Column : Keeping Sebi out of Satyam

A full two weeks after the country's biggest corporate fraud was revealed by the perpetrator himself, it's astonishing that the stock market regulator is still in the dark.

Sebi had ordered an investigation on the very day Satyam founder and ex-chairman B Ramalinga Raju made his infamous confessions and within two days, a team of senior officials had reached Hyderabad. Though they were told that they would get to meet Raju in the afternoon, Raju's lawyer turned up instead, seeking a day's deferment of the meeting, ostensibly citing Raju's stress levels.

The very next day, a Saturday, instead of meeting Sebi officials as promised, Raju and his brother surrendered before Andhra Pradesh's director general of police. The metropolitan magistrate who handled the case opted to send the Brothers Grimm to judicial custody instead of police custody, which was only allowed on January 18. This meant that neither the police nor Sebi could ask Raju a single question about his bunglings without the court's permission.

On January 21, after a Sebi meeting, its chairman CB Bhave, whose impeccable credentials make him a highly respected figure in financial markets, seemed hapless and helpless when he lamented that Sebi has still not been able to question Raju or his chief financial fraud officer Srinivas Vadlamani.

So, the state CID has the Rajus and their CFO in their custody now, and the Sebi team has only managed to question the auditors and the firm's internal finance department staffers. But that's not enough to unearth a fraud of such scale. Clearly, the state is in full control, not the market regulator, whose preamble says its primary role is to 'protect the interests of investors in securities and to promote the development of, and to regulate the securities market'. There may be an alphabet soup of investigators now probing Satyam's accounting cuisines, but few would be as up to speed with contemporary corporate realities as Sebi. Is an agency probing too deep into the mess or capable of coming up with answers too fast politically inconvenient? Is a three-month probe by the Serious Fraud Investigation Office more suited to powers that be?

Raju's custody extended; will enjoy special status in jail

Hyderabad, Feb 7 (PTI) A local court today extended the judicial remand of Satyam's former chairman Ramalinga Raju and two others till February 21, while the district magistrate allowed them special treatment in prison. Raju, his brother Rama Raju and Satyam's former CFO Vadlamani Srinivas would get a cell with an attached toilet, cot, pillows, chair and table, but the three would have to share the room though.

They can now buy their own food, including fruits and biscuits from outside the prison and would also be provided utensils for preparing food. The 6th additional chief metropolitan magistrate extended the judicial remand of all the five accused in the Rs 7,800-crore Satyam fraud case.

It was the fourth extension since their arrest early last month. Meanwhile, the Hyderabad Collector and District Magistrate Navin Mittal approved the classification of Raju and the two others as 'Special Class' under-trial prisoners and directed the Superintendent of Chanchalguda Central Prison to facilitate the special status to them.

Earlier, the magistrate court had recommended to the Hyderabad Collector to grant them special status, following an application by the trio on January 12 to this effect. The recommendation was made on the ground that they are accustomed to superior mode of living by virtue of their social status, education and habit of life.

Full text of Raju's resignation letter to the Board

To

     The Board of Directors,

  Satyam Computers Services Ltd. 

    From

    B. Ramalinga Raju,

    Chairman,

    Satyam Computer Services Ltd 

Dear Board Members, 

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 30, 2008 

a) Inflated (non-existent) cash and bank balance of Rs 5,040 crore (as against Rs 5361 crore refglected in the books) 

b) An accured 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 debtor 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 per cent of revenues) as against the actual revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore (3 per cent of revenue). 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 standalone, 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 the 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 the poor performance would result in a takeover, 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. Maytas’ investors were convinced that this is a good divestment opportunity and a strategic fit. Once Satyam’s problem was solved, it was hoped that Maytas 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, not 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 know 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 trigger. 

3. That neither me, nor the Managing Director took even one rupee/dollar from the company and have not benefitted in financial terms on account of the inflated results. 

4. None of the board members, past or 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, Kesab Panda, Virender Agarwal, A S Murthy, Hari T, S V Krishnan, Vijay Prasad, Manish Mehta, Murali V, Sriram Papani, Kiran Kavale, Joe Lagioia. Ravindra Penu Metsa, Jayaraman and Prabhakar Gupta are unaware of the real situation as against the books of accounts. None of my or managing directors immediate or extended family members has any ideas about these issues. 

Having put the 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 Aggarwal, 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 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 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. Mt 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 contribution 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 fact the consequences thereof. 

(B. Ramalinga Raju) 

Copied marked to: 
1) SEBI Chairman 
2) Stock Exchanges

 

Raju brothers to be produced before court within 24 hours: Police

HYDERABAD: The tainted founder of Satyam B Ramalingam Raju and his brother Rama Raju will be produced before the court within 24 hours, a top police official said.  "Both are in our custody... a case has been registered and we will produce them before the court within 24 hours," Director CB-CID V S Kaumudi told reporters outside the Director General of Police's office.  Kaumudi said they would seek police custody of the brothers when they are produced before the court tomorrow. He said they were arrested on the bases of a complaint filed by an investor. Kaumudi said they came to the DGP'S office and they have been arrested in connection with the business of the Satyam Computers.  "They are now in CID custody and they will be produced before the court sometime tomorrow," he said.  Mr Ramalinga Raju, Satyam's disgraced chairman, along with former MD Mr Rama Raju, was arrested late Friday night, two days after he confessed to perpetrating a Rs 7,000-crore financial fraud.  The CID had registered a case against Mr Raju based on his confessional letter to the Satyam board and SEBI. The Raju brothers have been booked for criminal breach of trust, cheating, criminal conspiracy and forgery under the Indian Penal Code.  Late night meetings were still on at the government level to finalise a new board for Satyam. Names doing the rounds include former Nasscom president Kiran Karnik, former SEBI chairman M Damodaran, former MphasiS chief Jerry Rao and angel investor Saurabh Srivastava.  With the government's decision on Friday, the board meeting of Satyam scheduled for Saturday will not take place. As per law, the new board will hold its first meeting within seven days, the minister added. The government's decision came as it was concerned about the future of the company and its stake holders including employees

Others may curse Ramalinga Raju; his village blesses him

ELURU/AP: For the whole world B Ramalinga Raju may be a villain, after the startling revelation of fraud in the company he founded, but for  residents of his native village in West Godavari district, he is still a good samaritan.  The non-descript village, Garagaparru, shot into the limelight with Satyam Computer growing to become the fourth largest IT firm in the country.  The villagers hail the development works undertaken by the Byrraju Foundation, the charitable arm of Satyam, and consider Raju as a good man.  "He has done many development works in this region. We hope he will tide over the present crisis," Rama Raju, a villager said.  Several other villagers have expressed similar feelings. The Satyam issue is the hot topic in the village ever since Raju tendered his resignation as chairman of the company.  The Byrraju Foundation has taken up a number of development work in the fields of education, health, drinking water and several others in hundreds of villages in the coastal districts of West Godavari, East Godavari, Krishna, Visakhapatnam and others. However, the developments in the company came as a shock to hundreds of shareholders in the West Godavari district.  "I have lost Rs 64,000. Many others in the town too lost large amounts," a shareholder in Eluru, who refused to be named, said.