Satyam - All Is Well That Ends Well

In Q2, our revenue grew… on the back of a 4-per cent volume growth and rupee depreciation against the US dollar… We believe these factors will also enhance annual margin performance… I would like to emphasise that Satyam is leaving no stone unturned in our efforts to create a sound foundation for our future. Note to investors from B. Ramalinga Raju, Founder & Chairman, Satyam Computer Services, when declaring the company’s results for the quarter ended September 2008

The balance sheet carries as of September 30, 2008 inflated (non-existent) cash and bank balances… 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 stand-alone…) Note from B. Ramalinga Raju to the Board of Directors of Satyam dated January 7, 2009

About Ramalinga B Raju

Byrraju Ramalinga Raju (born September 16, 1954) is the founder of Satyam Computers and was its Chairman until January 7, 2009 when he resigned from the Satyam board after admitting to corporate fraud.  For a man who ran India's fourth biggest software exporter, Mr Ramalinga Raju was not a showy person.His bungalow in Hyderabad city's upscale Banjara Hills is an understated two-storey structure, with parking for no more than three or four cars.

He was on the board of Naandi, a non-governmental organisation based in Hyderabad which does stellar work in providing clean drinking water in rural areas and supplying mid-day meals to more than a million schoolchildren across India. He also runs the Byrraju Foundation, named after his father, and an emergency ambulance service that has won global acclaim.

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.6 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.
January 11 New Satyam Board announced, Mr. Deepak Parekh, Kiran Karnik and C Achuthan appointed as board members
Feburary 5 A S Murthy appointed as new CEO
April 16 Company Law Board approved stake sale to Tech Mahindra

The Satyam Scandal – Explained

Satyam, which ironically means 'truth' in Sanskrit, was set up in 1987 with 20 employees as Raju spotted the opportunity in outsourced code-writing. Within no time, business was booming. Andhra Pradesh, of which Hyderabad is the capital, has one of the largest pools of skilled manpower in India. Satyam would prove a doughty competitor to its rivals, pricing its services so aggressively that some thought it was prepared to go with minimum profits in order to gain customers. And it expanded aggressively overseas. When he opened his Sydney office a few years ago, he occupied premises vacated by a top global IT firm. In China, provincial leaders vied to invite Satyam to set up operations in their areas. But once Mr Raju sold shares to the Indian public in 1992 and later, went for a New York listing in 2001, pressure grew on him to improve the company's performance. Ever competitive, he was also in a rush to catch the market leaders, Tata Consultancy Services, Infosys Technologies and Wipro. Raju was obsessed with getting past the billion-dollar sales mark. When he got there, he wanted to post US$2 billion. Satyam posted US$2.1 billion (S$3.1 billion) sales in the year to March 31, 2008.With the ever-rising pressure to perform, Satyam began doctoring the books to show bigger profits, a process that began several years back.

For Satyam, the recent developments are a direct leftover of the past. In fact, the story is about a decade old. In late 1999, IndiaWorld — a largely unknown internet firm — was acquired by Satyam group company, Satyam Infoway, for an eye-popping Rs 500 crore. The consternation that accompanied this deal was not hard to comprehend. IndiaWorld had a topline of just Rs 1 crore and a net profit of an insignificant Rs 25 lakh. At Rs 500 crore, Satyam Infoway, later renamed Sify, was paying this astronomical sum not just for IndiaWorld but for a number of sites that came with it — among them were samachar.com, khel.com and khoj.com. The argument dished out was based on the potential of the internet business and the logic of eyeballs was driving this valuation story. One was not sure about the source of funds and how much money went back to Ramalinga Raju.

A few months later in 2000, shareholders of Satyam were an irate lot. At the annual general meeting (AGM) of the company in Hyderabad in May 2000, shareholders accused Satyam of withholding facts and claimed they were defrauded. This was after the merger of three subsidiaries — Satyam Enterprise Solutions (SESL), Satyam Renaissance Consulting and Satyam Spark Solutions — with Satyam Computer Services. Post merger, 8 lakh shares of Satyam Computers were allotted to C Srinivasa Raju, who was then Satyam Computers’ executive director.

Shareholders contended that SESL had made a rights issue of 12 lakh shares at par just before this merger. A third of this was bought by Satyam Computer while the remaining 8 lakh shares went Srinivasa Raju’s way after they were renounced. Once shareholders of SESL were given shares in Satyam Computers in a 1:1 proportion, Mr. Raju got 8 lakh shares at just Rs 10 each, when the shares were trading at a whopping Rs 1,600. The management of Satyam Computers, however, maintained that things were above board, though shareholders thought otherwise. The seeds of accounting manipulation in Satyam were sown several quarters before Ramalinga Raju’s communiqué to the board on Wednesday, 7th Jan-09. In 2002, the department of company affairs (DCA) was in receipt of a slew of complaints from Satyam’s shareholders that there were accounting irregularities in the company. Here, it was stated that Satyam’s directors invested unwisely in subsidiaries that were underperformers. This merely facilitated the process of tax evasion and employing methods such as writing off large amounts on depreciation.

At first blush, Raju’s statement to the board (Raju’s letter to the board Appended as Annexure I) in which he confesses to inflating profits appears a act of contrition by a man who was willing to stand up and face the music for his transgressions. If Raju was dressing up the bottom line, it was only to boost the company’s valuation and ensure that it stayed in the big league of IT services. A higher valuation also enabled Raju to borrow more money against his shareholding.

But Where Did the Money Go?

Raju claims that Satyam inflated profits for many years...
• By inflating cash and bank balances of Rs 5,040 crore (as against Rs 5,361 crore reflected in the books)
• Accrued interest of Rs 376 crore is non-existent
• Liability of Rs 1,230 crore is understated on account of funds arranged by "me"
• Debtors position of Rs 490 crore is overstated (as against Rs 2,651 reflected in the books)

but if this Rs 7,000-odd crore did not exist…
• How were the salaries of 53,000 employees being paid with a business that ostensibly survived on just a 3 per cent operating margin?
• Were there more employees on the bench (than revealed)?
• Was Raju inflating profits to boost Satyam's valuation, and borrowing money by pledging its shares?
...but if the money did exist...
• Did the Rajus use Satyam funds to build a land bank of over 6,000 acres via a web of unlisted companies?
• What happened to the funds raised? There was an ADR issue in 2001, via which Satyam raised Rs 753 crore and on March 31, 2002, Satyam became an almost zero-debt company with Rs 431 crore unutilised amount of ADR proceeds 

The Cash Was King for Satyam

If Satyam was fudging profits, where were the funds for all-cash acquisitions coming from?

Sr.No Year Acquired Firm Profession Funding
(Amount in $)
1 Apr-05 UK based Citisoft PLC Business Consulting Firm 38Mn (Paid in tranches)
2 July-05 Singapore based Knowledge Dynamcis Consulting Solution Provider 3.3 Mn (All cash deal)
3 Oct-07 UK based Nikor Global Solutions Infrastructure based management services and consultancy group 5.5 Mn (All cash deal)
4 Jan-08 Chicago based Bridge Stratergy Group Management consulting firm 35.00 Mn (All cash deal)
5 Apr-08 Caterpiller Inc Market research and customer analytics operations 95.5 Mn for both deals (all cash purchase)
S& V Management Consultants Supply chain management frim

Satyam - All Is Well That Ends Well - Continued

Contributed By:  Shweta Rajpal shweta_ca2005@rediffmail.com 

Disclaimer: The views expressed in this article are purely that of the Contributing Writer.