2009 has barely just begun but the year’s first corporate scandal, which has quickly been dubbed the "Indian Enron," has already arrived. Your radar might not have picked this one up yet, but you may want to take a quick look at today’s news involving Indian information technology company Satyam Computer Services, Ltd.
As reported in articles on Bloomberg (here) and the New York Times website (here), Satyam’s Chairman, Ramalinga Raju, has sent a January 7, 2009 letter of resignation to the company’s Board of Directors, with copies the Bombay stock exchanges, in which he reveals, as the Times puts it, that "the company’s financial position had been massively inflated during the company’s expansion from a handful of employees into an outsourcing giant with 53,000 employees and operations in 66 countries."
It appears that as much as 53.6 billion rupees (or about $1.04 billion) in cash that the company reported as of the end of the second quarter that ended in September, was nonexistent. The company’s reported second quarter revenue was actually 21 billion rupees, rather than the reported 27 billion rupees.
The Chairman’s letter, which can be found here, is an absolutely extraordinary document.
With "deep regret and a tremendous burden," the Chairman details the specific balance sheet accounts that were inflated due to "non-existent cash." The letter further explains how the balance sheet "gap" came to exist – it is, the Chairman reports, "purely on account of inflated profits over a period of the last several years."
The letter states matter-of-factly that "what started as a marginal gap between the actual operating profit and one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of the company operations grew." The letter goes on to describe how the company strained to maintain the gap over time." The letter further describes the company’s attempts to work out of its dilemma by merging with other companies, which the letter describes as the "last attempt to fill the fictitious assets with real ones." (The mergers fell through.)
It was, the letter says "like riding a tiger without knowing how to get off without being eaten."
In an apparent bid to exculpate himself, the Chairman notes that neither he nor the company’s Managing Director (or their spouses) sold any shares, nor have the taken "one rupee/dollar from the company" and they have not "benefitted in financial terms on account of the inflated results."
The Chairman graciously emphasizes that none of the past or present board members "had any knowledge of the situation in which the company is placed." After identifying each of these individuals by name, he states that none of them "were aware of the real situation as against the books of accounts."
The letter concludes with a description of the corrective actions the company will now take, an apology, and the Chairman’s resignation.
The company, whose name means "truth" in Sanskrit, trades its shares on the Bombay stock exchange and also has American Depository Receipts that trade on the New York Stock Exchange. Its shares also trade on the Euronext exchange.As of the close of trading on January 6, 2009, the company had a market capitalization of over $3 billion. However, the shares plunged 77% in trading on the Bombay exchange today.
The Times reports that the company is audited by PricewaterhouseCoopers.
According to a January 7, 2009 commentary on the Wall Street Journal’s website (here), Satyam’s scandal is already being called "India’s Enron." Perhaps that comparison was inevitable, but I think the scandal, particularly the Chairman’s extraordinary letter of confession, has overtones of the Madoff affair.
How long do you suppose it will be before a securities class action lawsuit is initiated in the U.S.?
UPDATE: The answer to this question is: less than one day. Plaintiffs’ lawyers January 7, 2009 press release about their newly filed securities lawsuits agasint Satyam and certain of its directors and officers on behalf of purchasers of the American ADRs can be found here. The case was filed in the Southern District of New York.
FURTHER UPDATE: A copy of one of the Satyam complaints can be found here.
Special thanks to a loyal reader for supplying a copy of the Chairman’s letter.