Satyam – the Larceny Scenario

Investigators looking into the fraud that has been called India’s Enron have found a “maze” of about 300 companies related to Mr. Raju that were used to “siphon” as much as $1 billion in cash from Satyam, said a senior official involved in the inquiry, who was granted anonymity to discuss developments in the case.

A New York Times report indicates a simple answer to what happened to Satyam’s missing billion dollars – larceny. The performance of the company – revenues, margins – were not systematically overstated over many years as Ramalinga Raju claimed they were. Instead, the promoters were stealing. This simpler explanation is something I have suspected all along.

Ironically, if this is true, this is good news for Satyam. On many fronts.

If this is true, the circle of tainted people in the management of Satyam could be small. Overstating revenues, margins is much harder to carry off without many other senior people in the management being complicit. On the other hand, stealing from the company bank account could have been carried out by the Rajus and the CFO only with just a couple of other people in Finance suspecting something but never knowing for sure. The auditor is another matter altogether – the Partner was either involved or grossly negligent.

If the circle of tainted people is smaller, that is good. New management will not have to do a purge. Which can not just be hugely demoralizing, it can wash away all institutional knowledge and context and making it difficult for new management to carry out simple, routine tasks. It’ll be like going and living in someone else’s house without the hosts and without any instructions on where to find what.

Satyam has a healthy business – not one with declining revenues and 3% operating margins as Ramalinga Raju claimed they were. If the new auditors can quickly establish this, this will be the best thing going for Satyam. They will be able to raise capital or even sell themselves as a healthy, going concern. Customers won’t be worried that Satyam can’t pay its employees who will leave them stranded without any support to their systems.

The larceny scenario will be easier to deal with for the auditors. If they are reasonably satisfied that there was no over-invoicing, they can concentrate their efforts on verifying the bona fides of the parties who received money from the Satyam bank account. It is likely that they might be able to publish restated accounts, faster. If there is one thing that all stakeholders require – shareholders and customers especially – it is a quick resolution to the question of what is the true state of Satyam the company. A long drawn out process will force customers to switch vendors to eliminate any risks to business continuity. It also allows the board to hire a new management, who will also have the same question.

The way the Indian authorities have handled the situation so far deserves a lot of credit. Senior officials and pols have all made public statements on their resolve to get to the bottom of the matter. The Rajus and the CFO have been arrested. A new board with impeccable credentials is in place. New auditors have been appointed. In fact, even this leak to the New York Times is masterful – it allows a new theory to be out there to compete with Raju’s confessional letter – before the auditors and investigators have completed their task and they can issue an official statement.

If there is one thing that I can’t fathom is the kid gloves the authorities are using in dealing with PwC and the partner involved. Why should the ICAI only investigate the PwC partner? Why shouldn’t the police be conducting a criminal investigation? The worst that the ICAI can do is to suspend the partner’s license. That seems like a rap on the knuckles. Also, why should PwC India not also be on the hook? I believe the regulatory environment in this respect is too benign. Not enough to deter accounting fraud which we all know is rampant in India, if not to steal from shareholders (which also happens often enough) but certainly to cheat on taxes. As a contrast, in the Enron case, the FBI went after Arthur Andersen and subsequently shareholder lawsuits brought the whole accounting firm down.

A lot of people, including myself are skeptical about whether the authorities will follow the trail of the money and get it back. When there is this kind of money involved the trail is bound to lead to some powerful people and their Swiss banks. Will Satyam be able to get its money back? Will these powerful people be brought to justice?

We’ll have to wait and see.


  1. BSR says:

    Mr. Pradhan, I have been an avid follower of your blog ever since I found it a few weeks back. It's interesting to see that you're hoping for the best with the Satyam fiasco. I guess it is a slightly controversial issue and it's good to see someone play it safe, rather than overstate the case (which is often what the media does).
    All the same, I am not sure if there's a political angle to whole issue. The politicians have dropped Raju like a hot potato, to say the least. Something tells me that the whole Maytas business has a political/'benaami' angle to it. If you remember, Mr. E. Sreedharan (Delhi Metro) had raised some issues about the Hyd-Metro deal going to Maytas. I have a gut feeling Raju is taking the fall for one of the biggies (YSR/Chandrababu).


