About:
In 1987, Rama Raju and Ramalinga Raju founded Satyam Computer Services Ltd in Hyderabad. The name Satyam means ‘Truth’ in Sanskrit. The company started with 20 employees offering IT and BPO services to various sectors.
Satyam’s initial success led to its listing and IPO in the BSE in 1991, and it soon acquired Deere and Co, its first Fortune 500 client.
By 2003, the firm was worth $1 billion and had become the fourth-largest IT software exporter in the industry after TCS, Wipro, and Infosys. Satyam’s success was also reflected in its financials, with a CAGR of 40%, operating profits averaging 21%, and a 300% increase in its stock price.
In 2008, Satyam attempted to take over Maytas, a real estate company owned by Mr. Raju, which led to the reversal of the decision after 12 hours, impacting the stock price.
On December 23rd of the same year, the World Bank barred Satyam from doing business with any of the bank’s direct contacts for eight years. The World Bank alleged that Satyam had failed to maintain documentation to support fees charged to its subcontractors and provided improper benefits to the bank’s staff.
However, Satyam demanded an explanation and an apology from the World Bank, claiming that the allegations had damaged its investor confidence.
The backstory of fraud:
In 2008, The Satyam board gave their approval for the purchase of Maytas Infra (valued at $300 million) and Maytas Properties (valued at $1.3 billion) for a total of $1.6 billion. The agreement failed to materialize due to objections from investors and board members, resulting in the resignation of four directors of the company within four days.
On January 7th 2009, the announcement of Mr. Raju’s resignation included a startling confession that he had tampered with accounts worth Rs. 7000 crores. This revelation left investors and clients across the globe stunned and incredulous.
Now, this all started back in 1999, where Mr. Raju started exaggerating the quarterly profits to meet the analysts’ projections. One instance of this was the publication of results on October 17, 2009, which inflated quarterly revenues by 75% and profits by 97%. The global head of internal audit for the company aided Raju in this endeavor.
Consequently, the company would be able to acquire loans effortlessly, and the perception of its accomplishments resulted in an upsurge in the stock price. Furthermore, the cash that the company obtained from the US markets was not even reflected in the balance sheets. However, Raju was not content with these measures and proceeded to fabricate records for non-existent employees, from whose accounts he would withdraw salaries.
As a result of the escalated stock prices, Raju was motivated to dispose of as many shares as feasible, holding onto just enough to remain a member of the company. This enabled Raju to earn profits by selling them at inflated prices. Additionally, he withdrew $3 million every month in the guise of salaries for imaginary employees.
However, the question remains: what happened to all the money? While Raju had established an impressive IT company, he also had a keen interest in the real estate sector. In the early 2000s, the real estate market in Hyderabad was flourishing, and it was rumored that Raju knew the proposed route for a metro system that was scheduled to be built in the city.
In 2003, the groundwork for the metro system was initiated. Raju quickly transferred all the funds to the real estate industry, anticipating substantial profits once the metro became operational. Additionally, he founded a real estate company named Maytas.
However, unfortunately, like many other industries, the real estate sector was severely impacted during the 2008 recession. At this point, almost a decade of manipulating financial statements had resulted in vastly overstated assets and underreported liabilities, with approximately $1.04 billion in bank loans and nonexistent cash as per the books. The discrepancy was too substantial to be rectified.
Whistleblowing attempts also began to emerge around this time. One of the company directors, Krishna Palepu, received anonymous emails from someone using the alias Joseph Abraham, which revealed the fraud. Palepu forwarded the emails to another director and to S. Gopalkrishnan, a partner at PwC – the auditing firm for the company.
Gopalkrishnan assured Palepu that the allegations in the emails were unfounded and that a presentation would be made to the audit committee to reassure him, originally scheduled for December 29 but later pushed to January 10, 2009.
Despite this, Raju had one last-ditch effort – a plan that involved Satyam acquiring Maytas to bridge the gap that had accumulated over the years. The new financial records would indicate that the funds were utilized to purchase Maytas. However, shareholder opposition thwarted this plan.
Consequently, Raju had no choice but to face the legal consequences. Later, he described it as being akin to riding a tiger without knowing how to dismount without being devoured.
After Scam Exposed:
Raju was arrested two days after confessing and charged with criminal conspiracy, breach of trust, and forgery. The stock prices of Satyam fell drastically to Rs. 11.50 compared to the heights of Rs. 544 in 2008. The CBI conducted a raid on the youngest Raju sibling’s house and found 112 sales deeds for various land purchases. They also discovered 13,000 fake employee records in Satyam, and estimated that the fraud amounted to over Rs. 7,000 crores.
Initially, PwC claimed that they failed to catch the fraud because they relied on information provided by the management. However, PwC was found guilty, and its license was temporarily revoked for two years. This caused investors to become wary of other companies audited by PwC, which resulted in their share prices falling by 5-15%. The Sensex also dropped by 7.3% due to the news of the scam.
To prevent further damage to the stock markets and future FDIs, the Indian government quickly took action and appointed a new board to Satyam. The board’s objective was to sell the company within the next 100 days. They hired Goldman Sachs and Avendus Capital to fast-track the sale, and SEBI appointed retired SC justice Barucha to oversee the transaction to instil trust.
On April 13, 2009, several companies submitted their bids, and Tech Mahindra won the bid by purchasing Satyam for one-third of its value before the fraud was revealed. Raju, along with two others accused, were granted bail on November 4, 2011. In 2015, Raju, his two brothers, and seven others were sentenced to seven years in prison.
Conclusion:
This scam given following lesson for investors:
- If a company makes extraordinary returns then its peers should be double checked before investing.
- Always look at how much skin does top level management have in the business. If someone just keeps minimal required holding or reduces the holding the company should be double checked.
- Always look if the top level management is involved in diverse business, which could indicate that the top level management is not focus is not on one thing which is not good in the long run and should be checked before getting involved in the business.