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Satyam Fraud: India's "Enron"
Marlor
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Registered User regular
Satyam, one of the world's largest IT outsourcing companies is in real trouble after it was revealed that they had been hiding a multi-billion dollar debt via creative accounting (and outright fraud).
From Crikey:
The full letter from Satyam's chairman (B. Ramalinga Raju) announcing the fraud, and his resignation:
The company has been seen in a negative light by IT employees in industrialized countries, many of whom had their jobs outsourced to Satyam. On the other hand, many of the world's largest companies have been using Satyam's services to successfully slash their IT costs.
B. Ramalinga Raju was named the Ernst & Young 2007 Entrepreneur of the Year.
Satyam was the 2008 winner of the Golden Peacock Award for Corporate Governance.
http://www.forbes.com/markets/2009/01/07/satyam-chairman-resigns-markets-equity-cz_nk_0107markets04.html
http://www.ft.com/cms/s/0/24e4d8d4-dcf1-11dd-a2a9-000077b07658.html
http://www.bloomberg.com/apps/news?pid=20601087&sid=atFl4N629LNc&refer=home
From Crikey:
India now has a corporate scandal to compare with America's Enron or Bernie Madoff, after the chairman of one of the world's largest IT companies admitted to multi-billion dollar fraud.
Late yesterday, Satyam Computer Services chairman Ramalinga Raju issued a full, frank and strangely moving statement declaring that he and his brother, B. Rama Raju, the managing director, had inflated assets of approximately 50.4 billion rupees ($A1.46 billion) and a fudged a further 20.96 billion rupees ($A612 million) worth of figures.
...
But the question remains, how does one hide over $US1 billion? Clearly the board -- who according to Raju knew nothing -- will be investigated, as will the company's auditors PricewaterhouseCoopers. The PwC lead auditor has reportedly been taken in for questioning by the police.
The full letter from Satyam's chairman (B. Ramalinga Raju) announcing the fraud, and his resignation:
"It is with deep regret and tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice:
1. The Balance Sheet carries as of September 30, 2008, a) Inflated (non-existent) cash and bank balances of Rs 5,040 crore (as against Rs 5,361 crore reflected in the books); b) An accrued interest of Rs 376 crore, which is non-existent c) An understated liability of Rs 1,230 crore on account of funds arranged by me; d) An overstated debtors' position of Rs 490 crore (as against Rs 2,651 reflected in the books);
2. For the September quarter(Q2) we reported a revenue of Rs 2,700 crore and an operating margin of Rs 649 crore(24 per cent of revenue) as against the actual revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore (3 per cent of revenues). This has resulted in artificial cash and bank balances going up by Rs 588 crore in Q2 alone.
The gap in the balance sheet has arisen purely on account of inflated profits over several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance).
What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years.
It has attained unmanageable proportions as the size of the company operations grew significantly (annualised revenue run rate of Rs 11,276 crore in the September quarter, 2008, and official reserves of Rs 8,392 crore).
The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify a higher level of operations thereby significantly increasing the costs.
Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in the takeover, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten.
The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas' investors were convinced that this is a good divestment opportunity and a strategic fit.
One Satyam's problem was solved, it was hoped that Maytas' payments can be delayed. But that was not to be. What followed in the last several days is common knowledge.
I would like the board to know:
1. That neither myself, nor the Managing Director (including our spouses) sold any shares in the last eight years - excepting for a small proportion declared and sold for philanthropic purposes.
2. That in the last two years a net amount of Rs 1,230 crore was arranged to Satyam (not reflected in the books of Satyam) to keep the operations going by resorting to pledging all the promoter shares and raising funds from known sources by giving all kinds of assurances (statement enclosed only to the members of the board).
Significant dividend payments, acquisitions, capital expenditure to provide for growth did not help matters. Every attempt was made to keep the wheel moving and to ensure prompt payment of salaries to the associates. The last straw was the selling of most of the pledged shares by the lenders on account of margin triggers.
3. That neither me nor the managing director took even one rupee/dollar from the company and have not benefited in financial terms on account of the inflated results.
4. None of the board members, past or present, had any knowledge of the situation in which the company is placed. Even business leaders and senior executives in the company, such as, Ram Mynampati, Subu D, T R Anand, Keshab Panda, Virender Agarwal, A S Murthy, Hari T, S V Krishnan, Vijay Prasad, Manish Mehta, Murli V, Shriram Papani, Kiran Kavale, Joe Lagioia, Ravindra Penumetsa, Jayaraman and Prabhakar Gupta are unaware of the real situation as against the books of accounts.
None of my or managing directors' immediate or extended family members has any idea about these issues.
Having put these facts before you, I leave it to the wisdom of the board to take the matters forward. However, I am also taking the liberty to recommend the following steps:
1. A task force has been formed in the last few days to address the situation arising out of the failed Maytas acquisition attempt.
This consists of some of the most accomplished leaders of Satyam: Subu D, T.R. Anand, Keshab Panda and Virendra Agarwal, representing business functions, and A S Murthy, Hari T and Murali V representing support functions.
I suggest that Ram Mynampati be made the chairman of this Task Force to immediately address some of the operational matters on hand. Ram can also act as an interim chief executive reporting to the board.
2. Merrill Lynch can be entrusted with the task of quickly exploring some merger opportunities.
3. You may have a 'restatement of accounts' prepared by the auditors in light of the facts that I have placed before you.
I have promoted and have been associated with Satyam for well over 20 years now. I have seen it grow from few people to 53,000 people, with 185 Fortune 500 companies as customers and operations in 66 countries.
