The Satyam Story:Part 2

The Satyam Story:A Different Perspective
Nobody has so far come out with any note of approval or dissent on the financial manipulation  claimed to have been purported by Mr.Ramalinga Raju in Satyam . Why everybody in the country show a tendency to believe blindly Mr. Raju’s admission to fraud, simply  relying on the contents of his disclosure?

Everybody in the country seem to believe blindly Mr.Ramalinga Raju’s confession about and admission to fraud, apparently relying on the contents of his disclosure. One has  to look at the issue with an open and inquiring mind. One will find it extremely difficult to convince oneself that the financial statements of Satyam has been forged and that the financial jugglery has been going on for some time. We have hard evidence that Satyam had strength in the two most important areas which are considered to be essential for success for a software solutions provider namely, a great clientele( a number of   Fortune 500 companies figure in Satyam’s  clients’ list)and a head count sufficient enough and capable of delivering quality solutions. Even if we assume that the costs of Satyam were higher compared to other software majors  whose margins ranged from about 17% for Wipro (including FMCG products) to about 26% for Infosys over the last few years, Satyam must have been able to earn decent margins from its projects, and hence definitely profitable. Hence, it is hard to believe that the company was not making money and that the financial statements required to be  forged to show “inflated” profits and strong financial position.

Mr.Raju’s claim that merging Satyam with the two Maytas companies was “the last straw” for Satyam to stay afloat  hence looks unbelievable and totally false. It must be the other way round only. The balance sheet figures as on 30^th September,2008 (if audited) must have been correct. The changes in the financial position might have happened post-September 30, 2008.It is at this time that the real estate  and infrastructure sector started facing serious  problems in India(even though they were making news abroad).Maytas companies might have also faced serious cashflow problems consequent to fall in demand and prices. Real estate companies which have been riding  on the euphoria of unabated rise in land and property prices immediately found themselves severely strapped for cash. Maytas companies might have been no exception. Rajus, who  wanted to save Maytas companies  siphoned off funds from Satyam after September 30, 2008 , tried to wisely play their cards by putting a strategic-looking  proposal to the board for acquiring the two Maytas companies, under the pretext of “derisking”, thereby enabling them to show the money siphoned off to help Maytas companies as paid for equity stake in them. And all these had to happen  before the board meet to consider the  third quarter results as the  Rajus were very much afraid that they could be caught by the outside directors and auditor and that their ploy could be exposed.

 The auditors and the independent directors might  have been unaware of the transactions and the consequent changes in cash position happened after 30^th September. While the independent directors might have gone wrong in clearing the acquisition proposal, they might not have been party to any other wrong doings. But Mr.Raju has cunningly made the independent directors scapegoats  by saying that this forgery has been going on for some time  putting the very diligence and the commitment of independent directors to question. Public and media unfortunately  have started asking  for the blood of the independent directors and auditors, who might not have known what had happened and been involved at all in the whole episode because the whole manipulation and siphoning of funds must have happened in a matter of three months during which time no board meeting or no audit committee/auditor meeting have taken place.The only meeting that took place must have been the crucial and controversial meeting of December  16   , 2008 to discuss the proposal for acquisition of the Maytas companies. Mr.Raju must have been taking an anticipatory bail before the board meeting scheduled for considering the third quarter results, during which the real picture would have come to the knowledge of the Director  Board, and possibly the auditors.

Another question that puzzles many is why there was a delay of  three days in booking the Rajus even after Mr.Ramalinga Raju’s  admission that he committed himself to cheating (amounting to criminal offences under various provisions of law) by forging the financial statements to show profits inflated  by amounts in excess of Rs.5000 crores? Nobody  initiated any step to put him behind bars for the self-admitted criminal offences but waited for a full three days. Was he being given time to develop his story further?

Yet another question is about the role played by SEBI. Mr.Bhave, Chairman, said that the Satyam disclosure was of “horrifying magnitude”.But, has  SEBI, at least by now, studied the financials of Satyam for the last few years to verify any wrong doings or are they still blindly sticking to the disclosures of Mr.Raju? Prof.J.R.Varma, in his blog on financial markets (http://www.iimahd.ernet.in/~jrvarma/blog)  writing on the Satyam scam on 8^th  Jan, expresses a concern on the “willingness of  people to believe a liar’s confession blindly” . SEBI has the mandate to oversee  the governance of companies in addition to their role as a capital market regulator. And it is mandatory for listed companies  to submit their financial statements to SEBI.It is high time that SEBI randomly checks some of the financial reports so that they can take action against erring companies at an initial stage than waiting for a wholesale carnage of the market and investor confidence of the kind happened in the case of Satyam.Mr.T.T.Ram Mohan in an article(Time to rethink governance, ET,Jan 8,2008) suggested that a Board for Audit and Surveillance(BAS) be established with the authority to carry out surprise audit of any listed company above a certain size, on the lines of CAG which provides an additional layer of audit for the PSUs.I feel such a body can be attached to the SEBI considering it’s role in the regulation of corporate governance.

Last but not the least, nobody from SEBI, SEC of US, MCA, ICAI, Research arms of Brokers, investment banks, mutual funds, academics, investor associations, or audit companies has so far come out with any approval or dissent note on the financial manipulation  claimed to have been purported by Mr.Ramalinga Raju, even after five days apparently proving Mr.J.R.Varma correct.

End piece: Isn’t it premature on the part of  Dr.Reddy’s to ask Prof.Krishna Palepu to quit from directorship and on the part of Mr.T.T.Ram Mohan(http://www.ttrammohan.blogspot.com) to indulge in character assassination of him before ascertaining his  role in the whole Satyam scam?