Thursday, January 15, 2009

Satyam:The Truth "Lies" Beneath...

Satyam first came into news on 16th December with its announcement of purchasing 100% and 50% stakes respectively in his sons’ companies Maytas Properties and Maytas Infrastructure. (Maytas incidentally is Satyam spelled backwards).Ramalinga Raju’s family members own a combined stake of more than 30% in each of these companies. The deal was finalized for $1.6 billion-a figure that raised a number of eyebrows and invited shareholders’ wrath who questioned the rationale of this valuation and the high-handedness of the board members who took such a major decision without consulting or informing investors of the proposed move. The markets reacted sharply and Satyam’s share price took a beating. Many in the industry questioned the role of independent directors in ratifying such a move without due diligence and the issue brought into focus family dominance in corporate affairs.Rattled by the criticism the move was abandoned the very next day. The company’s image took another beating on 23rd December when the World Bank announced an eight –year ban on Satyam for data theft and providing improper benefits to World Bank employees. In the next few days its oldest board member M Srinivasan and independent directors Krishna Palepu and Rammohan Rao,the dean of the Indian School of Business quit on moral grounds. Also Merrill Lynch,which had been tasked with searching for strategic partners for Satyam backed out alleging serious irregularities in Satyam’s account books.Finally on 7th January Ramalinga Raju released a confessional letter to Satyam’s board informing of massive financial fraud and cooking up of company’s account books which had been going on for years for which he assumed sole responsibility claiming that no other board member knew about any of it. The company’s shares came crashing down in the stock markets with the price per share being reduced from Rs.179 to Rs.39 in a single day and shareholders losing massive amounts of money.Raju confessed to having inflated cash and bank balances of the company by Rs.5040 crores,understated Satyam’s liability to other companies by Rs.1230 crores,overstated debtor position i.e. amounts other companies owed to Satyam by Rs.490 crores and inflated interest received on loans issued to other firms by Rs.376 crores.The actual operating profit according to his statement was just 3%-something nobody in the industry seems prepared to digest because even a non-descript IT firm doesn’t operate below a profit margin of 20%. The reason he says all this was done is to prevent a takeover of the company which would have exposed the gap in the real and actual profits. But the gap kept getting bigger and when all attempts to bridge it failed the Maytas deal was conceived as a last-ditch attempt to do so.It was hoped that Maytas’ assets would justify the stated finances of the company and the latter’s payment could be delayed once Satyam’s problem was solved. Thus it was to be a deal in which Satyam was supposed to be paying with non-existent cash.In short it was a matter of money staying in the family.But since the move failed to pass muster, the game was up for the gap had grown too wide to be sustained and couldn’t have been concealed for long.Satyam didn’t have enough cash in its coffers to pay its employees so the fraud would’ve been exposed sooner or latter.

But experts argue that inspite of all his claims Raju couldn’t have done it alone for a fraud of such magnitude requires the connivance of the Chief Financial Officer and his team at the very least.It’s simply not possible to inflate revenues by Rs.588 crores in a single quarter as Satyam did without the CEO,CFOand COO not being in the loop unless they’re blind and dumb.

Another theory doing the rounds is that Satyam did make all the profits it claimed to be making but the promoters quietly invested it in real estate through Maytas companies without anyone’s knowledge.This,it turns out ,is a bigger crime than just inflating profits from a legal viewpoint. With real estate prices crashing in the recent times that investment got wiped off and the promoters were left with nothing in their hands.This theory derives strength from the fact that Rajus own large swathes of land in and around Hyderabad and Maytas needed funds for its own operations.

Raju’s claim in his letter that neither he or his family members have benefited from inflated profits sounds hollow in light of the fact that their holding in the company came down dramatically from 14% to 8% in a period of two months in 2006 when the share price(a direct function of the company’s inflated revenue declarations) was around Rs.700.He had claimed that they hadn’t sold their shares in the last eight years except for a small amount sold for philanthropic purposes.A reduction in holding by 6% translates into a sale of 1.5 crore shares giving a return of Rs.1000 crores- by no means a small amount.

