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    NAVNIRMAN INSTITUTE OF MANAGEMENT

    An

    Assignment

    On

    Financial Scams of Stock Market in India

    In

    Stock Exchange & Portfolio Management

    Submitted To:-

    Mr. Mayur PatelFaculty

    Navnirman Institute of Management

    Submission Date:-

    27 December 2010

    Class: - T.Y.BBA (sem-6)

    Submitted By:-

    Group Members Roll No

    1. Rinkesh Bilimoria 10

    2. Fenil Jariwala 32

    3. Bhavik Jariwala 70

    4. Jiten Rana 97

    5. Pratik Vakharia 120

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    Financial scams

    1). What is financial scams?

    Financial Scam, also known as stock fraud and investment fraud,

    is a practice that induces investors to make purchase or sale decisions on the basis of false

    information, frequently resulting in losses, in violation of the securities laws.

    Generally speaking, securities fraud consists of deceptive practices in

    the stock and commodity markets, and occurs when investors are enticed to part with their

    money based on untrue statements.

    Securities fraud includes outright theft from investors and

    misstatements on a public company's financial reports. The term also encompasses a wide range

    of other actions, including insider trading, front running and other illegal acts on the trading floor

    of a stock or commodity exchange.

    According to the RBI, securities fraud includes false information on a

    company's financial statement and Securities and Exchange Commission (SEC) filings; lying to

    corporate auditors; insider trading; stock manipulation schemes, and embezzlement by

    stockbrokers.

    http://en.wikipedia.org/wiki/Insider_tradinghttp://en.wikipedia.org/wiki/Embezzlementhttp://en.wikipedia.org/wiki/Embezzlementhttp://en.wikipedia.org/wiki/Insider_trading
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    2). Types of Financial Scam:-

    Corporate fraud:-

    Fraud by high level corporate officials became a subject of widenational attention during the early 2000s. It became a problem of such scope that the Bush

    Administration announced what it described as an "aggressive agenda" against corporate fraud.

    Internet fraud:-

    According to Securities and Exchange Commission, criminals engagein pump-and dump schemes, in which false information is spread in chat rooms, forums,

    internet boards and via email (spamming), with the purpose of causing a dramatic price increase

    in thinly traded stocks or stocks of shell companies (the "pump").When the price reaches a

    certain level, criminals immediately sell off their holdings of those stocks (the "dump"), realizing

    substantial profits before the stock price falls back to its usual low level.

    Insider Trading:-

    Insider trading is the trading of a corporation's stock or other security

    by corporate insiders such as officers, key employees, directors, or holders of more than ten

    percent of the firm's shares.

    Microcap fraud:-

    In microcap fraud, stocks of small companies of under $250 million

    market capitalization are sold fraudulently to the public. Its prevalence has been estimated to run

    into the billions of dollars a year.

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    Boiler Rooms:-

    Boiler rooms or boiler houses are stock brokerages that put undue

    pressure on clients to trade using telesales, usually in pursuit of microcap fraud schemes. Some

    boiler rooms offer clients transactions fraudulently, such as those with an undisclosed profitable

    relationship to the brokerage.

    Short Selling Abuses:-

    Abusive short selling, including certain types of naked short selling,

    is also considered securities fraud because they can drive down stock prices. In abusive naked

    short selling, stock is sold without being borrowed and without any intent to borrow. The

    practice of spreading false information about stocks, to drive down their prices, is called "short

    and distort."

    3). Case of financial scam:-

    Let us describe the main aspects by taking the cases of stock market frauds:

    1) Who are the (potential) felons?

    Some with the means to do it can be found among:

    Top executives of listed firms, Also their accountants / auditors / rating agencies Market / finance professionals (bankers, brokers, analysts, consultants, fund managers), Large shareholders (big hands) Financial (and other) media, Even public institution officials, directly or at least by turning a blind eye.

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    2) Why do they do it?

    Their purpose can be:

    To raise or to lower investors' expectations. It creates the hope that stock prices willrise, for the manipulators to sell high, or fall, fro them to buy cheap.

    Or, for the same purpose, to sustain those expectations. The trick is to boost, or not todiscourage - by using means explained below - the existing bullish or bearish trends.

