Satyam(Lead).

qxd 1/18/2009 5:16 AM Page 2

Is the Rs 7,000-crore fraud that B. Ramalinga Raju Where

resorted to an accounting scam—done to prop up Did the
valuations of the IT giant—or was the promoter Money Go?
siphoning out money from a fundamentally sound
company? E. KUMAR SHARMA Raju claims that Satyam inflated
profits for many years...
■ By inflating cash and bank
balances of Rs 5,040 crore
In Q2, our revenue grew… on the back of a 4-per cent volume growth and (as against Rs 5,361 crore
rupee depreciation against the US dollar… We believe these factors will reflected in the books)
also enhance annual margin performance… I would like to emphasise that ■ Accrued interest of Rs 376

THE
Satyam is leaving no stone unturned in our efforts to create a sound foun- crore is non-existent
dation for our future.
Note to investors from B. Ramalinga Raju, Founder & Chairman, ■ Liability of Rs 1,230 crore is
Satyam Computer Services, when declaring the company’s results for understated on account of
the quarter ended September 2008 funds arranged by “me”

GREAT
■ Debtors position of Rs 490
The balance sheet carries as of September 30, 2008 inflated (non-existent) crore is overstated (as against
cash and bank balances… The gap in the balance sheet has arisen purely Rs 2,651 reflected in the books)
on account of inflated profits over a period of last several years (limited
only to Satyam stand-alone…)

SATYAM
Note from B. Ramalinga Raju to the Board of Directors of Satyam … but if this Rs 7,000-odd
dated January 7, 2009 crore did not exist…
■ How were the salaries of
IT WASN’T A GIGANTIC FRAUD, IT WOULD HAVE BEEN A COLOSSAL

If
53,000 employees being paid

ROBBERY
farce. But when nearly $2 billion of wealth that belonged to 3 with a business that ostensibly
lakh shareholders is eroded in a week; when the jobs of survived on just a 3 per cent
53,000 employees are on the line; when shareholders’ net operating margin?
worth drops from a positive Rs 8,529 crore to a negative Rs 278
crore; when a company opens itself to multi-million dollar lawsuits; ■ Were there more employees
when a company’s founders are thrown in jail; and when its very survival on the bench (than revealed)?
is questioned, you wonder: What was Raju thinking; since when—and ■ Was Raju inflating profits to
why—was he thinking this way; and how did he do it? Over the next few boost Satyam’s valuation, and
pages, BT attempts to unravel this massive fraud, which involves one busi- borrowing money by pledging
ness family, company auditors and, inevitably, an ensemble of politicians. its shares?

… but if the money did exist…

In the Dock
The charges still need to be proved, and several regulatory authorities (CB-CID, SEBI, ■ Did the Rajus use Satyam
Ministry of Corporate Affairs) are on the job. They have a lot of work to do. funds to build a land bank
of over 6,000 acres via a web

IPC Section 120B: For alleged criminal conspiracy of unlisted companies?

IPC Section 409: Criminal breach of trust ■ What happened to the funds
raised? There was an ADR issue

IPC Section 420: Cheating in 2001, via which Satyam raised

IPC Section 468: Forgery Rs 753 crore and on March 31,
2002, Satyam became an almost

IPC Section 471: Falsification of records zero-debt company with
RITESH SHARMA

Rs 431 crore unutilised amount

SEBI is probing to see if insider trading in Satyam shares of ADR proceeds
Ramalinga Raju has been resorted to

Class action suits in the US

FEBRUARY 8 2009 BUSINESS TODAY 000

Satyam(Lead).qxd 1/18/2009 5:16 AM Page 2

Is the Rs 7,000-crore fraud that B. Ramalinga Raju Where

resorted to an accounting scam—done to prop up Did the
valuations of the IT giant—or was the promoter Money Go?
siphoning out money from a fundamentally sound
company? E. KUMAR SHARMA Raju claims that Satyam inflated
profits for many years...
■ By inflating cash and bank
balances of Rs 5,040 crore
In Q2, our revenue grew… on the back of a 4-per cent volume growth and (as against Rs 5,361 crore
rupee depreciation against the US dollar… We believe these factors will reflected in the books)
also enhance annual margin performance… I would like to emphasise that ■ Accrued interest of Rs 376