Satyam has established an excellent leadership and competency base at all levels.
I sincerely apologise to all Satyamites and stakeholders, who have made Satyam a special organisation, for the current situation. I am confident they will stand by the company in this hour of crisis.
In light of the above, I fervently appeal to the board to hold together to take some important steps. TR Prasad is well placed to mobilise a support from the government at this crucial time.
With the hope that members of the Task Force and the financial advisor, Merrill Lynch (now Bank of America), will stand by the company at this crucial hour, I am marking copies of the statement to them as well.
Under the circumstances, I am tendering the resignation as the chairman of Satyam and shall continue in this position only till such time the current board is expanded. My continuance is just to ensure enhancement of the board over the next several days or as early as possible.
I am now prepared to subject myself to the laws of the land and face the consequences thereof."
B. Ramalinga Raju
The company has been seen in a negative light by IT employees in industrialized countries, many of whom had their jobs outsourced to Satyam. On the other hand, many of the world's largest companies have been using Satyam's services to successfully slash their IT costs.
B. Ramalinga Raju was named the Ernst & Young 2007 Entrepreneur of the Year.
Satyam was the 2008 winner of the Golden Peacock Award for Corporate Governance.
http://www.forbes.com/markets/2009/01/07/satyam-chairman-resigns-markets-equity-cz_nk_0107markets04.html
http://www.ft.com/cms/s/0/24e4d8d4-dcf1-11dd-a2a9-000077b07658.html
http://www.bloomberg.com/apps/news?pid=20601087&sid=atFl4N629LNc&refer=home
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The bizarre bit is in the letter, where Raju details all the different attempts he made to "fill the fictitious assets with real ones".
It looks like their profits were a lot thinner then they expected, but they reported otherwise thinking investment capital would let them grow beyond the teething issues. Unfortunately it looks like they never were able to break that cycle. The interesting thing will be to see what happens. The most likely option is someone buys them up. But what that will do to existing contracts...well we'll see.
That's what people are predicting. Rakesh Jhunjhunwala, chairman of one of India's leading investment firms has said: "Satyam should be merged with either Infosys or Wipro which are companies that can be trusted".
Which is probably what will happen.
But most people would have thought they could trust Satyam and its management. That's why it won the 2008 "Golden Peacock Award" for Corporate Governance.
I've seen some other names tossed around as well. But the most likely thing will be that someone buys them up. How will this impact their customers? If you have a contract with Satyam that is profitable...most likely no change. If you have a contract that isn't profitable but could be...expect the buyer to renegotiate the contract for a higher price. If you have a contract that can't be made to be profitable...expect to be told to fuck off.
It seems that Satyam was more concerned with their image than anything else... so I wouldn't be surprised if they took on unprofitable contracts with big companies just so they could show-off their prestigious client-base.
Quite a few of Satyam's clients laid-off most of their IT staff in favour of outsourcing to Satyam. Many of them have been rather vocal at conferences about how much money they saved. They will quite possibly be changing their tune now.
Probably not. Satyam is most likely going to be acquired by someone one, and while contracts may be renegotiated, service is unlikely to stop.
But they will probably be at a higher (profitable) price. They might find that outsourcing doesn't offer as much of a cost-saving as they thought. In the past, it was basically being subsidised by Satyam's shareholders.
Unless all of the other outsourcing firms are in the same boat, the price rise probably won't be so much that it will have much of an impact on outsourcing. The small exodus we see will more likely be about trust rather then price. And it will be pretty small.
You actually see and hear a lot of use of crore and lakh when in India, as their numbering system is structured slightly differently than ours. Instead of $1,234,567,890, they would write it as Rs 1,23,45,67,890, with crore and lakh marking the 10,000,000 and 100,000 unit delimiters.
Held up as a leading company in the field, lots of accounting fraud, shitty oversight from auditors....there might be a few parallels to Enron.
This is one of India's largest and most respected IT companies going down because of fraud. It's being called "India's Enron" because the similar psychological effect on the whole Indian economy.
I never asked for this!
not really, tech support work camps in India and the Philippines are still more profitable than paying first world minimum wage.
IT tech support is especially slanted towards India because it has a large English speaking computer literate population that also happens to be poor, and therefore willing to work an all night shift for shit pay and benefits. I don't think many other countries have that exact combination, the only other country that comes close is the Philippines.
See also: globalization, reality
not really, tech support work camps in India and the Philippines are still more profitable than paying first world minimum wage.
IT tech support is especially slanted towards India because it has a large English speaking computer literate population that also happens to be poor, and therefore willing to work an all night shift for shit pay and benefits. I don't think many other countries have that exact combination, the only other country that comes close is the Philippines.
See also: globalization, reality[/quote]
For tech support and other call-center work yes. For other IT services, like actual programming or tech work, not as much. They're cheaper, yes, and faster, but after having dealt with some of said companies I've found the quality of their work to be extremely lacking. The sad part is having to explain this to completely tech illiterate upper management who only understand "But you cost more, they're cheaper, faster and nothing bad like you said has ever happened to us before!"
But yeah, fuck Raju, I hope the Indians put him in prison to rot.
(sold the rest at 88c
http://www.iht.com/articles/2009/01/22/business/outsource.1-413494.php
The short verison is that prosecutors claim he confessed to making up 10,000 employees. Satyam supposedly had ~50,000 workers. So 1/5th of his work force didn't exist. He apparently used the money to buy land in his mothers name.