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On January 7th, 2009, the chairman of the fourth largest IT company of India, B. Ramalinga Raju, confessed to the Securities and Exchange Board of India that he and his company, Satyam Computer Services, had manipulated their accounts over many years in several forms. The stock prices fell from Rs. 170 per share to almost Rs. 6.5 per share and shareholders had lost Rs.14,165 crores of value because of this scam.
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But how did the son of a farmer and his relatives pull this scam off for so many years, ruining everything he had built, especially the name of his company Satyam, which in Sanksrit means 'Truth'?
The beginnings of Satyam Computer Services
After failing in multiple businesses, Byrraju Ramalinga Raju incubated Satyam Computer Systems with his brother-in-law and 20 employees after seeing an opportunity in the IT outsourcing field in India. He was able to grow the company quickly and by 1992, Satyam was listed in the Bombay Stock Exchange and by 2001, was listed in the New York Stock Exchange too. Satyam had an extensive client list involving 185 of the Fortune 500 companies.
He had received multiple awards personally and many on behalf of Satyam Computer Systems too for their sustained continuous performances.
The lure of real estate
It is widely accepted that Raju was heavily interested in buying up land and real estate during the boom, especially in and around parts of Hyderabad, where Satyam was based on. He founded Maytas Infrastructures and Maytas Properties, where the head of directors were his family members, friends, relatives, and other connections.
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Once he started running out of cash to continue aggressively buying up properties, he started manipulating the accounts and financials of Satyam Computer Services.
For example, Satyam used to show profits of 600 crores, while the real profits might be only 50 or 60 crores. Satyam would show this fake profit to board members, shareholders, and investors to show rapid growth in the organization and raise the stock price. The profits made from the increased stock price would then be sold by the promoters for a profit to be funneled into Maytas Infrastructure and Properties. They would also put their shares up as collateral for bank loans and use that to buy property.
Raju had opened up over 300 different companies for his real estate holdings with many of them having Raju's friends, family members, relatives, and even employees as directors. According to Metro Man E Sreedharan, Raju had inside information regarding Hyderabad Metro's projects and rail routes and used that to buy land around the metro lines in anticipation of rising land prices. His alleged connections with the then-Chief Minister of Andhra Pradesh Chandrababu Naidu are said to have helped him in acquiring information regarding these lines.
Metro Man E. Sreedharan. Image credits : oneindia
Moreover, from the money he generated in his real estate deals, he was able to manipulate the books of Satyam by showing Maytas' revenue as Satyam. He generated as many as 7500 fake sales invoices to show his fake profit and countless fake bank statements to show that the money that Satyam generated from sales was in a bank account.
This practice kept going on, and Satyam continued selling the company's shares as the public kept buying Satyam shares unaware of the financial manipulation. In 1999, the promoters held 24% of all Satyam shares while by 2008, they held only 2% of all Satyam shares.
Brewing trouble and the Satyam comes out
Regardless of the actual figures, Raju and his friends could continue playing this game as long as the real estate numbers were rising. However, due to the 2008 global financial crisis, there was a recession in the real estate markets in India too, and Raju was unable to fill the gap between the actual financial figures and the manipulated one he was used to presenting.
So, to fill this gap, Raju put forth the decision for Satyam to acquire Maytas. This move would help to explain the variation in the financial figures, according to Raju, despite no cash transaction taking place. The Satyam board too approved the move on December 16, 2009, without the permission of the shareholders.
Satyam's Institutional investors, mainly Life Insurance Corporation of India (LIC), did not like this move and this led to a major crash in Satyam's share price in both BSE and the NYSE. Four independent board members had resigned and under pressure, Raju immediately canceled the deal.
Now left with no choice, Byrraju Ramalinga Raju had to confess to SEBI in his letter on January 7th, 2009 that he had been inflating and manipulating the company's financial statements for a long time.
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Questions have been asked of Satyam's auditors and independent directors as to how the figures were never crosschecked and how Satyam got away with thousands of fake sales invoices and bank statements checked.
On 9th January 2009, Ramalinga Raju and his brother Rama Raju were arrested.
image credits : Mint
The Central Government had to come in the scene and assign new directors to Satyam Computer Services. In April 2009, the company was sold to Tech Mahindra in an open bid and renamed Mahindra Satyam and by June 2013, Mahindra Satyam was merged with Tech Mahindra.
In 2015, Raju was sentenced to seven years in jail and fined Rs 15 crores, a mere slap on the wrist compared to the Rs 14,165 crores robbed from shareholders and Rs 900 crores robbed from LIC, the institutional investor in Satyam Computer Systems.