The Self Destruction Of Satyam

As many know the biggest scam in the history of India’s corporations has come to light. Satyam Computers, the country’s fourth largest IT Company stands on the brink of termination. More recently in the news for the failed takeover attempt of its sister company Maytas; Satyam is now staring into an abyss of anger and shame. Shareholders have dumped the stock left, right and centre. In every sense Satyam has managed to become India’s ENRON. It has blatantly cooked its accounts to show non existent revenues. We take a look at how this scam came about.

In a letter addressed to the Board of Directors of Satyam the former Chairman Ramalinga Raju whilst delivering his resignation has accepted total responsibility for the blatant fudging of the company’s accounts. That was however of little concern as the damage has already been done.

As I write this Satyam’s stock has fallen by over 70% on the Indian bourses. The Satyam stock listed in New York has fallen by over 90%.

In less than 24 hours the company could be sold to zero levels rendering it out of business. The National Stock Exchange has already removed Satyam from its Nifty index with the BSE likely to also remove it from the Sensex.

The fudging of accounts is indeed a criminal offence which if proved could very well lead to serious jail time for everyone involved in this fiasco.

For now the only culpable offender seems to be Mr.Raju himself who has accepted all the blame himself in his letter. However, it is indeed difficult to believe that only he is guilty of this offence.

Here’s what’s happened so far that’s led to this scam:

At some point earlier Satyam starts to make lesser and lesser profits. In order to maintain the same pace and acquire newer clients it starts to overstate its revenues and operating margins.

Profits reduce even more leading to Mr.Raju overstating his company’s revenues. While the revenues are in tens of crores, he manipulates the accounts to show them in the thousands.

Since the promoters and Mr.Raju’s family members hold minority equity stakes of Satyam Computers, Mr.Raju feels that if he reported the real figures his company could easily be a victim of a takeover. Therefore he continues to fudge figures and shows overstated numbers in quarterly reports and accounts.

Things start to become even more desperate and the fudging continues.

Mr.Raju realizes that he can’t continue to fudge figures anymore and decides to throw the dice one last time.

He decides to acquire Maytas Infra, A family owned company. The acquisition of Maytas could explain the discrepancies between the non-existent assets of Satyam and the existent ones.

Due to massive shareholder opposition the Maytas plan is dumped.

More allegations of corruption arise within the Satyam fold and the World Bank, an important client of Satyam decides to ban Satyam from doing business with the World Bank for eight years.

Finally, the writing is on the wall.Ramalinga Raju resigns realizing there are no other options left.