Sucheta Dalal :Is Raju Still Lying? (MoneyLIFE Issue 29th Jan 09)
Sucheta Dalal

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Is Raju Still Lying? (MoneyLIFE Issue, 29th Jan 09)  

January 13, 2009


These are the questions that the well-informed people in Hyderabad are asking each other after B Ramalinga Raju’s stunning confession that he single-handedly committed India’s biggest corporate fraud of a whopping Rs7,000 crore at Satyam Computers.
Raju’s story is highly implausible in itself (see Box: It Does Not Add Up) and stinks of political involvement. One clue is that the entire government machinery is taking its own sweet time to arrest Raju and, at the time of going to print, there were strong rumours that he had already fled the country.
The question is: is he protecting someone? The minister of company affairs is waiting for 14 days for the Hyderabad office of the Registrar of Companies when Raju has already confessed to a crime. The Serious Fraud Investigation Office is yet to come into the picture. And where is the crime branch of Andhra Pradesh police? Everywhere you see there is an absence of urgency. There is deliberate lethargy. Corporate circles say that Raju has worked out a political deal whereby his family (read his sons) is protected; the politicians who received large chunks of the vanished money remain unnamed; and he takes a relatively minor rap by claiming that Rs7,000 crore of cash didn’t vanish from the books but didn’t exist in the first place. Clearly, nobody wants him to talk.
EAS Sarma, former union revenue secretary, and a person of unquestionable integrity, is among the few to bring up the political angle in letters addressed to regulators and the Andhra Pradesh government, which raises pertinent questions about the manner in which the government, has been doling out cheap land and projects, without proper competitive bidding to various industrialists, including the two Maytas companies, DLF and Unitech. In a letter to Ramakanth Reddy, chief secretary of Andhra Pradesh, Mr Sarma says: “the State Government, for some inexplicable reason, has been showering undue benefits, over the last two to three years, on all these three companies, at the expense of the tax payers and the public.” He specifically mentions about “large chunks of valuable government land” given to Satyam Computers in Hyderabad, Vizag and other places and the fact that the state government has “been assigning one project after the other to Maytas firms, often bypassing the established competitive bidding procedures.” He has backed up his charge by outlining specific irregularities and asks the government to verify the correctness of claims made by Maytas Infrastructure and Maytas Properties with respect to their financial capacity to implement the Hyderabad Metro, luxury housing schemes and the Masula Port. 
While the Satyam investigation unfolds (see Box for highlights of Raju’s Confession), the Indian information technology industry is out expressing much indignation. But aren’t we forgetting DSQ Software and Dinesh Dalmia’s brazen flouting of every capital market regulation in India, London and the US? DSQ Software also had lucrative contracts which were systematically sold to Ramesh Vangal’s Scandent Technologies. The regulators ignored every revelation about the goings-on at the DSQ group and allowed Dalmia to flee to the US and create another $130 million scam. While SEBI ordered Dalmia to pay Rs630 crore as fines and penalty, the size of the scam perpetrated by Dalmia runs into several thousand crores.
Also, as MoneyLIFE has said earlier, Satyam’s governance was always dodgy; that is why the various awards that it wangled from Ernst & Young and the now-withdrawn Golden Peacock from the UK-based World Council for Corporate Governance were so surprising. Even its acquisitions smelt of over-payment. Remember its deal to acquire IndiaWorld for what was then an incredibly hefty payment of Rs500 crore at the height of the dotcom boom? There were other questionable acquisitions those days when Satyam was famous as a K-10 company – one favoured by scamster Ketan Parekh. Apart from the questions about Satyam, there are many questions about its business associates as well. Here are some queries that we have.
• PricewaterhouseCoopers’s (PwC) role as Satyam’s statutory auditor is an important piece in this scandal. An embarrassed Institute of Chartered Accountants of India has ordered an investigation, but what about PwC’s patchy past? PwC also audited Global Trust Bank (GTB), another infamous entity from Andhra Pradesh. It was even blacklisted by the Reserve Bank of India (RBI), but clawed its way back by taking RBI to court on the claim that it had resigned the account when GTB collapsed. Lovelock & Lewis, which is part of the same group, was statutory auditor to DSQ Software.
• Then there is DSP Merrill Lynch, which was appointed advisor to Satyam after the corporate governance fiasco, and terminated its agreement on 6th January, exactly a day before Raju’s letter of confession hit the public domain. DSP’s letter mentions that it found “material accounting irregularities” leading to its exit. What is, however, interesting is that DSP Merrill Lynch and DSP BlackRock were also big sellers of Satyam shares through IL&FS Trust Company off-loading 39 lakh and 74 lakh shares each between 23 December 2008 and 5 January 2009. Clearly, DSP was in a mood to sell-off long before it terminated its advisory assignment. When contacted, Hemendra Kothari, chairman of DSP, refused to comment. IL&FS Financial Services (5 January 2009), Deutsche Bank (29th and 30th December) and HDFC Mutual Fund (2nd January) were also sellers whose activities will come under SEBI scrutiny.
• SRSR Holdings Private Limited, a Satyam promoter group company, reported a sale of over 10 crore shares on 6th January and another sale of 2.11 crore shares earlier (without specifying a date). The sale has clear shades of insider trading, since it happened a day before the stock dived an incredible 77%.
