Satyam Fiasco

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Published on January 20, 2009

Author: Ulhas

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Satyam Fiasco : 19th Jan. 2009 Ulhas D. Wadivkar 1 Satyam Fiasco Raju Raju sat on the wall,Raju Raju had a great fall,Balance sheet died,Shareholders cried,Raju Raju made a fraud. Raju RajuYes Baba,Cheating usNo Baba,Telling LiesNo Baba,Open the balance sheetHA! HA! HA! Poet – Unknown & Not me Raju’s Letter to the Board -1 : 19th Jan. 2009 Ulhas D. Wadivkar 2 Raju’s Letter to the Board -1 To the Board of Directors, From: B. Ramalingam Raju Satyam Computer Services Ltd., Chairman, SCS Ltd., Dear Board Members, It is with deep regret, and tremendous burden that I am carrying on my conscious, that I would like to bring the following facts to your notice: The balance Sheet carries as of September, 30, 2008: Inflated ( non-existent) Cash and Bank balance of Rs. 5,040 Crores ( as against Rs. 5361 Crores reflected in the books) Raju’s Letter to the Board - 2 : 19th Jan. 2009 Ulhas D. Wadivkar 3 Raju’s Letter to the Board - 2 b) An accrued interest of Rs. 376 Crores which is non-existent. An understated liability of Rs. 1,230 Crores on account of funds arranged by me. An over stated debtors position of Rs. 490 crores ( as against Rs. 2651 reflected in the books) For the September Q2, we reported a revenue of Rs. 2700 Crores and an operating margin of Rs. 649 Crores (24% of revenues) as against the actual revenues of Rs. 2,112 Crores and an actual operating margin of Rs.61 Crores ( 3% of revenues). This has resulted in artificial cash & bank balances going up by Rs. 588 Crores in Q2 alone. The gap in Balance sheet has arisen purely on account of inflated profits over a period of last several years ( limited only to Satyam standalone, books of subsidiaries reflecting true performance). 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 un manageable proportions as the size of the company operations grew significantly. (annualized revenue run rate of Rs. 11,276 Crores in the September quarter, 2008 and official reserves of rs.8,392 Crores). The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and the assets to justify higher level of operations – thereby significantly increasing the costs. Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in a take-over, thereby exposing the gap. It was like riding a Tiger, not knowing how to get off. Raju’s Letter to the Board - 3 : 19th Jan. 2009 Ulhas D. Wadivkar 4 Raju’s Letter to the Board - 3 The aborted Mayatas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas’ investors were convinced that this is a good divestment opportunity and a strategic fit. Once Satyam’s problem was solved, it was hoped that Maytas’ payments can be delayed. But that was not to be. What followed in the last several days is common knowledge. I would like Board to know: That neither myself, nor the managing Director (including our spouses) sold any shares in the last eight years-excepting for a small portion declared and sold for philanthropic purpose. That in the last two years a net amount of Rs. 1,230 Crores was arranged to Satyam ( not reflected in the books of Satyam) to keep the operations going by resorting to pledging all the promoter shares and raising funds from known sources by giving all kinds of assurances ( Statement enclosed). Significant dividend payments, acquisitions, capital expenditures to provide for growth did not help matters. Every attempt was made to keep the wheel moving and to ensure prompt payments 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. That neither me, nor the Managing Director took even one rupee / dollar from the company and have benefitted in financial terms on account of the inflated results. Non of the board members, past or present, have any knowledge of the situation in which the company is placed. Even the business leaders and senior executives the in the company, such as Ram Mynampati, Subbu D, T R Anand, Keshab Panda, Virender Agarwal, A S Murthy, Hari T, S V Krishnan, Vijay Prasad, Manish Mehta, Murali V, Sriram Papani, Kiran kavale, Joe Lagioia, Ravindra Penumetsa, Jayaraman and Prabhakar Gupta are unaware of the real situation as against books of accounts. None of my or Managing Direstor’s immidiate or extended family members has any idea about these issues. Raju’s Letter to the Board - 4 : 19th Jan. 2009 Ulhas D. Wadivkar 5 Raju’s Letter to the Board - 4 Having put these facts before you, I leave it to the wisdom of the board to take the matters forward. However, I am also taking the liberty to recommend the following steps: 1. A task force has been formed in the last few days to address the situation arising out of the failed Maytas acquisition attempt. This consisits of some of the most accopmlished leaders of Satyam” Subbu D, T R Anand, Keshab Panda, and Virendra Agarwal, representing business functions and A S Murthy, Hari T, and Murali V