Tuesday, January 27, 2009


The Satyam probe

The scandal about Satyam just refuses to die down. There are so many questions that remain open, and there is the major feeling that even though the Central Government took quick action once Raju had come out with his confessional statement, the state Government of Andhra Pradesh is not being so open. Before Raju had made his statement, the Chief Minister, Rajshekhar Reddy had made a statement to the effect that the aborted merger was over, and people should get on with their lives. No reassurance about watching out for a company that was the star of Andhra Pradesh and employed 50,000 people. And just a few days after the Chief Minister dismissed all warnings, the Satyam Chief went ahead and wrote his confessional note. And after this, the Chief Minister had nothing to say.
Now, there are so many open questions that it seems that there are so many mysteries to resolve, and the former Satyam Chief is sitting in jail, with some police investigators getting access to him. For some arcane reason, SEBI investigators are unable to get access to Raju, currently in jail (The Andhra High Court has refused SEBI the permission to do so even though a huge amount of investor money went down the drain).
- How many employees does Satyam have ? There are multiple reports about whether it has 53,000 employees or it has a lower number of employees with contradicting statements from the board and from the public prosecutor
- How did Raju divert money away from Satyam to the extent that a software company that has a large margin is very low on money ?
- What are the exact details of the Andhra Government support to Maytas (a company also run by Raju and his family) ? It has a huge amount of Government contracts that are now in jeopardy. In fact, the contract for the Metro was so controversial that the head of Delhi Metro (Mr. Sreedharan) stepped away as a consultant with a talk about this being an unfair contract (and the Andhra Government threatened him with a defamation lawsuit).
- Why has the investigation into this huge fraud case not yet handed over to a central agency with the ability to do a financial and criminal investigation both ?
- Will the money that has been diverted away from Satyam ever be recovered ?
- What was the level of interaction between Raju and the Congress Government of Y Rajsekhar Reddy ?
- What was the exact role of the auditors given that they appear to be grossly incompetent, and maybe involved in a criminal conspiracy ?
There are so many other questions, and yet there are no good answers. The investigation is continuing, but already questions are emerging about whether this is a fair investigation, or whether this is an attempt to try and protect Raju. For a scandal that is India's largest and casts a negative impression on the overall positive India story, the investigations needs to be time-bound and very thorough.

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Wednesday, January 07, 2009


The Satyam case: major fraud

India has seen corporate scandals in the past, but never one of this magnitude. A software company, touted as a success story, the 4th largest software company in India and one that services around 1/3rd of the Fortune 500 companies, the events of the past one month have been a total shock. They have called into question the entire range of issues related to ethics, corporate governance, fiduciary responsibilities, professional auditing, and so on. There will be a lot more soul-searching that will happen, a lot more inspection and suspicion of other companies, search for more skeletons in the cupboard, and so on.
What has Mr. Raju brought forward. Starting from the surprise news about Satyam trying to buyout the realty companies, Maytas (run by Mr. Raju's sons), this is almost like a film story. The news about Satyam using its huge estimated surplus of more than $1.2 billion to buy companies related to the promoter (especially when the promoter held only 8% shareholding in the company) was a huge blow to all norms of corporate governance and met with huge resistance. Seeing this resistance, the company decided to roll back this proposal, but things would not stop from that point onward.
The issue kept on snow-balling, and when a popular issue comes up in the press, they can push at all areas and get more secrets out. So, questions started being asked about respected board members such as Vinod Dham as to whether they asked the right questions and acted in the interests of the shareholders. Other news started disclosing that actually the promoters had already pledged all their shares and effectively could be actually holding no stake in the company. And then the World Bank announced that in continuance of an earlier investigation, Satyam has been found to have a great many security problems with their last work (including probable sniffer tools and a data hole), and hence Satyam has been banned from further World Bank contracts. By now the independent board members had started resigning.
There was a lot of news about how attractive Satyam could be because of its huge holdings of cash and high book value vs. the value of shares, and then there were even more reports questioning whether Satyam really did hold onto these reserves.
And now, finally the CEO of Satyam has revealed all. The company was cooking its books, and once started, there was no going back, and hence the company eventually has declared reserves to be $1.5 billion more than what they actually hold.
All this came as a huge shock to the people of the country; how can such respected promoters actually commit this huge fraud, can one really believe them now when they say that they did not benefit ? What were the independent auditors (Price Waterhouse Coopers) doing when they were doing audits since 2001 ? There are already too many jokes about lawyers and accountants, so maybe this was another reason why accountants cannot be trusted. Is it possible that only a few board members and CEO knew about this, and no one else ? This was money that was supposed to be coming into the company, how can senior management (besides the promoters) claim that they did not know ? There are too many questions, and one wonders as to whether all this will really become clear ?
Now what happens ? Well, it is not like Satyam is bankrupt - it still has a large number of clients (although some of them would want to bail out), it has a huge number of people on its rolls (50,000), it is a huge part of the reputation of Hyderabad as a big IT city, and there are still institutions who hold a huge amount of the company's shares. It is difficult to let such a company go out of business, and one expects that there will be pressure to ensure that while the investigation goes on, the company is retained as a going concern. However, the US has a law where auditors and the company's management are responsible for the accounts of the company, and this is a blatant violation.

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