Business Today

The great Satyam robbery

Is the Rs 7,000-crore fraud that B. Ramalinga Raju resorted to an accounting scam—done to prop up valuations of the IT giant—or was the promoter siphoning out money from a fundamentally sound company? E. Kumar Sharma finds out.

E. Kumar Sharma | Print Edition: Feb 8, 2009

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

The Rs 7,000-crore fraud that B. Ramalinga Raju resorted to.
The Rs 7,000-crore fraud that B. Ramalinga Raju resorted to.
If it wasn’t a gigantic fraud, it would have been a colossal farce. But when nearly $2 billion of wealth that belonged to 3 lakh shareholders is eroded in a week; when the jobs of 53,000 employees are on the line; when shareholders’ net worth drops from a positive Rs 8,529 crore to a negative Rs 278 crore; when a company opens itself to multi-million dollar lawsuits; when a company’s founders are thrown in jail; and when its very survival is questioned, you wonder: What was Raju thinking; since when—and why—was he thinking this way; and how did he do it? Over the next few pages, BT attempts to unravel this massive fraud, which involves one business family, company auditors and, inevitably, an ensemble of politicians.

At first blush, Raju’s statement to the board in which he confesses to inflating profits appears a dignified 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 his shareholding. The founder of Satyam has been pledging the company’s shares for some time now, which has been largely responsible for the promoters’ holding shrinking from a chunky 26 per cent in 2001 to 3.6 per cent around the first week of January (lenders began to sell when share prices fell and Raju couldn’t pay up). And what was Raju doing with those borrowed funds? Ostensibly buying large tracts of land, most of it in Andhra Pradesh.

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

That’s a con of giant proportions, indeed. But it still pales in comparison to another more sinister likelihood—of the promoters sucking Satyam’s profits and using it to fund their orgy of land purchases, via an endless string of companies. The Rajus liked land more than they loved code.

In recent years, the Rajus have amassed a land bank of an estimated 7,000 acres. A number of companies, including the Maytas twins, were floated for this purpose. The memorandum of association of just one such company, Bangar Agro-Farms, has this as one amongst its many main objects to be pursued: “To carry on in India or elsewhere, the business to deal in acquisition and development of agriculture lands, other lands, properties…”

Cash was king for Satyam
If Satyam was fudging profits, where were the funds for all-cash acquisitions coming from?

April 2005 Acquired UK-based Citisoft Plc, a business consulting firm, with operations in investment management.
Funding: $38 million paid in tranches

July 2005 Acquired Singaporebased Knowledge Dynamics, a consulting solutions provider.
Funding: All-cash deal of $3.3 million

October 2007 Acquires a 100 per cent stake in Nitor Global Solutions, a UK-based infrastructure management services and consultancy group.
Funding: $5.5 million in all-cash deal

January 2008 Acquires Bridge Strategy Group, a Chicago-based management consulting firm, with revenues of $17 million.
Funding: $35 million in all-cash purchase

April 2008 Acquires construction equipment maker Caterpillar Inc.’s market research and customer analytics operations and Belgium-based S&V Management Consultants, a supply-chain management firm.
Funding: $95.5 million for both the deals, all-cash purchase

The more the merrier
List of companies in which B. Nandini Raju (wife of B. Ramalinga Raju) is a Director:

Name: B. Nandini Raju
Alakananda Agro-farms
Anuradha Bio-Tech
Anuradha Greenlands
Ayurda Greenlands
Bharani Agro
Brahmaputra Greenlands
BRNR Holdings
Continental Thermits
Dhanista Farms
Dronagiri Agro-farms
Mahanadi Bio-Tech
Medravati Agro-Farms
Parbati Agro-Farms
Penganga Agro-Farms

Such intentions run across several of the Raju companies, where either his family members or those close or related to him have either interests or are directors. In fact, Satyam was the only IT company where promoters had an interest in real estate—an interest that kept increasing even as their stake in the IT services major kept reducing! Till 2001-02, Andhra ranked among the states in which real estate was the cheapest.

