THE SELF DESTRUCTION OF SATYAM & SPELL BACKWARDS MAYTAS

As many know the biggest scam in the history of India’s corporations has come to light. Satyam Computers, the country’s fourth largest IT Company stands on the brink of termination. More recently in the news for the failed takeover attempt of its sister company Maytas; Satyam is now staring into an abyss of anger and shame. Shareholders have dumped the stock left, right and centre. In every sense Satyam has managed to become India’s ENRON. It has cooked its accounts to show non existent revenues. We take a look at how this scam came about.

In a letter addressed to the Board of Directors of Satyam the former Chairman Ramalinga Raju whilst delivering his resignation has accepted total responsibility for the fudging of the company’s accounts. That was however of little concern as the damage has already been done.

In less than 24 hours the company could be sold to zero levels rendering it out of business. The National Stock Exchange has already removed Satyam from its Nifty index with the BSE likely to also remove it from the Sensex.

The fudging of accounts is indeed a criminal offence which if proved could very well lead to serious jail time for everyone involved in this fiasco. And upto 10 years

For now the only culpable offender seems to be Mr.Raju himself who has accepted all the blame himself in his letter. However, it is indeed difficult to believe that only he is guilty of this offence.

At some point earlier Satyam starts to make lesser and lesser profits. In order to maintain the same pace and acquire newer clients it starts to overstate its revenues and operating margins.

Profits reduce even more leading to Mr.Raju overstating his company’s revenues. While the revenues are in tens of crores, he manipulates the accounts to show them in the thousands.

Since the promoters and Mr.Raju’s family members hold minority equity stakes of Satyam Computers, Mr.Raju feels that if he reported the real figures his company could easily be a victim of a takeover. Therefore he continues to fudge figures and shows overstated numbers in quarterly reports and accounts.

Things start to become even more desperate and the fudging continues.

Mr.Raju realizes that he can’t continue to fudge figures anymore and decides to throw the dice one last time.

This time he decides to acquire Maytas Infra, A family owned company. The acquisition of Maytas could explain the discrepancies between the non-existent assets of Satyam and the existent ones. Due to massive shareholders oppositions the Maytas deal is called off. More allegations of corruption arise within the Satyam fold and the World Bank, an important client of Satyam decides to ban Satyam from doing business with the World Bank for eight years.

Finally, the writing is on the wall.Ramalinga Raju resigns realizing there are no other options left.

GOLD RESERVES AS ON DEC 2007

Gold reserves (or gold holdings) are held by central banks as a store of value. In 2001, it was estimated that all the gold ever mined totaled 145,000 tonnes.

1. One tonne of gold equated to a value of US$25.75 million as of October 2008 ($730/troy ounces)

2. The total value of all gold ever mined would be $3.39 trillion at October 2008 prices.

At the end of 2004, central banks and official organizations held 19% of all above-ground gold as a reserve asset.

3. About one percent of all above-ground gold (370 metric tonnes) was mined in the first five years of the California Gold Rush (worth approximately $11 billion at July 2008 prices).

4. IMF gold reserves refers to 3,217 tonnes of gold held by the International Monetary Fund. It is currently priced at $42 a troy ounce ($1,370/kg) for accounting purposes, a price that was fixed in 1971 just before the Nixon administration officially delinked the U.S.dollar from gold and instead allowed market forces to set the dollar's worth. An attempt to revalue the gold reserve to today's value has met resistance for different reasons. For example,Canada is against the idea of revaluing the reserve, as it would flood the market with gold and therefore depress its price.

5. It is also not clear whether the gold reserve is the property of the IMF or of member countries. As of September 2008, gold exchange-traded funds held 1,039 tonnes of gold in total for private and institutional investors.

6. The United States' holding of gold is worth approximately $241 billion (July 2008). Although the United States has the largest reserves of individual countries, in total the Eurozone gold holdings are greater (11,065 tonnes as of December 2007).

SEBI's clause call: No misuse of client funds by brokers

The Securities and Exchange Board of India (SEBI) will consider revamping key clauses in the client-broker agreement to prevent stock brokers from misusing client funds.

