The Satyam Fraud -3: Letter From Interim CEO to the Employees

 

To: SatyamAssociates (Global) 

Subject: Open communication : Today’s developments 

Importance: High 

Dear colleagues 

 
I write this mail to update you on some critical Board and Leadership level changes in our company, effective immediately. A series of extremely unfortunate events led to this, which I am sure you have seen covered in the media over the past few hours.

A SWAT team consisting of senior leaders has been formed. Many of them are Satyam veterans with a minimum of ten years experience in our company and more than twenty years in the industry. I have been requested to play the role of an Interim CEO and this team will support me, as we steer Satyam through this challenging phase. These are the leaders on the ground and have always had the final call on most customer and associate related matters in the company, so far. This team has committed to work together, to make it happen. The SWAT team represents all Customer Facing units, key Horizontal Competency Units and critical Support Units.

Over the past twenty one years, with your passion and commitment we have built significant customer assets, formidable service offerings, excellent delivery processes and scalable support systems. Satyam has been consistently acknowledged for our leadership bandwidth and has a demonstrated reputation for collaborative functioning. Our renowned Full Life Cycle (FLC) model encouraged ‘Distributed and Empowered’ leadership and prepared us for all situations. This is the time when we have to apply it in real life. What we have been trained for, we will now put to work. Let us continue to handle our respective areas with total autonomy, freedom and control. This is as good a time, as any, to remind ourselves that we have been acknowledged as being amongst the top three Best Employers in India by Hewitt and Mercer in independent surveys in 2007 and American Society of Training & Development (ASTD) named us as the best globally, for our Learning practices – the first company outside USA to be ever awarded this honor. Satyam continues to have everything that is fundamentally required for its success – a strong customer base and a committed universe of approx 53,000 associates.

What we are confronted with is the challenge of continuing our business operations, seamlessly. We will need your involvement and ideas to make it happen. This might involve even more effort at every level, in the near term. This is the time to prove to the world that we are united and will succeed in overcoming the challenges.

This quarter will be tumultuous for us. Rumors will abound and it would be fair to assume that competition will try and leverage it to their advantage. As a proactive measure, we have formed fully empowered Cross Functional Teams, headed by seasoned leaders in the respective areas, to address pan-organizational issues like Delivery Excellence, Customer & Associate Retention, Pipeline Management, Cost Controls, Collections etc. You have helped to build Satyam to be what it is today – and we believe that this cannot be allowed to fail, at any cost. I am confident that I can count on your continued support as I commit to our customers that we will ensure deliverables and commitments are serviced.

On behalf of our new leadership team, I apologize to you for the uncertainty and inconvenience that this incident has caused to you and your families. I assure you that we will emerge stronger, because of this. Increased focus on transparency at all levels, integrity and ethical functioning will be ensured. I want you to stand confidently in front of your families and friends and say that we will now be a better company and that we shall soon be a successful case study of how organizations have turned over a new leaf.

We will be conducting “U Speak” (our Meet-the-Leadership sessions) in each city in India starting next week and will have numerous Webinars to address associates in various countries. We will be meeting many of our customers in person over the next two weeks and will meet those of you onsite, at that time. In these sessions, we will explain to you what happened and articulate the actions that are being taken to retain your confidence in our company.

Let us fight this battle together. I am confident that we will emerge stronger, TOGETHER.

 
Ram Mynampati

 

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Also Read:

1) The Satyam Fraud -2: Letter from Mr. Ramalinga Raju to its Board of Directors!

2) The Satyam Fraud -1: India’s biggest corporate scandal in history! Satyam chief resigns, admitting 823-million-dollar fraud !!    

     .

The Satyam Fraud -2: Letter from Mr. Ramalinga Raju to its Board of Directors!

[UPDATE: The letter is now available for download in high resolution. Click on the thumbnails.]

For your convenience, the complete text is given below:

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To the Board of Directors
Satyam Computer Services Ltd. Dear Board Members, It is with deep regret, at tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice:

1. The Balance Sheet carries as of September 30, 2008
   • Inflated (non-existent) cash and bank balances of Rs.5,040 crore (as against Rs. 5361 crore reflected in the books)
   • An accrued interest of Rs. 376 crore which is non-existent
   • An understated liability of Rs. 1,230 crore on account of funds arranged by me
   • An over stated debtors position of Rs. 490 crore (as against Rs. 2651 [cr.] reflected in the books)
2. For the September quarter (02) we reported a revenue of Rs.2,700 crore and an operating margin of Rs. 649 crore (24% Of revenues) as against the actual revenues of Rs. 2,112 crore and an actual operating margin of Rs. 61 Crore ( 3% of revenues). This has resulted in artificial, cash and bank balances going up by Rs. 588 crore in Q2 alone.