• Another shady element to the Satyam-Maytas scandal will be the role of Indian banks. State Bank of India is understood to have given a clean personal loan of Rs200 crore to Ramalinga Raju without any security. Market sources insist that SBI’s exposure to the Satyam-Maytas group is a big multiple of this number. It will be a miracle if the multiple investigating agencies can come up with at least partial answers to so many questions. After all, we still don’t have answers to who did what in the previous scams even as various scamsters walked away with clean chits.
It Does Not Add Up
If you wanted to know whether a company was running a shady operation, you would look at whether it is paying tax, has a small, unknown auditor and what its competitors say about it. By these counts, there were no red flags about Satyam Computers's operations. For 2007-08, Satyam provided for income tax of Rs254 crore. The auditor was PricewaterhouseCoopers. So, when chairman Ramalinga Raju says that he single-handedly cooked the books of Satyam for five years right under the nose of top auditors and put fictitious figures as cash balances, something looks funny.
In his letter, he says that while the September 2008 balance sheet shows cash and bank balance of Rs5,361 crore, only Rs321 crore of this is real; Rs5,040 crore is fictitious. He also says that the accrued interest figure of Rs376 crore is false as is the debtor position of Rs2,651 crore; the actual debt figure is Rs490 crore. In other words, assets of Rs7,577 crore shown in the books, do not exist. While putting this figure, Raju slipped in a claim of his as well: Rs1,230 crore that he claims to have put into Satyam to keep the operations of the company going by pledging his shares. Finally, Raju writes that the reported revenue of Rs2,700 crore for the September quarter and its operating profit of Rs649 crore were inflated. The actual figures were Rs2,112 crore and Rs61 crore, respectively, leading to cash and bank balances going up artificially by Rs588 crore in September quarter alone.
This is nonsense. This writer is a chartered accountant who has audited several large companies and has a working knowledge of how money and data flow through large companies. Raju is still not speaking the truth, the reasons for which are probably political (see the main story). Satyam, like most large Indian IT companies, has a large number of Fortune 500 companies as clients. It has won prestigious jobs all over the world against stiff competition. Without a solidly functioning process and excellent people at all levels, this kind of operations is not possible. And, if it does run a high-quality operation, its financial numbers would reflect it. The fraud that Raju describes is so huge that scores of people, at least four departments, would have to be involved to pull it off. Booking false sales for years together would involve multiple staff from multiple teams of sales, accounting and finance and also those in management committees. The HR would get to know it in no time. The kind of people Satyam recruits and promotes to the top would be able to quite easily smell that something is wrong.
Secondly, how could it be that Satyam was running at an operating margin of 3%? The software sector would not be recruiting tens of thousands of people every year if it were such a low-margin business. The revenue structure of software firms is standard. Everybody knows each other’s billing rates and cost of employees as a percentage of revenues. The same project is often split between three vendors. It is impossible that Satyam alone, among the software companies, was running on such thin margins. Take a look at the table of the margins of software companies much smaller than Satyam and Raju’s contention looks suspect. In fact, we cannot imagine any company being able to even survive on an OPM of 3% for more than a few quarters, forget about software companies, all of which have good growth and fat margins, to attract the cream of Indian talent.
Thirdly, if Satyam’s operation was so different from its competitors', word would have quickly spread. I remember, when Pentafour (Pentamedia) Software was being touted as a fast-growing software company, a cursory check with other leading software companies easily sowed doubts about it. As someone remarked: how come they are never present in any major competitive bids? Exactly the same thing was said about CRB Capital Markets when it was claiming to be No.1 in merchant banking. Nobody can say this about Satyam.
Fourthly, between the top bankers that Satyam had, how was it possible for Rs5,000 crore to go missing? If there was no money, how did Satyam show an interest income of Rs270.01 crore after deducting tax of Rs61.04 crore? Which was the bank? Were the TDS certificates also faked? In that case, how did the IT department not spot a discrepancy? The amounts are just too large. The fact is: Satyam was neither a shady operation nor was it possible for one person to sit and cook the books for years together. The only conclusion: there was profit; there was money. It was squirrelled away. That leaves us with one more “confession” from Raju: “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.” Who would believe that now? – Debashis Basu
Raju’s Confessions
According to Ramalinga Raju, the Satyam balance sheet as of 30th September 2008 has the following lies:
Ø      Inflated (non-existent) cash and bank balances of Rs5,040 crore out of Rs5,361 crore reflected in the books.
Ø      An accrued interest of Rs376 crore which is false.
Ø      An undisclosed liability of Rs1,230 crore on account of funds arranged by me (Raju).
Ø      Debtors' position of Rs490 crore    as against Rs2,651 crore reflected in the books.
Ø      Also, the company reported a revenue of Rs2,700 crore as against an actual revenue of Rs2,112 crore for the   September quarter. It reported an operating margin of Rs649 crore as against the actual operating margin of Rs61 crore (3% of revenues).
Ø      This has resulted in artificial cash and bank balances of Rs588 crore in September quarter alone.

-Sucheta Dalal


-- Sucheta Dalal