representing support functions. I suggest that Ram Mynampati be made the chairman of this task Force to immidiately address some of the operational matters on hand. Ram can also act as interim CEO reporting to the board. Merrill Lynch can be entrusted with the task of quickly exploring some merger opportunities. You may have a restatement of accounts prepared by the auditors in light of the facts I have placed before you. I have promoted and have been associated with Satyam for well over twenty years now. I have seen it grow from few people to 53,000 people, with 185 Fotune 500 companies as customers and operations in 66 countries. Satyam has established excellent leadership and competency base at all levels. I sincerely apologise to all Satyamites and stakeholders, who have made Satyam a special organisation, for the current situation. I am confident they will stand by the company in this hour of crisis. Raju’s Letter to the Board - 5 : 19th Jan. 2009 Ulhas D. Wadivkar 6 Raju’s Letter to the Board - 5 In light of above, I fervently appeal to the board to hold together to take some important steps. Mr. T R Prasad is well placed to mobilise support from the Government at this crucial time. With the hope that members of the Task Force and the financial advisor, Merrill Lynch ( Now bank of America) will stand by the company at this crucial hour, I am marking copies of this statement to them as well. Under the circumstances, I am tendering my resignation as Chairman of Satyam and shall continue in this position only till such time. the current board is expended. My continuance is just to ensure enhancement of the board over the next several days or as early as possible. I am now prepared to subject myself to the Laws of the land and face consequences thereof. (B Ramalinga Raju) Copies marked to : 1. Chairman SEBI 2. Stock Exchanges Satyam - maytaS : 19th Jan. 2009 Ulhas D. Wadivkar 7 Satyam - maytaS It is not a mere coincidence that maytaS is Satyam spelt in reverse way. As spelled out in Raju’s letter it was an effort to cover-up Satyam Fiasco. . Raju wanted to acquire Maytas in order to cover up the scam he was cooking, but failed miserably. After all isn’t Maytas a part of his family business? The answer lies in Maytas’s burgeoning growth in last 6-8 years. Maytas is a 2 decade old company. However it has been doing remarkably well for last 6-7 years. Projects worth billions are riding on them. Now talking about inappropriation of Satyam’s money. Raju showed a swollen gross margin in the period of July-December by almost 600 crores. meaning swollen records by over 1000 crores in a year. So it would take him about 5 or ma maximum 6 years to show an accumulated wealth of over 5000 crores (as stated in the records- Satyam’s supposed cash reserve). Thus, it comes out from here, that Raju must be syphoning the money from Satyam to Maytas since last 6 years. And now he wanted to buy it so that he can cover up Unfortunately, his share holders made him do a ‘full monty’ Mytas – A Hole in the Ship : 19th Jan. 2009 Ulhas D. Wadivkar 8 Mytas – A Hole in the Ship It all started on 16.12.2008, when Ramalinga Raju thought, buying an infrastructure firm made sense! He, then, nailed a hole in a sinking ship Satyam was.  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. Mytas – A Hole in the Ship : 19th Jan. 2009 Ulhas D. Wadivkar 9 Mytas – A Hole in the Ship 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 pulled off 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 by about 16%. 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 Merry 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 Ramaling 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 Mr. 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 Satyam – Corporate non- Governance : 19th Jan. 2009 Ulhas D. Wadivkar 10 Satyam – Corporate non- Governance India did need a blow-out on a scale like Satyam to bring home the painful reality of the generally rotten state of corporate governance and the vicious promoter-politician nexus endemic across different sectors of the economy. It would be naive to believe in the comments by select industry leaders and select politicians that the Satyam case is one-off and that the entire Indian IT sector (or for that matter, the entire Indian business fraternity) cannot be tarred by the same paintbrush. Satyam most certainly is not a only one-off high profile situation that India has been forced to face. It is not the first one in the last 25 years, and will certainly not be the last of the high profile ones in the next few years. To start with, we must accept that Satyam is our problem and we are expected to find the solution ourselves. It may be easy to blame Price Waterhouse, that they did not perform their duties as auditors correctly. We must accept that there would be many very large audit firms, who may also be routinely turning a blind eye to the shenanigans of various promoters. We