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Satya m Sca m Was Caught Way Back In October 2008
The Sat yam fr aud may have co me int o t he lime light aft er Ramalinga Raju ¶s
d isclo sure o f alar ming fact s regarding t he cooking up o f account ing books to an
upward inflat ed amount of Rs. 7000 crores. The Sat yam scam has beco me
t ransp arent in public do main no w it se lf, but it would co me t o your surpr ise, t hat
an analyst had figured it out way back in Oct ober 2008.
At t he analyst confer ence call, Kawalje et Saluja fro m Kot ak Secur it ies had
enqu ired t he rat io nale for t he $550 million lying idle in a current account . A
depo sit in a current account doesn¶t att ract any int erest .
The analyst int eract io n, organised aft er Sat yam¶s second quart er ear ning s o f
2008-09, was addr essed by chair man Ramalinga Raju, CFO Sr inivas Vadlaman i
and Ram Mynampat i, member o f t he board, who is now t he act ing CEO.
Cit ing no specific reason for parking t he funds in t he current acco unt ,
Vad lamani said t hat t he mo ney was rest r ict ed t o t he seco nd quart er only and
t hereaft er t he amount goes to t he deposit account . Unconvinced by t he answer,
Salu ja probed furt her.
³But Sr inivas if I look at your deposit account for t he last four quart ers t hat
nu mber has remained abso lut ely flat and most of t he increment al cash flo ws
have been parked in current account s. Would you highlight t he reasons for it ,´
t he analyst want ed t o know.
He also po int ed out t hat t his t rend had been co nt inuing for t he past few quart ers.
To t his Vadlamani replied: ³No, basically what will happen is t his amo unt will
be basically in different count ries and t hen we would br ing t hem t o India, based
o n t he needs. So me o f t hem are in o vernight deposits and we have kind o f
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p laced t hem int o normal t er m deposit s. So fro m t he next quart er onwards, we
will see t hat as part of t he deposit s.´
Over a dozen analyst s fro m bot h glo bal and lo cal brokerages-Bank o f Amer ica,
Go ld man Sachs, Susquehanna, Gilfor d Secur it ies, ICICI Secur it ies and
Edelweiss part icipat ed in t he Oct ober 17 conference call. On asked about t he
lo w yield ear ned by Sat yam o n it s excess funds, which was 5.3% against t he
ind ust r y rat e of 9-10 %, Vadlamani replied t hat t he yield is roughly around 8%
o r so .
Satya m CFO Srinivas Vadlamani Blames Raju Over The Satya m Sca m
Sat yam¶s chief financia l o fficer (CFO) Vadlamani Sr inivas on Sunda y cla imed
t hat he had no knowledge o f fudging o f o ver Rs 7,000 crore by for mer chair man
B Rama linga Raju.
Acco rd ing t o sources, Vadlamani in his confessio n st at ed he wasn¶t aware o f t he
fraud as his 80- member t eam provided him document s and he blindly signed o n
t hem. ³Team gave me document s, I blindly s igned´, says S at yam¶s ex-CFO.
In his confessio nal st at ement to t he police, Srinivas said t he audit ors never
po int ed o ut any ³deficiencies´ dur ing t heir discuss io ns. But t he most st art ling
revelat io n was t hat fixed deposit s wer e unreal and fict it ious which wer e
managed wit h an under st anding bet ween t he audit sect ion and management .
³T he bank deposit s were handled dir ect ly by Raju and he was specifically asked
no t to lo ok int o it ´, Srinivas said. This was corroborat ed in Ra ju¶s confessio na l
st at ement which said ³myself and my brot her used t o t ake decisio ns and inst ruct
o ur CFO to do as inst ruct ed³. He admit t ed t hat t he account s were manipulat ed
abo ut seven years.
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His co nfessio n is per haps a po int er t o the fact t hat t he promot ers could have
fo rged bank document s t o show fict it ious deposit s. This put s a quest io n on t he
po ssib le invo lvement of banks in t he sca m.
Tho se who should have a pret t y clear idea by now are t he so ft ware co mpany¶ s
main banker s ²ICICI Bank, Bank of Baroda, BNP Paribas, Cit ibank, HDFC
Bank and HSBC.
In t he no r mal course, Sat yam¶s st at utory Audit or Pr icewat erhouseCoopers wo u ld
have demanded cert ificat es fro m banks at test ing t o t he exist ence o f mo ney in t he
IT fir m¶s account s. Did t he banks indeed cert ify t hat t hey had t he mo ney? Or
were cert ificat es forged and present ed t o Pr icewat er houseCoopers?
