CASE STUDY
ON
Corporate Fraud and Governance Failure in India – The Satyam
Scandal
Submitted by
RITU RAAJ (C-47)
NEW LAW COLLEGE,
BHARATI VIDYAPEETH
DEEMED UNIVERSITY,
PUNE
BA. LLB, 4th YEAR (SEMESTER VII)
DIVISION- “C”
SUBJECT NAME- COMPANY LAW
Case Study: Corporate Fraud and Governance Failure in India – The Satyam Scandal
Introduction
Corporate governance is a critical element of company law, ensuring transparency,
accountability, and fairness in the management of companies. One of the most significant cases
of corporate fraud and governance failure in India is the Satyam scandal of 2009. This case
highlights the failure of governance mechanisms, the role of regulatory oversight, and the
consequences of unethical corporate behavior in the Indian business landscape. This case study
examines the events surrounding the scandal, the legal issues involved, and its broader
implications for corporate governance reforms in India.
Background
Satyam Computer Services Ltd. was one of India’s leading IT companies, listed on the Bombay
Stock Exchange (BSE), the National Stock Exchange (NSE), and the New York Stock
Exchange (NYSE). Founded in 1987 by Ramalinga Raju, the company grew rapidly, earning a
reputation for excellence in software services.
In 2009, however, Satyam was thrust into the global spotlight when it was revealed that its
founder and chairman, Ramalinga Raju, had orchestrated one of the largest corporate frauds in
Indian history. Raju admitted to inflating Satyam's financial statements, falsifying accounts,
and overstating assets to the tune of approximately ₹7,000 crore (US$1.5 billion). This
revelation led to a collapse in investor confidence, a sharp decline in the company’s stock price,
and criminal investigations.
The Fraud
The Satyam scandal revolved around the falsification of the company’s financial statements
over several years. Raju, along with other executives, engaged in the following fraudulent
activities:
1. Inflated Revenues and Profits: Satyam overstated its revenues and profits to project
an image of consistent growth. Raju confessed to overstating cash and bank balances
on the company’s books.
2. Fictitious Assets: Satyam's balance sheet showed non-existent assets, including cash
reserves, which were inflated to create a false sense of financial stability.
3. Manipulation of Financial Statements: The company’s auditors,
PricewaterhouseCoopers (PwC), were allegedly complicit in failing to detect the
manipulation of accounts. This raised questions about the effectiveness of external
auditors and their role in corporate governance.
4. Failed Acquisition and Insider Trading: In December 2008, Satyam announced its
intention to acquire Maytas Properties and Maytas Infrastructure, companies owned by
Raju’s family. This move was seen as a way to siphon off Satyam’s cash reserves to
cover up the financial irregularities. Following strong opposition from shareholders, the
acquisition was scrapped, but the damage had been done. Investigations revealed that
Raju and other insiders engaged in insider trading by selling shares based on non-public
information.
Legal Issues
The Satyam scandal brought several key legal issues to the forefront of Indian company law:
1. Corporate Governance Failure: The Satyam scandal exposed serious governance
gaps within the company. The board of directors, tasked with overseeing management,
failed to detect the fraud despite red flags, such as the Maytas acquisition proposal. It
was evident that the board lacked the independence and vigilance required to act as an
effective check on executive power.
2. Auditor’s Role and Accountability: PricewaterhouseCoopers, the external auditor of
Satyam, was accused of gross negligence in failing to identify the fraudulent activities.
The auditors' failure raised questions about their independence and effectiveness in
ensuring accurate financial reporting. PwC later faced legal consequences, including
fines and penalties.
3. Enforcement of SEBI Regulations: The Securities and Exchange Board of India
(SEBI), responsible for regulating Indian capital markets, faced criticism for failing to
identify early signs of corporate governance lapses at Satyam. The scandal prompted
SEBI to strengthen its regulations and monitoring mechanisms for listed companies.
4. Criminal Liability: Ramalinga Raju and other executives were charged with offenses
including forgery, breach of trust, and criminal conspiracy. Raju admitted to falsifying
accounts, and the case led to criminal prosecutions under the Indian Penal Code (IPC)
and the Companies Act, of 1956.
