The story of India's Biggest Corporate fraud!

The new India, or Bharat, is all about new technology, 5G adaptation, world-class infrastructure, changing railways, increasing D-mats and assets of mutual funds, and what not. India is on a dream run right now. There is a good chance that many nations envy our progress. We have given them many reasons to feel so. But when you try and compare the new India with the old one, you will find a few things that were eminent in the past as compared to India 2024. The most prominent were different types of scams. In the past few years, India hasn't actually experienced any significant fall in scams. Prior to 2010, the scams were more open. Maybe, post-2010, scamsters have found better ways to hide it. The size of the scam has definitely decreased. All the ones that have happened in the past involved a few thousand crores. It might sound a bit skeptical, but my favorite among many was the Satyam scandal. Don't worry. I am not inspired. Rather, I was amazed when I first heard about this case. I hope I can transfer that shock through this blog. So, let's get it started. 

A man comes out of his bathroom and goes towards his walk-in closet, where he has an outrageously expensive collection of suits. He then moves towards the shoe section, where he has around 300 different pairs, followed by his watch collection, which includes a few Rolexes and Patek Phillips. He then enters his private lift, which opens the gateway to what car lovers like me would call heaven: his garage. A shofar-driven Mercedes slides in, which takes this man to his office. This all sounds like a Hollywood movie, doesn't it? Well, believe it or not, this isn't a Hollywood story. Rather, this is the life that every 2000's teenager dreamt of, envying the lifestyle of none other than Mr. Ramalinga Raju. R. Raju was a flamboyant and crooked businessman who scammed not just India, average Indians, and the tax authorities but was successful in conning foreigners too. Having breakfast in Paris, cruising in Florida, shopping in Venice, and dinner at the Burj Al Arab was what he enjoyed. 

 

All these things were very regular for R. Raju. Mr. Raju was the managing director and CEO of a listed Indian company called Satyam Computers. Once India's 4th largest company in terms of market cap and 5th largest employer with 52000 employees, it sinks deep into the ocean after getting hit by a confession. You all might have heard about Bernie Madoff. What this man did would make Bernie Madoff sound like a chipmunk. Mr. Raju was called the Bill Gates of India. Ironically, four months before this scandal came out, he was felicitated with an award for corporate governance. It all starts when Mr. Raju returns to his motherland after completing his MBA from Ohio University. When he came back, his father found out that Mr. Raju was interested in setting up a restaurant. The venture failed within a few months. Inspired by Late. Mr. Dhirubhai Ambani, he ventured into the textile business and started exporting cotton, which again didn't last long. His last attempt to start a construction company also didn't work out.

He was basically trying his luck in doing business with the three basic necessities of humans: roti, kapda, and aur makan. Having made a few foreign connections when he was completing his MBA in Ohio, he learned that the next big thing will be the internet. With the help of 10 software engineers, he started Satyam Computers. As Farrah Gray once said, "Money doesn't change people; it rather magnifies who you really are'. One year into the operations of Satyam Computers, Mr. Raju ventured into the world of conning people by forming Maytas Ltd. Mr. Raju wanted to keep his legal and illegal businesses separate, and hence he used Maytas as a flagbearer of all illegal activities. During that time, the Hyderabad metro project was under discussion, and he knew that if the project got sanctioned, land values would skyrocket. Hence, he somehow managed to bribe an office that provided him with the blueprint so that Mr. Raju could buy land. Before we talk any further about his wrongdoings, you should know that almost every single Fortune 500 company was a client of Satyam. I guess MBA in Ohio means money before anything.

 

The year 2000 was a big breakthrough for Satyam Computers. Engineers hadn't thought about problems revolving around 2000 as a year in computers. Since the computers only mention the last two digits of the year, 00 would have caused a lot of chaos all over the world. Mr. Raju took charge of this, and with the help of his team, they found a solution to it. I don't completely believe this, but this is what I have heard.

After getting listed on the exchange in 1991, Satyam started manipulating their books of accounts. Let me give you an idea of the scale of his dubious operations. When Satyam actually made Rs 60 crore in profits, Mr. Raju asked his accountants to report it as Rs 6,000 crore. When the company sold goods worth Rs 120 crore, he reported it as Rs 12000 crore. That was the scale at which Satyam and Mr. Raju were operating. Looking at these numbers, people started buying their shares, taking Satyam from Rs 6 to Rs 600 in a matter of a few months. Through his offshore entities, Mr. Raju had traded heavily in his own stocks, earning thousands of crores in profits. There were a few enlightened souls who were doubting this rise because no other IT company was performing as well as Satyam. Their monthly sales were growing in double digits when other companies were struggling with single digits. 

