The infamously famous Satyam Scam - The Whole Story
Immediate rise after the Birth
Satyam Computer Services Limited was one of the biggest IT companies in India during the 2000s. It was started by Ramalinga Raju in 1987. Satyam used to offer various products and services related to software development, business intelligence and data warehousing, consulting and enterprise solutions. Rapidly, the organisation moved from being a domestic IT services company to a global IT firm.
The IT company got listed in the Bombay stock exchange in 1991. With the positive outlook of the firm and the industry atmosphere, the shares of the company were oversubscribed by 17 times. In 2001, Satyam Computers made a debut on the New York Stock Exchange (NYSE).
Two years before that, Satyam Infoway (Sify), the internet subsidiary of Satyam Computers got listed on the Nasdaq. The company and the promoters got numerous accolades for their achievements. In 2006, revenues of the company crossed $1 billion. Next year, Ramalinga Raju was named as the 'Ernest and Youngest Entrepreneur of the Year'.
Interest in Real Estate
When you look at all the fraud stories in the world, none of the fraud which is conducted is done with an intention to get caught. Fraudsters always have a plan which they think can fool everyone. In the Satyam scam case, Ramalinga Raju had an amazing plan to outdo the whole system.
In the early 2000s, the real estate market was witnessing a boom. To earn more, Ramalinga Raju's greed made him turn his attention to this market. Due to the industrial development happening in Hyderabad, prices of land was on a continuous rise. According to the estimates, the land prices were destined to rise exponentially within a few years.
Maytas infrastructures and Maytas properties were the companies which were owned by Ramalinga Raju and his family members. If you spell Satyam backwards, you will get Maytas! Raju aggressively started buying lands and properties in Hyderabad and other near places. To evade any doubts, the properties were brought on the names of Maytas infrastructures, Maytas properties and his other family members.
When he fell short of the money to buy lands, he started manipulating the financial statements of Satyam Computers. The total revenues and profits for the company in quarterly and annual reports were massively inflated. This gave a false image to the shareholders and other market participants that the company was doing exceptionally well. Rapid growth and strong financials lured the investors to buy Satyam's shares in the market.
The Plan A
The fast increase in demand led to the Satyam's share price shooting up. At these increased share prices, Ramalinga Raju and his brother started selling their shares to book higher capital appreciation. They also used their shares in Satyam as a collateral to get loans from the bank. The money came from these two routes were invested to buy more properties. He opened 365 companies on whose names he used to buy properties. It was also alleged that Raju had the map of the proposed metro route of Hyderabad. He used to buy lands near these metro routes so that he can sell the lands at higher prices in the coming years.
He planned to put some part of the money profited from the land back into Satyam's financials. This would decrease the gap between the actual and fake figures of revenues and profits.
It was later disclosed that to show fake sales in the financial statements, Raju made 7,500 fake invoices. This helped him to back the fake figures of total revenues of the company. But as the revenue increases, profits and the cash reserves of the company should also increase, right? To cover up for fake profits, Raju made fake bank statements saying that the profits are kept in banks in the form of fixed deposits. In reality, these fixed deposits never existed!
This process continues for many years. All this while, the share price of the Satyam Computers kept on increasing. The promoters of the organisation were also happy to sell their shares at these higher prices. In 1999, promoter's held 24% of the stake in the company. By 2008, this stake dropped to 5%!
The 2008 Recession
Future is unknown to everyone and it is highly uncertain. No one can plan anything perfectly.
Raju's plan lost its plot due to the 2008 financial crisis. The global financial crisis of the US had an effect all around the globe. The real estate sector which was booming suddenly collapsed. There were no buyers and the sellers were forced to decrease their land prices. This recession crashed Raju's dream to sell the property at higher prices and cover up the fake figures of Satyam Computers. But he didn't stop there. He had another plan to cover up all the mess, without the world even getting a hint of it.
The Plan B
Ramalinga Raju knew that he has to cover up the fake financials which he has issued out for so many years. The plan B was that Satyam Computers will buy 100% and 51% stake of Maytas Infrastructure and Maytas Properties. This money which will be invested by Satyam Computers will go to Maytas' promoters. And, who were Maytas promoters? Ramalinga Raju himself and his other family members. This deal would show that the difference in amount between the actual figures and fake figures is used to buy the two Maytas firms. But in reality, no cash transaction would take place. Another soundproof plan!
On 16th December 2008, the board directors of the company gave the green light to go through the two deals. Remember that promoters had only 5% stake left in the Satyam Computers? Thus, it was pivotal for Raju to get approval from institutional investors, who had a significant stake in the company, before making any acquisitions.
To Raju's dismay, institutional investors were not in favour of this deal. When this news broke out, the share price of the company started falling quickly. One of the investors in the US even filed a lawsuit against Satyam Computers. The share prices of the company nose-dived at both Indian and the US exchange. Under the humongous pressure, the company was forced to cancel the acquisition of both the Maytas companies.
The Ultimate Confession and Aftermath
After seeing the failure of both of his plans, on 7th January 2009, he confessed about all his wrongdoings in front of the exchanges and SEBI. He disclosed the Rs 7,000-crore accounting fraud in the company's financial statements about cash which never existed. Multiple government bodies were put to investigate everything about this scam. Several fingers were raised on the role of independent directors and Satyam's auditors. Investors questioned how the auditors failed to do their job for so many years. PricewaterhouseCoopers (PwC) was Satyam's auditor for all these years. It was later found that Satyam Computers were used to pay a lot more fees to PwC as compared to what other IT companies used to pay.
After two days of confession, Ramalinga Raju and his brother were arrested. The same day, the Central Government disbanded Satyam board and appointed its own 10 directors. Satyam Computers had become a big brand by that time with a huge number of employees. To save the company from dying, the government sold the company's majority of the stakes to Tech Mahindra. The entity was later called as Mahindra Satyam. Later, this entity got merged with Tech Mahindra. On 10th April 2015, Ramalinga Raju, his brother and few other accused were imprisoned for 7 years.
That is all about the Satyam scandal. One simple learning opportunity for all the investors from this case is to always research on why the promoters of a company are selling their shares.