In the country's biggest corporate fraud involving about Rs 8,000 crore (Rs 80 billion), iconic IT company Satyam was on Wednesday hurtling towards disaster following the shocking disclosure of accounts fudging by its founder Ramalinga Raju, who then quit as chairman - leaving an uncertain future for the company and its 53,000 employees.
By the end of the day, the fourth largest IT company lost a staggering Rs 10,000 crore (Rs 100 billion) in market capitalisation as investors reacted sharply and dumped shares, pushing down the scrip by 78 per cent to Rs 39.95 at BSE. The NYSE-listed firm could also face regulator action in the US.
The government, regulator SEBI and the industry reacted with shock and anguish over the turn of events that could tarnish India's corporate and raise vital issue like ethics, corporate governance and accounting and business practices.
Acting in tandem, Corporate Affairs Ministry and SEBI announced that the episode would be probed and action taken against the perpetrators of the fraud that entails inflating profits and creating fictitious assets.
"I am now prepared to subject myself to the laws of the land and face consequences thereof," Raju said in a letter to SEBI and the Board of Directors, while giving details of how the profits were inflated over the years and his failed attempts to "fill the fictitious assets with real ones."
The Maytas firms, although promoted by his family, proved to be his nemesis, with Raju saying: "The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones... But that was not to be. What followed in the last seven days is common knowledge."
While the government said the entire issue would be referred to the Serious Fraud Investigation Office, SEBI described it as an event of "horrifying magnitude." "It was like riding a tiger not knowing how to get off without being eaten," said Raju.
Ramalinga Raju requested the Board to "hold together" to take some important steps, while hoping that one of the Board members T R Prasad was "well-placed to mobilise support from the government at this crucial time."
Satyam is the country's fourth largest IT firm and has has over 51,000 employees. Giving details of the financial irregularities, Raju said the company's balance sheet as of September 30 carries "inflated (non-existent) cash and bank balances of Rs 5,040 crore (as against Rs 5,361 crore reflected in the books."
The balance sheet also carries "an accrued interest of Rs 376 crore (Rs 3.76 billion) which is non-existent, an understated liability of Rs 1,230 crore (Rs 12.30 billion) on account of funds arranged by me (Raju), an overstated debtors position of Rs 490 crore (as against Rs 2651 crore reflected in the books," Raju said.
He further said that Satyam reported a revenue of Rs 2700 crore (Rs 27 billion) for the September quarter and an operating margin of Rs 649 crore (24 per cent of revenue) as against the actual revenue of Rs 2112 crore (Rs 21.12 billion) and an actual operating margin of Rs 61 crore (3 per cent of revenue).
"This has resulted in artificial cash and bank balances going up Rs 588 crore in Q2 alone," Raju said. "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," Raju further said.
"It has attained unmanageable proportions as the size of the company operations grew significantly... 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," he said.
"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," he said.
Raju, however, claimed that neither he, 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.
Raju further said he or the company's MD did not take "even one rupee/dollar from the company and have not benefited in financial terms on account of the inflated results."