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This is almost old news but the scope and scale of the scam was so staggering that it merits a little more analysis.

The whole story actually started to unfold with the failed Maytas merger. B. Ramalinga Raju, the Chairman of Satyam and also the primary shareholder of both Maytas Properties (an unlisted real estate company) and Maytas Infrastructure (a listed infrastructure development company) tried to pull a fast one (and almost succeeded) and acquire both Maytas Companies through Satyam (its probably worth mentioning that Raju had only about an 8% stake in Satyam, most of which was pledged but owned almost all of the other 2 companies). This effort failed spectacularly as the entire Satyam shareholder community rebelled, threatened lawsuits and generally created hell. The acquisition was called off the very next day. This was in early December.

On January 7th, 2009, India’s corporate landscape changed forever. Raju sent out a letter to Satyam’s board, SEBI (the stock exchange regulator in India) and a couple of other parties. In this he alleged that he had been overstating revenues and profits by huge margins for years and that the cash reserves reflected in the company’s books were overstated by Rs. 5,000 crores ($1bn)!

The tone of the statement was a bit along the lines of Raju being a good person and having done all this to protect his beloved company, and preventing the stock price from crashing. Crucially, he also mentioned that he had personally lent the company over Rs. 1,200 crores ($250mn) to continue the fraud and maintain the facade of success.

This is where the story gets interesting. It seems that even the inflation was not really true but just a ploy to divert attention the the real scenario - that Mr. Raju was robbing the company blind.

All of Satyam’s revenue and profit figures seem to be accurate. The difference in the originally reported accounts and the ones alleged by Raju was actually what he stole and pumped into Maytas Properties or his own personal holdings. The extent of the fraud was mind boggling. A private office containing facilities to print fake Certificates of Deposit and bank statements was discovered (accessible only by Raju, his brother Rama Raju and the CFO S. Vadlamani). PriceWaterhouseCoopers, the auditors, were also most likely colluding with Raju and the 2 people who signed the audit are now sitting in jail.

The original plan would have gone something like this.

1. Siphon off tons of cash from the hugely cash-generative IT business and use it to buy major chunks of land (Raju through Maytas and personally is one of the country’s 10 largest landowners).
2. List Maytas Properties sometime in 2008 and raise a gazillion or so dollars.
3. Funnel the extra cash back into Satyam and no one would be the wiser.

This is what went wrong. The economy crashed and burned. The planned listing of Maytas Properties went out the door and suddenly Raju was left with a massive but wholly illiquid land bank and no way of making good on the Satyam stealing. The letter of apology was actually a masterstroke that diverted the authorities completely and made Raju out to be a perhaps dishonest but well-meaning man. It was also most probably done under severe political pressure as the real story (which is unfolding now) would have implicated too many of our esteemed politicians from both the current and previous governments.

If the letter story had stuck, Raju would have been embroiled in cases for a while, but his personal assets would have been untouched and probably made a lot more money for his family. Needless to say, with his still impressive clout, he wouldn’t have spent much (if any) time in jail. The real story seems to have come out (and this is only speculation on my part) when Vadlamani (the CFO who tried to commit suicide) “sang like a canary” to the cops.

This brings me to the actual business viability at Satyam. It’s still a great business. Especially in light of the fact that the earlier accounts were true. It’s probably an even better business than under Raju as now the cash it was generating can be used to expand the core IT business and not be siphoned off. Expenses will also be lower as the 10,000 fake employees that Raju created will no longer require salaries.

Satyam still has great clients ranging from Ford to Nestle and serves a third of the Fortune 500. In terms of revenues, they were the fourth largest Indian IT vendor.

There is no doubt that there will be a fallout from this crisis on the client base. But in the end, clients also realize that they’ve been getting great service from a great company that happened to be in the hands of crooks.

Whether Satyam continues under the direction of the Indian government or an investor with some appetite for risk (and there have been some offers from L&T as well as BK Modi’s Spice Group), it will bounce back. And whoever is along for the ride will probably make a killing!

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