You are on page 1of 23

Satyam Fiasco

Raju’s Letter to the Board -1

To the Board of Directors, From: B. Ramalingam Raju

Satyam Computer Services Ltd., Chairman, SCS Ltd.,
Dear Board Members,
It is with deep regret, and tremendous burden that I am carrying on my conscious, that
I would like to bring the following facts to your notice:
1. The balance Sheet carries as of September, 30, 2008:
b) Inflated ( non-existent) Cash and Bank balance of Rs. 5,040 Crores ( as
against Rs. 5361 Crores reflected in the books)
Raju’s Letter to the Board - 2
b) An accrued interest of Rs. 376 Crores which is non-existent.
c) An understated liability of Rs. 1,230 Crores on account of funds arranged by me.
d) An over stated debtors position of Rs. 490 crores ( as against Rs. 2651 reflected
in the books)

2. For the September Q2, we reported a revenue of Rs. 2700 Crores and an
operating margin of Rs. 649 Crores (24% of revenues) as against the
actual revenues of Rs. 2,112 Crores and an actual operating margin of
Rs.61 Crores ( 3% of revenues). This has resulted in artificial cash &
bank balances going up by Rs. 588 Crores in Q2 alone.

The gap in Balance sheet has arisen purely on account of inflated profits over a
period of last several years ( limited only to Satyam standalone, books of
subsidiaries reflecting true performance). 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 un manageable proportions as
the size of the company operations grew significantly. (annualized revenue run
rate of Rs. 11,276 Crores in the September quarter, 2008 and official reserves of
rs.8,392 Crores). The differential in the real profits and the one reflected in
the books was further accentuated by the fact that the company had to
carry additional resources and the assets to justify higher level of
operations – thereby significantly increasing the costs.

Every attempt made to eliminate the gap failed. 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. It was like riding a Tiger, not knowing how
to get off.
Raju’s Letter to the Board - 3
• The aborted Mayatas acquisition deal was the last attempt to fill the fictitious
assets with real ones. Maytas’ investors were convinced that this is a good
divestment opportunity and a strategic fit. Once Satyam’s problem was solved, it
was hoped that Maytas’ payments can be delayed. But that was not to be. What
followed in the last several days is common knowledge.
• I would like Board to know:
1. That neither myself, nor the managing Director (including our spouses) sold any shares in
the last eight years-excepting for a small portion declared and sold for philanthropic
2. That in the last two years a net amount of Rs. 1,230 Crores was arranged to Satyam ( not
reflected in the books of Satyam) to keep the operations going by resorting to pledging all
the promoter shares and raising funds from known sources by giving all kinds of
assurances ( Statement enclosed). Significant dividend payments, acquisitions, capital
expenditures to provide for growth did not help matters. Every attempt was made to keep
the wheel moving and to ensure prompt payments of salaries to the associates. The last
straw was the selling of most of the pledged shares by the lenders on account of margin
3. That neither me, nor the Managing Director took even one rupee / dollar from the company
and have benefitted in financial terms on account of the inflated results.
4. Non of the board members, past or present, have any knowledge of the situation in which
the company is placed. Even the business leaders and senior executives the in the
company, such as Ram Mynampati, Subbu D, T R Anand, Keshab Panda, Virender Agarwal,
A S Murthy, Hari T, S V Krishnan, Vijay Prasad, Manish Mehta, Murali V, Sriram Papani,
Kiran kavale, Joe Lagioia, Ravindra Penumetsa, Jayaraman and Prabhakar Gupta are
unaware of the real situation as against books of accounts. None of my or Managing
Direstor’s immidiate or extended family members has any idea about these issues.
Raju’s Letter to the Board - 4
• Having put these facts before you, I leave it to the wisdom of the board to take the
matters forward. However, I am also taking the liberty to recommend the following
1. A task force has been formed in the last few days to address the situation arising
out of the failed Maytas acquisition attempt. This consisits of some of the most
accopmlished leaders of Satyam” Subbu D, T R Anand, Keshab Panda, and
Virendra Agarwal, representing business functions and A S Murthy, Hari T, and
Murali V representing support functions. I suggest that Ram Mynampati be made
the chairman of this task Force to immidiately address some of the operational
matters on hand. Ram can also act as interim CEO reporting to the board.
2. Merrill Lynch can be entrusted with the task of quickly exploring some merger
3. You may have a restatement of accounts prepared by the auditors in light of the
facts I have placed before you.

