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
Ramalinga B Raju
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.
have dealt with the 54-year-old chairman of Satyam Computer
Services, say it is difficult to know what he is thinking
behind a calm exterior. He goes for morning walks, but seldom
appears at the swinging parties of Hyderabad's elite. Behind
his back, they sometimes refer to him as 'the man with the
Mona Lisa smile'. Mr Raju, a native of Andhra Pradesh state
in southern India, had a comfortable head start: He studied
abroad, obtaining a business management degree from Ohio State
On his return,
he began his career with forays into construction. Satyam,
was set up in 1987 with 20 employees as Raju spotted the opportunity
in outsourced code-writing. 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
About Satyam Computer Services Ltd
truth is as old as the hills" opined Mahatma Gandhi,
So a company named "Satyam" (Truth, in Sanskrit)
inspired trust, Satyam Computer Services Ltd was founded
in 1987 by B Ramalinga Raju. The company offers Information
Technology (IT) services spanning various sectors, and
is listed on the New York Stock Exhcnage and Euronext.
Satyam's network covers 67 countries across six continents.
The company employs 40000 IT professionals across development
centers in India, the United States, the United Kingdom,
the United Arab Emirates, Canada, Hungary, Singapore,
Malaysia, China, Japan, Egypt and Australia It serves
over 654 global companies, 185 of which are Fortune
has strategic technology and marketing alliances with
over 50 companies. Apart from Hyderabad, it has development
centers in India at Bangalore, Chennai, Pune, Mumbai,
Nagpur, Delhi, Kolkatta, Bhubneshwar, and Vishakhapatnam
of Satyam - Sr.No.
1 1987 Ramalinga Raju establishes Satyam Computer Services
2 1991 Satyam gets listed on the Bombay Stock Exchange, IPO
oversubscribed 17 times.
3 2006 Revenues cross '$1 billion.' Raju becomes Nasscom Chairman.
4 2007 Raju named Ernst & Young Entrepreneur of the Year.
5 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.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
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
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
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
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
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
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
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
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
views expressed in this article are purely that of the Contributing