The dramatic crash in the stock market at the beginning of this year and the ensuing liquidity crisis led to misuse of client funds by many broking firms. Acting on this, SEBI had formed an informal committee — comprising senior officials from both exchanges, brokers, and investors’ representatives — in June 2008 to address the issue. “The committee has sent its recommendations to SEBI to make the agreement more investor-friendly and less cumbersome. It is very likely that some changes will come through,” said a person familiar with the development. In the current structure, an account opening form, known as ‘Individual Client Registration Form’, has boxes which the investor has to tick depending on whether he wants to trade in cash, derivatives or debt markets. There have been instances, where brokers have ticked the derivatives option after the client has filled in the form, and then used his account to punt in the market. To curb this practice, SEBI is considering introducing different colour pages in the form so that the investor knows what he is applying for, and the broker will not be able to make changes later on. The committee has proposed reducing the number of signatures to be done by clients in the agreement. If implemented, the agreement will henceforth require just half-a-dozen signatures as opposed to nearly 20 signatures at present. After the agreement is signed, brokers will be required to give the copy of the agreement, signed by both parties, to clients. Currently, the form has a section titled “adjustment of balance in family accounts”, which gives a room to the broker to adjust the outstanding balance of two family members against each other without the consent of the other client. That will no longer be possible, once the new agreement comes into effect. The committee has recommended a provision to have a prior consent from the member on the form to do so. Further, the committee has said that the broker should be compulsorily required to make the account ‘zero balance’ every quarter by exchange of cheques so that disputes don’t go beyond three months. This should be accompanied by a balance confirmation from the client with signature at the end of every financial year. It is also recommended that there should be separate forms — one having mandatory requirements by SEBI and other with optional conditions stipulated by the broker. Currently, stipulations are mixed in one form, which also includes certain conditions not mandated by regulator, but incorporated by the broker as a safeguard against potential legal action by the client. Sources said that initially, brokers on the SEBI panel were resisting these moves, as these would involve more time and costs, besides making them more accountable to their clients. But due to increasing cases of client-funds misuse coming to light, brokers had to bow down to pressure from other committee members.

WHAT ARE BFSI COMPANIES?

Banking, Financial Services and Insurance (also known as BFSI) is an industry name. This term is commonly used by IT/ITES/BPO companies to refer to the services they offer to companies in these domains. Banking may include core banking, retail, private, corporate, investment, cards and the like.

Financial Services may include stock-broking, payment gateways, mutual funds etc. Insurance covers both life and non-life. A lot of data processing, application testing and software development activities are outsourced to companies that specialise in this domain.

Satyam's Experiment In Stupidity

Nobody takes shareholders for a ride – that’s the message that’s gone out loud and clear to the owners and promoters of Satyam Computers, one of India’s biggest IT companies. A corporate fiasco that began as little as a day ago has ended abruptly with the Board of Satyam throwing in the towel against a vastly growing majority of their own shareholders.Satyam’s decision to acquire Maytas Infra Limited was a very difficult decision to swallow for the shareholders. Questions were asked about the need of the acquisition. More importantly, how exactly was the company justified in spending a lot of money on a family owned company?

Satyam knew that they would not in any way have it easy in acquiring Maytas - an infrastructure company owned and operated by members of the same family that also runs Satyam Computers. Satyam did in fact play safe and announced the Maytas acquisition plan a day earlier late in the evening after the markets had closed because had they done so a few hours earlier the stock would have been hammered.

Nonetheless, the stock was hammered anyway and the impact of the announcement had the uppermost management of Satyam in crisis control mode. Satyam’s stock listed on the New York Stock Exchange was beaten down by half its market value.

Fearing the same reaction a few hours later on the Indian stock markets, Satyam’s home bourses; the company immediately realized the extent of the damage they had caused and announced that they had decided to drop the plan to acquire Maytas.

What had happened in New York was only the beginning because on the Sensex and the Nifty; Satyam’s stock was mercilessly drubbed into the sub-200 levels for the first time after a year. By the time the session closed,the stock had closed thirty percent lower leaving the management especially the Board of Directors with an important lesson to heed their own shareholders.

Shareholder opposition to the Maytas acquisition has been eminent for quite a while but their reaction to the company’s enforcement was definitely underestimated by Satyam.

Right from the morning of December 17, 2008 Satyam’s shareholders; big investment, mutual fund houses and average small investors systematically dumped their shares and continued to do so even after they learnt that the Maytas acquisition plans had been cancelled. It was clearly a lesson to Satyam from their shareholders.

There was definitely no need for Satyam an IT company to acquire Maytas-an infra development company. The fact that it was a family owned company that would cost 1.6 billion dollars to Satyam made things worse. If Satyam indeed felt the need to diversify into other fields, then many other choices were available.

It’s been an episode that has definitely embarrassed Satyam and has once again raised the question of Corporate Governance. Satyam in fact went ahead and said that they did not even need shareholder approval to acquire Maytas. It’s been this attitude that’s led to the fall in their share price.