Satyam admits to Rs 8,000 crore scam

AGENCIES
Posted on 2007-01-08
HYDERABAD- In the country’s biggest corporate fraud involving about Rs 8,000 crore, iconic IT company Satyam was on Wednesday hurtling towards disaster following the shocking disclosure of accounts fudging by its founder Mr Ramalinga Raju, who then quit as the chairman - leaving an uncertain future for the company and its 53,000 employees.
By the end of the day, the fourth largest IT company lost a staggering Rs 10,000 crore in market capitalisation as investors reacted sharply and dumped shares, pushing down the scrip by 78 per cent to Rs 39.95 at BSE. The NYSE-listed firm could also face regulator action in the US.
The government regulator Securities and Exchange Board of India and the industry reacted with shock and anguish over the turn of events that could tarnish India’s corporate and raise vital issue like ethics, corporate governance and accounting and business practices.
Acting in tandem, Corporate Affairs Ministry and SEBI announced that the episode would be probed and action taken against the perpetrators of the fraud that entails inflating profits and creating fictitious assets. SEBI has ordered a probe into buying, selling or dealing in shares of Satyam Computer Services.
“I am now prepared to subject myself to the laws of the land and face consequences thereof,” Mr Raju said in a letter to SEBI and the board of directors while giving details of how the profits were inflated over the years and his failed attempts to “fill the fictitious assets with real ones.”
The Maytas firms, although promoted by his family, proved to be his nemesis, with Mr Raju saying: “The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones... But that was not to be. What followed in the last seven days is common knowledge.”
While the government said the entire issue would be referred to the Serious Fraud Investigation Office, SEBI described it as an event of “horrifying magnitude.” “It was like riding a tiger not knowing how to get off without being eaten,” said Mr Raju. Giving details of the irregularities, Mr Raju said the company’s balance sheet as of September 30 carries “inflated (non-existent) cash and bank balances of Rs 5,040 crore (as against Rs 5,361 crore reflected in the books).”
It also carries “an accrued interest of Rs 376 crore which is non-existent, understated liability of Rs 1,230 crore on account of funds arranged by me, overstated debtors position of Rs 490 crore (as against Rs 2,651 crore in the books.” The $2-billion Satyam also reported a revenue of Rs 2,700 crore for the September quarter and an operating margin of Rs 649 crore (24 per cent of revenue) as against the actual revenue of Rs 2,112 crore and an actual operating margin of Rs 61 crore (3 per cent of revenue). “This has resulted in artificial cash and bank balances going up Rs 588 crore in Q2 alone,” Mr Raju said, adding that the gap in the Balance Sheet has arisen purely on account of inflated profits over a period of last several years.
Mr Raju can face seven years’ imprisonment in addition to monetary penalties for forging accounts, breach of trust and misappropriating funds. “He (Raju) can be charged under various sections of the Indian Penal Code for falsification of accounts, cheating and breach of trust. These offences attract a maximum penalty of seven years,” said a senior partner of law firm Titus and Company, Mr Diljeet Titus.
Expressing a similar opinion, senior Supreme Court advocate, Mr C A Sundaram said, “If the admissions (made by Raju in his resignation letter) are true, it is a very serious matter. It would be violation of the SEBI (code), Company Law and the IPC”.
Another senior advocate and corporate law practitioner, Mr U K Chaudhary said the Satyam chief could be imprisoned for seven years under various provisions of company law. “Under Section 628 of the Companies Act, which deals with misrepresentation of accounts, he could be punished for a maximum of 2 years along with penalty. However, the punishment term could be extended to seven years for producing false affidavits and other documents,” he said. In addition to Mr Raju, Titus said “action should also be taken against chief financial officers, finance managers and legal and tax advisors for their complicity in this episode”. Suggesting that the CBI should get into the case, he said if appropriate action is not taken, the Satyam fiasco would “make a mockery of the Indian enforcement mechanism”.
The pink slips have not arrived yet but the uncertainty is killingly painful for the 53,000 employees of Satyam, particularly at a time when IT industry is going slow on recruitment. Ranked among the top three employers in India last year, Satyam’s placement test papers were a rage among techies who compared notes through the Internet to make it to the company. “We are now worried about the jobs,” said Mr Raghu K, a Satyamite, dismayed by Wednesday’s revelations. Possibility of a takeover too looks distant further compounding the worries of the employees.
UNITES Professional India which has 1,800 members said that its website has got 7,000 hits from Hyderabad from Tuesday night. “It’s not only the employees, their peers and relatives are also coming to our Hyderabad office after the announcement to make out what we can do for them,” he added.
Satyam meanwhile said board member, Mr Ram Mynampati has been appointed interim CEO. “We are obviously shocked…immediate priorities are to protect interest of shareholders, protect the careers and security of its approximately 53,000 associates..,” Satyam said in a statement. A shocked industry called for deeper regulation. “This fraud on the investors and employees...shows a systemic breakdown in audit and board oversight... Questions will need to be asked,” FICCI president, Mr Rajeev Chandrasekhar said.
FICCI and CII, however, said the Satyam episode should not be seen as a blot on all the Indian firms. Corporate Affairs Minister, Mr Prem Chand Gupta said stern action would be taken under the law.