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By | John Oates 7th January 2009 12:36

Satyam chairman quits, admits faking accounts

Coughs to years of profit puffing at Indian outsourcer

The founder and chairman of Indian outsourcer Satyam Mr B Ramalinga Raju has resigned and admitted fiddling the company's accounts for years in order to inflate profits.

The company has had a torrid few weeks - the board admitted the company founders had hocked their shares to guarantee loans and that those shares may have been sold, it has been excluded from World Bank contracts because of bribery claims, and investors revolted over an attempt to buy a building firm owned by relatives of Ramalinga Raju. And now comes a frankly extraordinary letter, where B Ramalinga Raju admits years of falsely inflating profits.

The letter said the false profits got ever harder to fake as the company grew in size and that the aborted takeover of Matyas was a final attempt to fill the hole.

The missive begins by expressing Raju's deep regret and bemoaning the "burden that I am carrying on my conscience". Raju admits to inflating revenue to Rs 2,700 crore (Rs27bn) in its most recent financial year instead of the true figure of Rs 2112 crore. Profits were pumped up to Rs 649 crore instead of the real figure of Rs 61 crore.

Raju said: "Every attempt made to eliminate the gap failed... It was like riding a tiger, not knowing how to get off without being eaten. The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones."

Raju made clear that neither he nor any other director profited personally from the fictional accounts except in benefits to their share holding. The letter said the fear was that poor performance would lead to a takeover and the fiction would be exposed. He said no other board member "past or present" was aware of the fraud.

Speaking for Satyam Ram Mynampati, interim CEO, said: “We are obviously shocked by the contents of the letter. The senior leaders of Satyam stand united in their commitment to customers, associates, suppliers and all shareholders. We have gathered together at Hyderabad to strategize the way forward in light of this startling revelation.”

The company will hold a press conference within the next 24 hours to explain its way out of the mess.

Investors watched Satyam share price fall 62 per cent today after the letter was published. India's main index fell four per cent and the shock will clearly hit other Indian outsourcers too.

Ed Thomas, analyst of business process outsourcing at Datamonitor, said: "It is quite extraordinary - I've never read a resignation letter like that before. Satyam was held in high regard and had a good reputation and although Satyam was one of the big five standard bearers for India Inc. I'm wary of being too pessimistic about other Indian firms. It is earnings season coming up for these firms and they will be aware that they will be under much closer scrutiny."

Oh, and well done to Forrester Research. Satyam on Monday issued a press release citing a Forrester report praising Satyam for its "bottom up innovation" strategy and calling on other organisations to "emulate Satyam by unleashing and harnessing their firms' grassroots creative energy". Just don't copy the creative accounting which was going on at the top of the firm.

Next page: The letter in full and Satyam's response

To the Board of Directors Satyam Computers Services Ltd.

From B. Ramalinga Raju Chairman, Satyam Computer Servcies Ltd Dear Board Members, It is with deep regret, and tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice: 1. The balance sheet carries as of September 30, 2008 a) Inflated (non-existent) cash and bank balance of Rs 5,040 crore (as against Rs 5361 crore refglected in the books) b) An accured interest of Rs 376 crore which is non-existent c) An understated liability of Rs 1,230 crore on account of funds arranged by me

d) An over stated debtor position of Rs 490 crore (as against Rs 2651 reflected in the books)

2. 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 revenue). This has resulted in artificial cash and bank balances going up by Rs 588 crore in Q2 alone.

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 standalone, books of subsidiaries reflecting true performance). What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of the company operations grew significantly (annualized revenue run rate of Rs 11,276 crore in the September quarter, 2008 and official reserves of Rs 8.392 crore). 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.

Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was the poor performance would result in a takeover, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten.

The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas' investors were convinced that this is a good divestment opportunity and a strategic fit. Once Satyam's problem was solved, it was hoped that Maytas payments can be delayed. But that was not to be. What followed in the last several days is common knowledge. I would like the board to know: 1. That neither myself, not the Managing Director(including our spouses) sold any shares in the last eight years-excepting for a small proportion declared and sold for philanthropic purposes.

2. That in the last two years a net amount of Rs 1,230 crore was arranged to Satyam (not reflected in the books of Satyam) to keep the operations going by resorting to pledging all the promoter shares and raising funds from know sources by giving all kinds of assurances (Statement enclosed, only to the members of the board). Significant dividend payments, acquisitions, capital expenditure to provide for growth did not help matters. Every attempt was made to keep the wheel moving and to ensure prompt payment of salaries to the associates. The last straw was the selling of most of the pledged share by the lenders on account of margin triggers.

3. 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.

4. None of the board members, past or present, had any knowledge of the situation in which the company is placed. Even business leaders and senior executives in the company, such as Ram Mynampati, Subu D T R Anand, Kesab Panda, Virender Agarwal, A S Murthy, Hari T, S V Krishnan, Vijay Prasad, Manish Mehta, Murali V, Sriram Papani, Kiran Kavale, Joe Lagioia. Ravindra Penu Metsa, Jayaraman and Prabhakar Gupta are unaware of the real situation as against the books of accounts. None of my or managing directors immediate or extended family members has any ideas about these issues. Having put the facts before you, I leave it to the wisdom of the board to take the matters forward. However, I am also taking the liberty to recommend the following steps:

1) A task force has been formed in the last few days to address the situation arising out of the failed Maytas acquisition attempt. This consists of some of the most accomplished leaders of Satyam: Subu D, T R Anand, Keshab Panda and Virender Aggarwal, representing business functions, and A.S.Murthy, Hari T and Murali V representing support functions. I suggest that Ram Mynampati be made the Chairman of this task force to immediately address some of the operational matters on hand. Ram can also act as an interim CEO reporting to the board.

2) Merrill Lynch can be entrusted with the task of quickly exploring some merger opportunities.

3) You may have a 'restatement of accounts' prepared by auditors in light of the facts that I have placed before you.

I have promoted and have been associated with Satyam for well over twenty years now. I have seen it grow from few people to 53,000 people, with 185 Fortune 500 companies as customers and operations in 66 countries. Satyam has an excellent leadership and competency base at all levels. I sincerely apologize to all Satyamites and stakeholders who have made Satyam a special organization, for the current situation. I am confident they will stand by the company in this hour of crisis. in light of the above, I fervently appeal to the board to hold together to take some important steps. Mt T R Prasad is well placed to mobalize support from the government at this crucial time. With the hope that members of the Task Force and the financila advisor, Merrill Lynch (now Bank of America) will stand by the company at this crucial hour, I am marking copies of this statement to them as well.

Under the circumustances, I am tendering my resignation as the chairman of Satyam and shall continue in this position only till such time the current board is expanded. My contribution is just to ensure enhancement of the board over the next several days or as early as possible.

I am now prepared to subject myself to the laws of the land and fact the consequences thereof.

(B. Ramalinga Raju)

Copied marked to: 1) SEBI Chairman 2) Stock Exchanges

Satyam's response is here. ®

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