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Satyam: What to expect and what to do

Rajesh Kumar | January 16, 2009

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The Satyam fiasco: Complete coverage

The New Year was expected to bring happy tidings. But struggling with the scrutiny and criticism heaped on it after the Maytas acquisition announcement, Satyam Computer Services [Get Quote] held on only for a week in 2009 before shocking the country with its chairman's confession of deceit. On January 7, 2009, founder and chairman Ramalinga Raju admitted to fraud and resigned from the board.

Raju, in a letter to the board members, said the books of the company were cooked and the surplus of Rs 5,040 crore (Rs 50.4 billion) on the balance sheet actually does not exist. He said the numbers in the books were inflated over the years. In the second quarter, revenues were actually at Rs 2,112 crore (Rs 21.12 billion) against the disclosed Rs 2,700 crore (Rs 27 billion). Similarly, the operating profits were actually Rs 61 crore (Rs 610 million) and not Rs 649 crore (Rs 6.49 billion), he told the board.

Raju also accepted that the liabilities of the companies were understated. He said that the Maytas deal was his last attempt to replace fictitious assets with real ones. The confession pulled down Satyam's market capitalisation by around 80 per cent in a single day, and the broader markets fell over 7 per cent.

Pack of cards. Satyam, India's fourth largest software company by revenue, came under heavy questioning when, on December 16, 2008, its board proposed to acquire holding in Maytas Properties and Maytas Infra for about Rs 7,500 crore (Rs 75 billion). The Raju family promotes all three companies. The decision was later revoked under severe pressure from institutional investors and analysts. The management's decision to diversify into a completely unrelated business and the selection of the companies raised questions on the management's intentions and corporate governance. Under pressure from all sides, four independent directors resigned successively from the board.

Implications. This is the biggest scam to hit Corporate India and its impact will be felt severely and for a long time. Other IT vendors are already having to answer their customers' queries and justify their standards of corporate governance. Business in this space largely depends on trust.

Equity investors in general, and the retail segment in particular, will now find it difficult to trust figures disclosed by companies. Foreign institutional flow of money, which is already on a risk-averse trajectory, will also be affected.

What to expect and what to do. Satyam's management will have to answer tough questions to the regulators and face a number of lawsuits and criminal cases in India and the US (it is listed on the New York Stock Exchange). Its customers will try and distance themselves due to the uncertainity in the company's future.

Talks of a possible merger or takeover will not have credence for a while; the cash reserves that made Satyam attractive have now been proved to be imaginary.

In between all this, the biggest loser is the shareholder who has no option but to dump the stock. We recommended this stock in an earlier issue at Rs 349.55. Our recommendation was purely based on the financials and the free cash surplus of Rs 4,461 crore, which the company had reported at the end of last fiscal. Numbers have meaning only when they are honest, and with Satyam, we now know, the only truth was in its name.

The spark

Flouting corporate governance norms, Satyam Computer Services board proposed to acquire 100% of group firm Maytas Properties and 51% OF Maytas Infra for Rs 7,500 crore. Decision revoked after widespread outcry

The flare up

  • Intense adverse reaction to the deal
  • Four independent directors resign
  • On 7 January 2009, chairman Ramalinga Raju admits to fraud and cooking the books; resigns
  • Stock loses 80% market value in trade on a single day

What to expect

  • Detailed enquiry by regulators into Satyam's books, followed by legal actions
  • Auditors to be questioned on their negligence or involvement
  • Any takeover or merger difficult
  • Customers will try to distance themselves due to uncertainty in the company

What you should do

It's Probably the end of the road for Satyam -exit

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