A day after Satyam Computer Services’ Founder and Chairman B Ramalinga Raju made his sensational disclosures about fudging the company’s accounts for “several years”, government and regulatory bodies stepped in even as class action suits were filed by American Depository Receipt (ADR) holders in the US for damages that could cost the company millions of dollars.
The Securities and Exchange Board of India (Sebi) officials visited the Hyderabad headquarters this morning and the Reserve Bank said it would blacklist Satyam’s statutory auditors Price Waterhouse from its auditors’ panel for government-owned banks and non-banking finance companies.
The crisis also saw heads roll today with CFO Srinivas Vadlamani putting in his papers and former independent director Mendu Rammohan Rao stepping down as dean of the Hyderabad-based Indian School of Business.
Rao had chaired a mid-December board meeting that had approved a controversial decision for Satyam to invest nearly Rs 8,000 crore in two promoter-related companies, which was withdrawn following strong shareholder protest. He resigned soon afterwards, together with four other directors.
Meanwhile, the ministry of corporate affairs (MCA) has asked Sebi to scrutinise the accounts of eight subsidiaries of Satyam. A report is expected in the next three working days. The data will include any exposure that international branches of Indian banks have with the company and related parties.
“We are open to all possible action including replacing the board, but, as of now, we have not taken any decision,” said Prem Chand Gupta, minister of corporate affairs. He added that the action would be coordinated with the finance ministry, law ministry, Sebi and the Institute of Chartered Accountants of India (ICAI).
He also hinted that the government is thinking of revisiting certain corporate governance laws.
Price Waterhouse, which is facing many questions on its role in the accounting scandal, has said it will cooperate with the regulators in their investigations.
“The audits were conducted by Price Waterhouse in accordance with applicable auditing standards and were supported by appropriate audit evidence. Given our obligations for client confidentiality, it is not possible for us to comment upon the alleged irregularities. Price Waterhouse will fully meet its obligations to cooperate with the regulators and others,” the auditors said in a statement.
On its part, ICAI said it has written letters to Satyam Computers, the Registrar of Companies (RoC), Sebi and Price Waterhouse seeking information and relevant documents relating to overstatement of profits by the Hyderabad-based software services firm. These parties have 21 days to reply to the notice.
“Unless we have the documents with us, it is very difficult for the disciplinary committee to take action,” said Uttam Prakash Agarwal, vice-president, ICAI.
Based on the information collected, the committee will reconstruct Satyam’s balance sheet.
ICAI has also called for the “working paper file” that statutory auditors need to maintain. The institute’s president Ved Jain also briefed Gupta today on the latest developments and the institute’s plan of action.
Quick action on the international front, though: Two US-based law firms Izard Nobel LLP and Vianale & Vianale LLP — have filed class action lawsuits against Satyam Computer Services on ADR holders of the company. The lawsuits are among the first legal actions taken against Satyam’s management.
A statement from the New York Stock Exchange (NYSE), which suspended trading on the Satyam ADR yesterday, said, “NYSE regulation is currently evaluating the news relating to Satyam and will closely monitor further developments. The security will remain halted until further notice.”
Meanwhile, the Federal Court of Texas — which is hearing a case in which former client, mobile company Upaid had filed a petition claiming fraud, forgery and breach of contract — has asked for specific “information”. If Upaid wins the case, Satyam may have to pay a little over $1 billion as damages, the motion claims.
Damage control by management: All this took place even as the company’s top leaders, including board member and Interim CEO Ram Mynampati reiterated their commitment to company, its 53,000 employees and clients at an evening press conference. Myanampati said the six-member management team has launched an immediate action plan to ensure business continuity and leadership transition.
“We relied on data from reputed auditors,” Mynampati said, explaining his ignorance of the irregularities to which Raju confessed yesterday.
Declining to comment on specific financial transactions, he said although the liquidity position was “not encouraging”, the company is committed to paying salaries. He also said he was not in touch with Ramalinga Raju, had no idea where he was and that he was not related to the chairman.
Mynampati also noted that the company has started to reach out to customers globally. “Many clients rely on Satyam for mission-critical functions and collaborate closely with our team. While we have to address various customer concerns, we have been heartened by expressions of confidence and support from various clients,” he said.
Satyam’s top 100 customers account for 85 per cent of revenue and have had relationships with the company ranging from four to 10 years.
Meanwhile, Mynampati said CFO Srinivas Vadlamani’s resignation would be approved by the board on Saturday.
Rao’s mail to ISB faculty members and students said, “It is with deep regret, but with a sense of responsibility and duty towards ISB, that I have today stepped down from the position as Dean of ISB.”
Rao, whose five-year term as ISB dean ends in July, said the unforeseen developments of the past few weeks at Satyam had left him “very concerned and preoccupied”.
“Unfortunately, yesterday’s shocking revelations, of which I had absolutely no prior knowledge, mean that we are far from seeing the end of the controversy surrounding Satyam Computers,” he pointed out.
...others wait and watch: Meanwhile, VS Raju — an independent director on Satyam’s board and former director of IIT Delhi — said the revelations by Ramalinga Raju were “shocking and unbelievable”. “Why and how this (financial wrong-doing) happened, they have to say. I don’t know,” Raju, who had been supportive of the Maytas deal, told Business Standard.
He, however, said he would attend Satyam’s January 10 board meeting because “we have to see the interest of the company.”
“No comments,” T R Prasad, another independent director on Satyam board and former Cabinet secretary, said when asked about his reaction to yesterday’s developments.