Sr inivas has po int ed fingers at his assist ant Rama Kr ishna who has been
wo rking him for about t en years. ³Pr ior to quart er ly board meet ing s
Ramakr ishna will prepare balance sheet wit h t he assist ance of his t eam wit h
int er nal emp lo yees. I do not pay much att ent ion t o t he det ails o f t hat balance
sheet .
On his part , Raju said ³we want ed t o show more inco me in t he account to avo id
ot hers fro m invo lving in t he co mpany affairs and any ot her possible ho st ile
t akeo ver sit uat io n, and hence, manipulat ed t he balance sheet to att ract mo re
bu siness and show unavailable amount as available cash in hand´, said Raju.
Cr ime I nvest igat ion Depart ment sleut hs raided houses o f t he Raju brot hers in
Ju bilee Hills and Vadla mani¶s r esidence at Habsiguda on Sunda y.
Aro u nd 8am, five specia l t eams o f CID personnel r eached t he houses o f t he
Raju s o n Road Number 62, Jubilee Hills, and Vadlamani¶s house on St reet
Nu mber 3, Habsiguda, ar med wit h search warrant s. Dur ing t he searches, t he
spec ial t eams, co mpr is ing CI D and cit y po lice per sonnel, seized several
do cu ment s and copied dat a fro m co mput ers on t he t hree premises. The CID is
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also wo rking wit h SEBI and Regist rar of Co mpanies in t he searches at Sat yam¶ s
o ffices in Hyderabad.
The CID sleut hs said t here wer e no raids on houses o f t he direct ors of t he
super sed ed board (t he Cent re named t hree new dir ectors on Sunday) and none o f
t hem had been arrest ed.
´As part of t he invest igat ion, all persons or organisat ions invo lved in t he
Sat yam case will be quest io ned. But so far, Sat yam¶s board of direct o rs,
ind ependent direct ors and PwC per sonnel have not been quest ioned,´ addit io nal
DG (CID) A S ivanarayana said.
Vad lamani, who was quest ioned by CI D offic ials for near ly 18 hours, was
pro duced befor e addit io nal chief met ropolit an magist rat e P Ramakr ishna o n
Sund ay evening. He was remanded in judicial cust ody t ill Januar y 23 and was
shift ed t o t he Chanchalguda jail.
Po lice have sought cust ody of Vadlamani and t heir pet it ion will co me up fo r
hear ing on Monda y. T he CI D offic ials were t ight lipped on t he revelat io n.
³Vad la mani has t o be quest ioned furt her. So, we have mo ved a pet it io n seek in g
his cu st o dy,´ IG (CID) VS K Kau mudi said.
Govt. To Provide Help To CBI In Satyam Scam Case
The And hra Pradesh go ver nment on Wednesday pro mised t o render all poss ib le
assist ance t o t he Cent ral Bureau o f I nvest igat ion ( CBI) in probing t he massive
fraud in S at yam Co mput er Services aft er t he High Court expressed it s
d isp leasure over t he lack of coo perat io n wit h t he invest igat ing t eam.
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On a d ir ect ion fro m t he court , t he government filed a report wit hin t wo and half
ho urs, det ailing t he st eps it would t ake to ext end cooperat ion wit h t he mu lt i-
d iscip linar y t eam o f t he CBI.
Aft er being rapped by t he judge for not cooperat ing wit h t he CBI t eam, t he
go ver nment infor med t he court t hat it would provide t he st at e-owned Dilku sha
Guest Ho use on Raj Bhavan road t o t he invest igat ing o fficia ls.
It also promised t o provide all necessar y cooperat io n t o t he agenc y t o comp let e
t he pro be.
Ear lier, in an ext raordinar y mo ve t he CBI approached t he H igh Co urt ,
co mp lain ing t hat t he gover nment was not ext ending cooperat io n in t he
invest igat ions.
Tak ing a ser io us not e of t he gover nment ¶s at t it ude, Just ice N.V. Ramana
d irect ed t he st at e government t o file it s reply wit hin t wo and ha lf hours.
The CBI plea and t he court ¶s displeasur e have co me as major embarrassment t o
t he Co ngr ess gover nment , which was already under fire fro m t he opposit io n fo r
being so ft t owards t he disgraced founder and for mer chair man o f Sat yam B.
Ramalinga Raju and ot her accused.
The CBI last week took over t he invest igat ions int o t he Rs.70 billio n account ing
fraud, t he biggest in I ndia¶s corporat e hist ory.