    Or to hide financial problems. When people are desperate, or just greedy, they might betempted to disguise the truth or to play funny games.

    3) How do they do it?

    How do they mislead investors? They fool them for example by:

    Lying, plainly.Or more elaborately, building a good story that looks like a truth. And repeating such

    falsities, until they become familiar and seem true and relevant.

    Hiding the truth (lying by omitting some crucial points).Or insisting on some sensational news so as to leave in the shadow more important ones

    (weak signals...).

    Building false impressions, showing red herrings and creating smoke screens, directingpeople to the wrong path.

    4) When do they use their tricks?

    Some periods are more prone to market excesses than others. They give more opportunityto manipulate, bait and deceive.

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    Here some are the Financial Scammers of Indian Stock Market:-

    1. Harshad Mehta:-

    2. Ketan Parekh:-

    3. Ramalinga Raju:-

    1.Harshad Mehta:-

    Story of the missing Rs 4,000 crore, Samir K Barua and Jayanth R

    Varma explain how Harshad Mehta pulled off one of the most audacious scams in the history of

    the Indian stock market.

    Harshad Shantilal Mehta was born in a Gujarati Jain family of

    modest means. His early childhood was spent in Mumbai where his father was a small-time

    businessman. Later, the family moved to Raipur in Madhya Pradesh after doctors advised his

    father to move to a drier place on account of his indifferent health. But Raipur could not hold

    back Mehta for long and he was back in the city after completing his schooling, much against his

    fathers wishes.

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    Mehta first started working as a dispatch clerk in the New India

    Assurance Company. Over the years, he got interested in the stock markets and along with

    brother Ashwin, who by then had left his job with the Industrial Credit and Investment

    Corporation of India, started investing heavily in the stock market. As they learnt the ropes of the

    trade, they went from boom to bust a couple of times and survived.

    Mehta gradually rose to become a stock broker on the Bombay Stock

    Exchange, who did very well for himself. At his peak, he lived almost like a movie star in a

    15,000 square feet house, which had a swimming pool as well as a golf patch. He also had a taste

    for flashy cars, which ultimately led to his downfall.

    The year was 1990. Years had gone by and the driving ambitions of a

    young man in the faceless crowd had been realised. Harshad Mehta was making waves in the

    stock market. He had been buying shares heavily since the beginning of 1990. The shares which

    attracted attention were those of Associated Cement Company (ACC). The price of ACC was bid

    up to Rs 10,000. For those who asked, Mehta had the replacement cost theory as an explanation.

    The theory basically argues that old companies should be valued on the basis of the amount of

    money which would be required to create another such company.

    Through the second half of 1991, Mehta was the darling of the business

    media and earned the sobriquet of the Big Bull, who was said to have started the Bull Run. But,

    where was Mehta getting his endless supply of money from? Nobody had a clue.

    On April 23, 1992, journalist Sucheta Dalal in a column in The Times

    of India, exposed the dubious ways of Harshad Metha. The broker was dipping illegally into the

    banking system to finance his buying.

    In 1992, when the story about the Rs 600 crore that he had swiped

    from the State Bank of India came out, it was his visits to the banks headquarters in a flashy

    Toyota Lexus that was the tip-off. Those days, the Lexus had just been launched in the

    international market and importing it cost a neat package.

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    The crucial mechanism through which the scam was effected was the

    ready forward (RF) deal. The RF is in essence a secured short-term (typically 15-day) loan from

    one bank to another. Crudely put, the bank lends against government securities just as a

    pawnbroker lends against jewellery. The borrowing bank actually sells the securities to the

    lending bank and buys them back at the end of the period of the loan, typically at a slightly

    higher price.

    A typical ready forward deal involved two banks brought together by a

    broker in lieu of a commission. The broker handles neither the cash nor the securities, though

    that wasnt the case in the lead-up to the scam.

    In this settlement process, deliveries of securities and payments were

    made through the broker. That is, the seller handed over the securities to the broker, who passed

    them to the buyer, while the buyer gave the cheque to the broker, who then made the payment to

    the seller.