Raju’s credibility is being further eroded by allegations of fraud in the EMRI scheme which is supposed to be a charity providing emergency medical services.95% of the investment has come from state governments and 5% from Rajus and land to the tune of 10-20 acres is being allotted for free in each of the eight states it is operating in-something which is not at all required for such operations.Also the organization is overcharging the government for its services and tenders for contracts by state governments are being issued with terms in favour of EMRI.

Raju also has a past record of defrauding the government by not paying back the loan he took to start the Sri Satyam Spinning Mills in 1983.The loan to the tune of Rs.52 lakh was taken from Andhra Pradesh Industrial Development Corporation. His company ran into losses and Raju sold it to another party without repaying either the interest or the principal.The new owners professed no knowledge of pending dues and Raju dissociated himself from the issue saying that he was no longer associated with the company.Since then the APIDC has been able to do very little except issue notices and in effect has had to write off the amount as bad debt.This shows that this is not the first instance of bad corporate governance with Raju.Ironically Satyam has been awarded the Golden Peacock Award for excellent corporate governance thrice,most recently in 2008.

Another party being seen as hand in gloves with Raju is Satyam’s audit firm Price Water House Coopers which certified all its accounts and financial transactions-something not possible if they’re not in cahoots with the guilty except when they either act dumb or show gross negligence. That PwC wasn’t able to spot an irregularity of Rs.5040 crores in CB&B(cash and bank balances) and Merrill Lynch caught it in two weeks points to two possibilities-either their audit team didn’t bother checking it with the banks or the CFO’s office created forged statements on the letterheads of banks to fool them.Both cases amount to serious neglect of responsibilities by PwC which is supposed to certify to the shareholders that the accounts are “true” and “fair”. In any case the firm has lost its reputation and is already facing lawsuits in the US.Only if it is very lucky it may escape with severe fines,lose many of its clients and shrink into insignificance like Anderson which went bust owing to the Enron scandal(Anderson was its audit firm).

As of now,the government has superseded Satyam’s present board and appointed an interim board of three members-Deepak Parekh(chairman of HDFC),Kiran Karnik(former chairman of NASSCOM) and V.Achutan(legal eagle) to assess the company’s position and try to bring it back on track because despite its woes it remains profitable with solid foundations.The main concern is to arrange for operating capital i.e. money to keep the company’s day-to-day operations running and pay employees’ salaries as well as to ensure that the client base is not eroded. As of now,the government has refused to bail out the company on grounds that it would set a bad precedent and encourage potential scamsters to think they can get away with fraud.The new board has appointed KPMG and Deloitte-two of the “Big Four” audit firms on Wall Street to reassess Satyam’s financial position(PwC is or well! rather was one of the group before this fiasco).The fourth one is Ernst&Young-the firm which carried out the valuation of Maytas companies and declared the proposed deal to be worth the contentious figure of $1.6 billion.

Yesterday the government appointed three more members to the board:Tarun Das-chief mentor of CII(Confederation of Indian Industries) which is an industry association,T.N Manoharan-chartered accountant and past President of ICAI(Indian Chartered Accountants Institute) and S.Balkrishna Mainak of LIC which is a major stakeholder in Satyam.

Ramalinga Raju,his brother Rama Raju and CFO Vadlamani are in judicial custody-another controversial move as it is being alleged that the action was taken to prevent SEBI from questioning them(only the police can interrogate them as long as they’re in judicial custody and are in no way competent enough to question them on corporate affairs).

Although the businessman-politician nexus in this case is not being vigorously probed as of now,as the probe moves forward many skeletons are likely to come tumbling out of the closet for Raju is said to have built his empire by seeking and getting favours from Andhra politicians of all hues over the years who in return used him to further their own political ends by projecting him as the face of Andhra pride in front of the world.

For India this fiasco couldn’t have come at a worst time with economy on a path to slowdown and economic stimulus by the government yet to show any effects.The India story could be badly affected if the issue is not dealt with in an exemplary manner and perpetrators left unpunished for it would dent the country’s image in the eyes of clients and investors who might go elsewhere.It’s for this reason that all IT firms are taking pains to emphasize that this is a one-off case and the standards of corporate governance in the industry are quite high. The biggest question mark hangs over the fate of Satyam’s 53000-strong workforce that has been looking to find new jobs but finding few takers in face of hiring freeze as well as directives from NASSCOM to other IT firms not to poach Satyam’s employees.