09/04/2015 8:04 PM IST | Updated 15/07/2016 8:25 AM IST

Ramalinga Raju And The Incredible Story Of India's Greatest White Collar Crime

NOAH SEELAM via Getty Images
Indian former chairman of outsourcing giant Satyam, B. Ramalinga Raju, arrives to attend the final judgement of a fraud case against him and nine others at the Metropolitan Criminal Courts in Hyderabad on April 9, 2015. An Indian court on April 9, 2015, sentenced the former chief of outsourcing giant Satyam to seven years in jail over a $2.25 billion accounting fraud scandal dubbed 'India's Enron'. Byrraju Ramalinga Raju, his brother and eight others were found guilty of manipulating Satyam's books in a 2009 case that shook the industry and raised questions about the country's regulators. AFP PHOTO/ Noah SEELAM (Photo credit should read NOAH SEELAM/AFP/Getty Images)

On January 7, 2009, Ramalinga Raju, Chairman and founder promoter of Satyam Computer Services (SCS) vanished. He left a confessional letter. He said he had falsified accounts to the tune of thousands of crores. At the time, SCS was an IT major. It was headquartered in Hyderabad and listed on the New York Stock Exchange with over 45,000 employees and over $2 billion in reported turnover.

Raju surfaced a few days later, surrendering to the police. By then, chaos had descended. The SCS share price had been hammered down from over Rs 100 to below Rs 5. Dozens of senior SCS managers had been questioned by the police; many had been arrested. Clients had fled. Operations were on the verge of collapse. There was a class action suit by shareholders in the US.

The case was exceedingly complicated. It went to trial only in November 2010. It involved the examination of 216 witnesses, and the submission of thousands of documents. The CBI filed three long chargesheets, which were later clubbed into one humongous charge sheet.

The verdict was announced on Thursday. Ten accused including Raju himself were convicted under various sections of the Indian Penal Code (IPC), such as Sec 120B (criminal conspiracy), 409 (criminal breach of trust), 420 (cheating), 467 (forgery of valuable security), 468 (forgery for cheating), 471(using forged documents as genuine) and 477-A (falsification of accounts). Raju has been sentenced to seven years in prison.

"This fraud worked fine while the company had genuine growth which masked the falsification."

Ironically, Raju was considered one of the most honest members of India Inc. SCS had won the prestigious Golden Peacock award for Corporate Governance. The other members of the "gang of 10" include two of Raju's younger brothers, Rama Raju and Suryanarayan Raju as well as the CFO of the company, Vadlamani Srinivas.

Apart from this, the accused also include G. Ramakrishna, D. Venkathapathi Raju , Srissailam Chetkuru who were managers in the Finance Department. In addition, the head of internal audit for SCS, Prabhakar Gupta was convicted. So were Telluri Srinivas and S Gopalakrishnan, both partners at the statutory auditors, PriceWaterhouseCoopers.

What actually happened? Satyam consisted of a massive, multi-pronged fraud.

SCS was a genuinely profitable, large company, with many global Fortune 500 clients and legitimate business across many IT verticals. It "claimed" fiscal 2008 turnover in excess of $2.1 billion (Rs 8470 crore) with net profits exceeding Rs 1687 crore. (The numbers were recast after the scam but they were accepted by everybody at the time).

Raju had been inflating profits and doctoring the SCS accounts for years, with the connivance of the other accused. Indian businesses often fudge accounts to conceal profits and reduce tax incidence. But Raju could do it the other way around and inflate profits. Since all the profits came from exports, everything was exempt from income tax.

"Ironically, Raju was considered one of the most honest members of India Inc."

The point of inflated revenues and profits was that it boosted the company's valuations and shareprices. Thus, it raised the value of the Raju family's equity holdings. This fraud worked fine while the company had genuine growth which masked the falsification.

But by the end of calendar 2008, the US subprime crisis had hit profitability. The (non-existent) cash in the reserves amounted to over Rs 5,000 crore. In reality, SCS was finding it hard to meet dues of a few hundred crore. It was borrowing. Raju also pledged his own shares to raise money to pay creditors.

That gigantic hole in the balance sheet had to be plugged before the next quarterly results were reported. SCS had struggled in the July-Sept 2008 quarter. It looked likely to make losses in Oct-Dec 2008. (It did actually make losses according to recast accounts). It would be logically difficult to explain to investors why SCS was borrowing, when it had huge cash reserves. Sharper scrutiny of the accounts would, of course, lead to a can of worms being unearthed.


