The end of Satyam

Satyam can be saved only if someone from outside who understands the business takes charge

A company says it has Rs 5,000 crore in the bank, when it does not. It says that it has made over Rs 600 crore profit in one quarter, when it has barely broken even. How many people do you think would have known? The (former) chairman says only he and the managing director knew. Any takers for this story? What about the auditor, one of the big international firms in the business? Did it not take the simple and routine step of reconciling what the books said with what the company’s bank statements said? What about the company’s bankers, who would have got its annual reports, again as a matter of routine? What did the bankers do with those reports? If they saw huge profits and massive reserves being reported, did they not wonder why there was no money in the company’s account? Then, assume for the moment that the (former) chairman is correct when he says that no one on the board knew the real state of affairs? Wasn’t there an audit committee, as is mandated? What was it doing? And can a company with over 50,000 employees, several divisions and multiple profit centres really be run in such a manner that only the chairman and the managing director knew the true state of the company’s finances? What about the finance director, and the people immediately below him? What about the profit centre heads, who should have wondered where the company profits were coming from if their own division was not making any money?

 

There are only two scenarios possible. One is that a whole lot of people knew that things were badly wrong, and that none of them was willing to blow the whistle. In which case, they are all culpable and they should all be prosecuted under criminal law, not just Ramalinga Raju and his accomplice Rama Raju. The other is that only these two people did in fact know; in which case, many people in the company ought to be sacked (including the whole board, as well as the auditor—who should face action from that supposedly self-regulating body, the Institute of Chartered Accountants of India). And the company’s internal processes should be given a complete makeover. Either way, it is hard to see how the company can continue to function as an independent entity, and not suffer a loss of clientele and therefore revenue; that in turn will mean large-scale redundancies and therefore internal crisis. Before that happens, the best and the brightest in the company will have fled to safer pastures.

In short, the only way to save the company is for someone from outside Satyam who understands the business to take charge. But who would want to do such a thing? Here is a company that probably has about Rs 8,000 crore in annual turnover and a 3 per cent profit margin. The revenue per employee (Rs 15 lakh) does not compare well with other software companies, which means that the profitability upside is limited. The sad truth about Satyam (ranked 4th in the infotech sweepstakes) is that it does not have a great business, and it has suspect processes and non-existent controls. But then, at a stock market valuation of about Rs 2,600 crore, it could well be tempting for one of the other infotech/BPO giants to take a good hard look at the company and decide to take charge. At the moment, that looks like the best hope for Satyam.

The only people who come out of this massive scandal with some credit are DSP Merrill Lynch. Within barely a week of being hired to seek out possible partners for Satyam, Merrill Lynch realised that what the company was saying about itself and what the numbers were saying were vastly different things. It walked out of the contract, and would have been obliged to inform the stock exchange of the reasons for this. Left with no choice, Ramalinga Raju had to make a clean breast of things on Wednesday. The country should now ask for the same from the auditor, board members and senior executives—all of whom are now hiding behind a veil of silence. And criminal prosecution should follow swiftly.