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Satyam - All is Well That Ends Well

Satyam - All Is Well That Ends Well - Continued from

 

The Downfall of Raju

The downfall of Raju, began in Dec 08 when Satyam attempted to acquire two companies controlled by his sons - Maytas (Satyam spelled backwards) Properties and Maytas Infra - for 1.6 billion dollars in order to compensate for the holes in his books of account. The deal was abandoned 12 hours after it was announced when investors objected, claiming it was an irresponsible misuse of funds and an instance of nepotism. The Maytas deals acted as a red flag for international investors, with a host of companies like Unpaid Systems of Britain accusing Satyam of fraud, forgery and breach of contract.

Shortly thereafter, on Dec. 23, the World Bank barred Satyam from offering its computer services for eight years citing a potential trail of corruption - data theft and bribery - that led to Raju. The last straw perhaps came on Jan 09 when an Indian associate of Merrill Lynch terminated an agreement on grounds of "material accounting irregularities".

The Role of Auditors There is intense debate about the role of PricewaterhouseCoopers, the external auditors of the company in clearing the accounts of Satyam. Auditors are supposed to have checked, verified cash balances, bank statements, assets with relevant confirmations. Satyam was a large company, not a street store; PricewaterhouseCoopers is a globally reputed firm. The auditors cannot hide under the standard clause ‘auditors can be watchdogs and not blood-hounds’ especially when cash and bank balances have been overstated.

Role of Directors
The Companies Act in India has stringent corporate governance requirements of board members. Yet Raju was able to steer the fabricated accounts through his board members for 6-years! This has bewildered the corporate sector and regulators. At times, the company was holding excessive cash, as per the books. This should have invited questions by board members.

In particular, Independent Directors, who are appointed by shareholders at the behest of the board, are selected on the basis of their reputation, knowledge, and wisdom. They are the first defense of minority shareholders. Generally they bring specialized expertise. Independent directors have to meet standards set by stock exchanges too. The Indian Government specifically delineates the role of independent directors in safeguarding the interests of the organization and the shareholders. An independent director would normally assume that audited accounts have been rigorously examined. This is more so when an internationally credible firm- like Pricewaterhouse Coopers- has audited the numbers. But, they need to still ask the right questions and probe. Sitting on numerous boards compresses the time an independent director has to reflect on what is happening inside the belly of a company.

The Facts about Insider Trading

Raju has claimed that no one else in the company was privy to the fudging of accounts. But the facts speak something else. BSE figures show a number of senior people in the company, including Raju and CFO Vadlamani were reportedly selling Satyam's shares over the last 22 quarters.

Sr.No. Name of the Officail Year Stake in the Satyam/ No. of shares sold
1 Ramanlinga Raju June-2001 23.0%
Dec-2001 22.4%
Sep-2002 21.6%
2003 19.0%
2004 16.0%
2005 14.0%
2006 11.0%
2008 8.27%
2 Vadlamani (Then CFO) 92538 shares
3 Ram Mayanpari (Then CEO) 7,00,000 shares and 2,50,000 ADR’s
4 Kiran Cavale 4,00,000 shares and 10, 000 ADR’s
5 Rajan Nagarajan 4,30,000 shares and 70,000 ADR’s

Satyam Fraud Investigated
As soon as Ramalinga Raju confessed about the fraud, all the government deparments started investigating about the fraud. The deparments include CBI, SFIO, SEBI, ICAI and RBI.

CBI reveals modus operandi of Satyam fraud
Using cyber forensic techniques, the CBI has deciphered the modus operandi of the Satyam fraud. Following are the findings of CBI for some areas:

Sr. No. Area Remarks

1 Sales Data IT company generated false invoices to show inflated sales. 7561 invoices were found to be hidden in the Invoice Management System. These invoices were worth Rs.5,117 crore. The accused already entered 6,603 of these, amounting to Rs. 4,746 crore.
2 Receivables The fraud invoices resulted in creation of inflated receivables
3 Fixed Deposits Investments shown as fixed deposit receipts (FDRs) worth crores of rupees were fake and printed from his personal device. The fake FDRs showed huge amounts, as the interest on these deposits was projected to be over Rs 375 crore, as against the actual interest income of Rs 7.42 lakh only.
4 Bank Guarantee Manipulated the Bank Guarantees to show balance in bank accouts as Rs. 1800 crore
5 Balance in bank accounts Forged the bank documents showing the existence of the cash balance in five banks including ICICI Bank, HSBC, Citibank and BNP Paribas but the banks clarified that they do not have any cash balance in the name of the firm.
6 Who all were involved CBI Chargesheet names Ramalinga Raju, Rama Raju, Suryanarayana Raju, V. Srinivas, S. Gopalakrishnan, T. Srinivas, G. Ramakrishna, D. Venkatapathi Raju, and C. Srisailam.

