B. Ramalinga Raju, chairman of Satyam Computer Services, admits to balance sheet fabrication and sends India's stock market into a tailspin
Chairman B. Ramalinga Raju's admission that Satyam Computer Services Ltd's Balance Sheet was completely fabricated got the stock crashing down by 66.5 per cent to Rs 60 from Wednesday's high of Rs 188.70.
The share hit a low of Rs 58, as details of the extent of fraud perpetrated by the promoters shook the stock market and cast a grim cloud over the corporate practices of companies.
The BSE Sensex crashed 470.23 points or 4.55 per cent to 9,865.70, after rising to a high of 10,469.72 earlier Wednesday. Investors aggressively cut their positions. The BSE IT Index plunged 7.70 per cent and BSE Realty tumbled 11.20 per cent.
IT and other sectoral stocks were beaten down badly as the Satyam fraud raised question over corporate governance of other companies also, especially IT.
"The sectors which have done extraordinary well in a very short span of time such as IT and realty attracted distrust as Satyam's case has made investors uncomfortable about these companies," said Kapil Shah, analyst with DBM Wealth Management.
The Satyam fiasco has left a big question mark on corporate governance in India while sending a negative signal to the foreign institutional investors, analysts said.
Manish Sonthalia, VP—equity strategy, Motilal Oswal, said, "It is shocking! It has maligned India's image before the FIIs. In view of the current event, a lot of new regulations are expected in the near term by the regulators. Balance Sheets will be scrutinized meticulously."
The Satyam story poses a big question over the credibility of auditors in general, as PricewaterhouseCoopers was auditor of the company. The bankers to Satyam included Bank of Baroda, BNP Paribas, ICICI, HDFC, Citi Bank, HSBC.
Anita Gandhi, head-institutional business, Arihant Capital, said, "The Indian technology industry was a very important driver for the country's stock market for nearly a decade. Satyam's fraud is expected to lead a severe blow to the entire industry with investors being more cautious going ahead. This raises serious questions on the entire due diligence process conducted by the auditors of Satyam. What is more surprising is the chairman's confession after his resignation. This means, all along, he did have vested interest in keeping the investors in darkness."
Raju's letter to the company board revealed a fraud of unprecedented proportions. He states that Satyam's balance sheet as on Sep 30, 2008, carries an inflated (non-existent) cash and bank balances of Rs 5,040 crore (as against Rs 5,361 reflected in the books).
Further, it carries an accrued interest of Rs 376 crore which is non-existent. The books carry an understated liability of Rs 1,230 crore on account of funds arranged by Raju, and an over stated debtors position of Rs 490 crore (as against Rs 2,651 crore in the books).
For the second quarter ended Sep 30, 2008, Satyam reported a revenue of Rs 2,700 crore and an operating margin of Rs 649 crore (24% of revenues) as against the actual revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore (3% of revenues). This has resulted in artificial cash and bank balances going up by Rs 588 crore in the second quarter alone.
Ankit Sinha, CEO-Spark Advisory, said, "The sentimental impact that was seen across the board was but obvious as the Chairman of Satyam which was one of the reputed company revealed the horrifying internal facts. There are also rumours that the October quarter profit shown by Satyam was inflated. There may not be much impact on the other IT companies and one may see Infosys or TCS go up in next trading sessions. However, if IT companies lower their guidance for the current quarter one may see their stocks plunging in near term."
Amitabh Chakraborty, President—Equity, Religare, said, "Investors now need to pursue due diligence before investing in a company. Take a careful look at the cash position in the balance sheet. Enquire with the bankers."