I have promoted and have been associated with Satyam for well over
twenty years now. I have seen it grow from few people to 53,000 people,
with 185 Fotune 500 companies as customers and operations in 66
countries. Satyam has established excellent leadership and competency
base at all levels. I sincerely apologise to all Satyamites and stakeholders,
who have made Satyam a special organisation, for the current situation. I
am confident they will stand by the company in this hour of crisis.
Raju’s Letter to the Board - 5
• In light of above, I fervently appeal to the board to hold together to take some
important steps. Mr. T R Prasad is well placed to mobilise support from the
Government at this crucial time. With the hope that members of the Task Force and
the financial advisor, Merrill Lynch ( Now bank of America) will stand by the company
at this crucial hour, I am marking copies of this statement to them as well.
• Under the circumstances, I am tendering my resignation as Chairman of Satyam and
shall continue in this position only till such time. the current board is expended. My
continuance is just to ensure enhancement of the board over the next several days
or as early as possible.
• I am now prepared to subject myself to the Laws of the land and face
consequences thereof.

(B Ramalinga Raju)

Copies marked to : 1. Chairman SEBI

2. Stock Exchanges
Satyam - maytaS
• It is not a mere coincidence that maytaS is Satyam spelt in
reverse way.
• As spelled out in Raju’s letter it was an effort to cover-up
Satyam Fiasco.
•. Raju wanted to acquire Maytas in order to cover up the scam he
was cooking, but failed miserably. After all isn’t Maytas a part of his

