Thursday, May 11, 2017

Loan Syndication

A syndicated loan is often part of a wider financing strategy. These are big corporate loans provided to a corporate by the consortium of banks or institutional investors. Many companies use syndicated loans alongside bilateral agreements and a bond issuance program to maximize their ability to raise funds effectively and cheaply.
The loans are beneficial to banks, it helps in:
·         Diversifying their lending portfolio
·         Establish cross border relationships with institutional clients and customers
·         Reduce risk of high exposure to a counterparty
·         Sharing the responsibility and cost with other lenders

Benefits to customers / counterparty
There are different reasons why a corporate might want to arrange a syndicated loan. Common reasons include:
·         To meet the working capital financing.
·         To fund an expected merger and acquisition program
·         To fund a new big size project, such as building a new production facility.
·         To provide back stop facilities for other forms of financing, such as a commercial paper program.

In addition, the company would need to be able to provide the details on the usage of funds and how it will be meeting their business and operations strategy. Company would also need to provide the repayment plan for the mentioned fund obligations.
Syndication process:
Appointing arranger bank(s)
First step in syndicated loans process is to appoint one or more lead arranger banks for corporate loans. The role of lead arranger involves facilitation and leading the group of investors for major financing.
The selection of a lead lender is based on a number of factors, including the proposed terms and conditions of the facility, the willingness of the lender to hold a designated amount of the loan after the syndication, the reputation and experience of the potential lead lender, and the ability of the lead lender to execute and support other types of capital markets products for the company.
 Two issues need to be considered:
Club deal
This is essentially the same as a syndicated loan, with the same terms and conditions applying to all banks. They are mainly used by private equity groups to provide capital for acquisition of a target that is larger than the acquiring capacity of a single party. These deals allow private equity firms to compete for acquisition targets that were once only available to large acquirers.
These syndication usually covers a smaller amount up to $150 or $200 million. The main difference with syndication is that these loans are equally divided among the lead agent and other members. Similarly the fees and interest are also equally shared among the agent and participant banks.
However, there could also be added complexities on who would lead the acquisition, which party will take over the role of administrative agent, who will be overlooking the financial stability of the corporate and even the seller would need to negotiate with a number of different parties in the club rather than just one buyer.

Geographical spread
Lead arranger has to ensure that they have coverage in the markets where the parties willing to participate in a loan are located.
Multinational companies may want to invite banks in all their countries of operation to come into a syndication. It is important that the arranging bank(s) has presence in those countries and is aware of the investors business who are likely to be interested. This is generally referred to as distribution capability.
Loan Structure
After the lead bank/arranger gets appointed, next step is to structure the loan. This will depend on the purpose for which the company wants the loan, the creditworthiness of the borrower and the size of the required loan.
Term and repayment
First step to furnish the corporate’s loan requirement is determining the tenor of the loan. The decision varies according to the purpose of the loan and when the company expects to draw down the funds.
For example, if the funds are required to finance a particular project, the term should match the duration of that project (perhaps with an extension option if there is any delay). However, if the company views the syndication as contingency financing (to be used either when needed or when relatively cheap), the term should be determined within the overall context of the company’s financing strategy.
In effect, there are two alternatives, although a loan can be structured with both elements within it. The elements are:
1.    Term Loan aka Repayment on maturity.
These type of loans are drawn down in full and should be repaid on the maturity at the end of the term. This can be varied, by allowing companies either to draw down the funds in tranches or to repay in installments over the life of the loan.
These loans are
·         Similar to Mortgage loans
·         More structured – Only one Initial borrowing
·         Repayment schedule – due in installments/scheduled payments
·         Are drawn for a specific purpose – like to fund a new project
·         Payments to borrower will reduce the commitment made to borrower
·         The funds cannot be re-borrowed

2.    Revolving loan.
These type of loans are similar to credit card facility and are mainly used to fund the working capital requirements. Under the terms of a revolving loan, the company may be required to repay the loan in full at pre-determined points throughout the term of the loan. Once repayment has been achieved, the terms allow the company to draw down additional finance.
The key point is to ensure that an appropriate repayment profile is agreed. The purpose of this type of loan is to fund the working capital needs of a corporate and as such it emphasize the short-term nature of the funding and impose discipline on the liquidity management process.
These loans are:

·          Similar to a credit card
·          Facilitate daily transactions
·          Full commitment by bank expires only on maturity date of the facility provided to borrower
·          Used for ongoing cash management
·          Flexible line of credit

Fees and pricing
There are essentially five elements to the fees payable on a syndicated loan. These are:
1.    Margin
The lenders will charge a margin also called spread over an agreed market benchmark. In Europe, the loans are usually agreed on one of the interbank rates in the money market, either LIBOR or Euribor plus some spread over it. The size of the margin will depend on the creditworthiness of the borrower usually represented by the credit rating provided to corporate by S&P and Moody’s. The spread will normally range from less than 50 basis points for the highest quality investment grade borrowers to 300 basis points for the riskier leveraged buy-outs. The margin/spread may change over the course of the loan, if the terms and conditions allow, to represent, for example, a change in credit rating.

2.    Commitment fee
A commitment fee is charged by borrowers when a loan is not fully drawn. This is charged on the undrawn portion of the loan and is usually spread over the same benchmark rate as the margin. It will usually be between a quarter and a half of the drawn margin.
3.    Utilization fee
In some cases, banks may be able to charge a small additional fee if a high proportion of the loan is drawn. This applies to investment grade loans and reflects the fact that banks may have to set aside additional capital to meet capital adequacy rules. For example, this may be an additional 10 basis points if over half of the loan is drawn.

4.    Arrangement fee
The appointed lead arranger or banks will normally receive a fee for the syndication process once the whole process of arranging the participants and loan disbursement has been successfully completed. This will be determined by the size of the syndication and the associated credit risk. In some cases, other lenders will receive an upfront fee (of only a few basis points) for participation in the syndicate. Again, this will depend on their commitment and the risk of the credit. The payment of these fees will depend on the nature of the relationship the bank has with the borrower. In some cases, the arrangers or lenders will waive their fees as part of the overall relationship.

5.    Legal fees
Finally, companies will have to meet the costs of their legal advisors. The fee is normally paid for drafting the credit agreements and also for maintaining the financial statement ratios for the corporate.

Both parties will have to agree whether the arranger will underwrite the loan or not.
If the loan is underwritten, the borrower will receive the full amount of the loan, irrespective of whether the arranger has successfully syndicated the deal. If the arranger fails, then the underwriting bank or institution has to advance the balance of the underwritten loan.
If the loan is to be underwritten, the arranger will usually try to involve other banks as underwriters as part of the syndication process. Loans which are designed to raise a certain level of funds, perhaps to finance an acquisition, are more likely to be underwritten.
If a loan is not underwritten, it is said to be arranged on a ‘best efforts’ basis. This means the arrangers do not have to meet any shortfall in any unsuccessful syndication and the borrower will receive the reduced amount. ‘Best efforts’ deals are more likely when they are arranged on behalf of investment grade companies looking for back-up financing (where the total sum arranged is not vital).
Action by arranging bank
Once the lead arranger bank(s) has been appointed, it will start the process to arrange the loan participants to sell the syndication to other banks. The number of banks required will depend on the level of cash required to be raised and the individual banks’ appetites for involvement.
 First tier syndicate
The arranger will usually start by approaching the other members of the company’s core banking group. Where a company does not have a core banking group (if it is company being spun off another), this is more complex.
Extending the syndicate
Depending on the interest from the core banking group and the amount needed to be raised, the arranger may look to extend the syndicate to a broader base of banks. By definition, these are not the members of the core banking group. Banks joining the wider syndication may have a variety of objectives. They may see participation as the first step towards joining the company’s core banking group. Alternatively, they may be keen to diversify their portfolio of investments by lending to a a completely new sector/industry. Their main interest is to reduce the research cost.
Closing a deal
Once a sufficient number of banks have joined the deal, the arranger will close the syndication. At this stage, documentation is important as these loans are traded in the OTC markets. It is important that all participants agree to the same terms and conditions. This can take some time to negotiate. Once all parties are comfortable, the deal will be signed.
Administrative Agent
The company will need to appoint a bank to act as administrative agent. Normally the function is taken over by the lead arranger. The administrative agent has two main roles:
1.    It administers the collection of interest payments from the borrower and distributes them to the lenders. This can be a complex issue as the amounts outstanding can vary over the term of the loan as funds are drawn down and repaid.
2.    It administers any interim draw-down notices. Under the terms of a revolving credit, the borrower is entitled to call for a draw-down of funds at any time. In order to access these funds, all the participants in the syndication need to provide funds. Ensuring all participants meet their obligations is a key determinant of the success of the syndicated loan.
Secondary Trading
Once the syndication has been closed, investors are able to trade part or all of their investment in the secondary market. In most cases, there is a clause in the documentation which permits this. Most transfers are made "by novation", in which case the new lender becomes a ‘lender of record’. In these circumstances, the new lender simply replaces the original lender. The original terms and conditions apply, with only the bank receiving the interest payments changing. In these circumstances, the original investors will often simply be looking to make a fee on the trade of the loan. A small number of loans do not permit secondary trading or transferability.
The Loan Market Association was formed in 1996 with the aim of fostering a secondary market in European syndicated loans. Since then, the OTC loans secondary market has developed relatively quickly. The LMA has standardized the documentations required, at the heart of which is recommended form for primary documents.
Importance for lenders
The secondary market is an important factor for lenders. Lenders know that they can manage their exposure to a borrower by selling on part or all of their participation in a syndicated deal. There are three key aspects to this:
1.    The prospective lender is not committed to the credit for the term of the loan. Under a revolving credit, lenders often have the option of withdrawing from the loan after 364 days (depending on the structure of the loan itself). However, under a term loan, the ability to trade participation in the facility means the lender is not committed to the borrower until maturity.