    1. Atul says:

      there is a politicalangle to this clearly. Maytas, an unknown company acquired 12000 crs worth of contracts in 3 years. we know the award process in India, and its is politically motivated. The first reaction from the govt, when this blew up was to suggest a 2000 cr blowout – presposterous. Raju has clearly taken been the fall guy for the benami political guys. While Satyam will be cleaned up as a company, much of the politicians involvement can be deduced by what happens to Raju.

      While Basab talks about exemplary action by the govt, I think they goofed by sitting on this for 48 hrs. Can you imagine the documentaion shredding , and hiding of evidence which could have happened in those 48 hrs – not neccessarily by Raju, but by his management team, who may not have been directly involved, but worried about their complicity in this event.


  2. Krishna says:

    No case shall lie against auditors and others so long as their criminalities are established by the investigating authorities. Now that there is only a disclosure by Raju that is highly suspect. On the basis of findings made by the investigators, the Government and the shareholders can file a separate suit against Raju’s (for fraud, falsification of accounts and other transgressions) and auditors (for criminal dereliction of duty if not for complicity, that may or may not be established) and against the other companies in the web (for complicity in diversion of funds) for criminal misdemeanor and one against the bankers as well, for perpetuating the scam by allowing Satyam to carry on showing non-existent fixed deposits parked with them in its annual accounts.


  3. Krishna says:

    [oops… the first line in the above comment should end with the word `not' 🙂

    As you rightly say, the big relief is that the employees (except a critical few that sang along) are apparently innocent and can continue to do what they know best – to service clients. Tracking back the funds would be difficult if it had been turned over to politicians, who always put in place a well oiled laundry machinery (a la Mayawati in U.P who distributes slush money to her cronies and takes it back by way of `gift on her birthday’). We know how patronizing both Chandrababu Naidu (TDP) and YSR Reddy (Congress) has been to the Rajus until recently and given the ease with which MAYTAS was awarded the State government contracts even after the dramatic announcement of the ill-fated Maytas buyout deal by Satyam for $1.6 billion that opened the floodgates.

    One other thing. Now we know why H.D.Deve Gowda was angry against NRN and Infosys acquiring massive real estate a few years back. He obviously couldn’t play with Infosys like Chandrababu Naidu and YSR did with Satyam !


  4. suds says:

    Basab – you are absolutely correct. Satyam insiders confirm there is no overinvoicing to the best of their knowledge. Raju and gang has siphoned money and when the problem got neck deep – very disgracefully , Raju threw mud at satyam's profitability to distract the investigators. All satyam needs is now immediate cash (with all the money siphoned) and a good dynamic operation focussed board and it can survive. The perpetrators of this fraud – the raju gang and the accomplice in this case -PWC should be punished so severely – to make it a shining example.


  5. sriks7 says:

    The thing that I want to see is more of the institutional investors filing civil/criminal suits against the Rajus/Auditors. This is oddly reminiscient of the silence of outrage against the rating agencies and their complicity in the sub-prime scam in the US. I can understand that the management would take the investors for a ride if possible, and often do and it is the investor's job to ask the right questions. But for an auditor whose name is his reputation, to go along with the management in perpetrating gross manipulation of financial statements & claiming to be a victim is not excuseable


  6. Alok says:

    As Nadan Nileknai says about this scam – 'Innovation was way ahead of regulation' , i feel Satyam was playing with money the way their fathers and forefathers would have taught them and they felt comfortable with dont know if Mr Raju is MBA or financial degree anything but if he is not he cant be blamed , Dhirubhai Ambani the biggest ycoon was also a financial innovator often blamed to be criminal but he was good in networking with right guys and he turned his innovations to new financial norms .


  7. suds says:…. So the money was there in the bank on Sep 30, 2008 and disappeared after that!! INCREDIBLE


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