The Satyam scandal

Stake Holders: Satyam Computers, investors, India’s IT and outsourcing industry

Background:

· Admitting to the biggest scam ever to hit India’s IT sector, B Ramalinga Raju, Chairman of Satyam Computers, resigned from the board.

· A shell-shocked country watched as Satyam stock fell dramatically by 72% and the sensex, which had been showing some signs of recovery, plummeted 749 points.

· India’s IT sector, which had been thriving on good will, suffered a massive blow to its reputation. At a time when the world is battling an economic crisis, India may find it difficult to re-establish its image.

Key points:

· In his letter to the board of directors, Ramalinga Raju admitted to doctoring the company’s balance sheets to show an inflated amount of Rs. 5,361 crore at the end of September 2008. This was over 300 crore more than the actual amount.

· The balance sheet falsely showed that the company had received Rs. 376 crore as accrued interest.

· A fund of Rs. 1,230 crore, which the Chairman arranged by pledging promoter shares, found no mention in the account books.

· It claimed that debtors owed Satyam Rs. 2,651 crore, which was Rs. 490 crore more than the actual amount.

· The September 2008 results were inflated to Rs. 2,700 crore from the actual value of 2,112 crore, resulting in an imaginary cash balance of Rs. 588 crore.

· The operating margin, which was only Rs. 61 crore, was projected as Rs. 649 crore. The operating margin tells investors how much of a company’s revenue will eventually become its profit.

· Apparently, the fraud had been going on for years. Having started off as a marginal gap between the actual and reported operating profit, it had become unmanageable as the company expanded.

· Many attempts, such as the Maytas deal, had been made to plug the gap. But they were all in vain.

About the Maytas deal

· Satyam Computers announced its intention of buying Maytas Properties for $ 1.3 billion & 51% stake in Maytas Infra for $ 0.3 billion.

· The two companies were into real estate and Ramalinga Raju’s family had big stakes in both companies.

· Why a software company would want to diversify into the real estate market, especially when the market was doing poorly, raised a lot of doubts.

· The decision caused Satyam shares to plummet.

· The deal was called off when it was widely criticized by shareholders.

· Only after Raju confessed to the scam did it become clear that the proposed acquisition was a last ditch effort to plug the gaps in the Satyam balance sheets.

How the scam affected employees and share holders

· Satyam employs nearly 53,000 people, all of whom face an uncertain future now. Following the confession of the Chairman, many of them put up their resumes, seeking jobs in other companies.

· The sharp fall in the price of Satyam shares also seriously affected investors. Many speculators who had backed the company are now left with shares that cost about Rs.10 per share.

How the scam could affect the IT industry

· Coming at a time when the IT industry is experiencing a slow down, the scam is like a kick in its guts.

· Prospective clients would be more cautious, ask more questions and need more assurances.

· The scam does not reflect the nature of business in the IT industry. There is no reason to assume that frauds such as this are a trend in the industry.

· Before outsourcing work to a company, clients do a thorough research on its credibility and its work history. Any irregular activity on part of a vendor is enough to scare clients off. Following the scam, Indian companies will have to work harder to retain the faith of clients.

· There is very little doubt that Satyam will lose a sizeable number of its clientele. This, however, may not be bad news for other companies, who could capitalize on the situation and net some of these clients.

· The exodus of clients from Satyam to other companies may not, however, be very smooth. Clients will now pay more attention to the exit clause in their contracts with Indian companies.

· The more stringent checks that are likely will cause inevitable delays in awarding contracts.

Is the Chairman telling the complete story?

· Ramalinga Raju claims that though he did inflate the balance sheets, he did not personally profit from the venture.

· The balance sheets were probably tampered with to keep the stock price of Satyam up.

· But independent analysts as well as the employees of Satyam find it difficult to believe that the operating margin of the company was only Rs. 61 crore, a mere 3% of revenue.

· This has led to speculation in some circles that the profit was higher than the amount the Chairman projected, but a part of it was siphoned off.