Satyam: Unravelling the fraud

2009-04-08

India Inc.'s biggest corporate fraud will not be cracked open completely soon. The scam, which came to light when Satyam's erstwhile chairman B. Ramalinga Raju wrote a confession letter in January, has layers of complexity.

The decoding of the biometric laptops used by Raju and his team, screening of the internal financial software of the company and minutes of the board meetings for last six years, scanning of papers of 300-odd companies created by Raju and his family and scrutinizing the land records under these companies will keep the Central Bureau of Investigation (CBI) on its toes for a few months.

The probe initiated by the Crime Investigation Department (CID), the Serious Fraud Investigation Office (SFIO) and Institute of Chartered Accountants of India (ICAI) was handed over to the CBI in February. The Securities and Exchange Board of India has its own investigation team going through the books of the company with a fine-tooth comb.

So far, investigators have managed to find out how accounts were manipulated by Raju for the past six years. CBI will file its chargesheet in April, failing which Raju and others will have to be released from the prison. A senior CBI official, who didn't wish to be identified, confirmed to Business Today that Raju seems to have come clean in his confession letter except for his statement about not (having) benefited in financial terms on account of inflated results .

Under the scanner
List of companies being investigated for financial transactions with Satyam.
Aranya Agro Farms
Bilgiri Agro Farms
Ekadanta Green Fields
Ekalavya Agro
Eladamta Green Fields
Giriputra Green Fields
Kalindi Green Fields
Kalyani Green Fields
Kanigiri Agro Farms
Netravathi Green Fields
Panchakalyani Agro Farms
Panchamukhi Agro
Parvathagiri Agro Farms
Pingala Agro Farms
Sapta Swara Agro Farms
Surasa Green Lands
Teepa Agro


We are yet to establish if there was any diversion of funds from Satyam to any of Raju's entities. This will take some time to investigate, added the CBI official. Till now, the agency found that some of the documents of 300-odd companies floated by Raju contained land records and names of land mafia agents in Hyderabad, indicating that it may not be just an accounting fraud.

It appears that Raju's con game started in April 2002, at a time when the IT companies were on the radar of foreign investors through newly-listed American Depository Receipts (ADRs).

Then, Raju decided to maintain two subaccounts under a single bank account of the company.

The main bank account was controlled by Raju and his cronies and the statements of the subsidiary account were under the finance and account reconciliation (FAR) team.

So, at any given time, the accounts team would receive two bank statements for the same account a genuine set of statements from the bank and a second set of statements provided by Raju and his team.

More often than not, the finance team had to accept the bank statements given by the promoters, which were manipulated as the figures didn't always reconcile with the actual statements received by the team. Even the auditors relied on the documents supplied by Raju instead of going for a third-party verification of document.

While screening through the minutes of some of the board meetings, investigators found out that the total audit fees paid to PricewaterhouseCoopers for its domestic and international accounts was around Rs 7 crore, almost double the figure mentioned in the balance sheet.

Here's a closer look at the Modus Operandi of Raju.

How revenues and debtors were inflated

Raju's letter: We reported a revenue of Rs 2,700 crore and operating margin of Rs 649 crore as against actual revenue of Rs 2,112 crore and margin of Rs 61 crore Initial investigations have revealed that an in-house team of Satyam developed software to generate fake invoices. The fake invoice would include a genuine name of the client, genuine name of the project manager for the client, but the invoice amount was overstated. It worked like this a Company XYZ is Satyam's client and it pays Rs 100 to Satyam's bank account as the fees.

The original bank statement showed Rs 100 deposited by XYZ. But the statement provided by Raju overstated this figure. So, year after year, fake invoices in the name of genuine clients and employees were created and went unnoticed by auditors.

During an interrogation session, Raju is believed to have said that he never did anything wrong as everyone else in the industry does it.

How fictitious cash and bank balances were created

Raju's letter: Inflated (non-existent) cash and bank balance of Rs 5,040 crore (as against Rs 5,360 crore reflected in the books). An accrued interest of Rs 376 crore is non existent


The fictitious cash balance of Rs 5,040 crore was introduced in the balance sheet through fake fixed deposit receipts worth Rs 3,300 crore and a current account balance of Rs 1,700 crore. The accounts department had to accept the receipts shown by Raju and his team whereas the actual receipts from the banks showed a much lower figure. Simultaneously, another fictitious entry of accrued interest on fixed deposits has to be shown and that is how Rs 376 crore was introduced in the books.

Why liabilities were understated

Raju's letter: An understated liability of Rs 1,230 crore on account of funds arranged by me

For every fictitious transaction, another one had to be created to hide it. The actual liability of Rs 1,230 crore was the amount lent by private companies of Raju to Satyam. Had this liability been shown in the books it would have raised eyebrows. After all, why would a company incur this liability when it has so much cash on its books? So, to keep analysts and investors at bay, this loan amount wasn't shown in the books. As the chairman mentioned, this amount was arranged over the last two years to run the firm's operations.

Then, while company's bank balance was fictitious, the number of employees (around 50,000) was genuine and they had to be paid salaries. To meet these expenses, Raju and his family started pledging their stake in the company. The shares were pledged by the holding company SRSR Holdings, which in turn had 300-odd subsidiaries.