In India, Crisis Pairs With Fraud

Thus begins, in calm but painful fashion, one of the most extraordinary corporate confessions ever written, a letter sent Wednesday from B. Ramalinga Raju, the founder and chairman of Satyam Computer Services, to the company’s board. Among the startling facts Mr. Raju proceeds to disclose is that most of the cash on the company’s balance sheet does not exist, that Satyam’s revenue has been overstated for years, and that its real profit for the quarter that ended Sept. 30 was only $12.5 million — rather than the $136 million the company had reported to investors. Mr. Raju, in other words, had been cooking the books.
Satyam is a company I had been reading a lot about in the business papers during my recent trip to India. Mr. Raju, 54, founded the company 21 years ago, and turned it into what appeared to be one of India’s glittering technology success stories, a consulting and outsourcing powerhouse that rivaled the likes of Infosys and WiPro, with 53,000 employees, and 185 Fortune 500 companies among its roster of clients. Mr. Raju himself was a much-admired chief executive who won awards for entrepreneurship and established philanthropies to help Indians who lived in rural poverty.
When I was in India, however, Mr. Raju was grabbing headlines for a less exalted reason. He had tried to push through a deal to buy two companies in which he held ownership interests — Maytas Infra and Maytas Properties, which were run by his sons. (Maytas is Satyam spelled backward.) Satyam’s directors had rubber-stamped the deal — but to the surprise of the Indian business community, accustomed to seeing such inside deals go through, Satyam’s shareholders revolted.
Institutional investors denounced Mr. Raju for seeking to buy infrastructure and real estate companies that were far afield from technology outsourcing. Indian mutual fund managers complained anonymously in the business pages that Mr. Raju was using shareholders’ money to give himself and his sons a rich and undeserved payday. The board was raked over the coals in the press for approving the deal. The stock was pummeled.
And lo and behold, the investor backlash succeeded: Mr. Raju beat a hasty retreat and withdrew the offer to buy the two companies. Even after the deal fell through, it remained big news, and everyone I interviewed had an opinion about it. Some thought it gave India a black eye, because it exposed the country’s lackadaisical attitude toward corporate governance. Others thought it would ultimately be good for India, because it showed all Indian investors that they did not have to roll over every time a corporate executive tried to pull a fast one. No one, however, realized the truth. As Mr. Raju put it in his letter, “The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones.” When the deal fell through, the jig was up.
And thus came the final bit of proof — as if one was needed — that the credit crisis had hit India. Here in the United States, the extraordinary Ponzi scheme that Bernard L. Madoff is accused of running was exposed when the credit crisis caused his investors to seek wholesale redemptions — money he did not have. The credit crisis also helped bring Mr. Raju’s fraud to light. He had been keeping the company afloat by borrowing against his Satyam shares. But when the Indian stock market crashed last fall — and Mr. Raju could not meet the margin calls — his lenders began selling his shares. He made his confession because he no longer had any means to funnel money into the company. Any halfway decent financial crisis has to have its signature fraud, and thanks to Mr. Raju, India now has one.