Satyam Scam – Indian Corporate Fraud THE SATYAM SCAM… (RAJU NOT THE GENTLEMAN) India’s Enron , the biggest corporate fraud of Indian History The recent disclosure by the chairman of Satyam Computers, Ramalinga Raju uncovered the biggest corporate fraud of India which by some has been regarded as similar to Enron. The letter sent by Raju to the board of Satyam ,regulator, exchanges shocked the whole country and company’ s share at the exchanges hitted a life low of 30 from the intraday high of around 180, down almost 80%. All this raised many questions on the role of Auditors (PricewaterhouseCoopers). Copy of the letter written by B.Ramalinga Raju To the Board of Directors Satyam Computer Services Ltd, From B. Ramalinga Raju Chairman, Satyam Computer Services Ltd. January 7, 2009 Dear Board Members, It is with deep regret, and tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice; 1. The Balance Sheet carries as of September 30, 2008 a. Inflated (non-existent) cash and bank balances of Rs.5,040 crore (as against Rs. 5361 crore reflected in the books) b. An accrued interest of Rs. 376 crore which is non-existent c. An understated liability of Rs. 1,230 crore on account of funds arranged by me d. An over stated debtors position of Rs. 490 crore (as against Rs. 2651 reflected in the books) 2. For the September quarter (Q2) we reported a revenue of Rs.2,700 crore and an operating margin of Rs, 649 crore (24% Of revenues) as against the actual revenues of Rs. 2,112 crore and an actual operating margin of Rs. 61 Crore ( 3% of revenues). This has resulted in artificial cash and bank balances going up by Rs, 588 crore in Q2 alone. The gap in the Balance Sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance). What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew significantly (annualized revenue run rate of Rs. 11,276 crore in the September quarter, 2008 and official reserves of Rs. 8,392 crore). The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations -thereby significantly increasing the costs. Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in a take-over, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten. The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas’ investors were convinced that this is a good divestment opportunity and a strategic fit. Once Satyam’s problem was solved, it was hoped that Maytas’ payments can be delayed. But that was not to be. What followed in the last several days is common knowledge. I would like the Board to know: 1. That neither myself, nor the Managing Director (including our spouses) sold any shares in the last eight years – excepting for a small proportion declared and sold for philanthropic purposes. 2. That in the last two years a net amount of Rs. 1,230 crore was arranged to Satyam (not reflected in the books of Satyam) to keep the operations going by resorting to pledging all the promoter shares and raising funds from known sources by giving all kinds of assurances (Statement enclosed, only to the members of the board). Significant dividend payments, acquisitions, capital expenditure to provide for, growth did not help matters. Every attempt was made to keep the wheel moving and to ensure prompt payment of salaries to the associates. The last straw was the selling of most of the pledged share by the lenders on account of margin triggers. 3. That neither me, nor the Managing Director took even one rupee/dollar from the company and have not benefitted in financial terms on account of the inflated results. 4. None of the board members, past or present, had any knowledge of the situation in which the company is placed. Even business leaders and senior executives in the company, such as, Ram Mynampati, Subu D, T.R. Anand, Keshab Panda/Virender Agarwal, A.S. Murthy, Hari T, SV Krishnan, Vijay Prasad, Manish Mehta, Murali V, Sriram Papani, Kiran Kavale, Joe Lagioia, Ravindra Penumetsa, Jayaraman and Prabhakar Gupta are unaware of the real situation as against the books of accounts. None of my or Managing Director’s immediate or extended family members has any idea about these issues Having put these facts before you, I leave it to the wisdom of the board to take the matters forward. However, I am also taking the liberty to recommend the following steps: 1. A Task Force has been formed in the last few days to address the situation arising out of the failed Maytas acquisition attempt. This consists of some of the most accomplished leaders of Satyam: Subu D, T.R. Anand, Keshab Panda and Virender Agarwal , representing business functions, and A.S, Murthy, Hari T and Murali V representing support functions. I suggest that Ram Mynampati be made the Chairman of this Task Force to immediately address some of the operational matters on hand. Ram can also act as an Interim CEO reporting to the board. 2. Merrill Lynch can be entrusted with the task of quickly exploring some Merger opportunities. 3. You may have a ‘restatement of accounts’ prepared by the auditors in light of the facts that I have placed before you. I have promoted and have been associated with Satyam for well over twenty years now. I have seen it grow from few people to 53,000 people, with 185 Fortune 500 companies as customers and operations in 66 countries, Satyam has established an excellent leadership and competency base at all levels. I sincerely apologize to all Satyamites and stakeholders, who have made Satyam a special organization, for the current situation. I am confident they will stand by the company in this hour of crisis. In light of the above, I fervently appeal to the board to hold together to take some important steps. Mr. T.R. Prasad is well placed to mobilize support from the government at this crucial time. With the hope that members of the Task Force and the financial advisor, Merrill Lynch (now Bank of America) will stand by the company at this crucial hour, I am marking copies of this statement to them as well. Under the circumstances, I am tendering my resignation as the chairman of Satyarn and shall continue in this position only till such time the current board is expanded. My continuance is just to ensure enhancement of the board over the next several days or as early as possible. I am now prepared to subject myself to the laws of the land and face consequences thereof. (B. Ramalinga Raju) Copies marked to: 