THE
Satyam is leaving no stone unturned in our efforts to create a sound foun- crore is non-existent
dation for our future.
Note to investors from B. Ramalinga Raju, Founder & Chairman, ■ Liability of Rs 1,230 crore is
Satyam Computer Services, when declaring the company’s results for understated on account of
the quarter ended September 2008 funds arranged by “me”

GREAT
■ Debtors position of Rs 490
The balance sheet carries as of September 30, 2008 inflated (non-existent) crore is overstated (as against
cash and bank balances… The gap in the balance sheet has arisen purely Rs 2,651 reflected in the books)
on account of inflated profits over a period of last several years (limited
only to Satyam stand-alone…)

SATYAM
Note from B. Ramalinga Raju to the Board of Directors of Satyam … but if this Rs 7,000-odd
dated January 7, 2009 crore did not exist…
■ How were the salaries of
IT WASN’T A GIGANTIC FRAUD, IT WOULD HAVE BEEN A COLOSSAL

If
53,000 employees being paid

ROBBERY
farce. But when nearly $2 billion of wealth that belonged to 3 with a business that ostensibly
lakh shareholders is eroded in a week; when the jobs of survived on just a 3 per cent
53,000 employees are on the line; when shareholders’ net operating margin?
worth drops from a positive Rs 8,529 crore to a negative Rs 278
crore; when a company opens itself to multi-million dollar lawsuits; ■ Were there more employees
when a company’s founders are thrown in jail; and when its very survival on the bench (than revealed)?
is questioned, you wonder: What was Raju thinking; since when—and ■ Was Raju inflating profits to
why—was he thinking this way; and how did he do it? Over the next few boost Satyam’s valuation, and
pages, BT attempts to unravel this massive fraud, which involves one busi- borrowing money by pledging
ness family, company auditors and, inevitably, an ensemble of politicians. its shares?

… but if the money did exist…

In the Dock
The charges still need to be proved, and several regulatory authorities (CB-CID, SEBI, ■ Did the Rajus use Satyam
Ministry of Corporate Affairs) are on the job. They have a lot of work to do. funds to build a land bank
of over 6,000 acres via a web

IPC Section 120B: For alleged criminal conspiracy of unlisted companies?

IPC Section 409: Criminal breach of trust ■ What happened to the funds
raised? There was an ADR issue

IPC Section 420: Cheating in 2001, via which Satyam raised

IPC Section 468: Forgery Rs 753 crore and on March 31,
2002, Satyam became an almost

IPC Section 471: Falsification of records zero-debt company with
RITESH SHARMA

Rs 431 crore unutilised amount

SEBI is probing to see if insider trading in Satyam shares of ADR proceeds
Ramalinga Raju has been resorted to

Class action suits in the US

FEBRUARY 8 2009 BUSINESS TODAY 000

Satyam(Lead).qxd 1/18/2009 1:14 AM Page 4

THE US LAWSUITS
With two class action suits already filed against him in the US, and many more in the offing, Raju is in for the long haul.
aju’s confession has repercussions across financial mar- B. Ramalinga Raju and erstwhile CEO B. Rama Raju—will be