2.    The lender can manage its exposure to individual credits as part of the management of its counterparty portfolio. To participate in the syndication, a potential lender may be asked to advance a higher sum than it would like. Alternatively, a lender may want to extend credit to another borrower in the same industry sector although it has reached its limit in that sector. The ability to trade part of the loan in the secondary market allows the lender to manage its own portfolio of investments according to its overall credit policy.

3.    It offers investors the ability to recoup losses in the event that a loan becomes ‘distressed’. Banks can sell such loans to other investors at a significant mark down from face value. The investors in the ‘distressed’ loans are attracted by the additional returns offered in the event of full repayment.

The key factor in all cases is that the bank’s ability to sell loans in the secondary market reduces the counterparty risk associated with the decision to participate in the syndication. As a result, the secondary market enhances liquidity in the syndicated market.
Importance for borrowers
From the corporate borrower’s perspective, the development of the secondary market has enhanced liquidity in the primary market and, arguably, has brought down margins for all borrowers. This is because of the reduction in risk assumed by the original lenders.
Some corporate borrowers are still concerned about transferability of their loans. For the reasons outlined above, companies need to accept that transferability has been an important factor in the growth of the syndicated loan market. However, there are two valid areas of concern:
1.    Relationship management.
Transfer-ability makes it much more difficult for the corporate treasurer to evaluate a bank’s commitment to the company. Although a core relationship bank may commit to a syndication, the company may not know whether the bank has sold any of its loan in the secondary market. As a result, it makes it more difficult to know the true level of commitment over time to the company. Therefore it becomes very hard for the company to measure the level of ancillary business it awards on the basis of the banks providing credit.
2.    Renewing a facility.
Allied to this, any attempt to renew a syndicated facility on the basis of a commitment made in the original syndication can be complicated. Treasurers, or their arranging banks, may be surprised that some banks do not want to participate in a second syndication when the time comes to renew. This may make the renewal process more complicated, although other factors such as the market conditions and the nature of the credit will also be important.
Funding Flexibility
One of the major reasons corporates like syndicated loans is that they represent an alternative source of funding, providing them with additional flexibility. However, to achieve that flexibility, the company must take care to structure the loan appropriately. This requires careful thought about how the syndication fits within the company’s financing structure. This then needs to be communicated to the arranging bank(s) so that they understand the company’s objectives. Care needs to be taken to ensure documentation is appropriate. We will examine this next month.

Tuesday, April 4, 2017

Stock Market Bias / Financial Behavior Patterns- Informed & Uninformed Investor

Stock market Biases:
Though both Informed and uninformed investors are supposed to take a rational approach when seeking to maximize their wealth through investments in stock markets yet this doesn’t happen in the real world. There are many instances where emotion and psychology influence the uninformed investor’s decisions causing them to behave in unpredictable or irrational ways. Behavioral finance seeks to explain the reason behind this irrational and illogical behaviors through cognitive psychology.

