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Inside Ramalinga Raju's mind

January 21, 2009

Why did B. Ramalinga Raju do it? No, we are not talking about why and how he fooled all of us for seven years by presenting blatantly false financials of his company, Satyam Computer Services. We are more concerned about the timing of his sensational confession. What really makes a fraudster listen to his conscience? Or did he do it under duress because of pressure from his family members, friends and professional colleagues? Did he just wake up on 7 January and decide that he wanted to become the honest gentleman that he was way back in the 1980s? Or is there a more sinister reason to explain the revelations?

There are several conspiracy theories to explain the origins of the letter that Raju wrote to the Satyam board, admitting his guilt. But we will try and separate the grain from the chaff. He did it for the 'larger good' of everyone he knew, including himself. In retrospect, it may turn out to be a master stroke. Thanks to his 7 January letter, Raju has possibly saved Satyam, the group firms managed by his sons, friends and colleagues, and the politicians who helped him in the past. In an ironical twist to the tale, he may have saved himself from a long term behind the bars.

The fact is that Satyam as a company was about to collapse under its own financial weight. With a 3% margin, as Raju claimed, almost non-existent cash balances, with no hope of a new pipeline after Raju had pledged most of his personal shares with institutions, which sold them off, huge liabilities and receivables, and highly inflated revenues and profits, the company didn't have the money even to pay salaries in January 2009. Kiran Karnik, one of the six government-appointed directors on Satyam's board, has publicly said that the company needs nearly Rs 2,000 crore cash over the next three months.

In fact, this is the reason why the failed merger with group firms, Maytas Infrastructure and Maytas Properties, for Rs 8,000 crore was critical for Raju's survival. In one stroke, it would have cleaned up Satyam's balance sheet. The deal, which was opposed by institutional shareholders as the two Maytas firms were controlled by Raju's sons and, therefore, smacked of conflict of interest, would have infused new assets and also ensured new revenue and profit streams. For example, Maytas Properties possesses a land bank of 6,800 acres, with the ability to construct 245 million sq ft of built-up space.

The Satyam Saga
1987 Company established
1991 IPO over-subscribed by 17 times; company gets its first Fortune 500 customer in John Deere & Co.
1993 Awarded ISO 9001 certification. Signs joint venture with GE, another Fortune 500 company.
1999 Satyam Infoway (Sify) becomes the first Indian Internet firm listed on the Nasdaq.
2000 Company merged with Satyam Enterprise Solutions (SES) in a way that benefits Srini Raju of SES.
2001 Satyam Computer Services listed on the NYSE (SAY).
1999-2001 Its stock was one of the 10 that Ketan Parekh was rigging.
2002 The Dept of Co Affairs seeks clarification on alleged violation of the Companies Act.
2004 Acquires Citisoft and Knowledge Dynamics. Features in the Forbes Top Asian Companies.
2005 UK-based IT firm Upaid files case against Satyam for alleged fraud and forgery.
2006 Company says 'Revenue exceeds US$1 b'. Gets award from Institute of Internal Auditors, US.
2008 Announces acquisition of Maytas Prop and Maytas Infra. Deal shelved after outcry.
2009 Raju confesses to Rs 7,000-crore fraud; arrested. Satyam board reconstituted.

At the Satyam's board meeting on 16 December 2008 to discuss the merger, Ram Mynampati, a former director, disclosed that there was little future in infotech as accelerated growth was difficult in the current scenario, prices and margins were under pressure, and there was discomfort about anti-outsourcing voices emanating from the US, especially from the new President Barack Obama. Therefore, entry in construction and infrastructure seemed like an ideal de-risking strategy. If things had gone according to plan, Raju could have easily jumped off the Satyam tiger without being 'eaten up'.

When this strategy didn't work, Raju had no option. The only way to save Satyam was to come out in the open, confess to his crimes and hope that the government would act swiftly to save the future of Satyam's 53,000 employees as well as restrict the possible negative impact on the Indian IT story. This is exactly what happened. The future of Satyam, its employees and Indian IT seem much safer today. When we spoke to a few employees, they sounded a bit reticent, but confident. All of them said they were "optimistic that things would be back to normal soon".

Raju's sons were obviously angry. The father had practically destroyed their future. By not being able to go through with the merger, he had made sure that the Satyam scandal would become public knowledge. It could force several state governments, including that of Andhra Pradesh, to cancel the high-profile infrastructure contracts bagged by Maytas Infrastructure and Maytas Properties. At present, the two entities are working on projects worth Rs 30,000 crore, including the prestigious Hyderabad metro rail. Satyam's truth had the potential to severely tarnish the sons' image. And it did. However, the sons' anger could have weighed heavily on a desperate Raju, forcing him to reveal everything.