 

Mr. Raju was a well-read man. He knew what mistakes other scamsters had committed in the past, and hence he created more than 320 small companies through which he diverted funds so that no regulator could catch him. Since businesses can use expenses as a tool to decrease their taxable income, Mr. Raju offered his servants and farmers managerial positions with a mere Rs 5,000–Rs 10,000 salary. These people had no idea what they were signing up for. Mr. Raju used his servants as a tool to divert money. But what was his exact source of funds? He knew that if he created a good perception of his company in the market, people would feel compelled to buy Satyam. As mentioned earlier, he had offshore entities that were taking advantage of this manipulation and earning big profits. He used these profits and pledged some of his shares in order to get loans. This was his main source of capital. Share manipulation and share pledging. With the help of these funds, he started buying land aggressively. He treated properties like shares. He would buy one just to sell it at a profit a few months later. 2008 was a time when real estate was in a bubble. Americans were enjoying it, and so were Indians. Increased liquidity in the real estate sector helped him trade real estate like he was trading groundnuts. 

This was his plan, and to an extent, it was pretty successful. Historically speaking, real estate prices have always gone up, sometimes in single digits and sometimes in double digits. That's why Mr. Raju was so confident. But someone has truly said that the universe does not carry debt. It always returns to you what you gave it. Bernie Madoff was caught, and now it was Mr. Raju's turn. Ironically, the country that infused liquidity into the real estate sector was the same country that chocked him. In 2008, after the bankruptcy of the world's 4th largest investment bank with $700 billion in assets, the US markets went on hibernation. The real estate sector crashed, becoming the protagonist of the financial crisis all over the world. The majority of the money that Raju had invested was in real estate, whose valuations evaporated by 40–50% in a span of a week. Maytas was his cash cow. He used their operations as if they were Satyam's. Now, because of the recession, Maytas experienced a fall in profitability and revenues, which scared Mr. Raju since they were the only source through which he kept Satyam's sentiments high in the markets.

All the 320 companies that Satyam had had a system called MIS, or management information system, which helped the management track every single department in the company. This system was fudged by Mr. Raju so that he could easily manipulate the numbers whenever he wanted. He was manipulating stocks, companies, and his own books of accounts. The majority of the transactions were being undertaken with random and dubious entities. If anyone had allocated 10 minutes to reading their balance sheet and footnotes, this scam wouldn't have lasted for 20 long years. But when you are in a bull run, who cares? A similar thing happened with the Adani group as well. He was in trouble, but he was trying every possible thing to keep this confidential and his companies afloat. He passed a resolution in the board meeting saying that Matyas should take over Satyam, filling that gap in profitability and a healthy balance sheet. Every resolution requires shareholder voting, which Mr. Raju avoided. The shareholders were angry, resulting in a revolt against this takeover.

Finding no way out of this chakravyuha, he asked none other than Mr. Kothari of DSP. I don't know why, but every scam in India since 1992 has involved Mr. Kothari. May it be the Harshad Mehta scam, the Ketan Parekh scam, Yes Bank scam, or even the DHFL scam, Mr. Kothari suddenly appears at the crime scene out of nowhere. Mr. Raju confessed everything to Mr. Kothari and asked him to take over Satyam with the funds that retailers had given him. Surprisingly, Mr. Kothari rejected the offer, saying that this wasn't "legitimate" and that he would inform the SEBI about his wrongdoings. Mr. Raju wasn't expecting this because Mr. Kothari had undertaken dubious deals in the past and risked retailers' money in order to get fat commissions. Finding no way out, Mr. Raju wrote a letter to his shareholders, bondholders, SEBI, and tax authority and mailed one to every business channel, confessing his wrongdoings. Everyone was in shock. No one had ever imagined something like this. How can India's 4th largest company be a fraud?  

Investors panicked, and Satyam's shares fell from Rs 650 to Rs 6 in 2-3 trading sessions. As usual, retailers were the most hit. Since this was the 4th largest company and it did employ a few thousand people, the government asked other IT companies for a takeover. L&T and Tech Mahindra came forward, and Tech M won the bid by Rs 58 per share. Four days before he wrote this letter, he sold his shares. PWC was banned for 2 years since they were auditing Satyam's books. The funny thing was that Satyam used to pay twice as much in fees as compared to other IT companies to his auditors. The Satyam scandal had a lot of lessons.

1. Promoters running behind glamour is a red flag while investing.

2. Having some knowledge about the fundamentals of a company is a must.

3. Bull markets are filled with a lot of irrationality, and bear markets are filled with a lot of pessimism. Having a rational mind will make all the difference.

4. Vigilance is required while analyzing mutual funds and the respective fund managers.

5. Always have an emergency fund prior to investing in equities. This fund will give you the stability and liquidity you need in pessimistic situations.

 

With that being said, I have nothing left to add. Benjamin Graham once said, "Markets can remain irrational longer than you can remain solvent."

Happy Investing.