Satyam, Asatyam – Fraud on Investors? updated 09.01.08

Ref: 0901-005-NASA of 2009.01.08 – Satyam Asatyam

Ref: 0901-005-NASA – India   Sector – Software Company: Satyam Computers Serviced Ltd


India suffered major terrorist attack, this time at its Stock Exchanges – BSE and NSE – when thousands of investors were lined up and shot at close range. The investors were frozen to such an extent that even blood refused to ooze out. The red ink was seen everywhere on the exchange board. The stocks were recovering at frantic rate for last few days, and suddenly, bang and everything was busted.

Colossal damage was done to the faith and credibility to Indian bourses, especially the Software industry as a whole. This wound is so deep that it will take years before the credibility returns. The industry, at receiving end due to deep recession in USA and world over, was dealt death blow by one of the prominent software company – Satyam Computer Services Ltd.

Its Chairman declared that its financial statements for years were totally false, cooked up and…

  • Never had Rs 5064 crores (US$ 1.05 Billion) shown as cash for several years.
  • Its liability was understated by $ 1.23 Billions
  • The Debtors were overstated by $ 400 millions plus.
  • The interest accrued and receivable by $376 Millions never existed
  • For recent SepQ08, it reported
    • Revenue of Rs 2700 Cr or $562 Millions (Actual Rs 2100 Cr $438 millions)
    • Operating Margin Rs 649 cr/$135 Mln/24% (Actual Rs 61 Cr /$12.7 Mln/3%)
    • This resulted in excess Cash Balance of Rs 588 cr/$122 Mln

In the Land of Gandhi, can Satyam become Asatyam?


The news will cause yet another major casualty – the reputed auditor – PRICE WATERHOUSE – who has been the Satyam’s Auditor and who have certified the financial statements as reflecting true affairs.

It is possible that this firm may be banned in India and also be heading for bankruptcy for losing its credibility for not observing the basic standard in Auditing – verification of cash and bank balance on the date of closure of accounting period.

Is it real? How could Auditors miss the gaping hole when –

  1. It is normal practice of the Auditors to verify the Bank Balance by writing to the concerned bank officially and directly without any copy to the company.
  2. A sum of Rs 5000 crores are not normally held in Savings or Current accounts. They are usually placed in short term or long term Time deposits physically issued by the bank, In that case, Auditors could have seen and checked the Time Deposit receipts physically.
  3. There is usually a provision for “Continuous Audit” for such large company. The Auditors would have known any irregularity in routine manner.
  4. Auditors are required to prepare and verify the “Cash Flow” statement for relevant period from where deficiency could have been found out.
  5. The job of verification was so simple that even ordinary Commerce graduate could have found out glaring discrepancy in seconds. How could then Professional CPA miss this symptom?

It looks almost impossible. One can understand other items of Balance sheets – but disappearance of Cash on hand or at Bank – never. There is something wrong.  Yes, Mr. Raju admitted the fraud. but mere admission does not mean anything.  He may be lying to save something or some body. What or whom?

The news was “horrific” as SEBI Chairman put it. But wait, what happened on the exchange. The stock lost 80% in one day with the volume on both exchanges as under:

On NSE –                    330,164,149 shares 
On BSE –                     143,009,827 shares
Total    –                     473,173,976 shares (70.25% of total shares outstanding)
Total Shares O/S        673,487,968 shares (As of 30/Sept/2008)

The practical question arises in my mind. In such type of bad news, the buyers usually back away and the stock trades at lower circuit. Satyam being an Index stock was not subjected to Circuit rules. Even then, there were always large buyers at every fall of price. If 473 millions shares were sold by panicky investors, 473 millions shares were also bought by savvy investors. They know something which we do not know.  Who the hell will buy such massive quantity from the market?

Further, Mr. Raju admitted that he or neither of his promoters sold any shares.  It amounts to 8.61%. That leaves out only 21.14% remaining shares, close to mandatory offer of 20% required to be made under take over code.

Was there any collusion with the Satyam management and management of buying company, who in all probability will be another software company with deep pocket? The Names of Tech Mahindra, Reliance Mutual funds (part of Reliance Capital) were taken. Were they buying such huge quantity without triggering take over code? Was Mr. Raju helping the suitor to buy his company for a song by disclosing highly disturbing price sensitive news?

Satyam will be removed from NSE/BSE Index component and replaced by Reliance Capital Ltd. (RCL) if that was so; take over by RCL will indirectly continue the index listing of Satyam under new name of RCL. There would be no change.

RCL will also inherit 12,000 crores company with the investment of just Rs 4000 crores or close to $ 842 Millions. That is, Revenue of Rs 3 for each Rs 1 invested, if operating profit margin was Rs 26% as in the past, the OPM will be Rs 0.78. That is cool 78% return on every Rupee invested.