hope, that now, & perhaps finally, the regulatory systems and bodies responsible for ensuring compliance will start to function as they should have done before the Satyam blowout. Role of Independent Directors : 19th Jan. 2009 Ulhas D. Wadivkar 11 Role of Independent Directors The role of independent directors is now under close scrutiny. This has happened due to one of the less reported nexus between the Indian promoters, senior bureaucrats especially those from IAS, and senior bankers especially those from large PSUs. Retired civil servants are used as glorified liaison officers. Hopefully, the boards, in future, will be composed more on the basis of business-specific relevant competence rather than the retirement-eve titles. Independent directors of Satyam Computers, who agreed to the company's proposal of buying out two promoter-related companies, failed to be independent in 'spirit', The Satyam board, including its five independent directors had approved the founder's proposal to buy 51 per cent stake in Maytas Infrastructure and all of Maytas Properties, owned by the family members of Satyam Chairman B Ramalinga Raju. Independent directors need to be more active and directors need to maintain their independent spirit." Corporate governance should be a "principle-based" system rather than being "rule-based," In instances of larger issue of change in the entire business focus of the company, the Independent Director should take the decision to the shareholders before approving. Independent directors need to be vigilant in protecting minority interest and be `brave' enough to take adequate steps. "It is cumulative responsibility of the independent directors to protect the interest of shareholders and strategy of the organisation. Satyam & Investment Decision : 19th Jan. 2009 Ulhas D. Wadivkar 12 Satyam & Investment Decision The role of Satyam's independent directors is termed as `unpardonable‘. Acting against the interest of larger shareholders especially when the promoters themselves owned a little more than 8 per cent stake in the company and institutional investors owned more than 45 per cent. As do the independent directors on the boards. One can hardly ask for more qualified people than Vinod Dham and Krishna Palepu. But the fact that they voted in favour of the Satyam-Maytas proposal is shocking. What's the point in having independent directors if they can't guide the management on critical issues? Investors were furious about the way Satyam founders undertook the move to invest in a promoter-related company and wanted to know why the management failed to obtain prior consent of shareholders before deciding to invest, which amounted to change of `object clause' of the company. "Enforcement is important. It is no use making more and more rules and laws if you are not willing to enforce it," "Laws in India are quite strong." The investors' activism after Satyam's decision is appreciative. “It is hoped, that, after this incident most of the corporate India will behave in a reasonable fashion, In the case of Satyam's decision to acquire Maytas firms, Ramalinga Raju said the combined entity would deliver greater shareholder value. But the correct perception was that it will benefit Maytas promoters at the cost of Satyam's shareholders. This was reflected in the heavy beating Satyam's stock received after the announcement of the deal. Defending the decision, one of the company's executive said, "Satyam, as a company, was built over the years." However, it is common knowledge that it takes years to build a reputation of a company, which can be eroded overnight with one wrong move. Satyam Fiasco : 19th Jan. 2009 Ulhas D. Wadivkar 13 Satyam Fiasco It‘ was audacious, preposterous, outrageous and shocking t single 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. In the past institutional investors in this country haven't really spoken up against corporate misbehaviour. Even Sterlite's attempt, in September this year, to transfer the high-quality aluminum business and merchant power to Malco, in return for the low-quality, high cost, copper Konkola mines, again without so much as a by-your-leave, didn't anger shareholders. In that instance too, the promoters were enriching themselves, at the cost of minority shareholders, but no mutual fund really said so. There have been numerous other instances, admittedly of smaller consequence, that should have provoked mutual funds to ask questions. Now, the same institutional shareholders have found their tongues. This time, their stake is big - just over 50 per cent. Also, they realise how vulnerable and helpless they are because, had Ramalinga Raju wanted, he could have pushed through the deal. And no one could have stopped him, because the board had voted unanimously. Institutional investors have their own vested interests. It's well-known that there are back-to-back arrangements between mutual funds and corporations: Funds buy into the firm's