Riding a Tiger

-by Kunal Shah

Satyam’s case has been widely regarded as the debacle of the Indian Financial System. It was a 7800 crore (nearly $1.5 billion then) Fraud and it is seen as India’s Most Colossal Financial Fraud. The fraud shows how disastrously investors can lose money by simply misstating the figures in the Balance Sheet. Ironically, Satyam means “truth” in Sanskrit, but Raju’s admission of guilt has given the company, the name “Asatyam”!

Ramalinga Raju, in the year of 1987, established a company named Satyam Enterprise, with 20 salary accounts.

Within 20 years i.e. upto 2007 Satyam was recognised as fourth largest company of India and usually tagged as “IT Crown Jewel of India”. It was like a fairy-tale for both Ramalinga Raju and the people of India, how Satyam managed to be a huge success.

REALITY: -

At that time, a lot of companies were using some tricks to increase and decrease asset and liability respectively for increasing the company’s share price. So that foreign investors can be attracted towards purchasing the shares. And Ramalinga Raju was no different.

Initially he also used those tricks to increase satyam’s share price. But during 2000–08 he became greedier, and used unfair means to manipulate the asset and liability to an irreparable extent.

UNFAIR MEANS:

• Assets: — Actual Assets value of Satyam was $1.04 billion, whereas he lets say instead of showing actual cash balance as $10, showed $50 as his cash balance and through this technique he raised his asset value to $2.1 billion on paper. He simultaneously bribed the auditors to verify that cash as genuine so that nobody could raise a finger. Similarly, he decreased the liability to $253.38 million, which is below 27% percent than the actual figure.

• Revenue: — Actual revenue of Satyam was Rs 2112 crores/-, whereas he managed to create fake customer accounts and fake invoices with the help of auditors to show fake sales. In this way he managed to increase the revenue to Rs 2700 crores/-.

• Ghost Employees: — He strategically (obviously through the help of auditors) created 6,000 fake salary accounts in the company books i.e. created 6000 ghost employees who didn’t even exist in reality. And innocently draw those salaries to his own personal account.

• Loan Advance: — He created fake loan advance accounts by which he was able to show fake interest income (incoming) from those advances. In this way he managed to create $77.46 million of asset out of vain.

WHAT WENT WRONG:

He used every single cent earned to purchase real estate (through fake salaries employees’ accounts and Dividends) in his personal account. Post 1999, as Hyderabad started to develop further, he stepped up his land purchases. To finance the purchases, he started pledging and selling all of his shares and that of his families. Since the laws of land did not allow the denizens to acquire more than 54-acres of land, Raju began purchasing land through his privately held companies. When law caught him, he had managed to set up 325 companies, owned by his immediate relatives!! And to add to that, major portion was bought as agriculture land, so the rental income was not taxable! Raju landed in the position which he did because of the Financial Crisis of 2008 where the land prices had hit the bottom. The increased Land value could only have eliminated the mis-match of the true Asset and Liability Value in the company’s Balance Sheet, but however it went for a toss Real Estate plunged.

Ramalinga Raju was aware of the fact that, sooner than later his planning and scheming was going to be revealed by SEBI, due to massive difference between actual and book value (paper value).

Yet he had a trump card to play which could have saved Satyam from all the scams and humility. Ramalinga Raju’s family had a company named “maytas” which was basically an infrastructure company. It was a genuine company and was showing genuine profit since last five years. Ramalinga Raju had a stake of 37% in that company and he was one of the deciding board members in that company.

The only way to decrease the difference between actual and book value of assets in Satyam was to purchase some genuine assets out of those fake cash he showed in balance sheet. So, he without even consulting Satyam shareholders and major investors, influenced the board members to acquire Maytas @ $300 million, but when Shareholders got to know about this deal, they got panicked. They thought Ramalinga Raju was using this deal to gain unfair advantage in Maytas, as he was the 37% stake holder in Maytas.

And all the major shareholders decided to sell their shares in a single day which was the major reason for the breakdown and crashing of Satyam’s share value.

Later on Ramalinga Raju left with no choice confessed his wrong doings for Rs 7,800 crores approx. “It Was Like Riding a Tiger, not knowing how to get off without being eaten”, said the Satyam founder in his resignation letter confessing to fraud and offering himself to “the laws of the land and face the consequence”.