R kets on two different continents. Legal eagles in the US

are having a field day advertising their services for agg-
rieved shareholders seeking class action against Satyam
Computer’s erstwhile Chairman and Founder. According to
Kenneth J. Vianale, Partner, Vianale & Vianale, a US-based law
firm representing a Satyam Computers shareholder, by March 9
(which will mark 60 days of the filing of the suit), the Manhattan
federal court will receive motions for appointment of lead plain-
tiff and lead counsel. “The lead plaintiff, appointed by the court,
will be a shareholder or group of shareholders with the largest
financial loss in the stock,” points out Vianale.
Thereafter, the plaintiffs will likely amend their complaint
and may add parties, like the auditor, if the evidence permits.
Then the defendants (company) will respond to the complaint.
If the complaint fails to allege a fraud, then the court could dis-
miss the case. “If the case is not dismissed, the parties will en-
gage in discovery: plaintiffs will seek documents from the com-
pany and take depositions of witnesses. Then we move toward
trial. In the US, there’s a right to a jury trial,” adds Vianale.
He further points out that the conduct of the directors—
judged under the Indian law. “The directors may be liable under
US laws if they signed company documents filed with the US
SEC that they knew (or were reckless in not knowing) contained
materially false financial information.” Vianale steers clear of
predicting the future of the auditors, PricewaterhouseCoopers,
in the suit.
The new board of directors to the Satyam board won’t be
dragged to court. “The new directors would not be accountable
unless they participated in the misconduct and we have no evi-
dence that they did,” informs Robert Izard, Partner, Izard Nobel,
another US-based law firm that has been retained by some
shareholders to ascertain the facts of the case and will soon be
filing a suit against Satyam’s former Chairman and CEO. To that
extent, they will be relying on publicly available information and
company documents, with Raju probably giving a testimony
through a sworn deposition in India given that he’s incarcerated
here, says Izard. That may have been Raju’s final masterstroke,
as he would have fancied his chances with the Indian legal
system than with its US counterpart.
RACHNA MONGA & TEJEESH N . S . BEHL

At first blush, Raju’s statement to
the board in which he confesses to
inflating profits appears a dignified
act of contrition by a man who was
willing to stand up and face the
music for his transgressions. If Raju
was dressing up the bottom line, it
was only to boost the company’s
valuation and ensure that it stayed in
the big league of IT services. A
higher valuation also enabled Raju
to borrow more money against his
shareholding. The founder of
Satyam has been pledging the com-
pany’s shares for some time now,
which has been largely responsible
for the promoters’ holding shrink-
ing from a chunky 26 per cent in
2001 to 3.6 per cent around the
first week of January (lenders began
to sell when share prices fell and
Raju couldn’t pay up). And what
was Raju doing with those bor-
rowed funds? Ostensibly buying
large tracts of land, most of it in
Andhra Pradesh.
That’s a con of giant propor-
tions, indeed. But it still pales in
comparison to another more sinis-
ter likelihood—of the promoters
sucking Satyam’s profits and using it
to fund their orgy of land purchases,
via an endless string of companies.
The Rajus liked land more than
they loved code.
In recent years, the Rajus have
amassed a land bank of an estimated
7,000 acres. A number of compa-
nies, including the Maytas twins
(see The Maze that is Maytas, page
46), were floated for this purpose.
The memorandum of association

CASH WAS KING FOR SATYAM

If Satyam was fudging profits, where were the funds for all-cash acquisitions coming from?
April 2005 July 2005 October 2007 January 2008 April 2008
Acquired UK-based Acquired Singapore- Acquires a 100 per cent Acquires Bridge Acquires construction equipment
Citisoft Plc, a business based Knowledge stake in Nitor Global Strategy Group, a maker Caterpillar Inc.’s market
consulting firm, with Dynamics, a consulting Solutions, a UK-based Chicago-based research and customer analytics
operations in investment solutions provider. infrastructure manage- management consulting operations and Belgium-based
management. FUNDING: All-cash ment services and firm, with revenues S&V Management Consultants, a
FUNDING: $38 million deal of $3.3 million consultancy group. of $17 million. supply-chain management firm.
paid in tranches FUNDING: $5.5 million FUNDING: $35 million in FUNDING: $95.5 million for
in all-cash deal all-cash purchase both the deals, all-cash purchase

