 |
Jan. 7: Corporate chieftain B. Ramalinga Raju today stunned investors, clients and regulators with the revelation that he had padded profits and cooked up bank balances at Satyam Computer Services for years — and then promptly resigned from his position as chairman.
Brother Rama Raju — who was managing director at Satyam — also quit.
The startling admission erupted into India’s biggest corporate fraud that ranked in its sheer audacity — if not in scale — with the great American financial scams at Enron, Worldcom and Tyco. The shenanigans at Satyam add up to an amount of Rs 7,136 crore, according to Raju’s revelation.
The Satyam stock plunged 77.6 per cent on the Bombay Stock Exchange to close at Rs 39.95. Foreign institutional investors, including Aberdeen Asset Managers, Merrill Lynch, Morgan Stanley and Fidelity, dumped the shares and cut their losses.
The scandal threatened to rip India’s image as the outsourcing hub of the world and hurt foreign investment flows into Asia’s third largest economy.
Raju said he had falsified accounts, created fictitious assets and kept his employees and board in the dark.
When matters spun completely out of control, Raju said he tried to plug the gaping hole in his balancesheet by persuading his board of directors to rubber-stamp the acquisition of two companies he owned — Maytas Infrastructure and Maytas Properties. It was his last roll of the dice.
When a shareholder revolt scuttled that move, Raju realised his game was finally up and it was only a matter of time before the empire that he had created in the mid-nineties stood in danger of crumbling to dust.
“It was like riding a tiger, not knowing how to get off without being eaten,” he said in a note to his board of directors. A copy of the letter was sent to stock exchanges this morning.
Satyam Computers quickly named Ram Mynampati as interim chief executive and he promised to co-operate with regulatory authorities.
Regulators in action
A team from the Securities and Exchange Board of India (Sebi) — the capital market regulator — is scheduled to head to Hyderabad tomorrow to start preliminary investigations.
Unconfirmed reports said Merrill Lynch had approached Sebi chairman C.B. Bhave yesterday and said there were problems with Satyam’s books. Bhave is believed to have contacted Raju and asked him to come clean.
Merrill Lynch, appointed by Satyam to find a strategic partner, said it had terminated the Satyam contract.
In Delhi, Premchand Gupta, the minister for corporate affairs, said the government was likely to refer the Satyam accounting fraud to the Serious Frauds Investigations Office. He indicated that the government would also examine the possibility of nominating government nominees on the Satyam board.
Andhra chief minister K. Rajasekhar Reddy sent a letter to the Prime Minister, requesting the government to form a management committee of Wipro chairman Azim Premji, Infosys chief mentor N.R. Narayana Murthy and TCS chairman S. Ramadorai for the time being. Narayana Murthy is reported to have declined the offer.
The Institute of Chartered Accountants of India (ICAI) said it would showcause all the accountants involved with the audit of the company and debar them for life if there were clear indications of culpability.
Raju went into hiding after a brief appearance at the Satyam headquarters in the morning, fuelling rumours that he had left for the US to appear in court for a case. Some television channels reported he was on his way to Dubai.
The ‘why’ factor
Nobody was quite sure why Raju cooked his books for so long. One reason posited is that Satyam — which had managed to grab 185 Fortune 500 clients — was under pressure to perform as well as its peers like Infosys and Wipro.
As Raju’s stake in the company had dwindled to 3.6 per cent, he was under pressure to create a buzz around the stock and get FIIs to pick it up. Many FIIs did — and he might have felt the pressure to show a 40 per cent growth in profits to keep them invested.
Raju said in his note that he had falsified his accounts to show an operating profit of Rs 649.27 crore in the second quarter ended September 30 when in reality it was no more than Rs 61 crore. If there is any truth in these figures, Satyam would have reported a quarterly loss of Rs 74 crore — probably the first by an infotech major in the country.
ANATOMY OF THE SCANDAL
What did Ramalinga Raju do?
• Cooked the books of the company; inflated revenues and profits for several years
• Inflated cash and bank balances by Rs 5,040 crore
• Claimed interest of Rs 376 crore on a non-existentinvestment
• Raised Rs 1,230 crore (mostly by pledging his shares to lenders) and understating the liability of the company to that extent
• Overstated how much clients owed Satyam by Rs 490 crore
• The fraudulent entries add up to Rs 7,136 crore
Why did he confess?
• He had created fake accounts and assets. The gap between the fake accounts and the real one was expanding too quickly
• As his stake fell in the company (see graphic on holdings), he realised the company was going to become a takeover target. This would create problems: when a buyer went through his books he would find the fake assets
How did he get away for so long?
• Auditors PricewaterhouseCoopers did not scrutinise the accounts vigorously
• Independent directors on the board didn’t grill the management
• Institutional shareholders didn’t complain as long as the market was booming and the returns were good
• Claims to have kept his own executives in the dark
How did the scam unravel?
• Fictitious accounting meant that there was a big hole in the balancesheet
• The company had fake assets on its books; Raju wanted to replace this with real assets. He got the board to clear the buyout of two entities — Raju-owned Maytas Infrastructure and Maytas Properties — for $1.6 billion
• Satyam shareholders revolted, thinking that Raju was looking to bail out debt-laden Maytas entities. Nobody sensed it was the other way round
• Four directors quit; suitors circled the company
• Raju realised that he couldn’t keep up the sham if potential buyers scrutinised his books
