Former Satyam CEO Raju, his brother and CFO arrested and detained in profit-fraud scandal
Byrraju Ramalinga Raju, founder and Chairman of Satyam Computer Services and his brother, B Rama Raju, Satyam’s managing director, were arrested late Friday by Andhra Pradesh police and placed under judicial cusstody in a Hyderabad, India jail until 23 January. Facing charges of criminal breach of trust, criminal conspiracy, cheating, falsification of records and forgery, they face up to ten years imprisonment if convicted of misleading investors.
After 18 hours of CID probe at the state police headquarters, the Raju brothers were sent to the Chanchalguda prison and slept Saturday night on the floor along with 26 other minor inmates. Prison rules mandate service of jail food thrice a day. The menu includes 650 gm of rice thrice a day with 250 gm of vegetable curry and 125 gm of ‘daal’ plus tea twice a day. The incarcerated brothers will be shifted to the barracks on Monday after the court hears their bail petition.
S. Bharat Kumar, Rajus’ lawyer asked the magistrate to issue orders for health monitoring. “His blood pressure is fluctuating and he needs medical treatment,” said Bharat Kumar. Mr. Raju appeared before the court Saturday while a team of doctors visited him after he had complained of chest pain. Satyam’s chief financial officer Vadlamani Srinivas, who was also arrested Saturday, had undergone preliminary investigation and appeared Sunday before a special court, according to A. Sivanarayana, Andhra Pradesh additional director general of police.
Srinivas was remanded to judicial custody by Mr D. Ramakrishna, Sixth Chief Metropolitan Magistrate till January 23 and sent to the Chanchalguda jail with the Raju brothers after interrogation by the Criminal Investigation Department (CB-CID). During his Saturday night arrest and probe by the CID, Srinivas has made some startling revelations contained in his confession letter which he submitted to Network 18. “According to me fixed deposits are unreal and fictitious which were managed and was an understanding between the audit section management,” Srinivas stated among others.
The Hyderabad court on Monday postponed the bail hearing of the Raju brother and Srinivas to January 16. To be defended by a battalion of 25 lawyers the three accused will remain in Chanchalguda Central Jail until further court order. The Raju brothers Sunday were shifted Sunday to a mid-size Old Hospital Barrack cell shared with a bootlegger. Raju has high blood pressure and Hepatitis-C while his brother has high blood pressure. The police had filed against Raju charges under Sections 120-B (criminal conspiracy), 406 (criminal breach of trust), 420 (cheating), 468 (forgery for cheating) and 477-a (fraudulent cancellation of securities) of IPC.
Dr. Raju had on Wednesday admitted falsifying and overstating Satyam’s cash reserves by one billion US dollars (£661m) or 94 percent of its cash and bank balances on books at end-September, and did not exist. In December 2008, a failed acquisition attempt involving the company Maytas led to a plunge in Satyam share price. After his confession, Satyam stocks fell more than 70 percent, while the BSE SENSEX dropped to 7.3 percent Wednesday, causing the Thursday deletion of Satyam Computer Services from its indices.
The shares went wild going to a free fall to 11.50 rupees on Friday, their lowest level since March 1998, compared with around 180 rupees before the controversy amid last year’s high of 544 rupees. The fraud was perpetrated several years ago to bridge “a marginal gap” between actual and accounting books operating profits, and continued for several years. “It was like riding a tiger, not knowing how to get off without being eaten,” B. Raju said. Satyam’s clients include Nestle, Ford, General Electric Co., General Motors Corp., Nissan Motor Co., Applied Materials Inc., Caterpillar Inc., Cisco Systems Inc. and Sony Corp., and brought in about $40bn last year.
New York-listed Satyam Computer Services Ltd., India’s fourth-biggest software firm, is a consulting and information technology services company based in Hyderabad, India. Founded in 1987 by Dr. Byrraju Ramalinga Raju, Satyam’s network spreads all over 67 countries across six continents. It employs 53,000 professionals in India, the United States, the United Kingdom, the United Arab Emirates, Canada, Hungary, Singapore, Malaysia, China, Japan, Egypt and Australia. Its monthly salary outflow is estimated at six billion rupees ($125 million). Deriving more than half its revenues from the United States, it serves 700 global companies, 185 of which are Fortune 500 corporations.
In 2008, the company struggled to purchase two infrastructure companies founded by family members of company founder and CEO Dr. Raju – Maytas Infrastructure and Maytas Properties – for $1.6 billion, despite concerns raised by independent board directors. Dr. Raju tendered his resignation on January 7 after due notice of falsified accounts to board members and the SEBI. The grand deception was uncovered after Dr. Raju attempted to plug the hole by getting Satyam to acquire his son’s construction companies. Since January 7 when 2 lawsuits were commenced, dozens of other class action law suits were filed against Satyam for hundreds of millions of dollars damages based on fraud in the United States District Court for the Southern District of New York in Manhattan, among others. The securities fraud class-action lawsuits have been filed on behalf of investors who bought Satyam American Depositary Receipts (ADRs) since 2004.
