The Satyam saga

Philip Carter, Chris Morris, Aprajita Sharma, Mayur Sahni, Emily Tee, Cyrus Daruwala
14 Jan 2009

In Sanskrit, Satyam means 'truth'. Based on the letter that B. Ramalinga Raju (chairman and cofounder of the company) sent to the Satyam Board of Directors (dated January 7, 2009), it is clear that there was not a great deal of this critical element of corporate governance in terms of Satyam's financial reporting over the last few years. The letter admitted massive irregularities in the company's accounts.

For example:

  • In the second quarter ending in September 2008, of the reported cash and bank balances of INR53.61 billion ($1.1 billion), INR50.4 billion ($1.04 billion) was nonexistent (i.e., 94% overstated).
  • Operating margin for the same quarter was 3% as opposed to the reported 24%; revenue was INR21 billion ($431 million), 22% less than the INR27 billion ($554 million) that was reported.
  • INR12.3 billion ($252 million) was arranged to 'keep operations going' at Satyam over the last two years by pledging the founders' shares and raising funds from other sources.

The immediate market reaction was an 80% drop in the company's share price, and an 8% drop in the Bombay Sensex Index. The entire board was subsequently sacked and has been since replaced by the Indian government. Raju and his brother Rama (also a cofounder of the company) were detained and charged with criminal breach of trust and falsification of documents. Former company CFO Vadlamani Srinivas was also detained for questioning.

The revelations have sent shock waves throughout the business community in India and attracted a great deal of global attention, given that 80% of Satyam's "stated" revenue was derived from the United States and Europe alone.

Just over half of the services work being done by Satyam for its clients across the world was being done from offshore locations "” mainly India "” but the company had also set up delivery centers in China (Shanghai, Beijing, Dalian, Guangzhou, and most recently Nanjing), a Center of Excellence in Singapore, and a nearshore delivery in Cyberjaya, Malaysia.

This IDC Insight examines the impact of Satyam's recent accounting scandal on its customers in the Asia/Pacific region. It will also assess the potential scenarios for Satyam as a business entity in the short term, as well as the implications for the IT and business services industry in India as a whole.

Situation overview

The current situation was triggered by the announcement in early December 2008 that Satyam's board had approved proposals to acquire a 100% stake in Maytas Properties and a 51% stake in Maytas Infra. Both these companies were promoted by Raju's sons and are involved in infrastructure construction and property development in India.

Ostensibly, this deal was supposed to help Satyam diversify and hedge losses from its IT services business, but it faced stiff resistance from institutional investors (who owned a whopping 61.57% of the company) such as Reliance Mutual Fund, SBI Mutual Fund, Templeton Mutual Fund, and CLSA on the grounds that shareholders' funds were being utilized to buy stakes in businesses run by Raju's family members.

Within hours, the decision to acquire the Maytas companies was reversed and questions began to be asked as to the real driver behind the initiative. It is now clear that the aborted Maytas deal was the last attempt to fill Satyam's books with real assets (instead of the fictitious ones that were being reported), and hide the gap that had arisen therein.

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