The premier invest igat ing agency for med a mult i-d isciplinar y t eam t o probe t he
fraud, which Rama linga Raju admit t ed t o Jan 7.
Tho ug h CID handed over all t he evidence and mat er ial gat hered so far to t he
CBI t eam, t he lat t er felt t he st at e aut horit ies were not providing necessar y
facilit ies.
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Ramalinga Raju, his brot her and for mer managing direct or B. Rama Raju,
fo r mer chie f financia l o fficer Vadla mani Sr inivas and t wo for mer audit ors fro m
Pr ice Wat erhouse have been arrest ed and are lodged in Chanchalguda cent ral jail
here.
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The Crash that Shook the Nation
The 176-po int Sensex crash on March 1, 2001 came as a major shock for t he
Go ver nment of I ndia, t he st ock market s and t he invest ors alike.
Mo re so , as t he Unio n budget t abled a day ear lier had been accla imed fo r it s
gro wt h init iat ives and had pro mpt ed a 177-point increase in t he Sensex.
This sudden crash in t he st ock market s prompt ed t he Secur it ies Exchange Bo ard
o f I nd ia (SEBI) to launch immediat e invest igat ions int o t he vo lat ilit y o f st o ck
mark et s.
SEBI also decided t o inspect t he books of sever al broker s who were suspect ed o f
t rigg er ing t he crash. Meanwhile, t he Reserve Bank of I ndia (RBI) ordered so me
banks t o fur nish dat a relat ed to t heir capit al market exposure.
This was aft er media report s appeared regarding a pr ivat e sect or bank havin g
exceeded it s prudent ial nor ms o f capit al exposure, t hereby cont r ibut ing t o t he
st o ck market vo lat ilit y.
The p anic run o n t he bourses co nt inued and t he Bo mbay St ock Exchange (BSE)
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President Anand Rat hi's (Rat hi) resignat ion added t o t he downfall. Rat hi had t o
resig n fo llowing allegat ions t hat he had used so me pr ivileged infor mat io n,
which co nt r ibut ed t o t he crash. The scam shook t he invest or's confidence in t he
o verall funct io ning o f t he st ock market s. By t he end o f Mar ch 2001, at least
eig ht peo ple wer e report ed to have co mmit t ed suic ide and hundr eds o f invest o rs
were dr iven t o t he br ink o f bankrupt cy. The sca m opened up t he debat e o ver
banks fu nding capit al market operat ions and lending funds against co llat eral
secur it y. It also raised quest io ns about t he validit y o f dual cont rol o f co -
o perat ive banks.
The Man who Triggered the Crash
KP was a chart ered account ant by pro fessio n and used t o manage a famil y
bu siness, NH Secur it ies st art ed by his fat her.
Kno wn for maint aining a low pro file, KP's only dubious claim t o fame was in
1992, when he was accused in t he st ock exchange scam.
He was known as t he 'Bo mba y Bull' and had co nnect io ns wit h movie st ars,
po lit icians and even leading int er nat io nal ent repreneurs like Aust ralian med ia
t yco o n Kerr y Packer, who part nered KP in KPV Vent ures, a $250 millio n
vent ure capit al fund t hat invest ed mainly in new econo my co mpan ies.
Over t he year s, KP bu ilt a net work of co mpanies, ma inly in Mumba i, invo lved in
st o ck market operat io ns.
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The r ise o f ICE (I nfor mat ion, Co mmunicat ions, and E nt ert ainment ) st ocks al l
o ver t he wor ld in ear ly 1999 led t o a rise of t he I ndian st ock market s as well.
The do t com boom cont r ibut ed to t he Bull Run led by an upward t rend in t he
NASDAQ. The co mpanies in which KP held st akes inc luded Amit abh Bachchan
Co rpo rat ion Limit ed ( ABCL), Mukt a Art s, Tips and Pr it ish Nand y
Co mmu nicat ions.
He also had st akes in HFCL, Glo bal T elesyst ems (Glo bal), Zee Telefilms, Crest
Co mmu nicat ions, and Pent aMedia Graphics KP select ed t hese co mpanies fo r
invest ment wit h he lp fro m his r esear ch t eam, which list ed high gro wt h
co mpanies wit h a small capit al base. According t o media report s, KP t oo k
ad vant age o f low liquid it y in t hese st ocks, which event ually came t o be kno wn
as t he 'K-10' st ocks.
Excerpts
The Fact ors t hat Helped t he Man
Acco rd ing t o market sources, t hough KP was a successful broker, he did no t
have t he mo ney t o buy large st akes.
