This week we will talk about Satyam Scandal – the largest corporate scam of India and the 10th largest in the world
Satyam Computers, the organization that was involved in the scam, was the brain child of two brothers – Ramalingam Raju and Rama Raju. The company was started in 1987 in a city called Hyderabad in India as an IT and computing consultancy agency. During it’s entire life, Satyam computers rose as the largest IT firm in India, followed by accreditation by World Bank organization, followed by its eventual downfall in 2009 when it saw its share prices fall from Rs. 410(approximately US$7) to Rs. 25(approximately US$0.3) within 3 days.
On 7th of January 2009, Satyam Computers’ owners – Ramalingam and Rama – wrote a letter to the board of directors, explaining the manipulations they had done with the company’s balance sheets. In this letter they explained the degree to which this scam was done and the entire process that led up to their confession.
What could have caused Satyam computers, a US $2.1 billion company to perish is a very interesting story
The two brothers established the pillars of the company in 1987 to explore the newfound field of technology – computers. Satyam computers was amongst the first few IT related companies that were established in the east and hence, it had business partners across India, Japan, China, and several south east Asian countries. It was also amongst the few successful IT companies that were able to provide dynamic and customer friendly services and hence, by 2003, its business operations expanded to the United States, Germany, France and several prominent economies across the globe. In 2004, Satyam computers was handling IT operations for World Bank and multiple multinational organizations.
THEN THE SCAM BEGAN…
Ramalingam Raju along with his brother tried to reap personal benefits by taking advantage of the company’s esteemed reputation. In the process of doing so, he would show non-existent profits in his company’s balance sheets, eventually causing the stock prices to rise. Between 2003 and 2008, the company’s average operating profit was shown as 21% and the average compounding profit was shown as 35%. To explain the ever-rising profit margin, Satyam computers would divert the ‘fake profit’ to an asset that never existed. This would lead to an increased share-holder trust, causing them to invest more. This would drive stock prices up. At the end, Mastermind Raju and his brother in crime would realize the profits that they gained from the rise in stock prices.
While I found certain things too complicated to understand and explain, I was able to understand that their act of financial manipulation had the potential to lead the company to an irrevocable disaster. And so, it did. In his letter to the board of directors, Mastermind Raju claimed that the assets had been overstated by US$ 150 million; interest that was being paid factiously on an annual basis was US$ 77.46 million, for a credit that never existed; the companies liabilities were understated by US$ 300 million; and the revenue which was shown as US$36.60 million was actually US$28 million.
Raju, however, realized by late 2007 that his attempt to inflate share prices was about to counter react and hence he proposed to his shareholders to invest in a company called ‘MYTAS’. MYTAS was partly (35%) owned by Raju’s family members and thus, he wanted to merge Satyam Computers and MYTAS’s assets to fill up the financial gaps. While the board of directors accepted the proposal, the shareholders rejected the proposal, fearing diversion of money from Satyam computers to MYTAS.
Have you ever had this feeling of being successful in un-screwing up a problem that you created and later realizing that in the due course you may have aggravated the problem? The remorse is real. This is how Raju was feeling after realizing that the deal had been turned down. But things were about to get messier for Raju and Satyam computers and he had no idea about it.
On 28th December 2008 a lawsuit was filed in the United States against Satyam Computers for manipulating financial documents. When reports of the lawsuit reached the Indian stock market, their stock crashed. In retaliation and maybe, in fear of being harshly prosecuted, Raju came out clear to his board of directors with his ‘confession letter’ on 7th of January 2009 stating that a fraud worth Rs. 7,800 crore(approximately US$ 100 million) had been done.
The stock prices fell by 40% in a day, eventually causing Satyam computers to appeal for a bailout. The company was then taken over by Mahindra.
Let’s talk about my favorite question… why did this happen?
It was later found out that Mastermind Raju, his brother, the managing director of the company, external auditors – Pricewater house coopers – and government auditors were the main culprits. All the five parties were motivated by the idea of ‘greed’. We can also say that they were motivated by materialistic outsets as they faltered on their morals and ethics for self-gain.
Here, we can also describe the Indian Income Tax department and the investors of Satyam Computers as naïve and ignorant. Both the parties that were directly affected by the performance of Satyam computers continued to ignore the exceptional gains that Satyam Computers was having (possibly because they too, were beneficiaries of the exceptional rise in revenues and stock prices).
All being said and done, this incident tells us one thing about human behavior – Humans will report atrocities and misconducts only and only when they are staged as the disadvantaged party. This is possibly the reason why societal divisions continue to exist in our modern societies.
Think: Do you see any similarity in the names of the two companies discussed – MYTAS and SATYAM? If you did, let me know in the comments.