    In this settlement process, the buyer and the seller might not even know

    whom they had traded with. This the brokers could manage primarily because by now they had

    become market makers and had started trading on their account. To keep up a semblance of

    legality, they pretended to be undertaking the transactions on behalf of a bank.

    Another instrument used in a big way was the bank receipt (BR). In a ready

    forward deal, securities were not moved back and forth in actuality. Instead, the borrower, i.e.

    the seller of securities, gave the buyer of the securities a BR.

    As a BR confirms the sale of securities. It acts as a receipt for the money

    received by the selling bank. Hence the name - bank receipt. It promises to deliver the securities

    to the buyer. It also states that in the mean time, the seller holds the securities in trust of thebuyer.

    Having figured this out, Metha needed banks, this could issue fake BRs, or

    BRs not backed by any government securities. Two small and little known banks - the Bank of

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    Karad (BOK) and the Metorpolitan Co-operative Bank (MCB) - came in handy for this purpose.

    These banks were willing to issue BRs as and when required, for a fee.

    Once these fake BRs were issued, they were passed on to other banks

    and the banks in turn gave money to Mehta, obviously assuming that they were lending againstgovernment securities when this was not really the case. This money was used to drive up the

    prices of stocks in the stock market. When time came to return the money, the shares were sold

    for a profit and the BR was retired. The money due to the bank was returned.

    The game went on as long as the stock prices kept going up, and no one had a clue about

    Mehtas modus operandi. Once the scam was exposed, though, a lot of banks were left holding

    BRs which did not have any value - the banking system had been swindled of a whopping Rs

    4,000 crore.

    Mehta made a brief comeback as a stock market guru, giving tips on

    his own website as well as a weekly newspaper column. This time around, he was in cahoots

    with owners of a few companies and recommended only those shares. This game, too, did not

    last long. Interestingly, however, by the time he died, Mehta had been convicted in only one of

    the many cases filed against him.

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    2.Ketan Parekh:-

    Ketan Parekh was a chartered accountant by profession and

    used to manage a family business, NH Securities started by his father. Known for maintaining a

    low profile, KP's only dubious claim to fame was in 1992, when he was accused in the stock

    exchange scam.

    The companies in which KP held stakes included Amitabh

    Bachchan Corporation Limited (ABCL), Mukta Arts, Tips and Pritish Nandy Communications.

    He also had stakes in HFCL, Global Telesystems (Global), Zee Telefilms, Crest

    Communications, and PentaMedia Graphics KP selected these companies for investment with

    help from his research team, which listed high growth companies with a small capital base.

    According to media reports, KP took advantage of low liquidity in

    these stocks, which eventually came to be known as the 'K-10' stocks.

    Mutual funds like Alliance Capital, ICICI Prudential Fund and UTI

    also invested in K-10 stocks, and saw their net asset value soaring. By January 2000, K-10 stocks

    regularly featured in the top five traded stocks in the exchanges. HFCL's traded volumes shot up

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    from 80,000 to 1,047,000 shares. Global's total traded value in the Sensex was Rs 51.8 billion.

    As such huge amounts of money were being pumped into the markets, it became tough for KP to

    control the movements of the scrips. Also, it was reported that the volumes got too big for him to

    handle. Analysts and regulators wondered how KP had managed to buy such large stakes.

    According to market sources, though KP was a successful broker, he did

    not have the money to buy large stakes. According to a report, 12 lakh shares of Global in July

    1999 would have cost KP around Rs 200 million. The stake in Aftek Infosys would have cost

    him Rs 50 million, while the Zee and HFCL stakes would have cost Rs 250 million each.

    Analysts claimed that KP borrowed from various companies and banks for this purpose. His

    financing methods were fairly simple. He bought shares when they were trading at low prices

    and saw the prices go up in the bull market while continuously trading. When the price was high

    enough, he pledged the shares with banks as collateral for funds. He also borrowed from

    companies like HFCL.

    This could not have been possible out without the involvement of banks. A

    small Ahmadabad-based bank, Madhavapura Mercantile Cooperative Bank (MMCB) was KP's

    main ally in the scam. KP and his associates started tapping the MMCB for funds in early 2000.