family business? The answer lies in Maytas’s burgeoning growth in

last 6-8 years. Maytas is a 2 decade old company. However it has
been doing remarkably well for last 6-7 years. Projects worth
billions are riding on them. Now talking about inappropriation of
Satyam’s money. Raju showed a inflated gross margin in the period
of July-December by almost 600 crores. meaning swollen records
by over 1000 crores in a year. So it would take him about 5 or ma
maximum 6 years to show an accumulated wealth of over 5000
crores (as stated in the records- Satyam’s supposed cash reserve).
Thus, it comes out from here, that Raju must be syphoning the
money from Satyam to Maytas since last 6 years. And now he
wanted to buy it so that he can cover up Unfortunately, it did’nt
Maytas – A Hole in the Ship
• It all started on 16.12.2008, when Ramalinga Raju thought, buying an
infrastructure firm made sense!
• He, then, nailed a hole in a sinking ship Satyam was.
• It is a common affair in Indian Inc to make such pointless investments to
divide the dividends by manipulating profit margins.
• But the scale of this scam needs to take a deeper look in the fiasco
Satyam created.
• Satyam’s Maytas bid dragged media in to it.
• Satyam intended to buy entire stakes in Maytas Properties for $1.3 Billion
and 51% stakes in Maytas Infra for another $300 Million.
• Raju and his immediate family members own up to 35% stakes in Maytas.
• The deal was to be financed from “surplus” cash.
• Investors and the Fund managers were shocked that the bidding process
was carried without informing them.
• Raju said that the deal was in complete interest of the investors and
informing them was “unnecessary”.
• On following days, Satyam’s share prices started falling reflecting share
holders disbelief.
Mytas – A Hole in the Ship
• Satyam’s share prices nosedived in U.S.A. after the bid was announced.
• The interrogation by investors forced Raju to reconsider his decision, which
he pulled off within hours.
• World Bank, one of Satyam’s esteemed customers banned it from
providing service for next 8 years.
• Satyam’s image in front of its customers, investors, and more importantly,
the entire nation got dented.
• Share prices tumbled even further by about 16%. The aborted buy-out
deal and the ban indicated that something seriously went wrong at the
board level.
• Valuation of Maytas turned out to be fraudulent.
• All of the four Firms, including Merry Lynch and JP Morgan denied having
done any Valuation.
• The move sparked row between the institutional investors from across the
world and Sataym’s board members,
• Ultimately lawsuits followed valuation and now judicial custody of
Ramaling Raju and his brother.
• One of company’s two independent directors T.R. Prasad defended the
decision of buy-out believing it to be increasing share value,
• Another director Mr. Shrinivasan quit before it was too late.
• Vinod Dham (fouder of Pentium) was also one of the non-executive
directors of Satyam who later resigned in the wake of controversy.
• Two days after the controversial deal, Indian government ordered separate
probe in to the matter
• On 7th January, Ramalinga Raju wrote a letter to all the board members
and SEBI, informing them about inflated cash, faked profit margins and
accounting malpractices
Satyam – Corporate non- Governance
• India did need a blow-out on a scale like Satyam to bring home the painful
reality of the generally rotten state of corporate governance and the
vicious promoter-politician nexus endemic across different sectors of the
• It would be naive to believe in the comments by select industry leaders
and select politicians that the Satyam case is one-off and that the entire
Indian IT sector (or for that matter, the entire Indian business fraternity)
cannot be tarred by the same paintbrush.
• Satyam most certainly is not a only one-off high profile situation that India
has been forced to face. It is not the first one in the last 25 years, and will
certainly not be the last of the high profile ones in the next few years.
• To start with, we must accept that Satyam is our problem and we are
expected to find the solution ourselves.
• It may be easy to blame Price Waterhouse, that they did not perform their
duties as auditors correctly. We must accept that there would be many
very large audit firms, who may also be routinely turning a blind eye to
the shenanigans of various promoters.
• We hope, that now, & perhaps finally, the regulatory systems and bodies
responsible for ensuring compliance will start to function as they should
have done before the Satyam blowout.
Role of Independent Directors
• The role of independent directors is now under close scrutiny. This has
happened due to one of the less reported nexus between the Indian
promoters, senior bureaucrats especially those from IAS, and senior bankers
especially those from large PSUs. Retired civil servants are used as glorified
liaison officers.
• Hopefully, the boards, in future, will be composed more on the basis of
business-specific relevant competence rather than the retirement-eve titles.
• Independent directors of Satyam Computers, who agreed to the company's
proposal of buying out two promoter-related companies, failed to be
independent in 'spirit',
• The Satyam board, including its five independent directors had approved the
founder's proposal to buy 51 per cent stake in Maytas Infrastructure and all
of Maytas Properties, owned by the family members of Satyam Chairman B
Ramalinga Raju.
• Independent directors need to be more active and directors need to maintain
their independent spirit." Corporate governance should be a "principle-
based" system rather than being "rule-based,"
• In instances of larger issue of change in the entire business focus of the
company, the Independent Director should take the decision to the
shareholders before approving.
• Independent directors need to be vigilant in protecting minority interest and
be `brave' enough to take adequate steps. "It is cumulative responsibility of
the independent directors to protect the interest of shareholders and
strategy of the organisation.
Satyam & Investment Decision
• The role of Satyam's independent directors is termed as `unpardonable‘. Acting
against the interest of larger shareholders especially when the promoters
themselves owned a little more than 8 per cent stake in the company and
institutional investors owned more than 45 per cent.
• As do the independent directors on the boards. One can hardly ask for more
qualified people than Vinod Dham and Krishna Palepu. But the fact that they
voted in favour of the Satyam-Maytas proposal is shocking. What's the point in
having independent directors if they can't guide the management on critical
• Investors were furious about the way Satyam founders undertook the move to
invest in a promoter-related company and wanted to know why the
management failed to obtain prior consent of shareholders before deciding to
invest, which amounted to change of `object clause' of the company.
• "Enforcement is important. It is no use making more and more rules and laws if
you are not willing to enforce it," "Laws in India are quite strong."
• The investors' activism after Satyam's decision is appreciative.
• “It is hoped, that, after this incident most of the corporate India will behave in a
reasonable fashion,
• In the case of Satyam's decision to acquire Maytas firms, Ramalinga Raju said
