Key numbers
- Rs5,040cr
- Cash and bank balances that did not exist
- 24% vs 3%
- Reported vs real operating margin, Sep 2008 quarter
- $1.6B
- Maytas deal that investors blocked
- 62%
- Share price fall on the day of the letter
- Rs58
- Price per share Tech Mahindra paid
- 7 years
- Prison sentence for the founder, 2015
Story summary
The story
The short version
In 2008 Satyam Computer Services was one of the stars of Indian business. Based in Hyderabad, it wrote software and ran IT systems for big companies around the world, employed tens of thousands of engineers and was listed in Mumbai and on the New York Stock Exchange.
On 7 January 2009, its founder and chairman, B. Ramalinga Raju, sent a letter to the board and resigned. The letter said that most of the cash on Satyam's balance sheet was not there, and had not been for years. The share price fell 62 percent that day.
India called it its Enron. This is what the letter actually said.
The letter, in numbers
Raju's letter, which Satyam filed with the US Securities and Exchange Commission, listed the gaps one by one. As of 30 September 2008:
- Cash and bank balances of Rs5,040 crore did not exist. The books showed Rs5,361 crore.
- Rs376 crore of interest supposedly earned on that cash did not exist either.
- A liability of Rs1,230 crore, money Raju said he had arranged, was not shown.
- Money owed by customers was overstated by Rs490 crore.
Added together, those items come to Rs7,136 crore, the figure most reports used for the size of the hole.
The letter also showed how the trick worked each quarter. For the three months to September 2008, Satyam reported revenue of Rs2,700 crore and an operating margin of 24 percent. The real revenue was Rs2,112 crore and the real margin was about 3 percent. Each quarter, the fake profit had to be matched by fake cash. That quarter alone added Rs588 crore of cash that did not exist.
How it started
Raju wrote that it began small: "What started as a marginal gap between actual operating profit and the one reflected in the books of accounts" kept growing over the years. To keep up with the image of a fast growing, highly profitable firm, each quarter's numbers had to look a little better than the last. The gap grew until it was impossible to close.
His most quoted line: "It was like riding a tiger, not knowing how to get off without being eaten."
The Maytas deal
The first public crack came in December 2008. Satyam's board approved a plan to buy two companies, Maytas Infrastructure and Maytas Properties, for $1.6 billion. Both were controlled by Raju's family. Investors were furious that an IT company would spend its cash on property businesses owned by the founder's sons, and the deal was quickly dropped.
In his letter, Raju admitted what the deal was really for. It was "the last attempt to fill the fictitious assets with real ones." If Satyam had bought real companies with its fake cash, the fake cash would have disappeared into a real purchase, and nobody would have looked for it.
What investigators found
The rot went beyond cash. Raju had told the world Satyam had 53,000 staff. Investigators said in January 2009 that the real number was about 40,000, and alleged that salaries for roughly 13,000 non existent employees had been drawn every month.
The auditors were also in the spotlight. PwC, which had signed Satyam's accounts, said its reports could be "inaccurate and unreliable." In 2011 the US SEC fined PwC's Indian arm $6 million, and in 2018 India's market regulator SEBI barred Price Waterhouse from auditing listed companies for two years.
The rescue
India's government moved fast to save the business and its jobs. Within days, it replaced Satyam's board with respected outsiders, including banker Deepak Parekh. The new board ran an open auction for control. On 13 April 2009, Tech Mahindra won with a bid of Rs58 a share, beating Larsen & Toubro and the US investor Wilbur Ross. The company became Mahindra Satyam and was fully merged into Tech Mahindra in 2013.
On 9 April 2015, a Hyderabad court convicted Raju and nine others and sentenced them to seven years in prison.
What the ledger teaches
Satyam's fraud survived for years because everyone looked at profit and nobody checked the cash. Profit is a calculation. Cash is a bank balance that should be confirmed directly with the bank. When an auditor confirms the cash, a fake profit has nowhere to hide.
The rescue is the other lesson. Satyam's clients and engineers were real, and a quick, open sale kept most of them working. India learned that a company can be saved even when its founder's story cannot.
Questions to ask about any company's accounts
- Does the cash on the balance sheet earn the interest you would expect?
- Does reported profit turn into real cash flow over time?
- Why would a company with lots of cash borrow, or buy unrelated businesses?
- Has the auditor confirmed balances directly with the banks?
The ledger
| Date | Item | Figure |
|---|---|---|
| 1987 | Satyam Computer Services founded in Hyderabad | |
| Sep 2008 qtr | Revenue reported | Rs2,700cr |
| Sep 2008 qtr | Revenue actually earned | Rs2,112cr (fall) |
| Dec 2008 | Bid to buy family owned Maytas companies, then dropped | $1.6B (fall) |
| 7 Jan 2009 | Founder's letter: cash and bank balances inflated | Rs5,040cr (fall) |
| 7 Jan 2009 | Share price falls in a day | -62% (fall) |
| 13 Apr 2009 | Tech Mahindra wins control in an open auction | Rs58/share (rise) |
| 9 Apr 2015 | Founder and nine others convicted | 7 years (fall) |
Munshi's noteProfit is an opinion until it turns into cash you can count. If nobody counts the cash, the opinion can be anything.
Sources
- US SEC filing, January 2009Resignation letter from B. Ramalinga Raju (Exhibit 99.2)
- The Register, 7 January 2009Satyam boss quits
- AFP via Phys.org, 13 April 2009India's Tech Mahindra trumps rivals to win Satyam
- WikipediaSatyam scandal
- WikipediaMahindra Satyam