The Satyam board is now reduced to three members. Raju resigned yesterday and four independent directors did so last month following shareholder criticism over their role in approving the Maytas deals.
| SATYAMGATE DAY 2 |
| * BSE to replace Satyam with Sun Pharma on Sensex from Janauary 12, to be removed from BSE-100, BSE 200, BSE-500 and BSE Teck and BSE IT index |
| * CFO Srinivasan resigns |
| * ISB dean Rao resigns |
| * AP govt demands action |
| * Sebi to scrutinise data of 8 subsidiaries; report expected in next three working days |
| * Auditing firm Price Waterhouse too may face a reprimand from RBI |
| * Board to meet on Saturday to take stock of the situation |
| * Have appointed auditor to ascertain legitimacy of Raju’s email |
| * Financial results for Q3 09 expected by the end of this month |
| * New management may recommend action against Raju; many actions possible for company’s future |
| * Has no knowlegde of Raju’s whereabouts, ‘assumes’ Raju is in Hyderabad |
| * Liquidity and cash-in-hand were not encouraging though company managed to pay December’08 salaries to 53,000 employees |
| * Some outstanding payment to vendors yet to be made |
| * Have to raise liquidity in near term and confident of raising it |
| * Board relied on audited data on revenue, no inkling about fraud |
Bidders back out too: Larsen & Toubro today said it is not looking at taking over Satyam. “We have no interest in taking over Satyam,” an L&T spokesperson told PTI. L&T has a four per cent stake in Satyam through L&T Capital, the group’s investment outfit.”Our stake in the software company is only a portfolio investment,” he said, adding that this should not be seen as a strategic buy.
Speculation was rife that the engineering major might acquire Satyam to strengthen its presence in the information and technology arena where it has presence through its subsidiary L&T Infotech.
Earlier, Infosys’ founder Narayana Murthy categorically said he will not buy a “tainted” company, and Tech Mahindra (rumoured to be in the race for Satyam) also said it was no longer interested in the company.
Employees look to government intervention: Though it’s over 24 hours now since Raju’s revelations, employees are yet to come to terms with reality. Most of them turned up for work but were clearly at a loss for words. “We still do not believe that our company is in such a mess,’’ said an employee. But, owing to individual deadlines and projects, it’s business as usual for them.
Security too was tightened on Thursday with police personnel joining the private security guards.
Early in the day, various department heads huddled at the company’s InfoCity headquarters to discuss the crisis with respective teams. After all the disclosures, the employees now hope for government intervention to save their careers. An employee working on a Bank of America project feels the government should provide incentives for companies in the form of land and tax breaks to acquire Satyam. “I am with Satyam as of now,’’ is how an employee put it.
Attendance at four of Satyam’s premium premises in Pune was low. While a large number of employees preferred to sit at home and search for new job opportunities, others reached offices in state of confusion over their future.
Satyam Computers has four large campuses in Pune, which jointly accommodate more than 8,000 staffers. This is the largest head count in a city for Satyam. The company recently inaugurated a special economic zone (SEZ) facility at Rajiv Gandhi Infotech Park, where it wanted to recruit more than 5,000 staffers over next eight months.
The company management has sent emails to all its employees saying, the only option as of now for all is to continue with work. “The company’s future cannot be predicted at this instance and a lot of time would be spent to improve the situation. However, we all need to do our best during difficult times,” the email from Mynampati said. Esops’ fables? Many who are yet to be eligible for the employee stock option plan (Esop) now think they are better off without it considering the free fall. An ex-employee, who sold about 1,000 shares some time ago says, “If I had them, I would have had a lot to regret.’’
Another top level executive said, almost 40 per cent of the old employees of Satyam have opted for Esops. “The company management last week had asked employees not to worry because the company was doing well. Hence, most of the staffers decided to hold on to the shares. But Wednesday’s developments have ensured heavy financial losses for them,” the executive said.
Maytas Infra also fudged books
Satyam Computer is not the only Ramalinga Raju family-promoted company that fudged books. Maytas Infrastructure also seems to have misrepresented its financials.
The difference, however, is that where Satyam over-stated revenue, cash position and profits Maytas Infra under-stated profits in the April-June quarter and the discrepancies were “duly accounted for” in the company’s books later.
In contrast to Satyam, where the role of the auditors is under question, it was statutory auditors of Maytas Infra that pointed to the under-statement.
“The statutory auditors of the company in their limited review report for the quarter ended June 30, 2008, qualified that the company made an under-provision for service tax liability and excess provision for deferred tax liability, resulting in a net understatement of profit after tax by Rs 1.60 million for the quarter,” Maytas Infra's Vice Chairman B Teja Raju said in the “notes” attached to its quarterly results filed with the Bombay Stock Exchange.
“The liabilities have been duly accounted for in the books of account in the current reporting period (quarter ending September 30, 2008),” added Teja Raju, who is son of Satyam Founder and Chairman B Ramalinga Raju.
Maytas Chairman R C Sinha resigns
Maytas Infrastructure informed the National Stock Exchange that its Chairman and non-executive director R C Sinha had resigned for “personal reasons”.
Maytas Infra’s board includes R P Raju (independent director), Teja Raju (vice-chairman), PK Madhav (wholetime director and CEO) and Chander Sheel Bansal (wholetime director).
The company’s shareholding pattern as on September 2008 shows that Ramalinga Raju’s son Teja Raju holds 2.53 per cent and other members of the Raju family over 36 per cent.