the combined entity would deliver greater shareholder value.
• But the correct perception was that it will benefit Maytas promoters at the cost
of Satyam's shareholders. This was reflected in the heavy beating Satyam's
stock received after the announcement of the deal.
• Defending the decision, one of the company's executive said, "Satyam, as a
company, was built over the years." However, it is common knowledge that it
takes years to build a reputation of a company, which can be eroded overnight
with one wrong move.
Satyam Fiasco
• It‘ was audacious, preposterous, outrageous and shocking t single event, the
Satyam Computer-Maytas deal. That a promoter, with less than 9 per cent stake in his
company, would have the nerve to try and transfer $1.6 billion of cash to two completely
unrelated businesses owned by his sons is unthinkable. And to pass that off as a 'wonderful'
opportunity! Satyam. Chairman Ramalinga Raju says he didn't anticipate investors'
reactions and was surprised.
• In the past institutional investors in this country haven't really spoken up against corporate
misbehaviour. Even Sterlite's attempt, in September this year, to transfer the high-quality
aluminum business and merchant power to Malco, in return for the low-quality, high cost,
copper Konkola mines, again without so much as a by-your-leave, didn't anger
• In that instance too, the promoters were enriching themselves, at the cost of minority
shareholders, but no mutual fund really said so. There have been numerous other
instances, admittedly of smaller consequence, that should have provoked mutual funds to
ask questions.
• Now, the same institutional shareholders have found their tongues. This time, their stake is
big - just over 50 per cent. Also, they realise how vulnerable and helpless they are
because, had Ramalinga Raju wanted, he could have pushed through the deal. And no one
could have stopped him, because the board had voted unanimously.
• Institutional investors have their own vested interests. It's well-known that there are back-
to-back arrangements between mutual funds and corporations: Funds buy into the firm's
stock in return for investments in their income schemes. Instances of stock being dumped
just before the bad news is out or shares being snapped up before the good news is flashed
aren't always 'coincidental."
• But now it's time institutional shareholders got together to show promoters that they simply
cannot get away with this kind of behaviour. In India it only needs a 10 per cent stake to
call an EGM. The shareholders need to fight this one out. If they let Satyam off the hook,
Indian promoters will continue to believe they can get away with anything. As it is, most
managements in India have scant regard for even the basics of corporate governance or
respect for minority shareholders.
• Managements should be asked to take shareholders into confidence for any unrelated
diversification, with the definition of 'unrelated' clearly spelt out.
Satyam & PWC
• “It is hard to believe that he (Raju) was the lone perpetrator all along. In any
company, the CFO (chief financial officer) and financial committee members
would have full access to balance sheet details,”.
• Satyam has a presence in 66 countries and is listed on the New York Stock
Exchange (NYSE).“A company filing returns in the US according to (its)
Security Exchange Commission (SEC) guidelines could not have done this
without the cognizance of key executives,”
• “It’s impossible to go by the claim that none of the board members had any
clue about the inconsistencies in Satyam’s balance sheet; if the fraud went on
for ’several years’, it won’t be wrong to rule out that most of them, if not all,
had some idea about the happenings.”
• Fingers are also being pointed at the possibility of the auditors Price
Waterhouse Coopers (PWC) being hand in glove with the conspirators in the
multi-crores scam. It is highly unlikely auditors did not have any idea about
the scam brewing for so many years.
• Auditors will have to be scrutinised. PWC can only be unaware of the loose
balance sheet if Raju forged and doctored documents to support fraudulent
• Credibility of audit firms has come into question as the amount was too big
for any audit firm not to notice. If the audit firm claims that they didn’t know
about then their capabilities would come under the scanner,
• The audits were conducted by Price Waterhouse Cooper in accordance with
applicable auditing standards and were supported by appropriate audit
evidence," the firm said in a statement.
• As per Satyam's accounts, vetted by Price Waterhouse, auditors were paid Rs
3.73 crore during 2007-08 as against Rs 3.67 crore in the previous fiscal.
Satyam & PWC
• The auditor's report, signed on April 21, 2008, by Price Waterhouse
partner Srinivas Talluri, said: "... We have neither come across any
instance of fraud on or by the company (Satyam), noticed or reported
during the year, nor we have been informed of such case by the
• The auditor's report also said: "These (Satyam's) financial statements are
the responsibilities of the company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
• "We conducted our audit in accordance with the auditing standards
generally accepted in India. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material mis-statments," it said.
• While Raju in his statement to the board and SEBI had disclosed that he
was quitting because of the failure in bridging the gap between fictitious
and real assets, the auditors' report said that the company was
maintaining proper records, showing full particulars, including quantitative
details and situations of fixed assets.
• Unprecedented changes in the accounting profession and professional
services in general mean the current approach to safeguarding
shareholder interests as well as the other stakeholders of the modern
publicly traded global enterprise is no longer efficient nor effective.
Who Guards the Guardians?
• Satyam had been hunting for a buyer for a while. These same reports
cited Tech Mahindra and HCL as possible suitors. HT learnt that these
companies raised serious questions about the authenticity of Satyam’s
books and sought clarifications. This may have forced Raju’s hands.
• Merrill Lynch was hired to advise on alternatives to a recent failed
acquisition of a firm called Maytas. But, they may have known what's up.
And resigned the engagement, prior to the Raju’s stunning disclosure.
• In the Satyam affair, where was the billion of missing cash, and why didn’t
the auditors catch the discrepancy? Satyam was audited by a Big Four firm
– PwC. However, if fraud is involved in the Satyam affair, there may be
an argument that the audit firm was defrauded as well."
• There is complicity, incompetence or both with either the auditors or their
customers or both. Inadequate procedures over confirmation indicates
that, the auditors missed something really big.“
• Price Waterhouse gave wrong PAN to Satyam, as it turns out, PWC gave
Their Bangalore PAN Number to Satyam instead of New Delhi. PWC
Hyderabad falls in New Delhi jurisdiction
PWC Letter to New Satyam Board -1
• In a letter to the BSE, and addressed to the new Satyam (SATYAM) board,
Pricewaterhouse Coopers (PwC) has stressed that their audit reports for
the audit period June 2000 to September 2008, should not be relied upon.