Cognitive Bias
Cognitive psychologists have documented many patterns on investor’s behavior. Some of them are:

Heuristics (Rule of thumb): When faced with N choices uninformed investors follow 1/N rule for fund allocation. This might lead to sub optimal investment decisions. for example, suppose there are 3 funds to invest, then people allocate 1/3 of the funds into each. In case there are two equity funds of the 3, then 2/3 of the allocation will be for equities.
Informed investors on the other hand identify the risks associated with fund and prefer diversifying the allocations based on the fund type.

Overconfidence: Uninformed investors get overconfident about their abilities and tend to invest too much amount in one company. Their portfolio gets less diversified and is therefore becomes a riskier investment.
Informed investors generally identify the risk associated with investments, they regularly go through the financial statements and management decisions and weigh their investment options.

Mental Accounting: Uninformed investors tend to separate their money into different accounts based on their usage. This behavior often leads to detrimental and irrational effect on their consumption behavior. An uninformed investor divide their portfolio into safe investment portfolio and speculative portfolio whereas on the other hand informed investor keeps the investment under one large portfolio and does not prefer separating accounts.

 Representativeness: While investing money in a share market, uninformed investor tend to give more weight-age to their recent experiences rather than looking at the stocks past performance. Though this can be a temporary effect due to market movement.
Informed investor does not go by the experiences, they wait for the right time and take stock positions based on their objective, term and priority.

Many a times uninformed investor have very strong preconceived notions about something and tend to follow prejudices while making the investment decisions:

Confirmation Bias: Uninformed Investor tend to search for the information that supports his original idea rather than searching the information that contradicts it. This type of selective thought process is confirmation bias.
Informed investors on the other hand perform detailed analysis on the company financials. Their decisions are based on the facts and figures without pre-conceived thoughts.

Gamblers’ Fallacy: The probability of market going up or down the next day is independent of the past events. Still uninformed investors presume based on the historical events that markets will fall on the sixth day if it has risen for the last five days and according places a short call in the market.
Informed investors take a call based on their objective, term and priority. They are not impacted by the temporary fluctuations in stock market.

Negativity Bias: The uninformed investors normally fear that the market will reverse the course and with the said fear they tend to shy away from stock market during initial phases of Bull Run. Negativity bias causes investors to put more weight on bad news than on good news.
Informed investors are sort of independent of the phases. They prefer buying more when the market is low and see if they have achieved their respective targets.

Bandwagon Effect: The uninformed investors buy the shares based on market commentary and other investor’s hearsay. They buy when the market is at its peak and they sell the stock when the market is at rock bottom. Informed investors normally prefer buying the stocks when markets is low and they prefer to sell when they have achieved their targets.

Emotional Bias
Though cognitive and emotional bias seem to overlap; emotional bias is taking actions based on feelings instead of facts. Here are few examples:

Loss-Aversion Bias: Uninformed investor prefer to hold the stock even though it has heavily depreciated in value. They are of conviction that one day the stock would turn into profit before they could sell it.
Informed investor on the other hand go by stop loss and sell the stocks if the share has depreciated by a certain value. They prefer re-investing the amount into some other good quality stocks.

Endowment Bias: An uninformed investor prefer to hold to hold the loss making stock just based on the fact that he is holding the best stock in the sector and the stock will rise one day.
Informed investor on the other hand moves to some better-quality stocks if the current holding stock does not show any sign of appreciation in its value.

Monday, March 6, 2017

Foreign Direct Investment - FDI Investment in India

Foreign Direct Investment-

Foreign Direct Investment (FDI) is permited as under the following forms of investments.
Through financial collaborations.
Through joint ventures and technical collaborations.
Through capital markets via Euro issues.
Through private placements or preferential allotments.

Forbidden Territories: FDI is not permitted in the following industrial sectors:
Arms and ammunition.
Atomic Energy.
Railway Transport.
Coal and lignite.
Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.

Foreign Investment through GDRs (Euro Issues) Foreign Investment through GDRs is treated as Foreign Direct Investment
Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs). GDRs are designated in dollars and are not subject to any ceilings on investment. An applicant company seeking Government's approval in this regard should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years.
This condition would be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads.

Clearance from FIPB There is no restriction on the number of Euro-issue to be floated by a company or a group of companies in the financial year . A company engaged in the manufacture of items whose direct foreign investment after a proposed Euro issue is likely to exceed 51% would need to obtain prior FIPB clearance before seeking final approval from Ministry of Finance.

