Raju admits to accounting fraud, resigns

And recriminations were quick to flow. Speaking on television channel CNBC TV18, Mahindra and Mahindra Ltd’s vice-chairman Anand Mahindra said the Satyam incident had damaged India’s image globally. Brokerages downgraded the stock and one of them, Credit Suisse Group AG, suspended its coverage of the stock. The National Stock Exchange, or NSE, dropped Satyam from its benchmark Nifty Index and the Bombay Stock Exchange, or BSE, is expected to follow suit by dropping the stock from its Sensex index.

India’s Enron

In a scam that analysts and journalists have been quick to dub “India’s Enron”, Satyam’s main promoter and chairman Raju admitted to fudging the company’s account books to the tune of at least Rs7,136 crore, over a period of “several years”.

In the letter, copies of which were also sent to the stock exchanges and Sebi, Raju confessed that, as on 30 September, Satyam’s books were fudged to show bank balance of Rs5,040 crore, accrued interest of Rs376 crore, an understated liability of Rs1,230 crore, and an overstated debtors position of Rs490 crore.

While the exact reason for the timing of Raju’s confessional statement isn’t known, it may have have been prompted by DSP Merrill Lynch, which found “material accounting irregularities” in Satyam’s account books.

Merrill Lynch was hired on 6 January as an adviser for finding strategic options to enhance shareholder value of the company in the wake of the aborted $1.6 billion acquisition plan, which attracted the ire of investors and led to steeply lower valuation of the company’s shares on the stock markets.

Merril Lynch president Kevin Watts informed Sebi, BSE and NSE on Wednesday of the accounting irregularities and his firm’s decision to pull out of the advisory engagement with Satyam.

Shares of the company closed 77.9% down on the BSE, while in pre-market trading on the New York Stock Exchange, the company’s shares were down by 84%.

For the September 2008 quarter alone, Satyam reported an inflated operating profit of Rs649 crore against an actual operating profit of only Rs61 crore.

Raju’s resignation letter confirmed that the fraud has been going on for “several years”.

“What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of the company operations grew significantly,” Raju said. “Every attempt made to eliminate the gap failed.”

Ending the mystery over why the company’s promoters had to pledge their shares, Raju wrote in his resignation letter that in the past two years, “Rs1,230 crore was arranged to Satyam (not reflected in the books of Satyam) to keep the operations going...”

“As the promoters held a small percentage of equity, the concern was that poor performance would result in a take-over, thereby exposing the gap,” Raju said.

“Stern action”