs 300 in oct 2008. Just after this scandal the share price goes down to Rs 6.30.
‘ On 10 January 2009, the Company Law Board decided to bar the current board of Satyam from functioning.
‘ Bank of America and State Farm Insurance terminated its engagement with the company.
‘ SEBI, the stock market regulator, also said that, if found guilty, its license to work in India may be revoked.
‘ The New York Stock Exchange has halted trading in Satyam stock
‘ India’s National Stock Exchange has announced that it will remove Satyam from its S&P CNX Nifty 50-share index.
‘ 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
‘ Satyam was the 2008 winner of the coveted Golden Peacock Award for Corporate Governance under Risk Management and Compliance Issues, which was stripped from them in the aftermath of the scandal.
‘ Present time its share price is 107.89. Mahendra Satyam’s market growth is 7,800crore.
‘ Before the scandal Satyam was the 4th ranked among IT companies of India and on 9th jan2009 it became least valuable IT company in India.

‘ Although several companies are trying to have a bite into Satyam Computers, according to Gartner study, the company is likely to exist in its current form. It is expected to discontinue some of its businesses, service lines or cease to exist in certain geographies.
‘ Huge losses to investors aside, the Satyam scandal has caused ‘serious damage’ to India Inc’s reputation as well as the country’s regulatory authorities outside.
‘ The Government certainly cannot remain aloof and allow Satyam to die off especially when it provides occupation to 53,000 odd people and indirectly supports more than a million Indians.
‘ The Satyam scam effect has started its infectious presence. U.S. listed stocks of other Indian companies have started taken a severe beating.
‘ Indian firms are looking into methods to avoid scenarios of such scams within their companies.

Chapter 6: Suggestions:

5 ways to reduce corruption:
We are all aware of the term ‘corruption; and do a lot of discussion on how to control it. It may be defined as the misuse of the public office for one’s own advantage or for the purpose of any other illegal benefits by a public servant. According to sec. 2(c) (vii) of Prevention of Corruption Act, 1988, a public servant is, ‘any person who holds an office by virtue of which he is authorized or required to perform any public duty’. But in reality this has been seen to be abused. Every person has his/her own dignity and some fundamental rights. Corruption also affects the fundamental rights. How? It has been seen that a common (general) man fears to go to police station even when his/her right(s) is violated. Why? Because he/she does not want to face a series questioning of the police. Normally, what actually happens is, a person when goes to a police station for FIR, he/she has to struggle a lot and face a lot in order lodge his/her FIR in the order of it being properly written. If therefore suggests that we need such a body that could provide us a corruption free society. As per Prevention of Corruption Act, 1988. Sec. 13 (1) d (ii) of POC Act, ‘a public servant is said to commit the offence of criminal misconduct, if he, by abusing his position as a public servant, obtains for himself or for any other person any valuable thing or pecuniary advantage’. This seems to be omnipresent be it in any police department or medical department and even in judiciary.
The question again arises how to control this increasing corruption in our country? There are several bodies that are working for a corruption free system. Here are suggested some of the tools to reduce the corruption;
‘ The first tool is ‘education’. With the help of education we can reduce corruption. According to a survey conducted by India today the least corrupt state is Kerala, the reason being that in Kerala literacy rate is highest in India. So we can see how education effects education. In most of the states, normally a fairly large number of people are uneducated. Those who are uneducated do not know about the process, provisions and procedures through which they can get justice. Corrupt public servants try to make fool of them and often demands for bribe. It is due to unawareness in the field of law, public rights and procedures thereof that a common and an uneducated suffer out of the corrupt society. This suggests that if we are educated, we can understand our rights well.

‘ We need to change the government processes. If the members of the governing body are government officials, there will certainly be less reports of the criminal cases. The reverse may be possible only when there are no more criminal politician in our government. The provision is that, if there is any case filed against a person then he would not be eligible for election. But if we see hundred politicians then about sixty percent of them would be criminal in nature. If these criminal politicians command us and make laws, what types of law would be formed, we can guess! Thus during election, we should keep in mind the person for whom we shall not vote. In India there is a provision that no person as a criminal shall be allowed as a Member of Parliament or member of legislative. Unfortunately a fairly large number of them are a part of it.

‘ We can reduce corruption by increasing direct contact between government and the governed. E-governance could help a lot towards this direction. In a conference on, ‘Effects of Good Governance and Human Rights’ organized by National Human Right Commission, A. P. J. Abdul Kalam gave an example of Delhi metro rail system and online railway reservation as good governance and said that all the lower courts should follow the explanation of the Supreme Court and High Court and make the judgments online. Similarly, SivrajPatil said that the Right to information should be used for transparency. We have legal rights to know any information. According to this act, (Right to Information act 2005), generally people should follow the procedure of law given to then when their work is not being implemented in a proper way in public services. This act is a great help in the order to control corruption.

‘ Lack of effective corruption treatment is another reason. That means, instruments which are in use, are not running properly. For example Prevention of Corruption Act 1988 came into force on 9th September, 1988. But corruption is still flourishing. Why? Because of weak actions and proceedings towards corrupt people. People don’t have any fear of this act and the court. The act may thus be revised for its better implementation.

‘ Lack of transparency and professional accountability is yet another big reason. We should be honest to ourselves. Until and unless we will not be honest, we can’t control corruption. If each of us is honest towards our profession, then corruption will automatically decrease. We need to pay attention towards professional accountability i.e., how much we are faithful and truthful towards our profession. Corruption may be controlled by handling five major professions: lekhpal, medical, revenue, police and judicial.

Chapter 7: Conclusion:

There is a much better grasp today of the extent to which corruption is asymptom of fundamental institutional weaknesses. Instead of tackling such a symptom with narrow intervention designed to ‘eliminate’ it, increasingly it is understood that the approach ought to address a broad set of fundamental institutional determinants. However, the challenge of integrating this understanding with participatory process has barely begun. The implementation of institutional reforms can benefit significantly from the participatory process that is being developed for anti-corruption activities. Equally important, any participatory process, however sophisticated, ought to lead to concrete results beyond enhanced participation and heightened awareness.
Thus, identifying key institutional reforms in India, and mobilizing support for such reforms, needs to be fully integrated into the participatory process from very early on. Such early convergence is likely to promote a better balance between prevention and enforcement measures in addressing corruption. Until recently, the pendulum was firmly in the ‘enforcement’ corner. The gradual swing towards middle ground has taken place due to recognition of the limitations of ex post legalistic enforcement measures, since rule of law institutions themselves are currently part of the corruption problem in India.

Source: Essay UK -

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