How Raju did it
The Rs 7,000-crore Satyam scam was the outcome of a series of accounting misdemeanours by B. Ramalinga Raju and his accomplices. Here's how he doctored Satyam's books and hoodwinked investors for seven years:
Inflated Profits: Over the last several years. For September quarter, revenues and operating margin overstated at Rs 2,700 cr and Rs 649 cr (24% of revenue) against actual of Rs 2,112 cr and Rs 61 cr (3% of revenue).
Overstated Cash & Bank Balances: Of Satyam's reported cash and bank balances of Rs 5,361 cr on 30 Sept 2008, Rs 5,040 cr was non-existent. Even accrued interest of Rs 376 cr shown in books was non-existent.
Hid Liabilities: Debt on account of funds arranged by Raju by pledging shares was understated by Rs 1,230 cr. This was one of the triggers for Raju's confession after lenders sold these shares on margin triggers.
Inflated Receivables: Debtors' position was overstated by Rs 490 cr. Together, with this overstated debtors' position and understated liabilities, a staggering hole of Rs 7,136 cr arose in the balance sheet.

There's another angle to the family drama. Maybe there was a feeling that if Raju went down taking all the blame, there wouldn't be too much of an impact on the sons' businesses. It is probable that the nonexistent cash balances that Raju is talking about were monies that were siphoned out of Satyam to finance his sons' projects. It is possible that a part of the cash balances has gone into the personal accounts of family members. Or it could have been partially used to bribe officials in lieu of government projects awarded to the Maytas companies.

Now, consider what was going on in the minds of Raju's close colleagues before the founder's letter. They were scared. If Satyam went down, so would they. For no one would believe that Raju carried out this fraud for so long without the senior managers being aware of it. In return for their undying loyalty, they demanded Raju's head. He had to tell the truth and take the blame himself. This too seems to be panning out the right way as until now only the former CFO, Srinivas Vadlamani, has been arrested by government sleuths, who seem more worried about finding the extent of the damage.

As Raju got sucked into a financial tornado that he had created in the first place, he had to take care of the politicians, who had helped him throughout his entrepreneurial career. Yet again, it seemed like a perfect solution for Raju to confess after wiping out the tell-tale marks that could have pointed at a nexus between Satyam and the state's political leaders.

As of now, the media is speculating that former Andhra Pradesh chief minister N. Chandrababu Naidu of the Telugu Desam Party helped Raju wriggle out of income-tax cases earlier this decade. It is also being rumoured that the current Chief Minister, Y.S.R. Reddy of the Congress, helped Raju's sons bag the prestigious infrastructure projects in the state. Interestingly, both Reddy and Naidu are accusing each other of helping the Raju family.

Red Flags That Were Ignored
There were enough indications that something was wrong at Satyam, but nobody noticed these till it was too late.
Mismatch in balance sheet entries: Starting 2002-3, the company's reported cash and bank balance, including term deposits, continued to swell without matching the growth in cash flow. In fact, Satyam's free cash flow continued to wobble and was negative in two years.
Auditor fees shoots up: Auditor fees increased three times in the past couple of years though other IT companies continued to pay the same amount.
Non-payment of advance tax: Satyam did not pay advance tax in 2008-9. Payment of advance tax is an indicator of profitability and non-payment could imply that trouble has been brewing for some time.
Vanishing brass: In August 2008, many top officials left the company. This should have been a reason for further investigation.
Not using cash to acquire: It was puzzling that the company was proposing to invest $1.6 billion in real estate at a time when HCL was trying to expand its presence in the SAP market, essentially Satyam's turf.
Cash idling in current account: In Oct 2008, analyst Kawaljeet Saluja of Kotak Securities almost blew the lid off the scam when he questioned the rationale for keeping $550 million idle in a current account.

More political skeletons are likely to tumble out of Raju's cupboards, but they are likely to be mere limbs because the crucial evidence may have been carefully hidden, or simply made to vanish. Just like the thousands of crores of rupees in Satyam's bank accounts over the past seven years.

That leaves us with Raju. He had to chalk out his own survival too. After such a massive scam, possibly the biggest in the history of corporate India, he could languish in jail for the rest of his life. However, by admitting to cooking up the accounts, he may successfully divert attention from a far more serious crime—siphoning off money from a public company. Some lawyers feel that his confession may get him some form of immunity. And he may be let off with minor penalties. Section 24(B) of the Sebi Act states that if a person has made "full and true disclosure of the alleged violation", he can be granted immunity from prosecution for some of the offences.

We hope this doesn't happen in this case. Raju's conviction has to act as a deterrent to other optimistic and over-confident owners, who may think that they too can get away with such frauds. Or else, India Inc. will witness the birth of more Rajus who, as detailed out in a recent study by Wharton School, would believe that their firms were experiencing "only a bad quarter or patch of bad luck" and that it was "in the interest of everyone involved… to cover up the problem". But when things don't improve, the promoter is forced to continue his "fraudulent behaviour and he has to do more" in the subsequent quarters.

Therefore, it is imperative for the government to financially reboot India Inc.


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