stock in return for investments in their income schemes. Instances of stock being dumped just before the bad news is out or shares being snapped up before the good news is flashed aren't always 'coincidental." But now it's time institutional shareholders got together to show promoters that they simply cannot get away with this kind of behaviour. In India it only needs a 10 per cent stake to call an EGM. The shareholders need to fight this one out. If they let Satyam off the hook, Indian promoters will continue to believe they can get away with anything. As it is, most managements in India have scant regard for even the basics of corporate governance or respect for minority shareholders. Managements should be asked to take shareholders into confidence for any unrelated diversification, with the definition of 'unrelated' clearly spelt out. Satyam & PWC : 19th Jan. 2009 Ulhas D. Wadivkar 14 Satyam & PWC “It is hard to believe that he (Raju) was the lone perpetrator all along. In any company, the CFO (chief financial officer) and financial committee members would have full access to balance sheet details,”. Satyam has a presence in 66 countries and is listed on the New York Stock Exchange (NYSE).“A company filing returns in the US according to (its) Security Exchange Commission (SEC) guidelines could not have done this without the cognizance of key executives,” “It’s impossible to go by the claim that none of the board members had any clue about the inconsistencies in Satyam’s balance sheet; if the fraud went on for ’several years’, it won’t be wrong to rule out that most of them, if not all, had some idea about the happenings.” Fingers are also being pointed at the possibility of the auditors Price Waterhouse Coopers (PWC) being hand in glove with the conspirators in the multi-crores scam. It is highly unlikely auditors did not have any idea about the scam brewing for so many years. Auditors will have to be scrutinised. PWC can only be unaware of the loose balance sheet if Raju forged and doctored documents to support fraudulent claims. Credibility of audit firms has come into question as the amount was too big for any audit firm not to notice. If the audit firm claims that they didn’t know about then their capabilities would come under the scanner, The audits were conducted by Price Waterhouse Cooper in accordance with applicable auditing standards and were supported by appropriate audit evidence," the firm said in a statement. As per Satyam's accounts, vetted by Price Waterhouse, auditors were paid Rs 3.73 crore during 2007-08 as against Rs 3.67 crore in the previous fiscal. During this period, their "reimbursement of out of pocket expenses" went up from Rs one lakh to Rs five lakh. Satyam & PWC : 19th Jan. 2009 Ulhas D. Wadivkar 15 Satyam & PWC The auditor's report, signed on April 21, 2008, by Price Waterhouse partner Srinivas Talluri, said: "... We have neither come across any instance of fraud on or by the company (Satyam), noticed or reported during the year, nor we have been informed of such case by the management." The auditor's report also said: "These (Satyam's) financial statements are the responsibilities of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit. "We conducted our audit in accordance with the auditing standards generally accepted in India. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material mis-statments," it said. While Raju in his statement to the board and SEBI had disclosed that he was quitting because of the failure in bridging the gap between fictitious and real assets, the auditors' report said that the company was maintaining proper records, showing full particulars, including quantitative details and situations of fixed assets. Unprecedented changes in the accounting profession and professional services in general mean the current approach to safeguarding shareholder interests as well as the other stakeholders of the modern publicly traded global enterprise is no longer efficient nor effective. Who Guards the Guardians? : 19th Jan. 2009 Ulhas D. Wadivkar 16 Who Guards the Guardians? Satyam had been hunting for a buyer for a while. These same reports cited Tech Mahindra and HCL as possible suitors. HT learnt that these companies raised serious questions about the authenticity of Satyam’s books and sought clarifications. This may have forced Raju’s hands. Merrill Lynch was hired to advise on alternatives to a recent failed acquisition of a firm called Maytas. But, they may have known what's up. And resigned the engagement, prior to the Raju’s stunning disclosure. In the Satyam affair, where was the billion of missing cash, and why didn’t the auditors catch the discrepancy? Satyam was audited by a Big Four firm – PwC. However, if fraud is involved in the Satyam affair, there may be an argument that the audit firm was defrauded as well." There is complicity, incompetence or both with either the auditors or their customers or both. Inadequate procedures over confirmation indicates that, the auditors missed something really big.