    In December 2000, when KP faced liquidity problems in settlements he used MMCB in two

    different ways. First was the pay order route, wherein KP issued cheques drawn on BoI to

    MMCB, against which MMCB issued pay orders. The pay orders were discounted at BoI. It was

    alleged that MMCB issued funds to KP without proper collateral security and even crossed its

    capital market exposure limits. The second route was borrowing from a MMCB branch at

    Mandvi (Mumbai), where different companies owned by KP and his associates had accounts. KP

    used around 16 such accounts, either directly or through other broker firms, to obtain funds.

    Apart from direct borrowings by KP-owned finance companies, a few brokers were also believed

    to have taken loans on his behalf.

    KP's modus operandi of raising funds by offering shares as collateral

    security to the banks worked well as long as the share prices were rising, but it reversed when the

    markets started crashing in March 2000. The crash, which was led by a fall in the NASDAQ, saw

    the K-10 stocks also declining. KP was asked to either pledge more shares as collateral or return

    some of the borrowed money. In either case, it put pressure on his financials. By April 2000,

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    mutual funds substantially reduced their exposure in the K-10 stocks. In the next two months,

    while the Sensex declined by 23% and the NASDAQ by 35.9%, the K-10 stocks declined by an

    alarming 67%.

    It was alleged that 'bear hammering' of KP's stocks eventually led topayment problems in the markets. The Calcutta Stock Exchange's (CSE) payment crisis was one

    of the biggest setbacks for KP.Though officially the scrips were in the brokers' names,

    unofficially KP held them. KP used to cover any losses that occurred due to price shortfall of the

    scrips and paid a 2.5% weekly interest to the brokers. By February 2001, the scrips held by KP's

    brokers at CSE were reduced to an estimated Rs 6-7 billion from their initial worth of Rs 12

    billion. The situation worsened as KP's badla payments of Rs 5-6 billion were not honored on

    time for the settlement and about 70 CSE brokers, including the top three brokers of the CSE

    (Dinesh Singhania, Sanjay Khemani and Ashok Podar) defaulted on their payments.

    By mid-March, the value of stocks held by CSE brokers went down further

    to around Rs 2.5-3 billion. The CSE brokers started pressurizing KP for payments. KP again

    turned to MMCB to get loans. The outflow of funds from MMCB had increased considerably

    from January 2001. To revive the markets, SEBI imposed restriction on short sales and ordered

    that the sale of shares had to be followed by deliveries. A historical decision to ban the badla

    system in the country was taken, effective from July 2001, and a rolling settlement system for200 Group A shareswas introduced on the BSE.

    KP was released on bail in May 2001. The duped investors could do

    nothing knowing that the legal proceedings would drag on, perhaps for years. Observers opined

    that in spite of the corrective measures that were implemented, the KP scam had set back the

    Indian economy by at least a year. Reacting to the scam, all KP had to say was, "I made

    mistakes." It was widely believed that more than a fraud, KP was an example of the rot that was

    within the Indian financial and regulatory systems. Analysts commented that if the regulatory

    authorities had been alert, the huge erosion in values could have been avoided or at least

    controlled.

    After all, Rs 2000 billion is definitely not a small amounteven for a whole nation.

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    3. Ramalinga Raju:-

    Born

    September 16, 1954 (age 56)