000 BUSINESS TODAY FEBRUARY 8 2009

Satyam(Lead).qxd 1/18/2009 1:54 AM Page 5

THE
SATYAM
SCANDAL

SAVING SATYAM
What has been done so far…
■ The government had, till the time
of writing, appointed six directors
(including Deepak Parekh, Kiran Karnik
and Tarun Das) to the board of Satyam.
■ The new board appointed new
auditors—Deloitte and KPMG—to look
afresh at the numbers and restate the
financial position of the company. This
will help determine the exact position
of Satyam’s liabilities and liquidity.
■ The new board launches a search
to identify candidates for the positions
of CEO and CFO to replace
B. Ramalinga Raju and Srinivas
Vadlamani, respectively.
(Top to bottom) Parekh,
Karnik & Das: The new faces
on Satyam’s board
…and what more needs to be done.
■ The board needs to reach out to
clients to re-establish the lost
confidence and to ensure that clients
and employees continue with Satyam.
■ Steps to ensure that operations are
insulated from liabilities and problems.
■ Analysts suggest that the company
could look at selling operations only
(business, customers and employees)
and not liabilities to some third party.
■ The money received can be used
to clear the liabilites, settle the dues
to suppliers and all outstandings and
litigations.

of just one such company, Bangar
Agro-Farms, has this as one amongst
its many main objects to be pursued:
“To carry on in India or elsewhere,
the business to deal in acquisition
and development of agriculture lands,
other lands, properties…”
THE MORE Such intentions run across several
THE MERRIER of the Raju companies, where either
List of companies in which his family members or those close or
B. Nandini Raju (wife of related to him have either interests or
B. Ramalinga Raju) is a Director: are directors. In fact, Satyam was the
only IT company where promoters
■ Name: B. Nandini Raju had an interest in real estate—an int-
DIRECTORSHIPS: erest that kept increasing even as their
Alakananda Agro-farms stake in the IT services major kept
Anuradha Bio-Tech reducing! Till 2001-02, Andhra
Anuradha Greenlands
ranked among the states in which
real estate was the cheapest. As land
Ayurda Greenlands
prices started rising because of the
Bharani Agro state government’s reformist pitch,
Brahmaputra Greenlands the Rajus sniffed a bounty. Perhaps the
BRNR Agro patriarch saw an opportunity to create
BRNR Holdings business for his two sons, who despite
Continental Thermits being well-educated, weren’t too keen
Dhanista Farms on taking over the IT business. “You
have to understand that in a state like
Dronagiri Agro-farms
Andhra Pradesh, which used to have
Mahanadi Bio-Tech
vast tracts of agricultural land, local
Medravati Agro-Farms people are bound to have a fascination
Parbati Agro-Farms for owning land,” says a former inv-
Penganga Agro-Farms estment banker, who has worked
closely with the Satyam founders.
What clearly did Raju in was the
drop in share prices and in real est-
ate, in tandem. Result? He had to
buy more shares to avoid losing the
earlier ones; by the end he lost most
of them (see Living on the Pledge,
page 66, to see how pledging works).
Raju’s only hope lay in getting the
asset-laden Maytas firms merged
into Satyam. Ironically, when inve-
stors rubbished Raju’s proposal to
merge these firms, they felt that he
was attempting to strip Satyam off its
cash (of $1.6 billion). Little did they
know that he was trying to reconcile
Satyam’s fictitious assets with real
ones. Raju admits as much in his
confession letter. But what he
doesn’t say is whether Satyam’s bal-
ance sheet is threadbare because it
was run ragged to build the real est-
ate assets in the first place. That’s the
Rs 7,000-crore question investigators
will have to answer. ■
ADDITIONAL REPORTING
BY RACHNA MONGA &
CLIFFORD ALVARES
LOG ON TO www.businesstoday.in
FOR UPDATES AND FURTHER ANALYSIS

000 BUSINESS TODAY FEBRUARY 8 2009