Raju tried a desperate gamble. The Raju family also controlled an infrastructure and construction company, Maytas (Satyam spelt backward). Maytas was run by Raju's son, Teja. Maytas was reasonably profitable and it had been used to make an ambitious real estate play.

Maytas had offered to build the proposed Hyderabad Metro for free (it actually offered to pay the state government for the privilege). Land along the proposed alignment of the metro had been bought by hundreds of shell companies, mostly incorporated in Mauritius. It could be assumed that the value of that prime real estate would multiply several times over once the metro started.

Raju proposed that Satyam would use its reserves to buy Maytas. In effect, the (non-existent) cash in SCS's reserves would be handed over (along with some real cash) to buyout the controlling stakes of the Raju family in Maytas. The Raju family would in fact, continue to control both Satyam and Maytas, via their control of Satyam.

The problem of missing SCS reserves would be resolved because that money (which did not exist) would be shown as "paid" to the Raju family. Eventually, when the Maytas metro deal fructified, the real estate play would generate more than enough cash to replace all the fraudulent reserves.

"It would be logically difficult to explain to investors why SCS was borrowing, when it had huge cash reserves."

So this was the planned sequence of events on December 17, 2008 when Raju presented the plan of buying Maytas to the Satyam board.

1) Satyam pays (mostly imaginary) cash to buy real Maytas shares off the Raju family.

2) Satyam takes over Maytas.

3) The Raju family continues to control Satyam.

4) Ergo the Raju family also continues to control Maytas.

The Board cleared this proposal despite the strange concept of an IT company taking over a construction firm with no apparent synergies. But institutional shareholders kicked up an huge fuss about this deal. The shareprice was instantly hammered down on NYSE and on NSE and BSE. Raju realised that he couldn't force this deal through.

Raju's next attempt to find a way out of this chakravyuha was to find a buyer for Satyam itself. He called up Hemendra Kothari of DSP Merrill Lynch and asked DSP-ML to take the mandate for finding a buyer. Naturally, DSP-ML would have to do due diligence.

Raju told Kothari about the true situation and asked him to conceal and condone the fraud. Kothari not only refused; He told Raju that he would go to SEBI and the authorities with the truth. At that stage, Raju wrote his confession letter and ran for it. (By then, his pledged shares had also been forfeited so his stake had dwindled anyhow).

"Incredibly, SCS had continued to operate throughout the crisis, with its teams delivering on all its ongoing projects."

The authorities acted with great promptness when it came to rescuing Satyam. A scam in the high-profile IT industry was considered a shocker and a blow to India's prestige. Dr Manmohan Singh was due for a bypass operation. But before going into hospital, he asked his Minister of state, PMO, Prithviraj Chavan (later CM of Maharashtra) to coordinate a rescue with the Ministry of Corporate Affairs.

An emergency Board was constructed by the Ministry of Corporate Affairs, with luminaries such as Tarun Das, Deepak Parekh, Kiran karnik, T. Manoharan being inducted. This board was tasked with the job of finding a buyer for SCS. It appointed the firm of Amarchand & Mangaldas & Suresh A Shroff & Co as legal advisors. Sebi relaxed takeover norms for this case, rapidly drafting and pushing through necessary amendments. A forensic audit was initiated to figure out the actual financial status.

An auction was held in April 2009. Tech Mahindra put in the winning bid, and took over SCS. Incredibly, SCS had continued to operate throughout the crisis, with its teams delivering on all its ongoing projects. (Maytas was also sold in a separate set of unconnected manoeuvres to IL&FS in August 2009).

The rapid deployment of an effective rescue operation is interesting. It showed that the Indian government was capable of moving quickly when it had to. But of course, the legal case has taken its own sweet time dragging through the legal system despite the formation of a special court. In extenuation, it must be said that this was a very difficult to entangle white-collar crime and almost all the evidence involved poring over financial accounts and other paperwork.

This verdict and the sentencing will not necessarily put an end to the legal fallout. The income tax department has outstanding claims against the company. There may also be appeals against this verdict. But it does bring the entire episode nearer closure.

One thing is worth pointing out. When similar white-collar frauds (think Enron and Worldcom) have occurred in other jurisdictions, shareholders have usually lost everything and every employee (including those who had worked honestly and diligently) has suffered loss of livelihood in the meltdown. That didn't happen in the case of Satyam. The company survived and the rank and file continued to do productive work.

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