Satyam and Maytas Fraud

The CBI’s Report on Satyam Maytas Scam

In the Satyam – Maytas Fraud case, Ramalinga Raju and his family have siphoned off an incredible amount of Rs 2,743 crores says the CBI. Satyam had inflated non-existent cash of Rs 5040 crore. Satyam had also understated liability of Rs 1,230 crores and over stated debt by Rs 490 crores. Ramalinga Raju and the promoters of Satyam had floated 327 front companies and published inflated financials. Satyam had taken a loan of Rs 1230 crore loan from the front companies which are not even accounted in the books. Satyam had also taken unaccounted loan of Rs 1493.84 crore from banks. Satyam had executed projects in the name of seven non-existent companies. The seven companies include Mobitel, Cellnet, E Care, Synony, Northsea, Autotech and Hargreaves. Credit must be given to Satyam‘s employee Joe Abraham who had mailed the scam details to the board members on 18 December, 2008 says CBI.

The SFIO Report on Satyam Maytas Scam

CNBC-TV18 reported that the Serious Fraud Investigation Office (SFIO) in its report on the Satyam scam has recommended that its erstwhile chairman and perpetrator of the fraud Ramalinga Raju be charged for 32 offences under the Indian Penal Code and The Companies Act. It says that Satyam made its first losses in 2007-08, and that promoter shareholding was corporatised in order to avoid short-term capital gains tax.

It was also stated that Satyam’s promoters pledged 3.61 crore shares of Maytas Infra, in an attempt to cover margin calls in December 2007.

Sources say that the SFIO report has a number of major findings. The reports recommends prosecution for Ram Mynampati, the Satyam employee who had taken Satyam’s charge as CEO intermediately post the Satyam scam. This prosecution has been recommended under Sections 201 sub-clause 1A, Section 211 sub-clause 7 and 8 and Section 209 sub-clause 5 of the Company’s Act. A then whole-time director, Ram Mynampati’s explanation in the scam involvement, SFIO says, is not “tenable” and therefore it recommends prosecution.

The Maytas connection

The SFIO has told the Ministry of Corporate Affairs that 3.6 crore shares of Maytas Infra were pledged by the promoters of Satyam Computers Services Ltd to meet the margin calls on December 18 2007.

There is another one very glaring connection: the report says Maytas Infra issued a public offer, a Mauitian firm acquired 38% equity share in the realty company. SFIO says these deals look suspicious and has forwarded the details of these deals to the Directorate of Enforcement for further investigation as it suspects that the money for this deal was routed through accounts of Satyam Computers Services Ltd.

Auditors’ role

About the role of Price Waterhouse, Satyam’s auditors during the scam, the SFIO has suggested their “connivance” with the then management of Satyam to carry out the fraud.

The SFIO is pretty damning in its report: it says the auditors did not understand complexities of electronic book keeping, which is a glaring accusation and added that the auditors did not even check 1% of the invoices submitted by the then management of Satyam, which again shows their whole callousness towards verifying the accounts.

The report has also recommended that the non-executive directors should refund the commission, which they have been paid to the tune of Rs 72 lakh odd over the past one year.

The fraud deconstructed

Sources say that, over the last ten years, the Raju brother had run over 374 companies. Out of these, about 158 odd ones, are directly under the scanner. 150 of these companies were involved in purchase of land whereas eight companies were involved in investments.

SFIO sources say that according to its findings, the Rajus were also selling their shares through four out of these eight companies. They did not want to sell the shares directly in the market because they thought that would impact the sentiment negatively and therefore they were selling their shares through these four investment companies.

As far as the companies involved in purchase of land are concerned, the money that was required was again being routed through these eight investment companies.

Another name which has emerged according to sources in the report is that Surya Narayana Raju, Ramalinga Raju’s brother. The SFIO report says he helped and abetted to the crime.

According to sources in the Serious Fraud Investigation Office (SFIO), the agency probing into the Satyam scam, the IT company’s offshore exports were inflated by over Rs 4500 crore over a period of seven years.

Further, foreign currency of Rs 1,940 crore from exports over six years was not remitted to India. Sources say the company inflated books by Rs 27,167 crore between financial year 2001 and September 2008. The inflation was done by falsifying cash, bank balances and fictitious fixed deposits (FDs). Adding to this, inflation was done by understating liabilities and overstating debtors.

PwC suspends 2 partners, assurance leader steps down

From NDTV Profit

Auditor Price Waterhouse on Tuesday said it has suspended two of its partners – S Goplakrishnan and Srinivas Talluri – who worked on the accounts of scam-hit Satyam Computer and were arrested last week.

The audit firm has also announced the resignation of its assurance leader, Thomas Mathew, but said he will continue to remain a partner of the auditing firm.