The revelations by Serious Fraud Investigation Office (SFIO)

 

The government, on January 13, had initiated an SFIO probe into various corporate aspects of the fraud under Section 235 of the Companies Act. The SFIO is a multi-disciplinary body set up in 2003 to investigate serious financial frauds. It consists of tax professionals, auditors, fraud examiners, capital market experts and banking professionals. Following are the revelations of the SFIO Commitee

Sr. No. Area Remarks

1 Main areas of inflation inflation has happened mainly on six accounts, One is by falsifying cash and bank balances, by showing fictitious FDs, by showing fictitious interest being accrued on those FDs, by showing understated liabilities and also by showing overstating debtors.

2 Exports Inflated to the tune of over Rs. 4500 crores over the last 7 years
3 Currency Remittance Amount of Rs. 1940 crore is still unremitted
4 Books Books inflated to the tune of Rs. 27167 crore
5 How long has this been going on Fy 01 to Sep 08
6 Reason for fraud Very weak invoice management system and weak accounting practices
7 Accounting Sofware Loopholes in accounting software and left passwords unsecured to facilitate fraud. software system for managing company’s financial accounting functions was deliberately made very complex for inflating profits
8 Invoice Management System Weak password protection making the system vulnerable to misuse.

Therefore, fake invoices could be created by unauthorised users. In order to Balance the collections against these fictitious invoices, they were first shown as receipts in the current account maintained with the Bank of Baroda, New York Branch and subsequently they were shown to be transferred to other bank accounts as fixed deposits. There were no validation checks for a number of invoices. The SFIO report points towards a serious control deficiency in the system that facilitated entering of unauthorised transactions, making unauthorised payments and non-detection of unauthorised activities.

9 Fixed deposits The promoters were regularly generating fake quarterly balance confirmation letters showing the amounts of fixed deposits and the interest accrued on them. These forged current account balance statements and confirmation letters were fed into Satyam’s accounting software Oracle Financials for the quarterly audits of the company. 10 Current Accounts three other bank accounts in India, Citi Bank, HDFC Bank and HSBC were also used for this purpose of falsification of current account balances.

SFIO in its report on the Satyam fraud case said that the IT company's claims of depositing funds raised through American Depository Shares in 2001 in banks could not be verified. Satyam in 2001 through a public issue in the US raised Rs 760 crore and claimed it deposited the amount in Citibank, New York. Though the company claimed that it transferred Rs 397 crore to India, the SFIO report said, it was wrongly mentioned to have been transferred to India and the actual utilisation of this amount could not be traced as all the amounts were transferred from this account to some unknown accounts through Citibank, Bahrain.

Satyam- Now Tech Mahindra

Tech Mahindra pipped Larsen & Toubro and the Wilbur Ross group to claim the fraud-hit Satyam Computer. According to early reports on Monday, Tech Mahindra is paying Rs 1757 crore for a 31% stake in the company, or Rs 58 per share. Satyam Computer Services has now zoomed 15% to Rs 54.20 ahead of the announcement of the highest bidder for the company on April 13, 2009.

Conclusion

The Satyam Saga cannot be concluded in just few pages. The truth is still to be revealed. The only truth which we know now is that nearly $2 billion of wealth that belonged to 3 lakh shareholders eroded in a week; the jobs of 53,000 were on the line; the shareholders’ net worth drops from a positive Rs 8,529 crore to a negative Rs 278 crore only because of greed of few people.

But one thing is very true had it not been for a fraud, the way things were manipulated for over seven years in IT major Satyam Computers could be a “work of art”, If it were not for a dishonest purpose, the planning and execution to the minutest detail is truly admirable. But we still wonder What was Raju thinking; since when—and why—was he thinking this way; and how did he do it?

Annexure I
Raju’s Letter to the Board
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% 0f 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 Satyam 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)

Contributed By:   Shweta Rajpal shweta_ca2005@rediffmail.com 

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

 

 

 

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