SATYAM Quickies

Prithvesh Ashar (CA Final Student) (27 Points)

08 January 2009  
What is the crux of the scam in Satyam?
In essence, what disgraced chairman Ramalinga Raju has now admitted is that the company had been cooking its books to show higher revenues and lower liabilities, thereby grossly overstating the profits of the company as well as its reserves.

This has been happening, according to Raju’s confession on Wednesday, for several years. The net result of this massaging of accounts is that as of September last year the last quarter for which results are available — the company’s bank balance is overstated by Rs 5,040 crore and its receivables in the form of accrued interest by Rs 376 crore.

On the other side of the balance sheet, Raju said, liabilities have been understated by Rs 1,720 crore. The combined effect of overstating the positives and understating the negatives is that the overall balance looks Rs 7,136 crore healthier than it would otherwise do.
 
What was the purpose of the scam?
Rather like item numbers in Indian films, Satyam’s fancy numbers were aimed at s*xing up the company and making it more attractive for investors.

Raju pointed out that given the low promoter holding in the company (8.6% as of September 2008), poor performance could result in a take-over.

It was important, therefore, to make it seem as if both the top and bottom lines were growing at a healthy rate, even if that was not actually true.

 

How did it build up to such proportions?

The problem with overstating performance is that if you want to keep growth rate looking good, the absolute extent of the exaggeration has to keep getting bigger. To take this particular example, in 2003-04 Satyam reported net sales of Rs 2,542 crore. In the four years since then, that figure was reported to have grown by 36%, 34%, 40% and 31% respectively to reach Rs 8,473 crore in 2007-08.

Now, if a Rs 2,500-crore company wants to show 35% growth when it has actually grown by only say 25%, the extent of overstatement would be only Rs 250 crore (10% of Rs 2,500 crore).

But if a Rs 8,500-crore company wants to do the same thing, it will have to fudge the figures by Rs 850 crore. It is also important to realise that overstating revenues by 10% can overstate profit by a lot more.

For instance, if actual revenues are Rs 2,000 crore and actual net profits Rs 200 crore, an addition of Rs 500 crore to revenues without changing anything else would also add Rs 500 crore to net profit. While this would mean exaggerating revenues by only 25%, the profit figure would get overstated by 250% (500 cr is two-and-a-half times 200 crore).

 

How was Satyam’s proposed acquisition of Maytas linked to this scam?

Maytas, a real estate firm owned by Raju’s family, was proposed to be bought by Satyam for about Rs 6,400 cr and turned into a whollyowned subsidiary of Satyam. Raju has pointed out that this would have helped clean up the Satyam mess.

Since Satyam would have to pay Maytas owners (the Raju family) for its shares, on paper Rs 6,400 crore would have moved out of Satyams books into the Raju family’s hands, while Satyam would have gained Maytas shares. This could have been an excellent way of regularizing the pumping up of numbers.

 

Here is how. One, the payment would have actually become just a formality with the Raju family technically receiving Rs 6,400 crore. But, with Satyam’s reserves and surplus having already been depleted (or, conversely, inflated) the Raju family would have got much less. But, obviously, they would not have complained.

Two, this would have then given the company a legitimate opportunity through an acquisition — to bring down the reserves to its actual level without admitting that the books had been cooked. And, nobody would have been any the wiser since only the Raju family and their close confidantes would know about this.

Thus, while Satyam’s reserves would apparently have been used up to pay for the acquisition, in reality the non-existent reserves would be passed on to the Raju family. And Maytas would have found a new home.

The furore over what most people perceived as a blatant overvaluation of Maytas prevented the proposed merger going through, thus closing out an opportunity for Raju to paper over the bungling in Satyam.