How about Taxation as a hint?
Satyam was a heavy tax payer.  They would not be paying taxes if the profit was bogus one. Following are the Tax Payments: (Source Link:

Adjusted PBT







Mar 08

Mar 07

Mar 06

Mar 05

Mar 04

Tax Charges






Adjusted PAT






Non Recurring Items






Other Non Cash adjustments






Reported Net Profit






Earnings Before Appropriation






Equity Dividend






Preference Dividend






Dividend Tax






Retained Earnings






Thus, the company paid Income Tax running into Rs 234 crores + dividend of Rs 235 crores + dividend tax of Rs 40 crores, netting Rs 509 crores. The Auditors would have certainly seen Physical receipts of such payment while auditing.

If that was so, it would mean that the cash holding was genuine and present admission of fraud by its Chairman is misleading with some ulterior motive.

 Recent Events – World Bank dispute:
World Bank recently barred Satyam for 8 years from undertaking any software related work due to data insecurity.  Was Satyam facing law suite for damages for billions of dollars that would have lost hard earned “Cash”? Was Satyam trying to siphon off the cash to defeat the potential law suit?

We do not know. What we know was that there were many buyers for extra ordinary quantity for sale of 473 millions shares.  Most of the selling was soaked up and the stock that touched a low of Rs 31 rose to Rs 40 with no sellers at the end of the day (I bought 500 shares below Rs 34.5)

Effects on Market: All depends on how SEC in USA reacts and takes actions. The ADR were suspended for a few hours and then resumed. It lost over 51%.  It is certain Satyam will face massive penalty in USA where its ADRs are listed. I doubt whether Mr. Raju will travel to USA to defend his case. Otherwise he will land himself for fine + 20 years imprisonment.

Many will doubt the Balance sheets of info companies.  There is a reason for doubt due to the peculiar system prevailing in India. Most companies make following balance sheets:

  • 1. Balance sheet for Income Tax purpose
  • 2. Balance sheet for Company Registry purpose
  • 3. Balance sheet for Banks and Stock Exchanges
  • 4. Real Balance sheet for internal review of the top management.

In normal exports, there are various reporting requirements – known as GR1 form under which Customs, Banks and RBI are getting copy of same Exports Declaration. It can be verified by one source with another

In exports of software, there is no control. All services are provided on Net, so anyone can generate fictitious numbers.  I have seen some exporters in India who transfer the money from India by hawala and then bill the counterparty for software services sold. The counter-party then remits the same money back to India. The software company will show it as Export Sales and make its balance sheet better.  That will boost the share prices on NSE/BSE. The promoters then sell their stock at considerable profit. This “Pump and Dump” strategy is resorted to by smaller software companies.

Was Mr. Raju trying to destroy Satyam or save it from disaster in the form of massive law suits? We do not know. We therefore go by Mr. Raju’s admission that “he was the thief”. Has Hyderabad become hot bed of such massive frauds? We had Global Trust Bank before and now we have Satyam.

Will Satyam affair hurt the market?
In short term, yes; in medium to long term – not much. The Investors always have short term memory. It is wiped out as the time progresses. Such events are looked upon as “unique” to a particular company, never carried out further to other companies in same stable. Use this company specific problem as buying opportunity for other non-controversial counters.

Is Satyam a good buy or just get out of it…
It was a 10,000 Cr. revenue company. It also employed 53,000 workers. This is certainly a high end company. We do not know how Ministry of finance, Ministry of Corporate Affairs, RBI, SEBI and stock exchanges like NSE/BSE will react. If Mr. Raju was trying to deflect potential law suit, it is possible, some agencies may take lenient view behind the door and allow its take over by suitor  sans legal liability.

We are operating on blind. Not much information is available how could this have happened?  How did it escape the attention of Price Waterhouse – one of the best known names in Accounting. We have to wait for their report on entire episode. 

It will be a stock for highly enterprising investors. Unless you are willing to lose entire investment you should not buy it. It may treble if someone takes it over or it may go down more to negligible value. Invest only if you can afford total loss.

It will be a big trading counter, trade and rumor driven. It will gyrate in big swings. If you want to participate, be active player. If you are going on holidays, sell it first and then proceed. Unless you are in total control and supervision of this stock, do not even look at it.

Watch out for the reactions from SEBI/RBI/Ministry/Finance Minister/Prime Minister/CBI/SEC in USA.  The ADR could be trading at discount if the stock is delisted (quite likely) from NYSE

We will have another assessment when more information comes out. This is only First Information Report.

TRADE with risk capital.  Not good for small investors.  It will be news  and rumor driven stock from now on.  Float with it like a surfer.

The stock has been transferred  to  T2T section. 100% margin was insisted yesterday. There will be huge margin calls.  After additional volume of 200 millions shares in next 2 days or so, the downside would have reached – again read it with the news.

Professional Investors, who understand the language of risk, may take some core position right now, and trade with 80% of stock. Do not put in more than 3% of your capital into this stock. There is great downside potential and also some short term upside.

Nothing wrong with the market. Do not worry about FII. They are pre-occupied with their home country. Yes, US market is still tricky and could have major downside – almost 70% from now on. But India is relatively getting immune from Wall Street. Be stock specific and get into sectors that have hard, solid and verifiable assets.

Kalidas, Hong Kong
0901-005 – NASA – Satyam and Asatyam

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Keywords Satyam, Asatyam, Fraud, Indian Stocks, NASA, SEBI, Raju,

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