Satyam - All is Well That Ends Well
Downfall of Raju
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.
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
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
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
Sr.No. Name of the Officail Year Stake in the Satyam/ No. of shares
1 Ramanlinga Raju June-2001 23.0%
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
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
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.
revelations by Serious Fraud Investigation Office (SFIO)
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
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
Satyam- Now 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.
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
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
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
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)
The views expressed in this article are purely that of the Contributing