The gap in the Balance Sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance). What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew significantly (annualized revenue run rate of Rs. 11,276 crore in the September quarter, 2008 and official reserves of Rs. 8,392 crore). The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations — thereby significantly increasing the costs.

Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in a take-over; thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten.

The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas’ investors were convinced that this is a good divestment opportunity and a strategic fit. Once Satyam’s problem was solved, it was hoped that Maytas’ payments can be delayed. But that was not to be. What followed in the last several days is common knowledge.

I would like the Board to know:

1. That neither myself, nor the Managing Director (including our spouses) sold any shares in the last eight years — excepting for a small proportion declared and sold for philanthropic purposes.

2. That in the last two years a net amount of Rs. 1,230 crore was arranged to Satyam (not reflected in the books of Satyam) to keep the operations going by resorting to pledging all the promoter shares and raising funds from known sources by giving all kinds of assurances (Statement enclosed, only to the members of the board). Significant dividend payments, acquisitions, capital expenditure to provide for growth did not help matters. Every attempt was made to keep the wheel moving and to ensure prompt payment of salaries to the associates. The last straw was the selling of most of the pledged share[s] by the lenders on account of margin triggers.

3. That neither me, nor the Managing Director took even one rupee/dollar from the company and have not benefitted in financial terms on account of the inflated results.

4. None of the board members, past or present, had any knowledge of the situation in which the company is placed. Even business leaders and senior executives in the company, such as, Ram Mynampati, Subu D, T.R. Anand, Keshab Panda, Virender Agarwal, A.S. Murthy, Han T, SV Krishnan, Vijay Prasad, Manish Mehta, Murali V. Sriram Papani, Kavale, Joe Lagioia, Ravindra Penumetsa, Jayaraman and Prabhakar Gupta are unaware of the real situation as against the books of accounts. None of my or Managing Director’s immediate or extended family members has any idea about these issues.

Having put these facts before you, I leave it to the wisdom of the board to take the matters forward. However, I am also taking the liberty to recommend the following steps:

1. A Task Force has been formed in the last few days to address the situation arising but of the failed Maytas acquisition attempt. This consists of some of the most accomplished leaders of Satyam; Subu D, T.R. Anand, Keshab Panda and Virender Agarwal , representing business functions; and A.S. Murthy, Han T and Murali V representing support functions. I suggest that Ram Mynampàti be made the Chairman of this Task Force to immediately address some of the operational matters on hand. Ram can also act as an interim CEO reporting to the board.

2. Merrill Lynch can be entrusted with the task of quickly exploring some Merger opportunities.

3. You may have a testatement of accounts’ prepared by the auditors in light of the facts that.I have placed before you.

I have promoted and have been associated with Satyam for well over twenty years now I have seen it grow from few people to 53,000 people, with 185 Fortune 500 companies as customers and operations in 66 countries. Satyam has established an excellent leadership and competency base at all levels. I sincerely apologize to all Satyamites and stakeholders, who have made Satyam a special organization, for the current situation. I am confident they will stand by the company in this hour of crisis.

In light of the above, I fervently appeal to the board to hold together to take some important steps Mr T R Prasad is well placed to mobilize support from the government at this crucial time. With the hope that members of the Task Force arid the financial advisor, Merrill Lynch (now Bank of America) will stand by the company at this crucial hour, I am marking copies of this statement to them as well.

Under the circumstances, I am tendering my resignation as the chairman of Satyam and shall continue in this position only till such time the current board is expanded. My continuance is just to ensure enhancement of the board over the next several days or as early as possible.

I am now prepared to subject myself to the laws of the land and lace consequences thereof.

 

(B. Ramalinga Raju)
Copies marked to:
1. Chairman SEBI
2. Stock Exchanges

 

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Also Read:

1) The Satyam Fraud -3: Letter From Interim CEO to the Employees

2) The Satyam Fraud -1: India’s biggest corporate scandal in history! Satyam chief resigns, admitting 823-million-dollar fraud !!

 

[Credits: Arun Prabhudesai]

The Satyam Fraud -1: India’s biggest corporate scandal in history! Satyam chief resigns, admitting 823-million-dollar fraud !!

