Raju admits giant fraud

Hyderabad, Jan. 7: Satyam Computers’ chief, B. Ramalinga Raju, ambushed investors and Corporate India on Wednesday, admitting to long-running fraud of about Rs 8,000 crores in accounting and said the company did not have the money that it had claimed it had. He resigned later, saying his last-ditch efforts to fill the “fictitious assets with real ones” through the attempt to acquire Maytas failed. Mr Raju, who faces arrest, added that no other board member was aware of the financial irregularities. His brother and managing director, Mr B. Rama Raju, stepped down as well, days ahead of its January 10 board meeting. Mr Raju will still be the chairman of Satyam Computers till the board is expanded. The news sent Satyam shares and the equity markets into a tailspin. The stock lost 90 per cent wiping off more than Rs 10,000 crore market capitalisation. Trading in Maytas Infra was stopped because of the size of its fall. The New York Stock Exchange halted trading in Satyam’s shares indefinitely in New York and Amsterdam, saying it wanted to review the news. Satyam stock closed at Rs 39.90 on Indian bourses and $0.80 in the US market. Satyam’s auditor Pricew-aterhouseCoopers, who overlooked the huge mismatch in numbers, says it was investigating the matter. “If a company’s chairman himself says they built fictitious assets, who do you believe here,” said Mr R.K. Gupta, managing director at Taurus Asset Management. Analysts said that was unlikely to satisfy investors. “I think there is no future for this stock,” said Mr Jigar Shah, senior vice-president at Kim Eng Securities. Mr Raju’s farewell letter explaining his fraud and his actions, revealed quite a lot. * Mr Raju wrote: “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).” This was a confession that Satyam had cash and bank balance of only Rs 321 crore in October.

NSA axed for Kasab identity

Islamabad, Jan. 7: In a bizarre drama, Pakistan’s National Security Adviser Maj. Gen. (retd) Mahmud Ali Durrani was sacked on Wednesday night for having indicated days ago that Ajmal Amir Kasab, the lone Pakistani terrorist held for the Mumbai terror attacks, may have been a Pakistani, a fact ironically confirmed by the government earlier in the day. A brief statement issued by the Prime Minister’s House said Mr Yousuf Raza Gilani had sacked Maj. Gen. Durrani “for his irresponsible behaviour (of) not taking Prime Minister and other stakeholders into confidence and lack of coordination on matters of national security”. Mr Gilani was quoted by the Geo News channel as saying that Maj. Gen. Durrani’s “irresponsible” comments had tarnished Pakistan’s image. The move came soon after information minister Sherry Rehman and foreign office spokesman Mohammad Sadiq said that a probe by Pakistani security agencies had confirmed that Kasab was a Pakistani national.

Centre, State order probes

Hyderabad/New Delhi, Jan. 7: The threat of arrest loomed over Satyam Computers’ ex-chairman Ramalinga Raju as the Union government’s department of company affairs, market regulator Sebi and the AP government ordered investigations against Satyam’s promoters and others following the admission of fraud and fudging of profits by Satyam’s promoter-chairman B. Ramalinga Raju. The AP government announced an investigation by the CBCID into the fraud at Satyam. The Chief Minister, Dr Y.S. Rajasekhar Reddy, requested Prime Minister Manmohan Singh to constitute a top-notch team comprising the likes of Mr Azim Premji, Mr Narayana Murthy and Mr S. Rama-dorai, to manage Satyam affairs. He said the appointment of a management team would restore the confidence of the global customers and protect the interests of the employees and stakeholders till a new management takes over. In New Delhi, the minister for company affairs, Mr P.C. Gupta, directed the registrar of companies in Hyderabad to submit a report on Satyam by January 14. The government, he said, will refer the case to the Serious Fraud Investigation Office (SFIO) after the RoC verifies the facts. SFIO officials said it could take at least a year to investigate the fraud. The minister said the government was coordinating with the Securities and Exchange Board of India. In Mumbai, Sebi chairman C. Bhave said the investigation would have to go much beyond what the letter by Mr Raju contained. As per the law, if convicted, Mr Raju will have to undergo jail up to 10 years and will have to pay 500 times the amount as penalty under Section 45 of the Sebi Act. The Company Law Board and Registrar of Companies can initiate a suo motu inquiry on the basis of the statement given by Mr Raju on the inflation of funds. “The RoC need not wait for a formal complaint as Mr Raju has admitted his guilt,” said Mr Veera Red-dy, a senior advocate of the AP High Court. “A probe can be ordered under Section 235 of the Companies Act 1976.” Advocate Mr P. Subhash said Mr Raju’s statement involved criminal breach of trust.” “Producing forged or fictitious documents for personal gain amounts to criminal conspiracy.” Mr Subhash said police could launch an investigation based on Mr Raju's statement. “The police should book a case under Section 477 (a) of the IPC dealing with the falsification of accounts.” The Institute of Charted Accountants of India could initiate a probe into the role of the auditors. “If the Institute does not initiate the probe, an investor can file a complaint, contending that he invested the money based on the audit,” said Mr V.V.L. Narasimham, a chartered accountant. Mr Veera Reddy pointed out that the company secretaries could also face an inquiry for their role in the fraud. “The directors can also come under the ambit of the probe under the Securities Contracts (Regulation) Act, 1956,” he added.

