Fall of an icon

Published : Feb 13, 2009 00:00 IST

in Hyderabad

WHEN information technology in India was just a nascent industry, a young man hailing from Bhimavaram town in West Godavari district of Andhra Pradesh promoted a start-up to provide software development and consultancy services to large corporations. All he had was an MBA degree from Ohio University in the United States and just enough money to hire 20 employees. Twenty-one years later, this man, Byrraju Ramalinga Raju, now 54, stands at the centre of Brand Indias biggest corporate fraud.

The tremors have shaken not merely bourses in India and abroad but also, more importantly, the confidence of overseas and Indian investors about ethics and corporate governance practices in Indias IT industry. Worse may be in store for the countrys reputation as a global outsourcing hub once hearings begin on a clutch of class action lawsuits filed in the U.S. by purchasers of Satyams American Depository Receipts. British mobile solutions firm Upaid, which is already fighting a forgery case against Satyam in the U.S., questioned how $1.6 billion was siphoned out of the company to acquire Maytas in advance of a judgment on its lawsuit.

Ramalinga Rajus candid confession that he manipulated the account books to support his lie about the companys profits tempts one to draw comparisons with what a section of the U.S. media described as the Great Madoff Rip-off saga. Bernard Madoff had a reputation in the U.S. as respectable as Ramalinga Rajus in India as he was a pillar of the U.S. financial community.

He sullied it by running a hedge fund which, U.S. prosecutors said, raked up $50 billion losses. When clients wanted to withdraw their principal from the hedge funds worldwide, they were shocked to discover that Madoffs coffers were empty. He was running a Ponzi scheme in which early investors were paid off with money from those who joined later.

Pre- and post-economic reforms, there has never been a dearth of economic offences in India, a notable one being the Mundhra scam (1957) that forced Finance Minister T.T. Krishnamachari to resign when the industrialist manipulated the Life Insurance Corporation to make investments in his firms. After the economy was opened up in 1991, Big Bull Harshad Mehta and later Ketan Parekh, also a stock broker, defrauded bourses and banks, leaving small investors high and dry.

What puts Ramalinga Raju in a different league is the numerous awards and accolades he won for his entrepreneurial skills, his ability to compete with the biggest in Silicon Valley, and his becoming the IT service provider for the 2010 and 2014 Federation Internationale Football Association (FIFA) World Cups in South Africa and Brazil. This gilded image as a global player and Satyams operating profits of up to 50 per cent were apparently a cover-up for the false inflation of profits that Raju had been indulging in over a period of last several years.

The first signs that things were amiss in the Hyderabad-headquartered, Rs.11,276 crore IT bellwether were available when Ramalinga Raju hurriedly announced the acquisition of Maytas Properties and Maytas Infrastructure on December 16, 2008. Claiming to possess a land bank of 6,800 acres (one acre is 0.4 hectare), Maytas Properties is into building villas and apartments and developing special economic zones (SEZs), while Maytas Infra is one of the fastest growing companies in the fields of infrastructure development, construction and project management.

Within hours of the announcement, made without shareholders consent, Raju was forced to call off the $1.6 billion acquisition bid. Investors had revolted and the value of Satyams scrips in the Indian and U.S. markets had nosedived. Had it gone through, the transaction would have made his family members, particularly his U.S.-educated sons, richer by that amount. Maytas Properties was run by his younger son, Rama Raju, and Maytas Infra by the elder son, Teja Raju.

He justified the acquisition saying that his empire should be divided equally between IT and infrastructure. There are two bullocks that would draw the cart, he told investors, but they refused to take the bait. A week later, the World Bank announced the ban on Satyam for eight years on charges of giving improper benefits to the Banks staff and lack of documentation on invoices. The World Bank had paid hundreds of millions of dollars to the company to write and maintain all the software it used throughout its global information network, including back-office operations.

Embarrassed by these shady transactions, four non-executive directors of the company, Mangalam Srinivasan, Vinod K. Dham, Krishna G. Palepu and M. Rammohan Rao, resigned from the Board. Ramalinga Raju had led these directors up the garden path by presenting them a rosy picture about Satyams finances, assets held by Maytas Properties and the healthy order book. He provided them no clue about what was happening behind their backs. They had approved the accounts for the quarter and half year ended September 2008, which, by Rajus own confession, were completely cooked up. The Satyam chief also tried to create a false sense of confidence among his employees after the aborted Maytas deal. He said: We have always worked tirelessly to ensure that a high level of integrity is the cornerstone of all our practices.

That these claims of integrity were a charade became evident after he wrote a five-page confessional letter to his Board of Directors making five shocking admissions. He had inflated cash and bank balances of Rs.5,040 crore, showed non-existent interest of Rs.376 crore, understated Rs.1,230 crore liability on account of funds he had arranged and overstated the debtors position of Rs.490 crore. Finally, he had fudged the second quarter results by reporting a revenue of Rs.2,700 crore, when it was actually Rs.2,112 crore, and an operating margin of Rs.649 crore, when the true figure was Rs.61 crore.

All this was done to fill a marginal gap between actual operating profit and the one reflected in the account books. This gap attained unmanageable proportions as the size of the companys operations grew significantly. Every attempt to eliminate the gap had failed and the aborted Maytas acquisition was the last attempt to fill the fictitious assets with real ones.

Ramalinga Rajus deeds called into question the disclosure requirements of the Securities and Exchange Board of India (SEBI), the market regulator. It also sparked off inquiries about the certification procedures of Price Waterhouse and the vigour and credibility of its auditing standards. Did it cross-check bank statements furnished by Satyam, if at all, and verify the quarter-on-quarter accounts that admittedly contained understated dues and inflated profits? The Satyam chief said he did all this out of fear that the company would be vulnerable to a hostile takeover bid given its poor performance and the small percentage of equity held by the promoters.

It was like riding a tiger not knowing how to get off without being eaten, he said in his confessional statement to the Board. As many leaders do in order to justify their wrongdoings, Raju rationalised that neither myself, nor the managing director (including our spouses) sold any shares in the last eight years excepting a small proportion declared and sold for philanthropic purposes.

Ramalinga Raju is the eldest of four siblings. The third is B. Rama Raju, Satyams managing director, who is sharing a jail barrack in Chanchalguda with him. Hailing from a rural background, Ramalinga Raju married at the age of 22, in 1977.

He immediately plunged into business with the confidence that he could always fall back on the 100 acres of farmland and 20 acres of vineyards his family owned. He started Dhanunjaya Hotels and later forayed into construction, infrastructure and cotton spinning, ventures that were not so successful.

The break came in June 1987 when he started Satyam Computer Services at P&T colony in Secunderabad, which rose to become Indias fourth largest software exporter.

In 2000, Raju was showcased by the then Chief Minister, N. Chandrababu Naidu, to the then U.S. President, Bill Clinton, as a first-generation entrepreneur and the face of Indias IT prowess when the dignitary visited Hyderabad. Andhra Pradesh was desperately in need of poster boys, big-ticket entrepreneurs either in the manufacturing sector or in the digital sphere. The Institute of Chartered Accountants of India (ICAI) gave him the Golden Peacock award for corporate governance.

All this now appears as cruel irony. Ramalinga Raju has fallen from his iconic status after committing a Rs.7,100-crore fraud in a company that he himself built from scratch.

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