Excerpts from the book The Tech Phoenix: Satyam’s 100-Day Turnaround by TN Manoharan and V Pattabhi Ram, published by Rupa. 

So, why did it all happen, and how did it start?

Perhaps it began in the aftermath of 2000. The software industry had just then cracked the Y2K code, and Satyam was a part of the global race to set the bug right. Raju wanted to keep up with the Joneses. One possibility is that maybe he wanted to be in the company of, and spoken in the same breath as, the technology industry’s A-listers: Azim Premji, Narayana Murthy, Shiv Nadar and S. Ramadorai.

A second possibility is Raju ran the business very ethically from June 1987, when he incorporated Satyam, for about a decade. Subsequently, both revenue and profit dipped. Despite his best efforts to push delivery and billing, there was a gap between plan and performance. It was bound to impact the company’s rating in the market and lead to a sharp fall in stock price. Possibly, someone planted this idea to the chairman to bridge the gap with fictitious numbers. Unfortunately, Raju bit the fish bait.

Let me divert a bit here.

When an unfair practice is first suggested, the mind resists. But when you are told this is temporary and can be made right the next quarter, the mind wavers. It is when the moral fibre is tested. With apologies to Hamlet, it is a ‘to say “yes” or not to say “yes”’ dilemma. One has to ask oneself if it matters if you are fourth or fortieth in the pecking order. Do the means not justify the ends? Should you not sleep well at night?

But once you succumb to the urge to fake, you slip into quicksand. The next quarter, you tell yourself we can live the imaginary numbers just for this one year and clean up next season. Alas, it doesn’t work that way. What begins as an exception becomes the rule and soon a part of you. And when even the best of audit firms don’t spot the issues, you get tempted to repeat. So, the numbers keep swelling each year and ultimately snowball into a monster. Eventually, it becomes difficult to kill this tendency without shaking the painstakingly built empire.

I believe this version of ‘an inherently decent man who slipped on the righteous path’ when I read Raju’s giveaway line in his confession, ‘It was like riding a tiger, not knowing how to get off without being eaten.’

Thanks to his confession, we do know Raju had been priming profits for years. Usually, some businesses conceal profits and reduce taxes. Raju did it the other way, perhaps because the bulk of his income was from exports, and in the India of those days, export profits were tax-free.

How the scam happened

Let’s quickly review a few basics of the scam.

Raju needed artificial billing to show Satyam was in the premium league. These fictitious invoices lead to ghost debtors. Such debtors cannot stay outstanding for long, so they have to be shown as collected. This is because a debtor lying beyond reasonable period is bound to create suspicions about its bona fides. In an audit, outstanding beyond six months are scrutinized. For that, bank statements were fabricated to falsely reflect a flow of money from non-executed work.

Next, what was pictured as collected had to be invested. After all, any smart individual would ask why so much money was in the current account earning nothing. So, these cash balances were converted into bogus fixed deposits backed by fake receipts. And these deposits were shown as periodically renewed! Interest income on the fictitious bank deposits was also disclosed in the income-tax return.

Let’s now figure out what might have triggered the confession. There are a few theories to be considered.

When faking invoices became regular, Satyam needed to show it had the bandwidth to achieve this turnover. Satyam had ‘bench’ strength, namely, a workforce awaiting work, which was higher than its peers. This came in handy to support fictitious billing. Yes, while the invoices were ghosts, the operational costs were actual, and it was no wonder the operating margin nosedived.

At that time, the global financial crisis arrived unannounced. Satyam had cash flow issues and needed to raise money. But it would be a red flag since the balance sheet showed a lot of money in the bank. The high cash and bank balance should have raised the suspicion of any one of several people: the board, the auditors, the analysts or any of the many investors. Internally, some vertical heads had pointed to their turnover reflected in the audited statements being greater than what they had achieved. They were facilely told that the sale of a few software licences had been booked in their vertical. A lot of water had flown under the bridge during the second and third quarters of 2008. Things were getting out of control, and with operating losses looming large, it was time to clean up. The Rajus had pledged their shares for borrowings at a time when their holding stood at 8 per cent.

As the share prices began descending in the wake of the global financial crisis (from ₹533 in May 2008 to ₹251 in December that year), the lenders applied pressure for additional securities. With no extra security forthcoming, they encashed the shares even as it hurtled down to ₹114 by the year end. Furthermore, since promoters had a tiny percentage of equity, the threat of takeover by a third party was stark. Raju indicated much the same in his confession. ‘As the promoters held a small percentage of equity, the concern was that poor performance would result in a takeover, thereby exposing the gap.’ This was when Raju probably started to weigh the pros and cons of coming clean.

If outside agencies called out the fraud, the consequences could be devastating. America’s SEC would instantly step in as Satyam was listed on Nasdaq. The Sultan of Software would be deported to the US for trial, and if found guilty, taken away for long. Remember Jeffrey Skilling, the former CEO of Enron, was sentenced to 24 years and four months in prison? If that happened, his entire property would have been confiscated to pay penalties and settle class-action suits. His best protection lay in coming clean on his own, trigger action from domestic law enforcement agencies and take shelter in the safe havens of Indian jurisdiction.

Another dimension is that if external agencies spotted the fraud, Raju would have to cool his heels behind bars and, worse still, Satyam might disintegrate. But if he confessed, resigned and proposed a revival plan without him, the company might survive. His letter talks about such a programme. It’s another matter that the government, not he, masterminded the bounce back, as many believe. A Raju-acolyte later gushingly told me, ‘The boss had put himself on the chopping block to let Satyam stay afloat.’ It is possible these factors cumulatively culminated in the confession letter.

Ramalinga Raju may have been in his Mr Edward Hyde role in Robert Louis Stevenson’s novella, The Strange Case of Dr Jekyll and Mr Hyde. There is also a very distinct Dr Henry Jekyll in him.

Excerpts published with permission from Rupa Publications

Check out the book on Amazon

Title: The Tech Phoenix: Satyam’s 100-day Turnaround

Authors: TN Manoharan & V Pattabhi Ram

Publisher: Rupa Publications

Price: ₹395

Pages: 229

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