Use of GDRs
The proceeds of the GDRs can be used for financing capital goods imports, capital expenditure including domestic purchase/installation of plant, equipment and building and investment in software development, prepayment or scheduled repayment of earlier external borrowings, and equity investment in JV/WOSs in India.

However, investment in stock markets and real estate will not be permitted. Companies may retain the proceeds abroad or may remit funds into India in anticipation of the use of funds for approved end uses. Any investment from a foreign firm into India requires the prior approval of the Government of India.

Wednesday, February 15, 2017

Satyam Scandal- Ethical Model Analysis

Satyam Scandal- Ethical Model Analysis

1.   Introduction and Background
In the year 2009, when the world was already reeling under the impacts of major financial recession, Indian Technology sector was hit by what is termed as the most colossal fraud in corporate history of India, The Satyam Scandal. The fraud often dubbed as the ‘India’s Enron’1 took everyone by surprise as at the time scam was exposed, Satyam was a renowned Indian IT company. However, things turned ugly when on January 07, 2009, the chairman of Satyam Computer Services Ramalinga Raju wrote a letter to Securities and Exchange Board of India admitting to the fraudulent activities and financial irregularities in his company2.Ramalinga acknowledged in his letter that he had been forging company’s accounts by overstating its revenues and inflating its profits for years and that Satyam Balance sheet showed nearly $1.5 billion in non-existent cash and bank balances, accrued interest, and misstatements3.
Before we analyze the factors led to the debacle of Satyam, we briefly discuss the background of the company which was doing well in business before the scam came to light. Satyam, the name which ironically means ‘Truth’, was established in 1987.It was a major IT player which provided services across the globe in fields of healthcare, Bio -Tech, Telecommunication, Banking and Finance4 etc. Prior to 2009, Satyam Computer Services was fourth largest Indian IT Service Provider5 which was generating USD 2.1 billion revenue5. It had 9% of the market share6. There were 530007 employees working in different IT Projects on different IT projects in Satyam’s Development Center across the world. Its clients included 163 Fortune 500Companies. The exports of Satyam accounted for almost 75.9 %9of its total sales revenue with North America being the largest contributor (65%)10Everything was going well with Satyam until the sequence of events unfolded which ultimately led to the disclosure of not only the biggest financial but also the major ethical scam of corporate India
2.   Ethical Framework
Satyam was evidently the case of ethical malpractices of Ramalinga Raju, chairman of the company who admitted his own misconducts. The Serious Fraud Investigation Office (SFIO), investigating arm of Ministry of Corporate Affairs in India investigated the case and submitted its preliminary report on April 13, 200912.  Per the report, Satyam founders, ex-CFO Vadlamani Srinivas, and ex-vice-president (finance) G Ramakrishna, conspired to artificially increase the revenues and profits in the books. The report highlights that the falsification was done by deliberately leaving loopholes in the Computerized Accounting System which uses ERP modules. The high-level application landscape of Satyam internal applications has many links between various systems where either there was no integration or there was weak integration. These loopholes were intentionally left to insert fictitious invoices and bank statements to balance them without being detected13.