“Price Waterhouses assurance leader, Thomas Mathew, has announced that he will step down from this role with immediate effect,” the global auditing major said in a statement and added that he will continue to remain a partner of the firm.

An assurance leader is one who oversees the firm’s audit practice, policies and procedures, growth and quality control.

Though, Mathew had no connection with the audit of Satyam, Price Waterhouse said, “in light of the present situation, however, he believes it would be appropriate for him to relinquish his management position.”

The firm further said, “Mathew will remain a PW partner. PW will appoint a new assurance leader in the near future”.

Meanwhile, the global auditing major also said: “in light of recent allegations, S Gopalakrishnan and Srinival Talluri have been suspended of all their duties and functions as partners of Price Waterhouse, pending completion of the investigations into Satyam matter”.

PwC’s Chief Relationship Partner S Gopalakrishnan and Engagement Leader Srinivas Talluri, were arrested on January 24 and were slapped with charges of cheating, forgery, criminal breach of trust and criminal conspiracy under the Indian Penal Code (IPC).

Last week Price Waterhouse had expressed regret over their detention by Andhra Pradesh police but said it would continue to cooperate fully with the authorities.

“While they are suspended, neither partner will play any part in client matters. They will undertake no activities on behalf of PW and have been advised to cooperate fully with the ongoing inquiries regarding Satyam,” the auditing firm said.

“As the investigations proceed, PW will continue to evaluate the situation,” it added.

The Andhra Pradesh CID police had arrested on January 24 Gopalakrishnan and Talluri of PW at Satyam, as part of ongoing investigations into the accounting fraud disclosed by Satyam’s founder Ramalinga Raju on January 7.

The CID had earlier conducted searches at the office of PwC in posh Banjara Hills area.

Arrested PwC partner an ace at bagging clients

From Economic Times

HYDERABAD: A common perception in the chartered accountant community of Hyderabad is that S Gopalakrishnan, partner PricewaterhouseCoopers, wears the PwC brand on his sleeve in a manner that is not to the liking of most.

The man who signed the now infamous Satyam balance sheets till last year is the one behind making PwC what it is today in Hyderabad, say his contemporaries and rivals. They say he knows how to bag clients in his “aggressive” manner.

PwC was Satyam’s auditor and ever since Ramalinga Raju’s confession to his “inflated balance sheet” fraud, questions have been raised regarding the auditing firm’s involvement in orchestrating such a huge scam in connivance with the Satyam management.

Two names that figure in the balance sheets of Satyam are those of Srinivas Talluri and S Gopalakrishnan, who have audited Raju’s fudged accounts. PricewaterhouseCoopers has claimed that auditing standards have been maintained. Talluri started signing the Satyam accounts since 2007.

Though PwC is asserting that it did not do anything wrong, city-based chartered accountants are crying foul. They ask why Gopalakrishnan hasn’t quit from ICAI’s council, despite his alleged involvement in the Satyam scam.

When PwC made an entry into India, it was through the local auditing firm Lovelock & Lewes where Gopalakrishnan was holding a senior position in the firm’s Hyderabad branch. With Lovelock & Lewes becoming PwC India, Gopalakrishnan became the face of PwC in Hyderabad, with some describing him as more of an entrepreneur than an auditor.

“He now was with a big brand and knew it was easier to get more business,” says the head of a city-based auditing firm.

While his rivals in other auditing firms say that PwC’s business in Hyderabad runs because of Gopalakrishnan, who is due for retirement next year, they wonder whether in his search for business he became pliable.

Srinivas Talluri, who was with PricewaterhouseCoopers in the 1990s left the firm to join Ernst & Young only to rejoin PwC later. His recent appointment with the global auditing firm is less than two years old. He is known in the industry as down to earth and simple. “Talluri is unfortunate to be caught in this mess,” said a CA.

Gopalakrishnan is known as “hardworking business guy” who is essentially “revenue-driven” and focuses entirely on “growing business” in Hyderabad.

But over the last two years, it has been another partner at PricewaterhouseCoopers (PwC), Ramakrishna, who is handling operations. “Ramakrishna and Talluri were being groomed to take on the mantle. It’s a lost chance now,’’ says partner with an audit firm.

PriceWaterhouseCoopers (PWC) Auditors of Satyam arrested by Police

From moneycontrol.com

Sources in the Hyderabad police said the CB-CID police have arrested Satyam’s two Pricewaterhouse auditors S Gopal Krishnan and Srinivas Talluri last night. Pricewaterhouse had not responded to the arrest, at the time of filing the report.

Earlier on Friday, the 6th Metropolitan Magistrate of the Nampally Court rejected the petition of market regulator Securities Exchange Board of India (Sebi) to interrogate the Raju brothers — Ramalinga Raju and Rama Raju — in connection with the Rs 7,000 crore Satyam corporate scam that rocked the country recently.

