11 January 2009

Satyam I - what likely happened

In my FT piece, I discussed what was wrong with the story of the Raju confession, rather than what may be the correct story. Clearly, no one except those who carried out the fraud would likely know the story. Here is what may have happened as pieced together from my conversations with some of the people who are close to the action. Remember this is a semi fictional work, do feel free to discount it.

Sometime before Sept 2008, Raju and some insiders decided to take away some money. This could either be a personal theft or more likely to be a transfer to Maytas or other property companies owned by Raju. Between September and December 2008, and after the last limited audit by the outside auditors, this money was 'lent' to these affiliates (though it is difficult to imagine writing a cheque for 7,000 crore rupees (Rs.70 billion)). The lending was expected to be accounted for in the shady purchase of the two Maytas companies in the Dec 16th Board meeting at an inflated value - rubberstamped by a convenient Board of Directors. As the shareholders forced the hands of the directors to reverse the purchase of the two companies, Raju was left with a gaping hole which could not be accounted for. Just before the next limited audit was to start - he decided to come clean - but only in a half baked story of inflating profits over 7 years. He missed several details, including the obvious one - that it is easy to inflate profits, it is nearly impossible to inflate cash/bank balances without the connivance of nearly every person associated with the listed entity, chief amongst them the auditors.

Note: The key link if this hypothesis is true lies with the various banks, as the money would have been stolen using the banking channels. I read an interesting piece about the management being quizzed sometime back asking them why huge moneys were kept in 0 interest current accounts instead of a fixed deposit. The last annual report gives the names of all the unscheduled banks with amounts deposited with each; but the bulk of the deposits are with scheduled banks and no breakup is given. So who are these banks and can someone please go quiz them? Can we get the RBI use its clout to do some investigative work on the banks.


Madhan said...

Also, he projected as if Satyam's growth was drastically low that the operating margin was just 61 crores. This doesn't even remotely translate to 53K employees. If any industry vertical in the company has less projects/clients, it would be clearly evident across the company. Eventually, the news will reach the outside world. But nothing of that sort happened. He used this 'candid confession' as a tool to divert attention from what really happened.

Here, one should remember that Satyam's Chief strategy officer and Satyam BPO's CEO 'resigned' on October 2008. The reason behind their resignation was believed due to 'organizational restructuring!'

sdd said...

Even after the recent developments, officials of SEBI do not appear to have learnt much.

There are numerous legal flaws in the order dated 7th Jan of P K Nagpal, Executive Director, SEBI, authorizing investigation into the Satyam affair. This can severely curtail SEBI’s ability to take enforcement action later.

In this case, the matters to be investigated mainly are cooking of books (violation of clause 49 of listing agreement) and Off market transfer of shares (through pledge etc). Both these violations fall under Securities Contracts (Regulation) Act, 1956/ Rules, 1957(Section 23, Rule 19 and Section 13 / section 18 of SCRA).

The investigation order of 7th Jan (as available on SEBI website) issued by Mr P K Nagpal, Executive Director, has following glaring mistakes:

1) It invokes powers under SEBI (Merchant Bankers) Rules. These Rules are no more in existence and were rescinded vide notification 1455 of 07/09/2006.

2) The order signed by Mr. P K Nagpal, mentions Securities Contract (Regulation) Act, 1956 as having been notified (made) under SEBI Act, 1992

3) For appointing the investigating authority, the order invokes Regulation 7 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Markets) Regulations, 2003; and Regulation 29(1) of the SEBI (Merchant Bankers) Regulations, 1992. Mr Nagpal should know that Regulation 5 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities market) Regulations, 2003 deals with the appointment of “Investigating authority” and not regulation 7. Further, Regulation 29(1) of SEBI (Merchant Bankers) Regulations, 1992 refers to the appointment of “Inspecting Authority” and not “Investigating Authority”, whereas vide the said order and under said Regulation 29(1) SEBI has appointed an “Investigating Authority”.

4) There is no order to investigate violations of SCRA. Therefore, there is no power vested with the Investigating Authority to inquire into all major aspects of the Satyam case, which prima facie mainly involves SCRA violations. The investigating authority is, thus, empowered with a defective order.

All of this points towards lack of application of mind. Later, Satyam may argue on these basic defects in the order of Nagpal and get relief. One can only hope that SEBI wakes up now