“ Price Waterhouse gave wrong PAN to Satyam, as it turns out, PWC gave Their Bangalore PAN Number to Satyam instead of New Delhi. PWC Hyderabad falls in New Delhi jurisdiction PWC Letter to New Satyam Board -1 : 19th Jan. 2009 Ulhas D. Wadivkar 17 PWC Letter to New Satyam Board -1 In a letter to the BSE, and addressed to the new Satyam (SATYAM) board, Pricewaterhouse Coopers (PwC) has stressed that their audit reports for the audit period June 2000 to September 2008, should not be relied upon.    The firm has handed over the blame to the then Satyam management, saying that it placed reliance on management controls over financial reporting, and the information and explanations provided by the management, as also the verbal and written representations made to us during the course of our audits . A reproduction of the letter s text is given below:   Dear Sirs,  Re:      Our audit of your financial statements    1.         As statutory auditors, we performed audits of Satyam Computer Services Limited (the "Company") from the quarter ended June 2000 until the quarter ended September 30, 2008 ("Audit Period"). 2.         The above-referred financial statements were prepared by the management of the Company. We planned and performed the required audit procedures on such financial statements, and examined the books and records of the Company produced before us by the Company management.   4 We placed reliance on management controls over financial reporting, and the information and explanations provided by the management, as also the verbal and written representations made to us during the course of our audits. PWC Letter to New Satyam Board -2 : 19th Jan. 2009 Ulhas D. Wadivkar 18 PWC Letter to New Satyam Board -2 5. As you are aware, vide a letter dated January 7, 2009 {"Chairman's Letter") addressed to the erstwhile Board of Directors of the Company, the former Chairman of the Company, Mr. Ramalinga Raju has stated that the financial  statements of the Company have been inaccurate for successive years.  The contents of the said letter, even if partially accurate, may have a material effect (which effect is currently unknown and cannot be quantified without a thorough investigation) on the veracity of the Company's financial statements presented to us during the Audit Period. Consequently, our opinions on the financial statements may be rendered inaccurate and unreliable, a copy of the Chairman's Letter, extracted from the official website of the National Stock Exchange is annexed hereto as Annexure A, for the sake of record.   6. The ICAI has issued a guidance note on revision of audit reports in January 2003 ("Guidance Note") which prescribes steps to be followed by the auditor to prevent reliance on audit reports in such circumstances.  In view of the contents of the letter our audit reports and opinions in relation to the financial statements for the Audit Period should no longer be relied upon. 7. Such a requirement is also prescribed under the generally accepted accounting standards in the United States, where, as you are aware, the American Depository Receipts of the Company are listed.   We wish to inform you that pursuant to Section 10A of the United States Securities and Exchange Act of 1934, the information contained in the Chairman's Letter indicates that an illegal act could have occurred.  Accordingly, we advise that the Board of Directors of the Company should promptly commence an independent investigation pursuant to Section I0A of the United States Securities and Exchange Act of 1934 in order to determine whether such illegal acts occurred and, if so, the nature and extent of such acts, PWC Letter to New Satyam Board -3 : 19th Jan. 2009 Ulhas D. Wadivkar 19 PWC Letter to New Satyam Board -3 8.  We hope to work with the Company and provide assistance to the new Board of Directors to address any issues that arise in the course of such investigation, to enable both the Company and us as your statutory auditors to fulfill obligations under applicable law.   9 We wish to advise that the Company should promptly notify any person or entity that is known to be relying upon or is likely to rely upon our audit report that our audit opinion should no longer be retted upon.   10.  Consequently, such notification should be made to at least the Company's shareholders, lenders, creditors, Indian regulatory authorities and the United   11. States Securities and Exchange Commission, and indeed to all stock exchanges, whether in India or abroad, where the securities of the Company are listed.  We expect such notification would be made promptly and request that the Company advise us as soon as the notification has been made. Since we are required under the Guidance Note to mark a copy of this letter to the relevant regulatory authorities, we have done so

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