At the heart of it most scams are very simple—Satyam was no different. Sometime in 2003, B Ramalinga Raju, the founder and chairman of Satyam Computer Services started over-declaring revenues of the company. The process continued till 2008. On January 7, 2009, Raju in a letter to the board of directors of the company admitted to fudging the accounts of Satyam.
Between 2003 and 2008, Raju over-declared revenues of the company by creating fictitious clients. Once he had over-declared revenues he automatically ended up over-declaring profits. Over-declared profits had to be invested somewhere. This led to the creation of fictitious bank statements and fixed deposit receipts. With a rapid advancement in the quality of colour printers, creating fictitious bank statements wouldn’t have been very difficult.
In his letter to the board, Raju admitted that the cash and bank balances were hugely overstated. The cash and bank balances of the company as on September 30, 2008(the last time the company declared quarterly results) were at Rs 5,313 crore. Th actual number was at a much lower Rs 273 crore. More than half a decade of declaring fictitious profits had led to a massive jump in the cash and bank balances of the company. But the number, like the profits of the company, was fictitious.
The company was guzzling whatever “real” cash it had at a very fast rate. By the time January 2009 started, the company’s actual cash and bank balance of the company would have been much lower than Rs 273 crore.
One of the theories put forward after Raju admitted to all the wrongdoings in the letter was that only when he realized that the company wouldn’t have enough money to keep paying salaries to its employees did he decide to come out with the truth. As Raju said in his letter: “The company had to carry additional resources and assets to justify higher level of operations…It was like riding a tiger, not knowing how to get off without being eaten.”
The irony is that Raju had to get off the tiger, and he still hasn’t been eaten. Like all big businessmen in India, Raju is also a survivor. A special court in Hyderabad has found him and nine others guilty of cheating, criminal breach of trust, destruction of evidence and forgery. The court pronounced a seven year-jail term for the founder and also imposed a Rs 5 crore fine on him.
It took the judicial system six years and three months to sentence Raju. And this is not the end of it. The decision will be challenged in higher courts and the process will continue for a while.
The question I want to explore in this column is the timing of Raju’s confession. Raju sent a tell-all letter to the Satyam Board in January 2009. Why didn’t he do the same in January 2008? Or even earlier, for that matter, is a question worth asking.
The probable reason is that Raju was confident enough of pulling off the scam till he wasn’t. And why is that? It is worth remembering that between 2003 and 2008, the stock market in India had a huge bull run. The economy was also booming. And in such a scenario, when the financial system is flush with money, it is easy to keep a scam going.
As economic historian Charles Kindleberger writes in Manias, Panics and Crashes: “The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom.” This precisely what Ramalinga Raju was busy doing.
The stock market started crashing from early 2008, due the advent of what we now call the global financial crisis. And because of this, money wasn’t as easy to raise as was the case earlier. Raju tried to plug the huge gap in Satyam’s balance sheet by buying out two real estate firms Maytas Properties and Maytras Infra. Both these firms were owned by his family (Maytas is the opposite of Satyam).
But by late 2008, an era of easy money had come to an end. And sham transactions were not as easy to pull through. The idea here was to use Satyam’s fake cash and bank balances to buy out the real estate firms and thus have “real” assets on the balance sheet. As Raju wrote in the letter: “ The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones…Once Satyam’s problem was solved, it was hoped that Maytas’ payments can be delayed.” But this deal fell through after the independent directors on the Satyam board raised issues about an IT company taking over real estate assets. In fact, if Raju had tried to push this deal through a year earlier, chances are that the board might have agreed, given that the going was good at that point of time. And when the going is good no one wants to spoil the party by asking inconvenient questions.
As the economist John Kenneth Galbraith writes in The Great Crash 1929: “At any given time there exists an inventory of undisclosed embezzlement. This inventory – it should perhaps be called the bezzle – amounts at any moment to many millions of dollars. In good times people are relaxed ,trusting, and money is plentiful. … Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed. … Just as the (stock market boom) accelerated the rate of growth (of embezzlement), so the crash enormously advanced the rate of discovery.”
Interestingly, the Satyam scam was the first of many scams that were to hit the nation starting in 2009. It was followed by the 2G, Commonwealth games and the coalgate scam. Sahara, Saradha, Rose Valley and many other big Ponzi schemes came to light. The National Spot Exchange scam came to light as well. These scams were mostly executed during the period between 2003 and 2008, when the economy was doing well and the stock market was going from strength to strength, but they were only revealed after the good days came to a stop.
In that sense Raju set the trend of things to come. We have to give him credit for at least that.
(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)
The article originally appeared in the Daily News and Analysis on April 12, 2015