    Garagaparru Village,Bhimavaram,

    Andhra Pradesh,India

    Residence Hyderabad,India

    Nationality Indian

    Occupation formerChairmanofSatyam Computer Services

    Spouse Nandhini

    http://en.wikipedia.org/w/index.php?title=Garagaparru_Village&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Garagaparru_Village&action=edit&redlink=1http://en.wikipedia.org/wiki/Bhimavaramhttp://en.wikipedia.org/wiki/Bhimavaramhttp://en.wikipedia.org/wiki/Bhimavaramhttp://en.wikipedia.org/wiki/Andhra_Pradeshhttp://en.wikipedia.org/wiki/Andhra_Pradeshhttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Hyderabad,_Andhra_Pradeshhttp://en.wikipedia.org/wiki/Hyderabad,_Andhra_Pradeshhttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Chairpersonhttp://en.wikipedia.org/wiki/Chairpersonhttp://en.wikipedia.org/wiki/Chairpersonhttp://en.wikipedia.org/wiki/Satyam_Computer_Serviceshttp://en.wikipedia.org/wiki/Satyam_Computer_Serviceshttp://en.wikipedia.org/wiki/Satyam_Computer_Serviceshttp://en.wikipedia.org/wiki/File:Ramalinga_Raju_at_the_2008_Indian_Economic_Summit.jpghttp://en.wikipedia.org/wiki/Satyam_Computer_Serviceshttp://en.wikipedia.org/wiki/Chairpersonhttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Hyderabad,_Andhra_Pradeshhttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Andhra_Pradeshhttp://en.wikipedia.org/wiki/Bhimavaramhttp://en.wikipedia.org/w/index.php?title=Garagaparru_Village&action=edit&redlink=1
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    Byrraju Ramalinga Raju founded Satyam Computers in 1987 and

    was its Chairman until January 7, 2009 when he resigned from the Satyam board after admitting

    to cheating six million shareholders, some of whom have lost their entire life savings. After

    being held inHyderabad'sChanchalguda jailon charges including cheating, embezzlement and

    insider trading, Raju was granted bail on 18 August 2010.

    A botched acquisition attempt involvingMaytasin December 2008 led

    to a plunge in the share price of Satyam. In January 2009, Raju indicated that Satyam's accounts

    had been falsified over a number of years. He admitted to an accounting dupery to the tune of

    7000crorerupeesor 1.5 BillionUS Dollarsand resigned from the Satyam board on January 7,

    2009. In his letter of resignation, Raju described how an initial cover-up for a poor quarterly

    performance escalated: "It was like riding a tiger, not knowing how to get off without beingeaten.

    " Raju and his brother, B Rama Raju, were then arrested by theAndhra

    Pradeshpolice on charges of breach of trust, conspiracy, cheating, falsification of records. Raju

    may face life imprisonment if convicted of misleading investors. Raju had also used dummy

    accounts to trade in Satyam's shares, violating theinsider tradingnorm. It has now been alleged

    that these accounts may have been the means of siphoning off the missing funds. Raju has

    admitted to overstating the company's cash reserves byUSD$1.5 billion. Raju was hospitalized

    in September 2009 following a minor heart attack and underwent angioplasty. Raju was granted

    bail on condition that he should report to the local police station once a day and that he shouldn't

    attempt to tamper with the current evidence. This bail was revoked on 26 October 2010 by the

    Supreme Court of Indiaand he has been ordered to surrender by 8 November 2010. The people

    of his native village, Garagaparru, hail the development works undertaken by the Byrraju

    Foundation, the charitable arm of Satyam.

    Ramalinga Raju may head Indias first BPO from prison.

    http://en.wikipedia.org/wiki/Satyam_Computer_Services_Ltd.http://en.wikipedia.org/wiki/Satyam_Computer_Services_Ltd.http://en.wikipedia.org/wiki/1987http://en.wikipedia.org/wiki/1987http://en.wikipedia.org/wiki/Hyderabad,_Indiahttp://en.wikipedia.org/wiki/Hyderabad,_Indiahttp://en.wikipedia.org/wiki/Hyderabad,_Indiahttp://en.wikipedia.org/w/index.php?title=Chanchalguda_jail&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Chanchalguda_jail&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Chanchalguda_jail&action=edit&redlink=1http://en.wikipedia.org/wiki/Insider_tradinghttp://en.wikipedia.org/wiki/Insider_tradinghttp://en.wikipedia.org/wiki/Maytashttp://en.wikipedia.org/wiki/Maytashttp://en.wikipedia.org/wiki/Maytashttp://en.wikipedia.org/wiki/Crorehttp://en.wikipedia.org/wiki/Crorehttp://en.wikipedia.org/wiki/Crorehttp://en.wikipedia.org/wiki/Rupeeshttp://en.wikipedia.org/wiki/Rupeeshttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Andhra_Pradeshhttp://en.wikipedia.org/wiki/Andhra_Pradeshhttp://en.wikipedia.org/wiki/Andhra_Pradeshhttp://en.wikipedia.org/wiki/Andhra_Pradeshhttp://en.wikipedia.org/wiki/Insider_tradinghttp://en.wikipedia.org/wiki/Insider_tradinghttp://en.wikipedia.org/wiki/Insider_tradinghttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Supreme_Court_of_Indiahttp://en.wikipedia.org/wiki/Supreme_Court_of_Indiahttp://en.wikipedia.org/wiki/Supreme_Court_of_Indiahttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Insider_tradinghttp://en.wikipedia.org/wiki/Andhra_Pradeshhttp://en.wikipedia.org/wiki/Andhra_Pradeshhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Rupeeshttp://en.wikipedia.org/wiki/Crorehttp://en.wikipedia.org/wiki/Maytashttp://en.wikipedia.org/wiki/Insider_tradinghttp://en.wikipedia.org/w/index.php?title=Chanchalguda_jail&action=edit&redlink=1http://en.wikipedia.org/wiki/Hyderabad,_Indiahttp://en.wikipedia.org/wiki/1987http://en.wikipedia.org/wiki/Satyam_Computer_Services_Ltd.
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    The scam at Satyam Computer Services, the fourth largest