2.1         Unethical Conduct – Ramalinga Raju
Satyam’s chairman Ramalinga Raju’s way of conducting the business is the classical example of unethical practices in the industry. He was solely driven by the greed of money and acquiring lands. He wanted to compete with the top three IT companies of India (Infosys, TCS and WIPRO). Raju chose the easiest yet the most immoral ways to achieve his goals. He forged the accounting books for nine years, avoided taxes, and diverted the money received from shareholders, created fake clients, account salaries and invoices. Ramalinga Raju showed his company in very good financial health and attracted money from shareholders to buy lands. Ironically, he had bagged golden peacock global award in 200814 for good corporate governance. Also,+ world Bank in December, 2008 barred Satyam from business for eight years for providing Bank staff with “improper benefits”. Ethical standards thus in the company were poor15.
2.2         Insider Trading
The promoters indulged in insider trading of the company’s shares to raise money. The funds collected by the former chairman B.  Ramalinga Raju, his brother Rama Raju and their relatives were used to purchase lands in the names of 330 companies Promoters of Satyam and their family members during April 2000 to January 7, 2009 sold almost 3.9 crore shares collecting in Rs 3029.67 crore16. The promoters based on the inflated books thus projected a very good financial position of the company and used the shareholders’ money deceitfully for their personal gains.
2.3         False Books & Accounting
According to the findings of SFIO, Satyam’s balance sheet as on September 7, 2008 carried an accrued interest of Rs. 376 crore, which was non-existent. The company had created a false impression about its fixed deposits summing to be about Rs 3318.37 crore while they held FDRs of just about Rs 9.96 crores17.
One of the biggest sources of forgery at Satyam was the inflation of the number of employees. While founder chairman Raju claimed that the company had 53,000 employees on its payroll but in real number was just over 40,000.  The fictitious number  could  be fabricated only because payment to the remaining 10,000 employees was faked year after year - an operation  that  evidently  involved  the  creation  of  bogus  companies  with  a  large  number  of employees18.
2.4         Negligent Board of Directors
The directors at the Satyam Board never questioned the actions of their Chairman. They did not raise objections when the management decided to invest 1.6 billion dollars to acquire a 100 percent stake in the two real estate firms promoted by Raju's sons19 which was in gross violation of the Companies Act 1956, under which no company is allowed without shareholder’s approval to acquire directly or indirectly any other corporate entity that is valued at over 60 percent of its paid-up capital.
2.5         Dubious role of Independent directors
Six of the nine directors on Satyams Board werindependent directors including US academician Mangalam Srinivasan (the independent director since 1991), Vinod KDham (famously known as father of the Pentium and an ex Intel employee), M Ram Mohan Rao (Dean of Indian School of Business), US Raju (former director of IIT Delhi), T.R. Prasad (former Cabinet Secretary) and Krishna Palepu (professor at Harvard Business School)20. They all were men of good reputation. But the fact that seven out of nine of these directors were present when Maytas deals were unanimously finalized, raises questions about their integrity. It indicated that they were aware of the malpractices and kept silent about them.
2.6         Dubious role of rating agencies
Credit rating agencies based their ratings of Satyam based on the falsified documents and never did any due diligence in their coverage and assessment21. They seemed conveniently unaware of the deteriorating financial condition of Satyam and therefore could not warn investors in advance.
2.7         Questionable role of Banks
 Banks did not raise any doubt while sanctioning the short-term loans to Satyam which was supposedly a cash rich company. The behavior of banks is unscrupulous in this regard22.
2.8         Unscrupulous role of Auditors
Price Waterhouse, was the auditor for Satyam and have been auditing their accounts since 2000-0123. The auditors compromised on standards by not using the PwC standard testing tools rather they relied on Satyam for that. Auditors, in connivance with perpetrators, did not report the possibility of fraud and control deficiencies in Information Systems to shareholders. The Statutory auditors also failed in discharging their duty when it came to independently verifying cash and bank balances, both current account and fixed deposits. There needs to be a physical verification of assets owned by the company rather than simply relying on the books prepared by the company.
Satyam ownership model was flawed from the perspective of good corporate governance24.
1.   As a publicly owned company, it was under pressure to overstate profits to keep the company’s bonds and equities in high esteem.
2.   Mr. B. Ramalinga Raju, diluted his holding from 25.6 % in 2001 to 3.6 % in 2009. He could overstate profits with the objective of influencing other shareholders. The overstatement never hurt him as his own share was small.
3.   Satyam would not have overstated its revenues and profits if it had to back both with real cash. A big part of the blame for the colossal fraud thus belongs to India’s trade and fiscal policy makers.
·       Deontology: is the study of that which an “obligation of duty”25 and consequent action based on moral judgment determine whether the person, business or any actor has complied to.
Ramalinga Raju actions were ethically in contrast with what is expected from the leader of any organization. He put his greed and ambitions before his duties towards his company, employers and stakeholders and did not hesitate from falsifying the accounting books for years ignoring all moral obligations towards them.