Sebi had filed a petition with the court to record the statement of the Raju brothers. The court rejected the Sebi petition “on technical grounds” and not on merits of the case.

Maintainability and jurisdiction could be the reasons for the petition being rejected and it is said the Sebi may need to approach the appropriate higher court to get the petition reviewed.

The magistrate also asked the Serious Fraud Investigation Office (SFIO) to rework its petition to include suitable sections to interrogate the under-judicial-custody Raju so that it can be allowed to go ahead.

The magistrate also extended the judicial custody of the Raju brothers and ex-Satyam CFO Srinivas Vadlamani till January 31. The bail petition of Ramalinga Raju and Vadlamani will take place on January 27, while the order on Rama Raju’s bail petition was postponed to January 28.

In a related development, the CB-CID confirmed the arrest of Gopal Krishnam Raju, the general manager of SRSR Advisory Services, a firm promoted the Raju family.

The police also conducted search operations at the office of Maytas Infra in Greenlands, Somajiguda area in Hyderabad.

Maytas deal was structured to cover the fudging

What’s the crux of the Satyam scam?

In essence, what disgraced chairman Ramalinga Raju has now admitted is that the company had been cooking its books to show higher revenues and lower liabilities, thereby grossly overstating the profits of the firm as well as its reserves. This has been happening, according to Raju’s ‘confession’, for “several years”. The net result of this massaging of accounts is that as of September last year—the last quarter for which results are available—the company’s bank balance is overstated by Rs 5, 040 crore and its receivables in the form of accrued interest by Rs 376 cr. On the other side of the balance sheet, Raju said, liabilities have been understated by Rs 1,720 cr. The combined effect of overstating the positives and understating the negatives is that the overall balance looks Rs 7,136 cr healthier than it would otherwise do.

What was the purpose of the scam?

Rather like item numbers in Indian films, Satyam’s fancy numbers were aimed at sexing up the company and making it more attractive for investors. Raju pointed out that given the low promoter holding in the company (8.6% as of September 2008), poor performance could result in a take-over. It was important, therefore, to make it seem as if both the top and bottom lines were growing at a healthy rate, even if that was not actually true.

How it got here?

The problem with overstating performance is that if you want to keep growth rate looking good, the absolute extent of the exaggeration has to keep getting bigger. To take this particular example, in 2003-04 Satyam reported net sales of Rs 2,542 cr. In the four years since then, that figure was reported to have grown by 36%, 34%, 40% and 31% respectively to reach Rs 8,473 cr in 2007-08. Now, if a Rs 2,500-cr company wants to show 35% growth when it has actually grown by only say 25%, the extent of overstatement would be only Rs 250 cr (10% of Rs 2,500 cr). But if a Rs 8,500-cr company wants to do the same thing, it will have to fudge the figures by Rs 850 cr. It is also important to realise that overstating revenues by 10% can overstate profit by a lot more. For instance, if actual revenues are Rs 2,000 cr and actual net profits Rs 200 cr, an addition of Rs 500 cr to revenues without changing anything else would also add Rs 500 cr to net profit. While this would mean exaggerating revenues by only 25%, the profit figure would get overstated by 250% (500 cr is twoand-a-half times 200 cr).

How was Satyam’s proposed Maytas buyout linked to the scam?

Maytas, a real estate firm owned by Raju’s family, was proposed to be bought by Satyam for about Rs 6,400 cr and turned into a whollyowned subsidiary of Satyam. Raju has pointed out that this would have helped clean up the Satyam mess. Since Satyam would have to pay Maytas owners (the Raju family) for its shares, on paper Rs 6,400 cr would have moved out of Satyam’s books into the Raju family’s hands, while Satyam would have gained Maytas shares. This could have been an excellent way of regularising the pumping up of numbers. Here is how. One, the payment would have actually become just a formality with the Raju family technically receiving Rs 6,400 cr. But, with Satyam’s reserves and surplus having already been depleted (or, conversely, inflated) the Raju family would have got much less. But, obviously, they would not have complained. Two, this would have then given the company a legitimate opportunity – through an acquisition — to bring down the reserves to its actual level without admitting that the books had been cooked. And, nobody would have been any the wiser since only the Raju family and their close confidantes would know about this. Thus, while Satyam’s reserves would apparently have been used up to pay for the acquisition, in reality the non-existent reserves would be passed on to the Raju family. And Maytas would have found a new home. The furore over what most people perceived as a blatant overvaluation of Maytas prevented the proposed merger going through, thus closing out an opportunity for Raju to paper over the bungling in Satyam.

Source: The Times of India “Learning with the Times”

Text of Letter from Ram Mynampati

From: Ram Mynampati
Sent: Wednesday, January 07, 2009 2:05 PM

To: SatyamAssociates (Global)

Subject: Open communication : Today’s developments

Importance: High

Dear colleagues

I write this mail to update you on some critical Board and Leadership level changes in our company, effective immediately. A series of extremely unfortunate events led to this, which I am sure you have seen covered in the media over the past few hours.

