Decoding Raju's Letter

If one goes through the letter, nowhere has Ramalinga Raju confessed that the overstatement of various assets and understatement of expenses have been done by him. He is silent on the same. That raises the big question about who has actually done it. On the contrary, Raju, through his letter, suggests that, “Neither me nor the Managing Director took even one rupee/dollar from the company and have not benefitted in financial terms on account of the inflated results.”

The way letter has been drafted with the right kind of punctuation makes us believe that this letter has not been written in a hurry. It has, by all reasoning, been drafted very cleverly keeping in mind that any subsequent damage should be kept to the bare minimum. We have a strong feeling that this letter may have been written in consultation with legal experts. Also, the manner in which the exact financial numbers have been put in clearly shows that the information had been compiled over a long period, probably several days. It is not an outburst of a single moment that has brought Raju to the confession chamber. To us, it looks like a well-thought-out strategy.

“The balance sheet carries as of September 30, 2008 an understated liability of Rs 1,230 crore on account of funds arranged by me.”

His letter indicates that Satyam has to pay this amount to B Ramalinga Raju. Isn’t this shocking? Will the new Satyam Board pay this amount to B Ramalinga Raju and his family? This is a new trend he wants add through this letter.

“That neither me nor the Managing Director took even one rupee/dollar from the company and have not benefited in financial terms on account of the inflated results.”

How can the managing director of a company not be aware of financial irregularities? Why is everyone so suspicious about the CFO’s role but not the one played by the MD? Raju’s letter does not throw any light on the role of the MD or the CFO in these irregularities. Does it mean that they were aware about the financial irregularities in the company? If so, why did Raju prefer to remain silent on this issue? If he was anyway in the mood for confessions, he should also have given a clean chit to both the MD and the CFO as he did to other senior members of the company.[PAGE BREAK]

“The balance sheet carries as of September 30, 2008 inflated (non-existent) cash and bank balances of Rs 5,040 crore (as against Rs 5,361 crore reflected in the books). For the September quarter (Q2) we reported a revenue of Rs 2,700 crore and an operating margin of Rs 649 crore (24 per cent of revenues) as against the actual revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore (3 per cent of revenues). This has resulted in artificial cash and bank balances going up by Rs 588 crore in Q2 alone.”

Raju claims in his letter that the September quarter operating profit was inflated by Rs 588 crore and that this artificially inflated the cash and bank balances. Extending the same logic of the inflated Rs 5,040 crore of cash and bank balance in the books of accounts would mean that this inflated amount came through showing inflated operating profits of the last many years. Going by the company’s last few years’ financial data, it would have taken at least three years of financial manipulation to reach this number.
Our calculations of operating profit since March 2006 give us a figure of Rs 5,368 crore. Assuming that some of the profits would be genuine in the last three years, this would mean that the company has been manipulating the accounts for at least three years. Raju in his letter has not clarified since how long the practice of overstating the financial numbers in the balance sheet has been carried out. He has used the words ‘last several years’, thus leading everyone to make several guesses.

“The gap in the balance sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satyam) with the books of subsidiaries reflecting true performance.”

Raju admits that the numbers were fudged only in the stand-alone accounts and books of subsidiaries are perfectly fine. Does it mean that the Indian accounting standards and systems are quite lax as compared to international standards? Does it call for disclosures that should be made more stringent? What do SEBI and DCA have to say about this, considering that they always state that our systems are the best in the world?

“The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations, thereby significantly increasing the costs.”[PAGE BREAK]

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Raju claims in his letter that to make the profits and operations look commensurate to the size of the company, it was forced to carry additional resources and assets to justify higher level of operations, thus increasing the cost. This could be the reason why Satyam’s operating profit margin stands at a mere 3 per cent against many of the peer companies that have above 25 per cent.
The content of this letter is apparently false and misguiding because when other companies have strong operating margins at 20-25 per cent how can it be only 3 per cent for Satyam. It seems that he has siphoned the profits and placed in the international banks.

“Every attempt made to eliminate the gap failed.”

While Raju claims that many attempts have been made to eliminate the gap between actual and real financial numbers which failed, the letter is silent about how many attempts were made and what the nature of these attempts was. We all know only about one attempt which was related to the taking over bid of Maytas Infra and Maytas Properties. Maybe this is the right time for the new board to dig out further details and inform the investors.

“That neither myself, nor the Managing Director (including our spouses) sold any shares in the last eight years – except for a small proportion declared and sold for philanthropic purposes. That neither me, nor the Managing Director took even one rupee/dollar from the company and have not benefited in financial terms on account of the inflated results.”

As we pointed out earlier, it would have taken three years to be able to fudge accounts to this level and it lends credence to our belief that Raju should be held for insider trading as his stake in the company over these three years took a huge beating. We would not like to agree with Raju’s statement that he and his family have not benefitted from any irregularities. Raju claims of not selling any shares in the last eight years except a small proportion declared and sold for philanthropic purposes. Such claims should be taken with a pinch of salt since our findings suggest otherwise. Raju and his family were holding a 25.60 per cent stake as in March 2001 in Satyam and their stake was only 8.61 per cent as in September 2008. In other words, they have sold near about 17 per cent stake in the company in last eight years and this would have roughly fetched him Rs 2,500 crore.[PAGE BREAK]

“That in the last two years a net amount of Rs 1,230 crore was arranged to Satyam (not reflected in the books) to keep the operations going by resorting to pledging all the promoter shares and raising funds from known sources by giving all kinds of assurances.”

Raju has claimed that he and his family have pumped Rs 1,230 crore into the company. We would like to draw attention to the word ‘net’. Does this mean that Raju pumped in money, took some of it out, and then again pumped some money? If so, how did the auditors not notice the money coming and going from the company without being accounted for in the books? There is no sign to indicate the presence of Rs 1,230 crore in the books of accounts. How can such a huge sum remain hidden?

“Merrill Lynch can be entrusted with the task of quickly exploring some merger opportunities.”

Here we would like to look at the sequence of events. Raju’s letter is dated January 07, 2009 while Merrill Lynch wrote the letter to the SEBI on January 07, 2009 claiming that they had informed the management on January 06, 2009 itself about termination of their service to Satyam. If so, why did Raju mention Merrill Lynch in his letter? There could only be one possibility which is that Raju’s letter must have been written much before the arrival of the letter from Merrill Lynch. If so, this concurs with our previous observation that this letter has been written not in a hurry but was well planned for in advance.