Satyam’s shocking admission: revenues, profits and cash inflated

Satyam Computer Services is staring at a big hole in its books, due to falsification of accounts over a number of years, by its promoters. Even as the seriousness and extent of the problem will emerge over the next few weeks, the company could even be staring at bankruptcy, unless a quick bailout is arranged.

India’s corporate image took a big blow as Satyam Computer Services, a leading IT company and a constituent of the BSE Sensex, stands exposed. Its chairman, B. Ramalinga Raju, admitted to the company having consistently falsified its accounts, with a view to showing a much better performance. Over the years, there have always been murmurs whether the cash on its books is actually there. That it was never invested but stayed in cash and bank perhaps amplified that fear.

Today, Satyam (actually Ramalinga Raju) has said in a statement, which is not very well drafted, that the balance sheet as of Sept 30, 2008 carries inflated (non-existent) cash and bank balances of Rs 5,040 crore, against Rs 5,361 crore reflected in the books. Though not properly worded, this seems to indicate that there is actually no cash at all, though the actual cash figure could be much lower. There is a non-existent accrued interest figure of Rs 376 crore. There is an understated liability of Rs 1,230 crore on account of funds arranged by B Ramalinga Raju.

This seems to indicate that Satyam is actually liable to pay this money, though it does not appear on its books. The debtor position, people who owe it money, as of Sept 30 is only Rs 490 crore and not Rs 2,651 crore as stated. In short, Satyam is not as cash rich as it has made it out to be. In the September’08 quarter, against reported revenues of Rs 2,700 crore and an operating margin of Rs 649 crore, the real figures are only Rs 2,112 crore and operating margin of Rs 61 crore.

The gap in the balance sheet, Raju claims, is due to inflated profits of the last several years in Satyam Computer’s standalone performance What started as a marginal gap, says the letter, has turned into one of unmanageable proportions. Its growing size, with annualised revenues of about Rs 11,276 crore, meant that Satyam ‘had to carry additional resources and assets to justify the higher level of operations’ leading to higher costs. In short, if its cash and profits were unreal, its employee expenses and debt costs are real.

So, the promoters tried eliminating the gap but it only got bigger. They claim to have arranged a sum of Rs 1,230 crore for Satyam (not reflected in its books) by pledging shares and giving ‘all kinds of’ assurances. That is in short a brief view of how Satyam has been cooking up its accounts over the years.

It is difficult to sum up what has happened and the impact, least because this is a situation that will continue to unravel. Suffice to say that its shareholders have been ditched by the promoters. The promoters’ claim that they did not sell a single share rings hollow, after all they raised money by pledging these shares. It does not matter if they did not sell the shares themselves, someone did.

The losers in this case, as always are shareholders and retail investors, either directly or through mutual funds. The share price is down by 71% at the time of posting. Coming ahead: will be writing stories on: what may happen next and the options before Satyam, how its books were cooked and if possible, gauge the extent of its problem and on corporate governance. Keep watching this site.

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