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The Satyam scandal

On morning of January 7, 2009, Satyam Computer Services Ltd's Chairman Mr.Ramalinga Raju resigned after notifying its board members and SEBI that he falsified accounts and assets...

india Updated: Jan 07, 2009 22:26 IST

On morning of January 7, 2009, Satyam Computer Services Ltd's Chairman Mr.Ramalinga Raju resigned after notifying its board members and SEBI that he falsified accounts and assets. The shares of the IT Company were down by more than 82% touching low of Rs 30.70.

Satyam's auditing firm PricewaterhouseCoopers will be scrutinized for complicity in this scandal.

The truth came to fore when Mr.Raju sent a letter to the board members, copying it to SEBI. Letter stated that Satyam's balance sheet as on Sep 30, 2008, carried an inflated (non-existent) cash and bank balances of Rs 5,040 crore (as against Rs 5,361 reflected in the books).

Further, it carried an accrued interest of Rs 376 crore which was non-existent. Himself arranged an understated liability of Rs 1,230 crore on account of funds. An over stated debtor's position of Rs 490 crore (as against Rs 2,651 crore in the books).

For the second quarter ended September 30, 2008, the company reported a revenue of Rs 2,700 crore and an operating margin of Rs 649 crore (24% of revenues) as against the actual revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore (3% of revenues). This had resulted in artificial cash and bank balances going up by Rs 588 crore in the second quarter alone. The gap in the balance sheet had arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone, books of subsidiaries were reflecting true performance).

As per Raju, "What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew significantly (annualised revenue run rate of Rs 11,276 crore in the September quarter of 2008 and official reserves of Rs 8,392 crore).

As the promoters held a small percentage of equity, the concern was that poor performance would result in a takeover, thereby exposing the gap. The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones.

It was like riding a tiger, not knowing how to get off without being eaten."

Raju had made a task force comprising its members Subu D, TR Anand, Keshab Panda and Virendra Agarwal and AS Murthy, Hari T and Murli V in the last few days before letting news out, to address the situation arising out of the failed Maytas acquisition attempt.

Ram Mynampati was made the Chairman of this task force to immediately address some of the operational matters on hand. Merrill Lynch was entrusted with the task of exploring some merger opportunities, which it later walked out cancelling the agreement.

Raju says that neither he nor the managing director sold any shares in the last eight years except a small proportion sold for philanthropic purposes.

A net amount of Rs 1,230 crore was arranged to Satyam (not reflected in the books) to keep operations going by resorting to pledging all the promoter shares and raising funds from known sources by giving all kinds of assurances. Significant dividend payments, acquisitions, capital expenditure to provide growth did not help matters. Every attempt was made to keep the wheel moving and to ensure prompt payment of salaries to the associates. The last straw was the selling of most of the pledged shares by the lenders on account of margin triggers.

Raju also acknowledged that neither he nor the managing director took have benefited in financial terms on account of the inflated results. He confessed that none of the board members had any knowledge of the situation in which the company is placed.

Acknowledging the facts, Satyam's official website says, "We are obviously shocked by the contents of the letter. The senior leaders of Satyam stand united in their commitment to customers, associates, suppliers and all shareholders. We have gathered together at Hyderabad to strategize the way forward in light of this startling revelation" said Mr. Ram Mynampati, Interim CEO (pending ratification by the Board) and Member of the Board, who has been mandated by the Board to steer the company through this crisis."