Business Today

Satyam's six deadly sins

With a fiction to the tune of over Rs 7,000 crore on account of fraud in terms of the overstatement of revenue, profit, and cash on hand, the Satyam fiasco is now being seen as the largest scandal in the history of corporate India. E Kumar Sharma reports.

E. Kumar Sharma        Print Edition: January 25, 2009

B. Ramalinga Raju, Chairman, Satyam Computer Services
B. Ramalinga Raju
"It was like riding a tiger and not knowing how to get off without being eaten.'' That was how Byrraju Ramalinga Raju described his status at Satyam Computer Services in a five-page letter on January 7th to his board of directors. Whether, he got off the tiger or had fallen off it, what is certain is that he made a huge dent in the lives of the 53,000 employees of the company and that of his shareholders apart from hurting the image of the Indian IT outsourcing story.

What he revealed was not just that there was no cash in the balance sheet of the company but that revenues were overstated (apparently to show higher profits and better valuation). With a fiction to the tune of over Rs 7,000 crore on account of fraud in terms of the overstatement of revenue, profit, and cash on hand, the Satyam fiasco is now being seen as the largest scandal in the history of corporate India. Prior to making this public, as is apparent below, he had enraged his investors and shareholders with an aborted attempt to acquire two unrelated companies, which, he now justifies as ``the last attempt to fill the fictitious assets with real ones.''

The government has now superceeded the Satyam board and there is no board meeting on Saturday, January 10. The government will now nominate 10 directors and apparently within one week the new board will hold its meeting. Do watch this space and we will keep you updated.

1.Proposing a selfish, high-risk acquisition
On December 16, Raju announced the board’s approval for two proposed acquisitions: “To acquire 100 per cent shareholding in Maytas Properties and a 51 per cent controlling stake in Maytas Infra... The two companies being acquired in the challenging market offer potential for significant upside in the future,” is how the board apparently saw it.

Unfortunately, investors didn’t see the proposed acquisitions the same way, and duly beat the stock to pulp. Foreign institutional investors (FIIs), mutual funds and insurance companies own a little over 60 per cent of the company. They were quick to protest what they interpreted as sheer brazenness of the promoters to push through non-synergistic acquisitions of family-promoted companies, ostensibly to transfer money from a cash-rich company (Satyam) to the other family-owned ones. The Raju family owned (till the news came of pledged shares having been sold) barely 8.6 per cent of the company but over 30 per cent in the two infrastructure companies. The $1.6 billion (Rs 8,000 crore) proposed acquisitions of Maytas Properties and 51 per cent in Maytas Infra would have used up the company’s entire cash. Evidently, the company’s rationale of this being a diversification and growth opportunity found few takers and the stock prices of all three companies went into a free fall.

2.Overvaluing the proposed acquisition
Even if you buy the argument that the acquisitions made strategic sense, what analysts consider dishonest is the price the cash-rich Satyam was willing to pay for the two Maytas firms. Consider Maytas Properties, for which Raju was willing to pay $1.3 billion (Rs 6,500 crore). Some brokerage firms estimate the net worth of the company to be $225 million (Rs 1,125 crore). On what basis was the price tag for the buyout reached? The deal translates into a valuation of Rs 1 crore per acre. This, Satyam CFO Srinivas Vadlamani thinks, is reasonable. His reasoning: DLF has got a land bank of 10,000 acres and the valuation of DLF is roughly Rs 60,000 crore! The mystery shrouding the valuation only intensified the feeling that Raju was trying to suck money out of Satyam and bail out firms promoted by his sons. Neither Raju nor his family members were available for comment.

A fortnight that undid 21 years of endeavour

DEC. 16
Satyam announces major diversification strategy; $1.6 billion acquisition plan involves acquiring 100 per cent stake in Maytas Properties and 51 per cent in Maytas Infra. Both companies are promoted by the Raju family. Investors revolt and the stock plunges. The ADR listed on the NYSE lost 52 per cent in a day

DEC. 17
Proposed acquisitions called off after vicious investor reaction

DEC. 18
Satyam announces a board meeting on December 29 to consider a proposal to buy back shares in a bid to boost investor sentiment

DEC. 19
UK’s Upaid Systems files motion to request depositions of top Satyam executives in connection with “Maytas transaction assetstripping attempt...”

World Bank issues a statement confirming that it declared Satyam ineligible to receive direct contracts under its corporate procurement programme

DEC. 23
Dr (Mrs) Mangalam Srinivasan, who has been on the Satyam board since July 1991 as independent director, takes a lead and resigns

DEC. 25
Satyam objects to statements made by the World Bank representatives and seeks apology

DEC. 27
Board meeting rescheduled from December 29 to January 10; will address issues beyond the buyback and look at additional options, including measures to strengthen governance structure, increase the size and alter the composition of the board, and the company’s strategic options “to enhance shareholder value”. Also, address issues arising from possible dilution of promoter stake in the company

DEC. 29
Both Prof. Krishna G. Palepu, Non-executive Director and Vinod K. Dham, Non-executive and Independent Director resign. Later that day, ISB Dean Prof. Mendu Rammohan Rao, Nonexecutive and Independent Director, resigns.

Satyam announces that its promoters’ stake in the company may have got diluted. Says its promoters had informed Satyam that all their shares in the company were pledged with institutional lenders and that some lenders may have exercised their option to liquidate shares to cover margin calls

3.Promoters pledging their entire holdings
On December 29, after reports surfaced that the Satyam promoters had pledged their shares, the company issued a press release that stated: “The promoters informed Satyam that all their shares in the company were pledged with institutional lenders, and that some lenders may exercise or may have exercised their option to liquidate shares at their discretion to cover margin calls.” Following this belated disclosure, three independent directors, Vinod Dham, Krishna Palepu and M. Rammohan Rao, resigned. This raises the question: Were these directors kept in the dark about the pledging of these shares? Surely, some may want to debate whether it is mandatory or not for Indian promoters to disclose to the board whenever they pledge shares. However, one of the independent directors on the board of another leading company says it is important that such matters be disclosed; according to him this is a clear breach of corporate governance. The other question being raised is: For what purpose had Raju pledged their shares—could it be that he was keen to use the proceeds to fund nonrelated businesses?

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