The hard work behind Satyam’s survival

The hard work behind Satyam’s survival

Two terabytes. That’s the amount of data that forensic accountants from Deloitte and KPMG dredged out of laptops and personal computers at Satyam Computer Services Ltd to analyse accounting irregularities at Satyam. It was more than could be warehoused anywhere in India and so was moved to England till lab facilities could be created in India.

With investors deserting Satyam around 16 December—its share price fell 57% in a single day on the New York Stock Exchange—Raju appointed DSP Merrill Lynch Ltd amid much fanfare to advise Satyam on strategic options to shore up shareholder value.

Hemendra Kothari, chairman of DSP Merrill Lynch at the time, wouldn’t have got into the picture if shareholders had not forced Satyam to reverse its decision to acquire a 51% stake in Maytas Infra Ltd, owned by Raju’s family.

Within a few days, DSP Merrill Lynch realized what Raju was up to, and Kothari rejected the mandate from Satyam.

For many years, Satyam’s internal rate of return was around 3%, whereas for most other information technology companies of Satyam’s size, it was 25-30%. Though Raju claimed Satyam operated on thin margins to retain clients, the truth is Satyam’s returns were lower because Raju was siphoning money out of the company.

Though a lot of money went from Satyam’s books, according to Raju’s confession of 7 January 2009, the company’s receivables were real—that was a saving grace. Unless Satyam’s receivables were real, it would have been impossible to pay the salaries in January and turn the corner so quickly.

Whereas the company had only Rs100 crore in its bank accounts, the wage bill for January required Rs400 crore. The government-appointed directors, who had their first board meeting within the week of Raju’s confession, managed with help from senior employees to realize some Rs700-800 crore from Satyam’s receivables, borrowed another Rs600 crore from banks and built a Rs1,300 crore corpus with which operating expenses could be met for up to three months.

It was really crucial: Satyam’s 53,000 employees were shocked. People were sending in resignations everyday and unless Satyam managed to pay January salaries, there was a possibility that it could have lost all its key people and 800 client contracts. Top IT firms in India realized that Satyam’s crisis had implications for the whole industry, and did their bit to prevent Satyam’s total collapse by resolving not to poach the firm’s employees or clients. The government was watching their behaviour, and this may have brought about the discipline of anti-poaching.

Beleaguered: B. Ramalinga Raju, Satyam’s founder, confessed to the Rs7,136 crore hole in the company’s accounts on 7 January 2009. Bharath Sai/Mint

The Securities and Exchange Commission (SEC)—the securities market regulator of the US—was actively investigating the market injury caused by the fraud. Multiple Indian law enforcement agencies, too, stepped in—Central Bureau of Investigation, Serious Fraud Investigation Office, Securities and Exchange Board of India (Sebi), besides the state police.

But perhaps the biggest of all the challenges was that the new directors of Satyam didn’t know whom to trust. Satyam was a very person-centric organization—everything went to Raju for final approval; teams worked in silos with hardly any interaction. The board was fortunate to locate A.S. Murty, who was appointed interim chief executive by the new board, thanks to the interaction of its management adviser Boston Consulting Group and special adviser Homi Khusrokhan, who assisted the company free of cost.

Initially the directors didn’t know where to start to clean up the mess and simultaneously accelerate the sale process—it was impossible to get people to bid for the company unless they could conduct a meaningful due diligence. So forensic accountants were brought in from Deloitte and KPMG to establish the magnitude of the fraud and Sebi was petitioned to change its takeover regulations, especially where a listed company’s accounts were no longer considered reliable.

It took up to two months to analyse Satyam’s accounts to understand how Raju manipulated the company’s books. It was found out that Raju and his brother could override the accounts system and introduce false vouchers and show false income credits without the knowledge of the business teams. It is possible that there were around 40 people in the company, including the Raju brothers, the chief financial officer and the internal audit team, who would forge documents to support fictitious entries introduced by Raju.

Some of the forged documents that I have reviewed had telltale signs—for instance, acknowledgement of the bank balances by Satyam’s bankers, allegedly issued by a bank on its letterhead, gave telephone numbers that had ceased to exist or had the logo printed on the right. It is common knowledge that most banks’ letterheads always have the logo on the left. Further, the balances were written in figures and not in figures and words as per normal practice.

While the forensic accountants dredged data out of Satyam’s computers, the government-appointed directors started the sale preparation within four days of their first board meeting. They were hurrying because the government had made it clear that it wouldn’t offer a bailout package for Satyam though it would, in every other way, facilitate the revival of the company.

Finally, four companies showed interest. Yet, there was concern among the directors whether these firms would eventually bid for Satyam given its financial situation. The question was could Satyam offer credible information for them to carry out their due diligence.

Sebi, as a market regulator, showed a great deal of flexibility and allowed bidders to access price-sensitive confidential information. There was, however, a rider that bidders would not buy or sell Satyam’s shares for at least six months. Also, Satyam obtained a Rs5 crore bank guarantee from each bidder as security to make sure they didn’t leak price-sensitive information. Sebi waived the six-month average pricing formula (for arriving at a price for the shares in an open offer) and agreed to receiving financial bids in a controlled auction process.

Satyam’s directors, along with the government and under the supervision of the Company Law Board, decided that the company would sell 31% of its fully expanded equity capital to the winning bidder, after which the winner would make an open offer for additional 20% of the stock. Sebi created a special dispensation under which Satyam could make a second preferential offer to the winning bidder if the open offer wasn’t fully subscribed.

Thanks to the government’s support and, most importantly, the untiring hard work of the six government-nominated, Company Law Board appointed directors, Satyam could be sold and the bids were above the ruling market price. I think it is the only company of that size in the world that survived a fraud of that magnitude without financial help from the government—all credit to the people who steered it through the crisis. The directors and the advisers, Partho Datta, Khusrokhan, Arun Maira and James Abraham, need special mention for their free of cost work to salvage the company.

Shardul S. Shroff is managing partner of Amarchand Mangaldas, a law firm that advised Satyam on its sale. Respond to this column at