Accor ding t o a r ep or t, 12 la kh s har es of G lobal in Ju ly 199 9 wou ld have cost KP
ar ound Rs 200 million. T he stake in Aft ek I nf os ys wou ld ha ve cost him Rs 50 million,
while t he Z ee a nd HFCL stakes wou ld have cost Rs 250 million each.
Ana lysts claimed t hat KP bor r owed fr om var ious compa nies a nd ba nks f or this
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pur pos e. H is f ina ncing met hods wer e fair ly simp le. H e b ou ght s har es when t hey wer e
tr ading at low pr ices and sa w t he pr ices go up in t he bu ll mar ket while cont inu ous l y
tr ading. When t he pr ice was high enou gh, he pledg ed t he s har es wit h ba nks as
collat er al f or fu nds. H e als o b or r owed fr om compa nies like HFCL.
The S yst em t hat Bred These Fact ors
The sma ll invest ors who lost t heir life's savings felt t hat all part ies in t he
fu nct io ning o f t he market were responsible for t he scams.
They o p ined t hat t he broker-banker-pro mot er nexus, which was deemed to have
t he accept ance of t he SEBI it self, was the main reason for t he scams in t he
Ind ian st ock market s.
SEBI's measures wer e widely cr it icized as being react ive rat her t han proact ive.
The mark et regulat or was blamed for being lax in handling t he issue of unu sua l
pr ice mo vement and t remendous vo lat ilit y in cert ain shares over an 18- mo nt h
per io d pr ior to Febr uar y 20 01.
The People that the Syste m Duped
KP was released on bail in May 2001. The duped invest ors could do not hing
kno wing t hat t he legal proceedings would drag on, perhaps for year s.
Obser vers opined t hat in spit e of t he correct ive measures t hat were
imp le ment ed, t he KP scam had set back the Indian eco no my by at least a year.
React ing to t he sca m, all KP had to say was, "I made mist akes."
It was widely believed t hat more t han a fr aud, KP was an example o f t he rot t hat
was wit h in t he I ndian financial and regulatory s ystems.
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! was an I ndian st ockbroker and is alleged t o have engineered t he
r ise in t he BSE st ock exchange in t he year 1992. Explo it ing several loopho les in
t he bank ing syst em, Harshad and his associat es sipho ned o ff funds fro m int er-
bank t ransact ions and bought shares heavily at a premium across man y
seg ment s, t r igger ing a r ise in t he Sensex. When t he scheme was exposed, t he
banks st art ed demanding t he mo ney back, causing t he co llapse. He was lat er
charged wit h 72 cr iminal o ffenses and more t han 600 civil act io n suit s wer e
filed ag ainst him. He died in 2002 wit h many lit igat ions st ill pending against
him.
Early life
Harshad S hant ila l Meht a was bor n on 29 July in a Gujarat i Ja in family o f
mo d est means. His ear ly childhood was spent in Mumbai( Kandiva li) where his
fat her was a small-t ime businessman. Lat er, t he family mo ved t o Raipur in
Chat t isgadh aft er doctors advised his fat her t o move t o a dr ier place o n acco unt
o f his ind iffer ent healt h. He st udied in Holy Cross Higher Seco ndar y S cho o l,
Byro n Bazar,Raipur, but Raipur could not ho ld back Meht a for long and he was
back in t he cit y aft er co mplet ing his schooling.
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Stock Market Scandal
Meht a gradually rose t o beco me a st ock broker on t he Bo mbay St ock Exchange
and lived almo st like a movie st ar in a 15,000 square feet apart ment , which had
a swimming pool as well as a go lf pat ch. He also had a t ast e for flashy cars,
which u lt imat ely led t o his downfall. T he year was 1990. Year s had gone by and
t he dr iv ing ambit io ns o f a young man in t he faceless crowd had been r ealised.
Harshad Meht a was making waves in t he st ock market . He had been bu ying
shares heavily since t he beginning of 1990. The shares which at t ract ed att ent io n
were t ho se o f Associat ed Cement Co mpany ( ACC). The pr ice o f ACC was bid up
to Rs 10,000. For t hose who asked, Meht a had t he replacement cost t heor y as a n
exp lanat ion. The t heor y basically argues that old co mpanies should be valued o n
t he bas is o f t he amount of mo ney which would be required t o creat e ano t her
such co mpany.
Thro ugh t he seco nd half o f 1991, Meht a was t he dar ling of t he business med ia
and ear ned t he so br iquet of t he µBig Bull¶ , who was said t o have st art ed t he bu ll
run. But , where was Meht a get t ing his endless supply o f mo ney fro m? Nobo d y
had a clue.