Safety tips for investors

Mumbai, Jan. 7: Clear Capital Ltd, a subsidiary of the UK’s Noble Group Ltd, in a report on “the tricks that promoters play at the expense of shareholders”, has come out with tips for shareholders on what to do to “check out” a promoter. The report, prepared after the Satyam-Maytas debacle, makes some startling revelations about companies in the BSE 500. It highlights the most common tricks that Indian promoters, including some of the biggest names, employ to enrich themselves at the expense of the shareholders. They call these three tricks “pump and dump”, “blab and grab” and “expense manipulation”. They translate into pushing up stock prices and then selling their holdings, announcing new ventures to garner more funds, and sucking out cash by inflating expenses under various heads. So what should investors do? The report says while there is no cut and dried method to establish a promoters’ probity, there are at least three relatively straightforward ways to do this: primary data contacts, financial analysis and charting. Primary data contacts in the promoter’s industry, like customers and competitors, are a good source of data regarding the promoter’s probity. The report says a more basic check on the promoter’s intentions are “insider transactions”. In most of the case studies carried out by CCL, promoter sales usually foreshadow problems for the company. About the second way, financial analysis, the report says there is merit in tracking seemingly insignificant cost items like other operating expenses, miscellaneous expenditure and distribution expenditure. These items are highly discretionary and should fall in tough economic conditions. If they rise, it means the promoter has something to answer for. The report makes the following points: * At least 30 companies in the BSE 500 are using aggressive revenue recognition techniques. This is evident from the deterioration in their cash flows from operating activities in spite of a rise in Ebitda (earnings before interest, taxes, depreciation and amortisation), suggesting early booking of revenues. * 60 companies in the BSE 500 seem to have booked “sales” which might have arisen from investment income or other income. * At least 10 companies in the BSE 500 seem to have shifted expenses away by reducing depreciation rates. * At least 15 companies have disbursed the bulk of their loans and advances to companies in which directors have an interest. * 25 firms had profits shown in the full year results lower than the sum of the quarterly results. The third way, charting, is a little complicated. The investor needs to make a chart of share prices versus volumes overlaid with corporate announcements and insider sales. It is a good “initial screen” to highlight whether the promoter has an affinity for the first two tricks mentioned above.

Just why did Raju shoot and scoot now?

Hyderabad, Jan. 7: Just why did Mr Ramalinga Raju chose to confess and quit now? According to some experts, Mr Raju might have been forced to put in his papers after DSP Merrill Lynch, the investment banker appointed by Satyam Comptuers on December 27 to consider strategic options, noticed the financial irregularities. “Mr Raju might have decided to quit after Merrill Lynch communicated its termination on Tuesday. There is a possibility of information about financial irregularities leaking to other financial institutions,” the sources said. In a formal statement, Merrill Lynch said: “We came to understand that here were material accounting irregularities, which prompted our aforesaid decision.” Many also linked his resignation to the Upaid case, in which the British telecom services provider has sued Satyam Computers for $1 billion for alleged fraud and forgery. The case comes up for hearing on Wednesday in a Texas court. Some reports said Mr Raju had left for the US to attend the hearing, but Satyam sources said the company was being represented by its counsel.

PwC ‘did’ Satyam, GTB

Hyderabad, Jan. 7: Both Satyam Computers, whose chairman, Mr Ramalinga Raju revealed a Rs 7,000 crore fraud, and Mr Ramesh Gelli’s Global Trust Bank, which collapsed in 2004 after fudging figures, had Pricewaterhouse Coppers, one the biggest accounting firms in the world. PwC turned a blind eye to Satyam’s financial irregularities to inflate cash reserves, operating margins and understate liabilities. PwC said it would not comment on the fraud at Satyam saying “We are not commenting further on this subject due to issues of client confidentiality.” In GTB case, PwC had shown fewer non-performing assets, making the bank seem stronger than it was. Regulatory authorities have started investigating PwC which could face a an in India for up to 10 years.

Hearing impaired man shot

Srinagar, Jan. 7: A civilian, who police claimed was deaf, was shot dead by Army personnel when he allegedly intruded a high-security Army premises housing officers, about 500 metres from Chief Minister Omar Abdullah’s residence. Earlier this month, a BE student escaping traffic police was shot by Army personnel guarding the local Brigadier’s residence in Bengaluru. Abdul Rashid Reshi, 35, was shot “after he intruded the premises of 31 Sub Area commander and ignored repeated warnings” on Monday night, a defence spokesman said. Police said Reshi was speech and hearing challenged and had come to meet his relative.