Court Proceedings
After Raju’s confession in January 2009, multiple legal proceedings were initiated. The Central
Bureau of Investigation (CBI) took charge of the investigation, and in 2015, a special court in
Hyderabad sentenced Ramalinga Raju and his co-accused to seven years in prison for their
roles in the fraud.
Additionally, SEBI imposed heavy penalties on Raju and his family members, and PwC was
banned from auditing any listed company in India for two years due to its involvement in the
scandal.
Corporate Governance Reforms
The Satyam scandal had far-reaching consequences for corporate governance in India, leading
to significant reforms aimed at improving transparency, accountability, and oversight in
corporate management. Some of the key reforms introduced in the wake of the scandal include:
1. The Companies Act, 2013
The Companies Act, of 2013, which replaced the Companies Act, of 1956, was a direct
response to governance failures like those seen in the Satyam scandal. The Act introduced
several provisions to strengthen corporate governance, including:
Mandatory Appointment of Independent Directors: The Act requires certain
companies to appoint independent directors who are expected to bring impartiality and
objectivity to the board’s decision-making process.
Audit Committees: Companies are now required to establish audit committees with a
majority of independent directors. These committees are responsible for overseeing
financial reporting and auditing processes.
Rotation of Auditors: To ensure the independence of auditors, the Companies Act
mandates the rotation of auditors after a specific period, preventing auditors from
becoming too closely aligned with management.
2. Enhanced Role of SEBI
SEBI implemented several reforms following the Satyam scandal, including:
Clause 49 of the Listing Agreement: SEBI revised Clause 49, which governs
corporate governance practices for listed companies. It introduced stricter norms for the
composition of boards, mandatory audit committees, and more rigorous disclosure
requirements.
Whistleblower Protection: SEBI made it mandatory for listed companies to establish
mechanisms for employees to report unethical behavior or fraud, ensuring better
protection for whistleblowers.
3. National Financial Reporting Authority (NFRA)
The NFRA was established under the Companies Act, 2013, to oversee the quality of financial
reporting and auditing in India. The NFRA’s role includes investigating cases of professional
misconduct by auditors and ensuring that the financial statements of companies adhere to
prescribed standards.
Implications of the Satyam Scandal
The Satyam scandal had several significant implications for Indian corporate governance and
company law:
1. Increased Scrutiny of Corporate Governance: The scandal exposed the weaknesses
in corporate governance in India, particularly in terms of board oversight, auditor
independence, and the role of regulators. This led to a broader debate on how to ensure
transparency and accountability in Indian companies.
2. Investor Confidence: The scandal shook investor confidence, both domestically and
internationally, in the Indian corporate sector. It underscored the need for stronger
governance mechanisms to protect shareholders and restore trust in the market.
3. Focus on Ethical Business Practices: The Satyam case emphasized the importance of
ethics in business. While the fraud was carried out under the guise of profit
maximization, it led to the downfall of one of India’s largest companies and highlighted
the need for businesses to prioritize long-term sustainability and ethical practices.
4. Global Repercussions: As Satyam was listed on the NYSE, the scandal had global
repercussions, affecting foreign investors and the reputation of Indian companies
operating internationally. This led to increased scrutiny of Indian corporate governance
practices by foreign regulators and investors.
Conclusion
The Satyam scandal remains one of the most significant corporate fraud cases in India’s history.
It exposed serious lapses in corporate governance, auditing standards, and regulatory oversight.
However, it also acted as a catalyst for widespread reforms in Indian company law, particularly
with the introduction of the Companies Act, of 2013, and SEBI’s enhanced regulations.
The case underscores the importance of maintaining robust corporate governance practices to
ensure transparency, accountability, and ethical behavior in the business world. While legal
frameworks can provide the necessary safeguards, the Satyam scandal demonstrates that
corporate governance is ultimately a matter of ethical responsibility for boards, management,
and auditors alike.
References
1. Securities and Exchange Board of India (SEBI) Regulations, 2009.
2. The Companies Act, 2013.
3. Ghosh, S. (2010). Satyam Scam: Truth, Lies, and Corporate Governance. Economic
and Political Weekly.
4. Chakrabarty, B. (2015). Satyam Scam: A Case of Corporate Governance Failure in
India. International Journal of Business and Management.