On Apr il 23, 1992, jour nalist Suchet a Dalal in a co lumn in T he T imes o f I nd ia
expo sed t he dubious ways o f Harshad Met ha. The broker was dipping illegall y
int o t he banking syst em t o finance his bu ying.
The aut hors expla in: ³T he crucial mechanism t hrough which t he scam was
affect ed was t he read y for ward (RF) deal. The RF is in essence a secur ed sho rt -
t erm (t yp ically 15-day) loan fro m one bank to anot her. Crudely put , t he bank
lends against gover nment secur it ies just as a pawnbroker lends against jeweller.
The bo rrowing bank act ually sells t he secur it ies t o t he lending bank and bu ys
t hem back at t he end of t he per iod o f the loan, t ypically at a slight ly hig her
pr ice.´
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It was t his ready forward dea l t hat Harshad Meht a and his cronies used wit h
great success t o channel mo ney fro m t he banking s yst em.
A t yp ical read y forward deal invo lved t wo banks brought t oget her by a broker in
lieu o f a co mmiss io n. The broker handles neit her t he cash nor t he secur it ies,
t ho ugh t hat wasn¶t t he case in t he lead-up to t he sca m.
³I n t his set t lement process, deliver ies of secur it ies and payment s were made
t hro ugh t he broker. That is, t he seller handed over t he secur it ies t o t he bro ker,
who passed t hem t o t he buyer, while t he buyer gave t he cheque t o t he bro ker,
who t hen made t he payment t o t he seller.
In t his set t lement process, t he buyer and t he seller might not even know who m
t hey had t raded wit h, eit her being known only t o t he broker.´
This t he brokers could manage pr imar ily because by now t hey had beco me
mark et makers and had st art ed t rading on t heir account . To keep up a semblance
o f legalit y, t hey pret ended t o be undert aking t he transact ions on behalf o f a
bank.
Ano t her inst rument used in a big way was t he bank r eceipt (BR). I n a read y
fo rward deal, secur it ies wer e not moved back and fort h in act ualit y. I nst ead, t he
bo rro wer, i.e. t he se ller of secur it ies, gave t he buyer o f t he secur it ies a BR.
As t he aut hors wr it e, a BR ³confir ms t he sale o f secur it ies. It act s as a receipt
fo r t he mo ney received by t he selling bank. Hence the name - bank receipt . It
pro mises t o deliver t he secur it ies t o t he buyer. It also st at es t hat in t he mea n
t ime, t he seller ho lds t he secur it ies in t rust of the buyer.´
Having figured t his out , Meht a needed banks, which issue fake BRs, or BRs no t
backed by any go ver nment secur it ies. ³T wo small and lit t le known banks - t he
Bank o f Karad ( BOK) and t he Met ropolit an Co-operat ive Bank (MCB) - came in
hand y fo r t his purpose. These banks were willing t o issue BRs as and when
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requ ir ed, for a fee,´ t he aut hors point out.
Once t hese fake BRs were issu ed, t hey were passed on t o ot her banks and t he
banks in t urn gave money t o Meht a, obviously assuming t hat t hey wer e lend ing
against gover nment secur it ies when t his was not really t he case. T his mo ney was
used t o drive up t he pr ices o f st ocks in t he st ock market . When t ime came t o
ret urn t he mo ne y, t he shares were so ld fo r a profit and t he BR was ret ired. T he
mo ney due t o t he bank was ret urned.
The game went on as long as t he st ock pr ices kept going up, and no one had a
clue abo ut Meht a¶s modus operand i. Once t he scam was exposed t hough, a lo t o f
banks were left ho lding BRs which did not have any value - t he banking syst e m
had been swindled o f a whopping Rs 4,000 crore. When t he scam was fina lly
revealed, t he Chair man o f t he Vijaya Bank co mmit t ed suicide by jump ing fro m
t he o ffice roof because he k new t hat if people co me t o know about his
invo lvement in issuing cheques t o Harshad Meht a, people would accuse him.
Meht a made a br ief co meback as a st ock market guru, giving t ips on his o wn
websit e as well as a weekly newspaper co lumn. This t ime around, he was in
caho ot s wit h owners o f a few co mpanies and reco mmended only t hose shar es.
This g ame, t oo, did not last long.
Int erest ingly, by t he t ime he died, Meht a had been convict ed in only one o f t he
man y cases filed against him.
T ill no w, t he real st ory behind t he ent ir e scam is unknown. The recent Hind i
mo vie 'Gafla' showed t his scam in a differ ent perspect ive.
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