As land prices started rising because of the state government’s reformist pitch, the Rajus sniffed a bounty. Perhaps the patriarch saw an opportunity to create business for his two sons, who despite being well-educated, weren’t too keen on taking over the IT business.

“You have to understand that in a state like Andhra Pradesh, which used to have vast tracts of agricultural land, local people are bound to have a fascination for owning land,” says a former investment banker, who has worked closely with the Satyam founders.

What clearly did Raju in was the drop in share prices and in real estate, in tandem. Result? He had to buy more shares to avoid losing the earlier ones; by the end he lost most of them. Raju’s only hope lay in getting the asset-laden Maytas firms merged into Satyam. Ironically, when investors rubbished Raju’s proposal to merge these firms, they felt that he was attempting to strip Satyam off its cash (of $1.6 billion). Little did they know that he was trying to reconcile Satyam’s fictitious assets with real ones. Raju admits as much in his confession letter. But what he doesn’t say is whether Satyam’s balance sheet is threadbare because it was run ragged to build the real estate assets in the first place. That’s the Rs 7,000-crore question investigators will have to answer.

The US lawsuits

With two class action suits already filed against him in the US, and many more in the offing, Raju is in for the long haul.

Raju’s confession has repercussions across financial markets on two different continents. Legal eagles in the US are having a field day advertising their services for aggrieved shareholders seeking class action against Satyam Computer’s erstwhile Chairman and Founder. According to Kenneth J. Vianale, Partner, Vianale & Vianale, a US-based law firm representing a Satyam Computers shareholder, by March 9 (which will mark 60 days of the filing of the suit), the Manhattan federal court will receive motions for appointment of lead plaintiff and lead counsel. “The lead plaintiff, appointed by the court, will be a shareholder or group of shareholders with the largest financial loss in the stock,” points out Vianale.

Thereafter, the plaintiffs will likely amend their complaint and may add parties, like the auditor, if the evidence permits. Then the defendants (company) will respond to the complaint. If the complaint fails to allege a fraud, then the court could dismiss the case. “If the case is not dismissed, the parties will engage in discovery: plaintiffs will seek documents from the company and take depositions of witnesses. Then we move toward trial. In the US, there’s a right to a jury trial,” adds Vianale. He further points out that the conduct of the directors— B. Ramalinga Raju and erstwhile CEO B. Rama Raju—will be judged under the Indian law. “The directors may be liable under US laws if they signed company documents filed with the US SEC that they knew (or were reckless in not knowing) contained materially false financial information.” Vianale steers clear of predicting the future of the auditors, PricewaterhouseCoopers, in the suit.

The new board of directors to the Satyam board won’t be dragged to court. “The new directors would not be accountable unless they participated in the misconduct and we have no evidence that they did,” informs Robert Izard, Partner, Izard Nobel, another US-based law firm that has been retained by some shareholders to ascertain the facts of the case and will soon be filing a suit against Satyam’s former Chairman and CEO. To that extent, they will be relying on publicly available information and company documents, with Raju probably giving a testimony through a sworn deposition in India given that he’s incarcerated here, says Izard. That may have been Raju’s final masterstroke, as he would have fancied his chances with the Indian legal system than with its US counterpart.

Rachna Monga & Tejeesh N.S. Behl

Saving Satyam
What has been done so far…

The government had, till the time of writing, appointed six directors (including Deepak Parekh, Kiran Karnik and Tarun Das) to the board of Satyam.

The new board appointed new auditors—Deloitte and KPMG—to look afresh at the numbers and restate the financial position of the company. This will help determine the exact position of Satyam’s liabilities and liquidity.

The new board launches a search to identify candidates for the positions of CEO and CFO to replace B. Ramalinga Raju and Srinivas Vadlamani, respectively. …and what more needs to be done.

The board needs to reach out to clients to re-establish the lost confidence and to ensure that clients and employees continue with Satyam.

Steps to ensure that operations are insulated from liabilities and problems.

Analysts suggest that the company could look at selling operations only (business, customers and employees) and not liabilities to some third party.

The money received can be used to clear the liabilites, settle the dues to suppliers and all outstandings and litigations.

Additional Reporting By Rachna Monga & Clifford Alvares

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