 

Ramalinga Raju, chairman of Satyam Computer Services, told the Bombay Stock Exchange that he did not profit from the accounting problems he disclosed Wednesday. (Adeel Halim/Bloomberg News)

 

NEW DELHI: The chairman of Satyam Computer Services, a leading Indian information technology company that serves numerous Fortune 500 companies, resigned on Wednesday amid major accounting irregularities, roiling Indian markets and causing Satyam’s shares to plummet 78 percent.

Ramalinga Raju tendered his resignation after revealing that the company’s financial position had been massively inflated during the course of the company’s expansion from a handful of employees into an outsourcing giant with a workforce of 53,000 and operations in 66 countries. Of the 53.6 billion rupees in cash and bank balances the company reported at the end of its second quarter, which ended September 2008, 50.4 billion rupees were nonexistent, Raju said Wednesday.

In a four and a half page statement to the Bombay stock exchange, Raju described how the gap in the balance sheet had arisen on account of inflated profits over several years. “What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew,” his statement said.

Satyam provides systems and software, and serves as the back office for some of the largest banks, manufacturing and media companies in the world.

Clients include General Electric and General Motors. In some cases, the company is responsible for keeping track of clients’ own transactions with their customers, and the client’s own books.

Satyam, which in a separate statement said it was “shocked” by Raju’s revelations, has been listed on the NYSE since May of 2001, and listed on Euronext in January of last year. The company is audited by PricewaterhouseCoopers, which had no immediate comment.

Satyam has been under scrutiny in recent months, after an October report that the company had been banned from World Bank contracts for installing spy software on some World Bank computers. In December, the World Bank confirmed that Satyam had been banned but did not elaborate on the cause.

Also in December, Satyam’s investors revolted after the company proposed buying two firms with ties to Raju’s sons. That acquisition, had been “the last attempt to fill the fictitious assets with real ones,” Raju said in his statement Wednesday.

The scandal has immediately raised questions over accounting standards in India as a whole, as observers asked themselves whether similar problems might lie buried elsewhere. The risk premium for Indian companies will rise in investors’ eyes, said Nilesh Jasani, India strategist at Credit Suisse.

News of the scandal – quickly dubbed India’s equivalent to the Enron scandal in the United States – sent jitters through the entire Indian stock market on Wednesday, sending the benchmark Sensex stock market index down 7 percent by late afternoon.

“This was a company which had the most high profile independent director.

It had an auditor of significant repute,” Tarun Siodia, head of research at Andand Rathi, told Reuters. “Despite that, if such an event can occur, then why not other companies? That is going to raise bigger issues.”

R.K. Gupta, managing director at Taurus Asset Management in New Delhi, also speaking to Reuters, echoed this: “If a company’s chairman himself says they built fictitious assets, who do you believe here? Not only Satyam, this has put a question mark on the entire corporate governance system in India.”

Just a few months ago, Raju was trying to convince investors that the company was sound. In October, he surprised investors with better than expected results, saying he was “pleased” that the company had “achieved this in a challenging global macroeconomic environment, and amidst the volatile currency scenario that became reality.” But by late December, it seems he had little support from board members or investors: Four of the company’s directors resigned in recent weeks.

 

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Also Read:

 

1) The Satyam Fraud -3: Letter From Interim CEO to the Employees

2) The Satyam Fraud -2: Letter from Mr. Ramalinga Raju to its Board of Directors!

 

 

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Related Links:

1) India’s Satyam chief resigns, admitting 823-million-dollar fraud: http://bit.ly/16gIv

2) India’s Satyam chief quits, says profits inflated: http://www.reuters.com/article/businessNews/idUSTRE50616H20090107?feedType=RSS&feedName=businessNews

3) Satyam chief resigns over inflated assets: http://www.iht.com/articles/2009/01/07/business/outsource.php

4) Satyam does an Enron! : http://mostlyeconomics.wordpress.com/2009/01/07/satyam-does-an-enron/

5) Satyam head quits after admitting massive fraud [Express Buzz]: http://bit.ly/LXmc

6) Satyam Chairman Resigns After Falsifying Accounts (Update1): http://www.bloomberg.com/apps/news?pid=20601080&sid=a37YOX1irBus&refer=asia

7) India’s Satyam chief resigns, says profits inflated: http://www.washingtonpost.com/wp-dyn/content/article/2009/01/07/AR2009010700220.html

[PS: A few links have been shortened using URL shorteners as they were too long to be displayed correctly.]