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A case study on Satyam Computers
Satyam Fraud It was audacious, preposterous, outrageous and shocking event – the Satyam Computer-Maytas deal. That a promoter, with less than 9 per cent stake in his company, would have the nerve to try and transfer $1.6 billion of cash to two completely unrelated businesses owned by his sons is unthinkable. And to pass that off as a 'wonderful' opportunity! Satyam. Chairman Ramalinga Raju says he didn't anticipate investors' reactions and was surprised. It is not a mere coincidence that Maytas is Satyam spelt in reverse way (Satyam Maytas). As it became evident from Raju’s letter it was basically an effort to cover-up Satyam fiasco. The figures stated in the resignation letter of Raju relating to Satyam: Inflated ( non-existent) Cash and Bank balance of Rs. 5,040 crores An accrued interest of Rs. 376 Crores which is non-existent An understated liability of Rs. 1,230 Crores An over stated debtors position of Rs. 490 crores Total Rs. 7136 crores!
It all started on 16.12.2008, when Ramalinga Raju felt that the only way to cover up the scale of fraud perpetrated was through buying the infrastructure companies owned by his sons and family members. It is a common affair in Indian Inc to make such pointless investments to divide the dividends by manipulating profit margins. But the scale of this scam needs to take a deeper look in the fiasco Satyam created. Satyam’s Maytas bid dragged media in to it. Satyam intended to buy entire stakes in Maytas Properties for $1.3 Billion and 51% stakes in Maytas Infra for another $300 Million. Raju and his immediate family members own up to 35% stakes in Maytas. The deal was to be financed from “surplus” cash. Investors and the Fund managers were shocked that the bidding process was carried without informing them. Raju said that the deal was in complete interest of the investors and informing them was “unnecessary”.
On following days, Satyam’s share prices started falling reflecting share holders disbelief. Satyam’s share prices nosedived in U.S.A. after the bid was announced. The interrogation by investors forced Raju to reconsider his decision, which he had to reverse within hours. World Bank, one of Satyam’s esteemed customers banned it from providing service for next 8 years. Satyam’s image in front of its customers, investors, and more importantly, the entire nation got dented. Share prices tumbled even further. The aborted buy-out deal and the ban indicated that something seriously went wrong at the board level. Valuation of Maytas turned out to be fraudulent. All of the four Firms, including Merrill Lynch and JP Morgan denied having done any Valuation. The move sparked row between the institutional investors from across the world and Sataym’s board members. Ultimately lawsuits followed valuation and now judicial custody of Ramalinga Raju and his brother. One of company’s two independent directors T.R. Prasad defended the decision of buy-out believing it to be increasing share value. Another director M. Shrinivasan quit before it was too late. Vinod Dham (fouder of Pentium) was also one of the non-executive directors of Satyam who later resigned in the wake of controversy. Two days after the controversial deal, Indian government ordered separate probe in to the matter On 7th January, Ramalinga Raju wrote a letter to all the board members and SEBI, informing them about inflated cash, faked profit margins and accounting malpractices
Chronological summary of events which Computer Services on its path to disaster:
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Satyam
2008 December 16 Satyam gets Board's approval for acquisition of Maytas Infrastructure and Maytas Properties for $1.6 billion (Rs. 7680 crores) December 17 Defers Maytas' acquisition on stiff investor resistance. December 18 Schedules board meet for the proposal of buyback of shares on December 29. British mobile solution provider Upaid files a law suit against Satyam in a district Court in the US over Maytas deal. December 24 World Bank bans Satyam for 8 years on charges of data-theft. December 25 Mangalam Srinivasan, non-executive and independent director resigns from board. December 27 Postpones board meeting to January 10, 2009 to consider buyback of shares. December 27 Promoters disclose that their entire holding in Satyam pledged with institutional lenders since 2006. December 28 Two independent directors - Krishna G Palepu, Vinod K Dham - resign from the board. December 29 M Rammohan Rao, another independent director, resigns from board. 2009 January 2 Promoter holding in Satyam drops to 5.31 per cent from 8.27 per cent after sale of pledged shares by lenders. January 6 IL&FS Trust company sales 2.45 crore shares of Satyam pledged to institutional investors by the promoters January 6 Raju family holding in Satyam falls to 3.16 per cent after sale of pledged share by lenders January 7 Satyam Chairman Ramalinga Raju sends letter to board tendering his resignation and admitting to fraud in accounting books. Satyam Managing Director B Rama Raju also resigns. DSP Merrill Lynch terminated its advisory engagement with company.