·       Consequentialism26: is the judgment on right or wrong based on the consequences of action taken or conduct of individual, company et al.
It is quite evident from Ramalinga Raju’s letter that when he started to show inflated numbers in his Account books, he miscalculated the consequences of his unlawful actions in long term. Since company was doing well in terms of business (on papers) stakeholders were happy, Raju chose to conveniently overlook the approaching disaster. In his own words “It was like riding a tiger without knowing how to get off without being eaten” (source 7: Economic Times (New Delhi), January 8, 2009, p1.). After his last attempt to fill the fictitious asset with real ones failed, he had to come face to face with the disastrous consequences of his unethical actions.
·       Graham Tucker’s 5 Questions27: The actions of Ramalinga Raju’s can be analyzed based on following questions:
o   Is decision profitable?  -  In short term, Yes. In long term, No. Due to manipulation in accounts, Satyam established its good reputation in the global IT market that helped it attract many investors and gain confidence of clients. The share prices rose due to fictitiously inflated numbers in accounting books but as soon as the truth came out the Satyam shares crashed 77% directly hitting the shareholders28 So in long run Ramalinga Raju’s unethical actions did not yield any profit to anyone.
o  Is decision legal? – No. Raju flouted all the corporate governance rules. He projected the bank balance which did not exist and created fake salary accounts, invoices and illegally diverted money to purchase lands.
o   Is decision fair? -  No, the decision was not taken based on fairness and accountability. The balance sheet and other financial statement should reflect the correct picture of the organization however, in Satyam’s case all the financial statements were unfair and manipulated.
o   Is the decision, right?  -  No, the decision made by Raju reflects his greed and hunger for power and money. As a decision maker, Raju should have considered the negative impacts of his decision on the Indian IT industry. He was rather focused on improving his company’s profits by manipulating the accounts and statements bringing the trust factor on Indian IT companies.
o   Is the decision going to further sustainable development?  - No, the decision in fact had negatively impacted the company’s sustainable development. The decision’s scope was not limited only to Satyam but led to the crash of entire Indian stock market.
·       Virtue Ethics29: Satyam prescribed itself to some great virtues and principles, though their conduct is completely opposite of what they claim to be. Ramalinga Raju flouted every rule in the book of corporate governance to fulfill his hunger and greed for power and money. If the conduct was ethical it would act parallel to the virtues expected by stakeholders. Out here virtues like Sustainability, Honesty and Integrity were only preached but not practiced. The act is based more on greed of making profits at the cost of shareholder’s money.
As soon as the news of Ramalinga Raju’s letter to SEBI (Securities and Exchange Board of India) broke out, the Satyam shares plunged 77%, the future of 40000 employees became uncertain, and the trust on Indian IT sector was shattered. Government of India promptly intervened to save interests of shareholders and, employees as well reinstate the faith in India Inc at global level. Legal cases were filed as per law of land of India against all accused including Ramalinga Raju, his brothers and PWC auditors. Government appointed six-member board to contain the damages in the aftermath. The boarselected Tech Mahindra through the global competitive bidding process. Consequently, Tech Mahindra (holding 31% stake in Satyam) bought Satyam renaming it on June 21, 2009, as MahindrSatyam and replaced its executive Board and Auditors30. Though the steps taken by Government ensured that Satyam did not collapse, however there were multiple financial, legal and customer challenges for new “Mahindra Satyam”In the first few months after the takeover, the new management in Mahindra Satyam spent its energy on traveling, meeting key customers, and reassuring them that it was  business  as  usual. A few customers like State Farm Insurance had moved to rivals even before the new owner and management came on board. Others, shaken by the scam, decided to de-risk and move. One of the most high-profile losses was that of British Petroleum’s $1-billion contract31. A few big names such as GE, a top customer, and GSK stayed on but extracted their pound of flesh. They asked for 15-20% rate cuts across the vendor base, and Mahindra Satyam was no exception32.
4.1         Ramifications in Corporate Governance Strategies in India
The Satyam fiasco led government of India to introduce the new measures in corporate governance to prevent reoccurrence of such frauds in future33. These are:
Ø  The voluntary adoption of international financial reporting standards;
Ø  The appointment of chief financial officers by audit committees based on qualifications, experience, and background.
Ø  The rotation of auditors every five years so that familiarity does not lead to corporate malpractice and mismanagement34.
Ø  Independent Directors are not entitled to receive remuneration for their services, except for reimbursement. At least one-third of the Board of a company should consist of independent Directors35.
Ø  Audit committee has to accommodate a majority of independent Directors.
Ø  Additional disclosure norms are – providing for the formal evaluation of the performance of the Board of Directors, filing returns with the Registrar of Companies with respect to any change in the shareholding positions36.

15.  The World Bank is now having a relook at the ban imposed on the Mahindra Satyam when it was under the Rajus family. Mahindra Satyam requested for lifting the ban. (Economic Times, New Delhi, May 06, 2010, Page 21).