Satyam has a new cook

rama_rajuCook as in cooking the books. Satyam is the 4 largest IT major in India and was started by Rama Raju. Today he dropped a massive bombshell that involved an accounting scandal which sent the stock tanking 77%, it closed at Rs 40.25 a share (the 52 week high was Rs. 542). Rama faxed a letter to SEBI Wednesday morning where he outlined the level of fraud and why he did what he did. The letter tries to show him as the knight in shining armor trying to rescue the company…what a crock of [email protected]#. According to the letter he is solely responsible and nobody knew anything but him, even though Satyam has over 53,000 employees, had 9 directors on the board and PwC as the auditor.

The meaning of Satyam in sanskit is truth, which brings me to this point about trust. Who can you trust? The founders of the company? The board of directors? The auditors? The analysts? The regulators? The ratings agencies?

To quote a line from my spiritual advisor – LA rapper 2Pac Shakur:

Before I go to sleep
Tell me, who do you believe in?
Who do you believe in?

So why did he do it? The usual culprit is pump up the numbers to drive the stock price up (aka pump and dump). Based on my extensive research (using google and talking to one person) I have two theories:

1. The numbers for the past several years were pumped up by using the cash on the balance sheet to play in the equity markets. When the markets fell last year, that cash disappeared. Is this likely, maybe. When I came to India a couple years ago, I met with a pharma company that had Rs 50 CR on the books and wanted to invest in the equity markets. They said “why invest in our business when we can make 30-40% in the markets.”

2. Government payoff (read bribe). IT companies in India are usually free of corruption but infrastructure and real estate companies are the exact opposite. Rama has two sons – Teja (runs Maytas Infra) and Rama Jr. (runs Maytas Real Estate). Where did Maytas Infra get the money to “win” the contract for the Hyderabad Metro project?

I would highly recommend reading the letter he faxed to SEBI, below is the best line from the letter:

It was like riding a tiger, not knowing how to get off without being eaten

The lead partner from PwC who handles Satyam is Srinivas Talluri, you can email him at [email protected] to get all your questions answered.

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