Satyam's Books Were Fudged, Raju Resigns

After the aborted Maytas deal, questions were raised about the future of Satyam and its current management and there were lot of rumours in the Indian media about the likely candidates who might acquire / merge with Satyam. In what can be termed as a dramatic turnaround, Satyam's chairman Ramalinga Raju has resigned after admitting some serious irregularities in its books. Among the frauds are some time tested tricks like inflating sales, inflating profits and understating liabilities. The inflated profits led to the huge pile of 'fictitious' cash in the balance sheet. This 'cash' was the one which was to be used for the proposed Maytas acquisition. The unusually large amount of cash (that too lying in their Current Account) on Satyam's balance sheet had raised some concerns earlier. Satyam management never did anything to allay these fears. It looks like the worst has come true.

Satyam Computer Services' decision to keep large amounts of excess cash in current accounts which do not yield interest income is raising eyebrows and prompting questions about why it has been growing the hoard of idle surplus money. 

As speculation increases about the amount of available cash that is being shown in the books of India's fourth largest software exporter, at least one major brokerage firms saying it has concerns about cash utilisation at the Satyam, describing it as "baffling." (Link)

The full text of Ramalinga Raju's letter to the Board is available on Livemint site.

He said that the balance sheet has inflated cash & bank balance of Rs 5040 crore. No board member had any knowledge of the real situation as against books. The balance sheet was inflated and accrued interest of Rs 376 crore in the books is non-existent.

He further writes in the letter that Rs 1230 crore was arranged to Satyam, which is not reflected in books. 

Raju in his letter further said that the Q2FY09 reported revenues of Rs 2700 crore Vs actual revenue of Rs 2112 crore. The Q2FY09 operating margin reported was Rs 649 crore against Rs 61 crore. The Q2FY09 numbers had Rs 588 crore of artificial cash in books.

He said that he is prepared to subject himself to law of the land and face the consequences. The account manipulation started several years ago. An attempt to eliminate the manipulation was failed, he added. (Link)

Although corporate frauds and accounting irregularities have come to light in the west (Enron), this is one of the biggest of its kind in India. If a company of the scale and repute like Satyam indulges in such activities, there may be numerous other smaller frauds happening in the small and medium sized listed companies which may never be unearthed.

Normally, the first one to face the flak in such a circumstance would be the auditors. We saw it in Enron where Arthur Andersen was in the spotlight. Similarly, PriceWaterhouse Coopers (PWC) would have to face the heat over their involvement in this whole issue.

Raju's excuse that the accounts were fudged and profits were overstated to project that thecompany was financially stable and to ward off any takeover attempt because of the negligible  promoter stake is simply unacceptable. It is like saying that I copied in the exam to avoid being scolded by my parents and teachers. 

Satyam's future looks bleak in its current form. DSP Merrill Lynch, which was appointed to look at strategic options has also backed out. There is also the risk that lot of the contract renewals might not come through because of the credibility issue. In this economic climate, taking over a company with over 50,000 people is not an easy task. The buyer needs to work with a lot of unknowns and it is going to be a fire sale.

If all this drama had not happened, Maytas acquisition might have gone through and that might actually have benefited the shareholders as real assets were to be infused by parting with the fictitious cash.

How soon can we expect Ramalinga Raju to be arrested?