Jan 11, 2009

Satyam or ASatyam

E&Y Entrepreneur of the Year (2007), Asia Business Leader Award (2002), Dataquest IT Man of the Year Award (2000) are a few of the awards this man received.

His journey began from a small town called Bhimavaram in Andhra Pradesh. Byrraju Ramalinga Raju born in an agricultural family and a management graduate from Ohio University, tried out a lot of ventures like construction and textile. He finally found Satyam in 1987, which grew leaps and bounds; it bagged its first fortune 500 customer John Deere & Co. in as early as 1991. By year 1999 it had presence in 30 countries across the globe and next year the employee head count crossed 10,000. It crossed the revenue mark of US$ 1 billion in 2006. By the end of 2008 it had about 53,000 employees, 690 clients of which 185 fortune 500 clients, spanning in 20 industries and 65 countries, development centers in 12 countries and revenue in excess of US$ 2 billion. Or is it?

On 7th of January 2009 came a confession from him that shook the nation. He confessed to Rs 7,136 crore fraud, Raju said Satyam's books had been cooked for years to inflate profit and revenue figures. In September 2008, they showed a non-existent cash and bank balance of Rs 5,040 crore and hundreds of crores of fictitious accrued interest and debtors' position. Liabilities worth Rs 1,230 crore were kept hidden. These huge figures made it the biggest accounting fraud in the Indian history. The first warnings signals came in as early as Sept’08, in the form of a report from DMRC chief Sreedharan hinting a big scandal in Maytas, controlled by Raju’s son, but these allegations were disposed of by Planning Commission on the basis of not backing with evidence on his suspicion. Also in mid December when Satyam announced its intensions on buying Maytas Infrastructure and Maytas Properties, serious questions and protests were raised against Satyam’s top management.

The fraud that is also termed as Indian version of Enron had enormous impact on the Indian markets; with Satyam Computers own stocks getting a beating at the sensex with value of its stock falling by as much as 78%. It also triggered the fall in both Nifty and Sensex, as people became cautious of stocks in family run businesses ranging from RIL, ADAG, DLF to Bharti Airtel. Stocks of the sectors that were not known for best of corporate governance practices also went southwards, thus totally negating the positive market sentiment that was build after the second stimulus package.

The more important question is about the future of those 53,000 employees that the company has. With this news of fraud coming in there is a low probability of Satyam getting new clients and even the existing clients will start parting away from it. FIFA already said that it is monitoring the situation related to Satyam. More of its clients are expected to follow and there is a bigger risk of clients even moving out of their existing deals. If this happens, then the staff working on those projects will be out of service. So they are facing a risk of getting laid in future along with the employees who are already on bench. There is one more issue that might be crossing the minds of Satyam’s employees that with minimum out-go of salary being estimated to Rs 500 crore but according to Raju’s confession mail, company had cash of only about Rs 320 crore in cash and its bank accounts, that too in the month of September. They somehow managed to pay salaries till now but possibility of paying full salaries to its employees in months to come looks impossible to say the least.

Within minutes of Raju’s confession, news of strong actions that are initiated against Satyam has made a lot of noise. With law suits filed against the company in US, SEBI ordering probe into Satyam operations. Major brokerage firms degrading its credit rating and slashing its target price. NYSE halted the trade of its stock. BSE and NSE removed Satyam from their benchmark indexes, Nifty and Sensex respectively. Government also started a probe into corporate lapses and financial misdemeanor in Satyam.

Even with all this happening and an own it all confession of Raju there are a lot of questions that are left unanswered. Or to say this whole issue gave birth to a lot of questions like the role of PricewaterhouseCoopers (PwC), as per Mr. Raju’s confession this financial gap was accumulated over the years, then what was this auditing firm doing during those years? It is interesting to note that PwC had been the associated to accounting irregularities in the now-defunct Global Trust Bank in 2007 and in DSQ software also. Another interesting fact is that Raju stated that the operating margins of Satyam were unusually low at Rs. 61 crore or 3% which looks weird as traditionally software industry boosts of high operating margins with industry leader Infosys having about 33% and other IT companies have this figure in the range of 20-30%.

Sources for this article
http://economictimes.indiatimes.com/articlelist/40657581.cms
http://en.wikipedia.org/wiki/B.Ramalinga_Raju
http://en.wikipedia.org/wiki/Satyam_Computer_Services_Ltd.
http://satyam.com


Shashank Saini
MBA Class of 2010