    company in Indias much showcased and fiscally pampered information technology (IT)

    industry, has had an unusual trajectory. It began with a successful effort on the part of investors

    to thwart an attempt by the minority-shareholding promoters to use the firms cash reserves to

    buy out two companies owned by them Maytas Properties and Maytas Infra. That aborted

    attempt at expansion precipitated a collapse in the price of the companys stock and a shocking

    confession of financial manipulation and fraud from its chairman, B. Ramalinga Raju.

    What is known as of now is that over an extended period of time,

    the promoters decided to inflate the revenue and profit figures of Satyam. In the event, the

    company has a huge hole in its balance sheet, consisting of non-existent assets and cash reserves

    that have been recorded and liabilities that are unrecorded.

    According to the confessional statement ofMr. Raju, the balance

    sheet shortfall is more than Rs.7000 crore.

    Why did a leading company in one of Indias most successful

    industries of recent years need to inflate profits? After all, the revenues of Indias IT industry

    have grown at a scorching compound annual rate of almost 30 per cent in the past eight years,

    driven by exports. This is remarkable, assuming that revenue and profit inflation have not

    excessively overstated performance. With cheap skilled labour having shored up profits that

    were lightly taxed when compared with the norm, net profits must have been substantial and

    rising too. Why then did the fourth largest IT company choose to take the criminal route of

    falsifying accounts and indulging in fraud?

    One possible cause could be the desire to drive up stock values. The

    benefits derived by promoters from high stock values are obvious, allowing them to buy into real

    wealth outside the company and giving them the invasion money to acquire large stakes in

    other firms. This tendency was epitomised by the benefits derived by America Online when it

    merged with Time Warner. Although the latter had more assets, revenues, and customers, AOLs

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    higher market capitalisation led to that company and its chairman, Steve Case, getting more out

    of the deal than did long-time giant Time Warner.

    There is some suspicion that Mr. Raju and his family may have soughtsimilar benefits. The family chose to build its shareholding in Satyam Computer Services and

    shed it when required. For example, in year 2000 Satyam Computer merged with a related

    company, Satyam Enterprises. Rajus cousin, C. Srinivasa Raju, who held 800,000 shares, or 19

    per cent, in Satyam Enterprises, was reportedly allotted an equivalent number in Satyam

    Computer, leading to criticism that relative prices did not justify the 1:1 swap.

    But the original promoters share held by the Raju family and their

    subsequent acquisitions were not for keeping. Though the precise numbers quoted vary,

    according to observers the stake of the promoters fell sharply after 2001 when they held 25.60

    per cent of equity in the company. This fell to 22.26 per cent by the end of March, 2002, 20.74

    per cent in 2003, 17.35 per cent in 2004, 15.67 per cent in 2005, 14.02 per cent in 2006, 8.79 in

    2007, 8.65 at the end of September 2008, and 5.13 per cent in January 2009 (Business Line,

    January 3, 2009). The most recent decline is attributed to the decision of lenders from whom the

    family had borrowed to sell the shares that were pledged with them. But the earlier declines must

    have been the result either of sale of shares by promoters or of sale of new shares to investors.

