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January 7, 2009 8:31 pm

The $1bn black hole at heart of Satyam’s finances

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On the investor page of Satyam Computer Services’ website on Wednesday was a box announcing results for the quarter ended September.

The box, which had not been changed since before the scandal began, kicked off with a bullish introduction from B Ramalinga Raju, the founder and now former chairman of the country’s fourth largest software group.

“I am pleased to announce a better-than-guided performance for the second quarter of fiscal year 2009,” Mr Raju said. “We achieved this in a challenging global macroeconomic environment.”

In fact, by Mr Raju’s own admission on Wednesday, the company achieved this by rigging the accounts from top to bottom – and not just in September but over the past several years. In the process he perpetrated a fraud so large, complex, and brazen that Indian business people are already calling it the country’s “Enron”.

“This is not pocket change we’re looking at here, these are really, really large numbers,” said Prof Sandeep Parekh at the elite Indian Institute of Management in Ahmedabad and a former executive director at the Securities and Exchange Board of India, the stock market regulator.

“Obviously a lot of people were paid to go to sleep at the wheel or were kind of winking at the last moment. I don’t think this is a negligence-based thing – there will be many people implicated in this.”

The first inkling most investors received that something was wrong at Satyam was late last year when Mr Raju and the board suddenly approved the $1.6bn acquisition of the Maytas infrastructure and property companies controlled by his family.

However, Mr Raju abandoned the deal within hours, after a rebellion from institutional shareholders.

The transaction would have depleted the company’s more than $1bn in cash and left it with net debt of around $400m. At the time it was seen as a blatant attempt by the controlling family to raid the group’s cashpile.

But gradually it emerged that Mr Raju was in much deeper trouble.

He revealed to the Bombay Stock Exchange that his 8 per cent stake in the company had been pledged to institutional lenders in return for loans. After the shares plunged in line with the global financial crisis, these institutions had begun liquidating the stock to cover margin calls.

With his stake in the company dwindling and faced with the possibility of being ousted from his management role, he seems to have had little choice but to come clean.

He said the company had rigged its results over a succession of quarters to show a large operating profit margin, in the range of 20 per cent, versus the actual margin in the September quarter of just 3 per cent.

At the heart of the fraud, though, is a Rs53.61bn ($1.1bn) cash balance that Mr Raju now claims was mostly “fictitious”. At least Rs50.04bn of this amount never existed and was an accumulation of previous overstatements of company profit.

The letter he wrote to the board reads like the words of a villain in a Bond film helpfully laying out his whole dastardly plan for his audience at the end of the movie.

“The aborted Maytas deal was the last attempt to fill the fictitious assets with real ones,” Mr Raju said.

He claimed he had not benefited “one rupee” from the fraud and that no board members knew of it. “I am now prepared to subject myself to the laws of the land and face the consequences thereof,” Mr Raju said.

But others scoff at suggestions only a few people could have known of the scam.

“Although the regulations are there, there has been total negligence in the implementation, otherwise there is no way such a big fraud can happen by oversight alone,” said Suresh Sarana, of RSM Astute Accounting Group.

The country’s regulators, including Sebi and India’s Institute of Chartered Accountants, have promised an investigation. Under the spotlight will be the role of PwC, the company’s auditor, which last night said it was examining Mr Raju’s statement.

Aside from stricter oversight of auditors, analysts believe the rules governing independent directors will need to be tightened to force them to be more accountable.

Questions are also being asked about governance at India’s other family dominated businesses.

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