Enron Comes to India...

Warren Buffett is an extraordinary investor who can spot opportunities when others can only see train wrecks and disasters. That's a well known fact and you really don't need me to tell you that. But a lesser known fact, but one much more entertaining, is that he is also a master of pithy one-liners which are both hilarious and insightful. As Joey Tribiani of Friends would have said, "They're funny, but they also make you think". One such pearl of wisdom  the sage of Omaha gifted us was, "You don't know who's swimming naked until the tide goes out." And boy, "Rambling" Raju, the founder and former-chairman of Satyam and one-time Golden boy of the Indian software landscape, has been skinny-dipping for a while... Seven years to be precise, by his own admission.

Breath-taking as it is, the fact begs the question of what independent auditors, regulators and directors were doing over the last seven years. Clearly, a lot of people fell asleep at the wheel at the same time. A balance sheet gap of a billion dollars is no pocket change by anyone's standards. The number has more zeros than most people can comprehend... and apparently, more zeros than even the aforementioned parties responsible for the requisite checks and balances could comprehend. In the extraordinary letter Raju compiled admitting to malfeasance, he stated that what started as a small balance sheet gap, had ballooned into a gaping hole that threatened to sink the ship... as if what happened was an accident!! In the same letter, he also states that Satyam's operating margin was 3% which the fudged numbers helped boost to 20%+, bringing it in line with the industry average. So, either Satyam's operations were suffering very badly or Raju's clearly lying. Considering that the period between 2001 and 2007, when Raju was his creative best, was also a period of sustained boom for software service providers, I am inclined to believe that Raju was spinning a bit of yarn in his letter. Which brings us to the question "why". My explanation: Raju was siphoning off money from Satyam, most likely into Maytas and other family-run businesses. And instead of saying, "Yes, I am a crook. I stole the money", Raju tried to put an emotional spin on the whole thing by insinuating that he fudged the numbers to hide poor operating margins that would leave the company vulnerable to a hostile takeover. 

By Raju's admission, he was solely responsible for the entire fraud. Let's just try to visualize that for a moment: One man, over a period of seven years, fudges books to the tune of one billion dollars at a firm that has operations and bank accounts across the world, is publicly traded.. not just in India but in the US too, has its accounts audited by external auditors and has a supposedly "independent" board of directors. This would require the brilliant individual in question to be able to modify balance sheets, invent fictitious assets & associated documentation and possibly forge bank statements in multiple geographies. So, Raju is either Jason Bourne in disguise, or clearly has had a LOT of outside help. You decide which is more likely!! Let us also consider statements emanating from some of the other distinguished personalities who have figured in the Satyam saga. The CFO issued a statement to the effect that he was specifically asked not to look at the finances of the company. Maybe the man mis-understood what the acronym CFO stood for. By definition he was responsible for the finances of the company. If all that was required of him was to sign checks and financial statements, Raju could as well have appointed a monkey the CFO and taught him to use a pen. Oh, wait... Raju might just have done that!! Now I get it...

Many commentators have hazarded that the Satyam incident has negatively impacted India's standing in the global business community, and raised serious questions about the state of corporate governance in Indian firms. While all that is true, I believe it is not a crushing  blow that has done irreparable damage. What will determine India's standing in the international community is how the Government and corporate India react to this incident. The Government's initial bone-headed and muddled moves raised serious fears that the damage from the incident would indeed be significant. Things seem to have significantly improved since, with a new board being appointed to oversee operations at Satyam and investigation initiated into the incident. But India's history is littered with instances of fact finding missions never quite finding the facts.. or finding facts that change according to the seasons. So, establishment of facts and dispensation of justice is not a given. Well, I guess the one thing we can do is see how this new drama plays out, and hope that it has a happy ending. Happy for the employees, clients and shareholders of Satyam, that is... not for Raju and his partners in crime. What do you think I am, Mahatma Gandhi? Until later.. cheers