    According to audited balance sheet figures (if they are to be trusted) available from the CMIEs

    database, the paid-up equity in Satyam Computer Services rose from Rs. 56.24 crore in March

    2000 to just Rs. 64.89 crore by March 2006 and further to Rs. 133.44 crore in March 2007.

    Overall, the number of shares held by the promoter group fell from 7.16 crore (22.8 per cent) to

    5.8 crore (8.6 per cent) between September 2001 and September 2008.

    This points to a conscious decision by the promoters to sell shares,

    which may have been used to acquire assets elsewhere. The more inflated the share values, the

    more of such assets could be acquired. It is quite possible that the assets built up by the eight

    other Raju family companies under scrutiny, including Maytas Properties and Maytas Infra,

    partly came from the resources generated through these sales. If true, this makes Rajus

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    confession suspect, since he stated that neither myself, nor the Managing Director (including

    our spouses) sold any shares in the last eight yearsexcepting for a small proportion declared

    and sold for philanthropic purposes.

    This may not have been the only way in which resources were

    transferred out of Satyam Computer Services into other arms of the expanding Raju family

    empire. Money could have been siphoned out through opaque transactions with beneficiaries

    who were paid sums not warranted by their business profile. Satyams business strategy did

    involve unusual transactions. One example was the acquisition in 1999 by group company

    Satyam Infoway, which was the largest private Internet Services Provider in the country at that

    time, of IndiaWorld Communications, for a sum of $115 million. The acquired company

    operated popular portals such as samachar.com and khel.com that had no clear revenue model,

    and was the principal beneficiary just as in the AOL deal.

    According to reports, the owner of IndiaWorld was himself charged

    with intellectual property violations by his erstwhile employer IndiaWorld.com, an Internet

    services company managed by U.S.-based ASAP Solutions Inc. Satyam Infoways position was

    that it was aware of the claim being made by ASAP Solutions, but that its interest was not in

    IndiaWorld.com but was limited to the URL indiaworld.co.in and the other portals under its

    banner, for which it had of course paid a huge sum. There is reason to suspect that this

    acquisition delivered little to the company, raising questions about the motivation.

    Mr. Rajus confession is also suspect for another reason, which has

    been widely discussed in the media. Even if he and his colleagues were inflating revenues and

    profits, the actual revenue earning capacity of the company, as confessed by him, seems to be

    extremely low. He claims that the huge difference between actual and reported profits in thesecond quarter of 2008-09 was because the ratio of operating margins to revenues was just 3 per

    cent rather than the reported 24 per cent. But even if Satyam Computer Services was cooking its

    books, it was engaged in activities similar to that undertaken by other similarly placed IT or ITeS

    companies and it too had a fair share of Fortune 500 companies on its client list. It is known that

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    many of these companies have been showing operating margins that are closer to the 24 per cent

    reported by Satyam than the 3 per cent revealed in Mr. Rajus confession.

    Thus in financial year ending March 2008, the ratio of profits

    before tax of Infosys was 32.3 per cent of its total income, that of TCS 23.1 per cent, of Satyam27.8 per cent, and that of Wipro 19.2 per cent.

    This suggests that either Mr. Raju is exaggerating the hole in his

    balance sheet or there is some other, more complex, and more disturbing explanation. But

    whatever it is, the difference between 24 per cent and 3 per cent seems too large to be the

    industry standard.

    Despite indicators of these kinds, which could raise suspicion, Satyam

    Computer Services remained a leading player with substantial investor support for many years.

    The promoters continued to hold control over the company despite the small share in equity they

    held and built an empire with land assets and contracts for executing prestigious infrastructural

    projects. And despite its award-winning reputation for corporate governance, its impeccable

    board with high-profile independent directors, and its appointment of big-four member PwC as

    its auditor, this still mysterious accounting fraud occurred. The full truth, it appears, is not yet

    out.

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