• The firm has handed over the blame to the then Satyam management,
saying that it placed reliance on management controls over financial
reporting, and the information and explanations provided by the
management, as also the verbal and written representations made to us
during the course of our audits . A reproduction of the letter s text is given
Dear Sirs,
• Re: Our audit of your financial statements

1. As statutory auditors, we performed audits of Satyam Computer

Services Limited (the "Company") from the quarter ended June 2000 until
the quarter ended September 30, 2008 ("Audit Period").
2. The above-referred financial statements were prepared by the
management of the Company.
3. We planned and performed the required audit procedures on such
financial statements, and examined the books and records of the
Company produced before us by the Company management.
4 We placed reliance on management controls over financial
reporting, and the information and explanations provided by the
management, as also the verbal and written representations made
to us during the course of our audits.
PWC Letter to New Satyam Board -2
5. As you are aware, vide a letter dated January 7, 2009 {"Chairman's Letter")
addressed to the erstwhile Board of Directors of the Company, the former
Chairman of the Company, Mr. Ramalinga Raju has stated that the financial
statements of the Company have been inaccurate for successive years. The
contents of the said letter, even if partially accurate, may have a material
effect (which effect is currently unknown and cannot be quantified without a
thorough investigation) on the veracity of the Company's financial statements
presented to us during the Audit Period. Consequently, our opinions on the
financial statements may be rendered inaccurate and unreliable, a copy of the
Chairman's Letter, extracted from the official website of the National Stock
Exchange is annexed hereto as Annexure A, for the sake of record.
6. The ICAI has issued a guidance note on revision of audit reports in January
2003 ("Guidance Note") which prescribes steps to be followed by the auditor
to prevent reliance on audit reports in such circumstances. In view of the
contents of the letter our audit reports and opinions in relation to the
financial statements for the Audit Period should no longer be relied
7. Such a requirement is also prescribed under the generally accepted
accounting standards in the United States, where, as you are aware, the
American Depository Receipts of the Company are listed. We wish to inform
you that pursuant to Section 10A of the United States Securities and
Exchange Act of 1934, the information contained in the Chairman's Letter
indicates that an illegal act could have occurred. Accordingly, we advise
that the Board of Directors of the Company should promptly
commence an independent investigation pursuant to Section I0A of
the United States Securities and Exchange Act of 1934 in order to
determine whether such illegal acts occurred and, if so, the nature
and extent of such acts,
PWC Letter to New Satyam Board -3
8. We hope to work with the Company and provide assistance to the
new Board of Directors to address any issues that arise in the
course of such investigation, to enable both the Company and us as
your statutory auditors to fulfill obligations under applicable law.

9 We wish to advise that the Company should promptly notify

any person or entity that is known to be relying upon or is
likely to rely upon our audit report that our audit opinion
should no longer be retted upon.

10. Consequently, such notification should be made to at least the

Company's shareholders, lenders, creditors, Indian regulatory
authorities and the United

11. States Securities and Exchange Commission, and indeed to all

stock exchanges, whether in India or abroad, where the securities of
the Company are listed. We expect such notification would be
made promptly and request that the Company advise us as soon as
the notification has been made. Since we are required under the
Guidance Note to mark a copy of this letter to the relevant
regulatory authorities, we have done so
• The Satyam fiasco has brought into
spotlight three important areas of
corporate culture:

• Corporate governance, the role of

independent directors, and investor