In a letter to the board, Dr. Raju said that neither he nor the managing director had benefited financially from the inflated revenues. Further claiming that none of the board members had any knowledge of the dire company situation, he noted that Satyam’s balance sheet as of the September 30, 2008, carried inflated figures for cash and bank balances of INR 5,040 crore (as against INR 5,361 crore reflected in the books). He alleged it also carried an accrued interest of INR 376 crore which was non-existent. He confessed that he himself prepared an understated liability of INR 1,230 crore on account of funds amid an overstated debtors’ position of INR 490 crore (as against INR 2,651 crore in the books).
Indian analysts have called the Satyam-Raju scandal as India’s own Enron scandal. Immediately following the media expose, PricewaterhouseCoopers, auditor of Satyam’s accounts, was set to be probed for complicity in the controversy. Amid Inspector General CID VS Kaumdi denial, Times Now reported that the Andhra Pradesh CID Saturday night arrested PricewaterhouseCoopers (PWC) representative Gopal Krishnan for investigation. The New York Stock Exchange has terminated trading in Satyam stock as of January 7, while the National Stock Exchange of India said it will remove Satyam from its S&P CNX Nifty 50-share index from January 12.
India’s biggest-ever corporate fraud has seriously tainted India Inc.’s strong corporate governance image. “The admission of fraud in financial affairs has created an adverse impression in the minds of trade, business and industry across the world,” the Indian government admitted. The government intervened on Friday night, dismissing Satyam’s board of directors, announcing it will appoint representatives to manage the affairs of the insolvent outsourcing giant. The board would meet within seven days. Dr Yeduguri Samuel Rajasekhara Reddy, chief Minister of State of Andhra Pradesh, India, on Sunday said that the main agenda is to protect the jobs of the software professionals. “We are taking all needful steps in coordination with the government of India to ensure that the jobs of 53,000 engineers are protected and the shareholders’ money is salvaged,†Reddy said.
“We are working on the names. The Satyam case is an aberration. The credibility of the Indian corporate sector in general, and IT sector in particular, should not be allowed to suffer because of this.” Prem Chand Gupta, the Corporate Affairs Minister said. The Federal Government of India Sunday appointed a three-member independent board with full authority for Satyam and will convene within 24 hours. “We have appointed Deepak Parekh, chairman of Housing Development Finance Corporation, Kiran Karnik, former president of IT industry body NASSCOM and C. Achutan, former member of Securities and Exchange Board (SEBI) of India,” Mr. Gupta said.
In early Monday trading (0535 GMT) after the creation of the three-member board, Satyam shares rocketed 60 percent at 38.15 rupees, even if the main Mumbai market was down more than 2 percent. BBC reported that Satyam shares have jumped Monday 51% at 36.05 rupees after the stock lost 87% last week. “The constitution of the new board is seen as a positive step by the market. It’s a confidence boosting measure,” K.K. Mital, Globe Capital, New Delhi head of portfolio management services said. “But the rally will depend largely on the financial situation at the company and the kind of measures that are taken to improve liquidity,” he added.
Thurgood Marshall United States District Court for the Southern District of New York Courthouse at 40 Centre Street.
The Company Law Board, however, has requested Satyam’s interim board not to implement its decisions. “We are asked by the Company Law Board not to implement the decisions of the board. But we are allowed to continue our activity. The team which was constituted recently is continuing its work,†Satyam head global marketing and communications, Mr Hari Thalapalli said.
Lazard Ltd. who has a 7.4% stake, sought representation on the new Satyam board and wrote The Indian Ministry of Corporate Affairs. “As the largest shareholder in the company, we want to be consulted in whatever decisions are being taken by the Indian government. We have written to the Ministry of Corporate Affairs and are awaiting a reply from them,” Hitesh Jain, a partner at ALMT Legal, who claimed to represent Lazard, said. “It is a fair proposal and we will take a decision as and when we clear other issues. No decision on this has been taken yet,” P.C. Gupta replied.
Meanwhile, the Securities and Exchange Board of India (SEBI) also announced it will try to control the damage and take steps to boost investor confidence. “This exercise will be undertaken after the third quarter results and is expected to be completed by end of February this year,” a SEBI official statement said. A SEBI team is also investigating acting-CEO Ram Mynampati whose salary was greater than that of founder Dr. Raju and all the directors combined. Dr. Raju had just one fifth of Mynampati’s total package of over Rs 3.5 crore as of March 2008. All the directors comparably received only a total of Rs 2.6 crore as salary, commissions, sitting fees, professional fees and other receivables.
Further, the Andhra Pradesh Police Crime Investigation Department (CID) and teams assigned by the Economic Offences Wing of the CID’s Crime Branch (CB-CID) conducted searches of homes of the accused including the ex-CFO’s office Sunday to gather documentary evidence about the financial fraud.
- wikinews
- “Satyam rebounds on rescue hopes“. BBC Online, January 12, 2009
- ICT by IANS “From cosy comfort to claustrophobic cell, Rajus fall from grace“. Thaindian News, January 12, 2009
- ICT by ANI “Hyderabad court defers Raju’’s bail plea hearing to Jan 16“. Thaindian News, January 12, 2009
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