1. Chairman SEBI 2. Stock Exchanges Later in the evening the ADR on the NYMEX fell 91% are trading was suspended in ADR of Satyam for a indefinite period. Raju went missing and did not apper in public for 3 days. Satyam isn’t the only Indian company involved in fudging accounts.” Such cases abound-it’s just things haven’t come out into the open like this. For some reason that’s still not fully clear, Satyam’s promoter has felt compelled to spill the beans. In hindsight, investors’ concern about Satyam’s corporate governance and relatively weak financial parameters should have been taken more seriously. Investors would do well to now apply these checks on other firms. Although Satyam has been among the top software firms in the country, its debt has been relatively high at about 90 days’ sales. Similarly, cash flow generation has been among the lowest as a percentage of sales. For these reasons, the Satyam stock has always quoted at a substantial discount to its peers. Normally, accounting irregularities show up in the cash flow statement, but the scale at which Satyam’s fraud has been done, even cash has been doctored with. Still, relatively low cash flow is certainly an alarm bill that investors shouldn’t ignore. Satyam’s operating profit margins, too, were the lowest among the top firms. But Wednesday’s revelation that margins are actually at 3% and not the reported level of over 20% is a complete shocker. Even the smallest of IT firms have better margins in India and Satyam boasts of much larger clientele and would certainly bill these clients at higher rates compared to tier-II and tier-III firms. The assertion that the company’s cost structure is disproportionately large too doesn’t make sense. Firms such as HCL Technologies Ltd that have a comparable size have an operating margin of 20% or more. An IT analyst with a domestic firm is in complete disbelief about the statement that the company has a profit margin of 3%. The Satyam Timeline Year 1987: Ramalinga Raju established Satyam Computer Services Ltd. 1991 : Satyam gets listed on the Bombay Stock Exchange, IPO oversubscriber 17 times. 2006: Revenues cross ‘$1 billion.’ Raju becomes chairman of Nasscom 2007: Raju named Ernst & Young Entrepreneur of the Year. 2008 September 23: Satyam awarded with Golden Peacock Award for Corporate Governance and Compliance. December 16: Satyam Chairman Ramalinga Raju announces plan to buy Maytas Infra and Maytas Properties owned by his sons for $1.6 billion. December 17: Raju does a U-turn because of negative investor reaction. December 23: Satyam barred from business with the World Bank for 8 years for alleged malpractices in securing contracts. Shares fall to lowest in 4 years. December 25 – Satyam asks World Bank to apologize. December 26 – Board member Mangalam Srinivasan resigns followed by exits of members Vinod Dham, Krishna Palepu. December 30 – One of Satyam’s largest investors says it could sell its stake.More suitors join in the fray to acquire Satyam. 2009 January 2: Satyam says its founder’s stake fell by a third to 5.13%. January 6: Satyam’s i-bank DSPML meets Sebi, informs about accounting irregularitites. January 7: Ramalinga Raju resigns, discloses a Rs 7000-crore accounting fraud in balance sheets about cash which never existed in the company. January 8: Satyam’s bank Citibank freezes its 30 accounts. Interim CEO Ram Mynampati says company in severe cash crunch and may not be able to pay salaries. Satyam’s auditor PwC faces ire. January 9: Ramalinga Raju and his younger brother B Rama Raju arrested by Police. Central Govt disbands Satyam board, to appoint its own 10 directors. January 10: Satyam’s largest investor Lazard seeks a nomination board. SEBI grills Raju. In the instant case, the auditors happen to be PricewaterhouseCoopers and it has failed on more than one count: not verifying cash balances which were shown as over Rs 5,000 crore but non-existent; an interest component of Rs 376 crore that never flowed into the company’s coffers; liabilities which were not reflected to the tune of Rs 1,230 crore and likewise an over-stated debtors position. “Without the concurrence of auditors, no fraud, and that too of this magnitude, can be committed year after year. It remains to be seen how seriously the government will view this and bring about changes that would check auditing firms being hand-inglove with the companies,” an analyst said. Sumeeth Kachwaha, managing partner of Kachwaha & Partners in Delhi, said not only Raju but dozens of others, including auditors and accountants, should be held accountable for signing false balance sheets. “They should be charged for financial wrong-doing by instituting a special tribunal under Corporate Affairs and Ministry of Commerce,” he said. Interestingly, the Satyam saga is similar to the Global Trust Bank, whose rise and fall was a story in itself. The edifice of GTB was built on falsified accounts in an attempt to shore up valuations. The scandal surfaced when its then head Ramesh Gelli tried to diversify into insurance by making an honourable exit from the bank. But that did not happen and GTB was ultimately merged with the Oriental Bank of Commerce. Even in the Global Trust Bank case, the auditors were none other than PricewaterhouseCoopers and the Reserve Bank of India had then imposed a ban on their auditing bank accounts. What Ramalinga Raju attempted and failed is exactly the same. Whatever be his public pronouncements, the promoters tried to maintain a high valuation for the company and to ensure this the books were fudged. Just as Gelli tried, he sought to wriggle himself out by moving into real estate and infrastructure by buying the two Maytas companies. When the deal was stalled, his fate was sealed. The other interesting element in the story is that both these shares – GTB and Satyam – figured among the 10 scrips that were operated by Ketan Parekh (named as KP 10) in the infamous stock market scandal years ago. The US Government had acted in the toughest possible manner when the Enron scandal was exposed, by imprisoning the CEO and also barring the auditing firm – Anderson and Co – from being in the business. Whether a similar fate awaits Ramalinga Raju and his partners in the fraud remains to be seen.
Posted on: Sun, 29 Sep 2013 16:14:33 +0000
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