A SWAT team consisting of senior leaders has been formed. Many of them are Satyam veterans with a minimum of ten years experience in our company and more than twenty years in the industry. I have been requested to play the role of an Interim CEO and this team will support me, as we steer Satyam through this challenging phase. These are the leaders on the ground and have always had the final call on most customer and associate related matters in the company, so far. This team has committed to work together, to make it happen. The SWAT team represents all Customer Facing units, key Horizontal Competency Units and critical Support Units.

Over the past twenty one years, with your passion and commitment we have built significant customer assets, formidable service offerings, excellent delivery processes and scalable support systems. Satyam has been consistently acknowledged for our leadership bandwidth and has a demonstrated reputation for collaborative functioning. Our renowned Full Life Cycle (FLC) model encouraged ‘Distributed and Empowered’ leadership and prepared us for all situations. This is the time when we have to apply it in real life. What we have been trained for, we will now put to work. Let us continue to handle our respective areas with total autonomy, freedom and control. This is as good a time, as any, to remind ourselves that we have been acknowledged as being amongst the top three Best Employers in India by Hewitt and Mercer in independent surveys in 2007 and American Society of Training & Development (ASTD) named us as the best globally, for our Learning practices – the first company outside USA to be ever awarded this honor. Satyam continues to have everything that is fundamentally required for its success – a strong customer base and a committed universe of approx 53,000 associates.

What we are confronted with is the challenge of continuing our business operations, seamlessly. We will need your involvement and ideas to make it happen. This might involve even more effort at every level, in the near term. This is the time to prove to the world that we are united and will succeed in overcoming the challenges.

This quarter will be tumultuous for us. Rumors will abound and it would be fair to assume that competition will try and leverage it to their advantage. As a proactive measure, we have formed fully empowered Cross Functional Teams, headed by seasoned leaders in the respective areas, to address pan-organizational issues like Delivery Excellence, Customer & Associate Retention, Pipeline Management, Cost Controls, Collections etc. You have helped to build Satyam to be what it is today – and we believe that this cannot be allowed to fail, at any cost. I am confident that I can count on your continued support as I commit to our customers that we will ensure deliverables and commitments are serviced.

On behalf of our new leadership team, I apologize to you for the uncertainty and inconvenience that this incident has caused to you and your families. I assure you that we will emerge stronger, because of this. Increased focus on transparency at all levels, integrity and ethical functioning will be ensured. I want you to stand confidently in front of your families and friends and say that we will now be a better company and that we shall soon be a successful case study of how organizations have turned over a new leaf.

We will be conducting “U Speak” (our Meet-the-Leadership sessions) in each city in India starting next week and will have numerous Webinars to address associates in various countries. We will be meeting many of our customers in person over the next two weeks and will meet those of you onsite, at that time. In these sessions, we will explain to you what happened and articulate the actions that are being taken to retain your confidence in our company.

Let us fight this battle together. I am confident that we will emerge stronger, TOGETHER.

Ram Mynampati

Ramalingam Raju, promoter of Satyam Computer Services has admitted that a massive fraud was committed by him and that the books of account of the Company are fraudulent.

The text of the letter written by Ramalingam Raju is as follows:

To the Board of Directors
Satyam Computer Services Ltd.
From B. RamaJinga Raju
Chairman, Satyam Computer Services Ltd.
Dear Board Members,

January 7th 2009

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 30th 2008

a. Inflated (non-existent) cash and bank balances of Rs. 5,040 crore (as against Rs. 5361 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 over stated debtors position of Rs. 490 crore (as against Rs. 2651 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% Of revenues) as against the actual revenues of Rs. 2,112 crore and an actual operating margin of Rs. 61 Crore ( 3% 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 a period of last several years (limited only to Satyam stand alone, 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 company operations grew significantly (annualized 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 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 a take-over, 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. Mavtas’ investors were convinced that this is a good divestment opportunity and a strategic fit. Once Satyam’s problem was solved, it was hoped that Mavtas’ 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 share 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, pastor 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, Murali V, Sriram Papani, Kiran Kavale, Joe. Laglola, Ravindra Penumetsa, Jayaraman and Prabhakar Gupta are unaware of the real situation as against the books of accounts. None of my or Managing Director’s 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 Virender Agarwal I 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 CEO 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 twenty 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 apologize to all Satyamites and stakeholders, who have made Satyam a special organization, 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. Mr. T.R. Prasad is well placed to mobilize 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 this statement to them as well.

Under the circumstances, I am tendering my 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 consequences thereof.

(B. Ramalinga Raju)

Copies marked to:

1. Chairman SEBI
2. Stock Exchanges