Archive for January 7th, 2009

Satyam does an Enron!

January 7, 2009

When I had posted earlier that be ready for more financial frauds, it was least expected that it would come from Indian shores. And that too from a company in a sector (Information Technology) which is highly respected worldwide. The company found of fraud – Satyam Computer Services Ltd. is no less a name. It was part of the elite club and these four companies were always mentioned in the same breath- Infosys, TCS, Wipro and Satyam. Mostly Economics stayed away from the news as focus was on equally breath taking events in world economy. The fraud deserves a post.

Satyam’s chief Ramalinga Raju admits to corporate fraud in what has been a breathtaking pace of events. Satyam has been cut into pieces right from the infamous Maytas deal and now this admission of corporate fraud. The letter of Raju to board of directors exposes the fraud.

  • For the Septemeber quarter we reported a revenue of Rs 2700 cr and an operating margin of Rs 649 cr (24% of revenues) as against the actual revenues of Rs 2112 cr and an actual operating margin of Rs 61 cr (3% of revenues). This has resulted in artificial cash and  bank balances going up by Rs 588 cr in Q2 alone.
  • The gap in balance sheet has arisen on account of inflated profits over a period of last several years
  • Every attempt to eliminate the gap failed
  • As promoters had small % of equity, concern was poor performance would result in take-over
  • The aborted Maytas deal was an attempt to fill fictitious assets wth real ones.
  • Once Satyam’s problem was solved, it was hoped that Maytas’ payments could be delayed. But that was not to be. What followed in the several days is common knowledge…..

So much so for Satyam which means truth in Sanskrit! It is a remarkable story.  (By the way I also read Maytas is Satyam spelled backwards!) Satyam also won

All this takes my memory back to Enron days where we saw a spectacularly rising  company falling equally spectacularly. Quite a bit if similarity-  Cooked balance sheets, a superb board of directors (see Enron’s and see Satyam’s resigned Board members) and  current ones) and complete ignorance of basics. Another similarity is Enron was known for its strategy before it collapsed and it was part of every management strategy book. Satyam on the other hand won Golden Peacock award for Corporate Governance.  Can anyone beat that as recent as 2008!!  (Golden Peacock is London based organisation formed by Institute of Directors in 1991 to give boost to Indian Industry.)

There is a difference though as Enron was much bigger and in vogue than Satyam and the fraud in Enorn was much larger (at least till now; Enron has USD 25 billion of assets at time of bankruptcy; We don’t know whether Satyam would follow the path). Another difference is in Enron there was a whistle blower – Sherron Watkins. I am not aware of any Satyam whistle-blower.

This crisis has led to a lot of questions on role of regulators, credit rating agencies, CEOs etc. Now, I guess with this fraud the time to move to role of independent directors, equity research analysts and auditors.

  • It is paiful to download Satyam’s Annual reports so am not sure who the auditors have been. This report says it is a biggie for 2007-08. I also chekced old reports from SEBI’s EDIFAR website (it isn’t it updated as it doesn’t have reports from 2004 onwards) which says the biggie was the auditor in 2002 , 2003 and 2004 as well. I am not sure what to say.
  • I have seen 2 reports of Satyam from top research houses as latest as Aug/Sep 2008 and both recommend a guess what – Buy. Someone tells me this morning some brokerage house upgraded Satyam! On a serious note, it is ok to miss your price targets, but if frauds can’t be found research needs to be questioned. And this was a continuous fraud as Raju himself points profits were inflated for many years now. So, there is no escaping from this.
  • Independent directors – Well, am not sure what to say on this. Satyam had all who’s who on its board and this is quite shameful now. They were unaware of frauds all the while. It has some real prominent names:

Prof. Krishna G Palepu (Harvard Prof who teaches how to improve corporate boards! – resigned)
Vinod K Dham (Inventor Pentium – resigned)
M. Rammohan Rao (ISB Dean – resigned)
M Srinivasan (another academic – resigned)
V S Raju (former director of IIT Delhi – still there)
T R Prasad (former union cabinet secretary – still there)

What is going on? I r’ber reading Palepu and his management theories . Here is research on the amount of money the independent directors made.

Satyam was the last thing you needed in already battered equity markets. The focus now shifts on who is hiding what? It will be really tough going from here.

Addendum:

1) Satyam is in BSE 30 and NSE -50 and SEBI seems to have completely missed it.
2) Satyam is listed in NASDAQ. So even SEC seems to have bitten the bullet despite Sarbanes Oxley Act in place. I am equally interested to know the stance of SEC which is facing enough troubles already.

I was also thinking about what Raju mentions in his letter:

Once Satyam’s problem was solved, it was hoped that Maytas’ payments could be delayed. But that was not to be. What followed in the several days is common knowledge…..

It was pretty much a Ponzi Scheme. The company was waiting for money to come from somewhere to pay for Maytas deal and hoping the bandwagon continued. You keep paying from monies raised from somehere else..this is what a Ponzi scheme is….

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Assorted Links

January 7, 2009

1. Krugman has some stimulus  arithmetic

2. Nudges asks can we avoid fin bubbles?

3. BS on risk managment

4. CTB pointsto a new paper on crisis managemnt for emerging economies

5. ASB on lack of countercyclical policies in India.

6. IDB points to rankings of states on the basis of envronment sustainability.

7. Urbanomics points to series of papers from Rogoff- Reinhart duo on hostory of financial and economic crisis and impact.


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