SHARETIPSINFO >> Articles Directory >>Satyam Computer The Great Fall, Trashed Indian Stock Market
COMPANY AT GLANCE:
On 24th June 1987, Satyam Computer was incorporated as private limited company for providing software development and consultancy services to large corporation. The company was promoted by B Rama Raju and B Ramalinga Raju.
In 1991, Satyam Computers became the first Indian company to provide offshore services. His first major client John Deere, was skeptical about outsourcing to Satyam, but Raju`s simple extensive management module convinced it.
What started as humble beginning in 1990`s by the end of the decade catapulted the Satyam Computer into the big league of IT companies in India. Satyam became the fourth largest IT Company.
‘Humpty Dumpty had a great fall’, Satyam computer image got severe hit that can never be mended when its promoter accepted in writing to SEBI about the fudging of books of account of the company for showing inflated profit. Investor lost all out faith in the working of the company and dumped the share of the company. Satyam share price had a free fall on Wednesday and it closed about 80% down from the previous day close price at Rs40.
RISE AND FALL OF RAJU:
Traditionally in agriculture business. Raju family is considered as the top ten big land owners in South India.
Raju started his first business in 1977 by entering into the textile business. He floated Sri Satyam Spinning and weaving mill.
Diversified his business portfolio by entering into real estate business. For this venture he floated Satyam Construction.
Founded Satyam Computers Services jointly with one of his brother in law DVS Raju in 1987.The Company went public in 1991.
Started Satyam Infoway (Sify).Stepped down as chairman of Sify on 10December 2002.
Elected Nasscom chairman in April 2006.
Received the lifetime achievement awards from the Hyderabad management association in June 2005.a doctorate from the Anna University, Chennai, on December 14, 2007 and Frost & Sullivan Excellence in Leadership award for 2008.
Step down as the chairman of Satyam on January 7, 2009 after the accepting the manipulation in the books of account of the company.
EVENTS LEADING TO THE FALL:
2008 December 16- Satyam Computer Services announces $1.6 billion acquisition of 100% stake in Maytas properties and 51% stake in Maytas Infra, both promoted by Ramalinga Raju and sons.
December 17-Satyam-Maytas deal is scrapped following investor-shareholders rebellion. Raju mulls on the share buyback.
December 21-Government asks registrar of companies to submit the report with factual evidence on Satyam-Maytas deal.
December 24-World Bank bars business with Satyam for 8 years starting September 2008.
December 25- Academician and independent director Mangalam Srinivasan exits from Satyam on Christmas owning moral responsibility for not voting against it.
December 28- Satyam Computer defers crucial board meet from December 28 to January 10.
December 29- Satyam appoints DSP Merrill Lynch to review strategic option and assess implications of possible dilution of Ramalinga Raju`s stake; Non-executive director Krishna Palepu and in dependent director Vinod Dham resign from board.
December 30- Satyam`s board nearly halved as Indian school of Business dean Rammohan Rao also quit.
January 2- Satyam discloses to stock exchange that Raju and his family have pledged all their shares, held in a corporate entity SRSR limited, to institutional lenders.
January 3-Ramalinga Raju`s stake in Satyam falls to 5.13% from 8.27% as lenders sell shares.
January 6-Ramalingu Raju`s stake falls further to 3.6% from 5.13%.
January 7- Chairman Ramalinga Raju and MD Rama Raju resign.
MAGNITUDE OF FRAUD:
The fudging of books of account by the promoters of Satyam is one biggest fraud that Indian corporate world has witnessed. Raju admitted the falsifying of the earning and asset in his letter to the SEBI chairman. He admitted of the following:
Inflated cash and bank balance of Rs 5040 crore.
Non-existence of accrued interest of Rs 376 crore.
Understated liabilities of Rs 1230 crore on account of funds arranged by Raju.
Overstated debtors position of Rs 490 crore.
Q2 2008-09 revenue was stated as Rs2700 crore as against Rs 2100 crore. Operating profit margin was stated as 24% as against actual 3%.
Profit inflated over last several years attained unmanageable levels as company grew.
Aborted Maytas acquisition was a last an attempt to fill the fictitious asset with real ones.
CIRCUMSTANCES FORCED RAJU:
Promoter shareholding in the company was so low that it became very difficult for Raju to conceal the truth for long. He was also horrified by hostile takeover by some company and eventually the manipulation of account coming into picture. Raju was in catch 22 situations. He don`t have any option other than to publicly accept his guilt.
We also feel that there could be some other force who may have been involved in the fraud that Raju is trying to save.
Political and property combo cannot be ruled out for the great fall of Satyam Empire and his king. Sometimes back DMRC director E Sreedharan had called the Hyderabad Metro Rail Project a “future political scam”. He objected to the way the government allowed the private consortium to develop land commercially. It should be noted that Maytas properties and Maytas infra is leading the consortium for Hyderabad Metro Rail Projects. Both the firms are promoted by Raju and family.
This could only be the tip of the iceberg, we expect more high profile people involved in the scam.
We even suspect the role of independent directors. We cannot digest the fact that they did not know about the fact. Just resigning from the chair does relieve them from the responsibility.
There is rumour that L&T subsidiary is increasing the stake in the company. We can only wait and watch the development. Let’s see how thing unfold.
IMPACT OF SATYAM SAGA:
We are of the opinion that in short to medium term there will be ripple effect that could be seen on the street and IT companies will be affected by it. Street will feel the pinch for some time and the scars of the broken trust could be seen in investors’ eyes for years. As it is said time is the greatest healer so people will move forward.
We expect government to strengthen the auditing norm and the corporate governance. In this case PwC work as auditing firm is under scanner and is highly questionable.
Insurance company is also in line to lose a significant portion in terms of claim. As Satyam has $75 million covers to defend directors who are under fire for dereliction of duty.
We have never expected this to happen but this world is full of surprises. When you are confident that everything is going fine something unwanted happens. As our market too regained strength and started the rally, this shook the market as never before. Market crashed by more than 6% on Wednesday. As investors returned after a long hibernation this event scared them beyond anyone’s imagination.
There are people who might have lost their life saving. There are 53000 employs whose future is at stake, at the time when economy is reeling under recession.
The only answer to Satyam fiasco that we have is this ‘bad corporate governance’.
India Inc now has to answer how to make the corporate governance more transparent and accountable.
With this we are closing our view on Satyam. We hope there is no repeat of Satyam story.
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