Satyam: A cleverly crafted scam

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » RELATED NEWS Sebi team reaches Satyam complex and PwC office in H'bad Satyam directors, employees shocked Satyam Timeline: How the scam unfolded Satyam stunner: Highs and lows of Raju's career Satyam scam: The legal perspective ALSO READ See what other CNBC-TV18 anchors have to say Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty?

Ramalinga Raju, Chairman of Satyam has resigned from the board, reports CNBC-TV18. In his letter to the board, Raju admitted that the IT major's balance sheet has inflated cash and bank balance of Rs 5,040 crore. "No board member had any knowledge of the real situation. Accrued interest of Rs 376 crore in books is non-existent. Rs 1,230 crore was arranged to Satyam, but was not reflected in the books."

Here is  a verbatim transcript of Udayan Mukherjee's comments on CNBC-TV18. Also watch the accompanying video.

On shareholders of Satyam:

It was a very cleverly crafted scam. Not to overstate this because this is one company which has enacted a fraud on its shareholders and board of members, investors large and small but the temptation would be to now extrapolate that and to drive conclusions like the FII will now lose complete faith in every Indian corporate not knowing what to trust because these kind of frauds happen in every country.

So we don't want to extrapolate this to a very dire situation where Satyam equals many other companies in India and therefore not to believe anything that is reported on the exchanges on a daily basis. That I think would be a complete and gross over reaction. So if you are asking whether this leads to a complete derating of the market, it may happen but it would in my eyes be a very extreme reaction because one bad apple does not mean that everything in the basket is rotten.

Having said that will it shake investor's confidence? Absolutely and unequivocally yes, more than anything else that has shaken investor confidence. This is not one crooked stock broker scamming investors by leading them up and getting a line of finance from a bank, it is one of the country's biggest companies; it is an index stock with a several billion dollar marketcap, it was thought just a few months back as one of the beacons of Indian IT and today the promoters come and said, everything that I shared with you was a complete scam. Do you think this will have no repercussions? Absolutely not, that would be too simplistic an inference to draw. I am finding it difficult to articulate what one should after looking at the scale and magnitude of this scam which has played out, where the promoter in five pages has just blown the biggest scam going in this country and has submitted himself to the forces of law.

To think that when the scam actually broke, Ramalinga Raju came on our channel and spoke so eloquently about justifying the Maytas deal, holding everything up. So I think investors would be completely rattled not just in Satyam Computers but in their whole conviction and belief in what numbers are reported because if Satyam can do it, where do you draw the line. So I am completely aghast about what has happened and we should just put out a graphic of the first couple of pages of this confession within quotes.

I really feel sorry for investors like Aberdeen and Fidelity who have picked up, who are sitting on very large chunks of Satyam Computers. We cannot blame them for naively believing the numbers which Satyam kept putting out quarter after quarter but now they are holding stock in a completely dud company - we don't know what to believe.

No floor for a stock like Satyam:

It is an F&O stock so there cannot be any kind of a circuit filter on that. This is a truly extraordinary circumstance, the promoter has just come in and said that everything was a figment of his imagination, it was a big lie which he enacted and therefore you don't know how to value this stock anymore.

He still says that there is some cash on the books but the way he has cooked up Q2 accounts which was just reported from 60 crore to 600 crore, you don't want to believe even his confession what he has put out. So if it was a non-F&O stock maybe there would have been a circuit filter and trade would have got stopped and people would have got some time to analyze it but maybe it is just as well that trade is happening and people who want to get out as they would at this point would want to get out of the stock.

I just feel bad for the guy who does not own 500 shares of Satyam but owns several lakh shares or million shares of Satyam Computers. How does an Aberdeen exit right now and he is a blue-blooded FII who has taken a lot of India bets running a several billion dollar India portfolio. What happens to Fidelity who owns several million shares between various Fidelity accounts probably 9% of Satyam? He cannot sell in the secondary market today and get out for his lot of shares and he would be standing in line at some point to exit.

So even if there is any kind of a modest bounce in Satyam from whatever price level because people believe that the 5,000 crore of cash is still there, there is a big line of people and the Fidelity and Aberdeen's of the world are not going to stand down with Satyam right now because of whatever cash is lying on its books. They want out and they want out like yesterday.

So this stock now has huge amount of overhead supply which just cannot be absorbed because the number of sellers far outnumbers the number of buyers in Satyam Computers at any price point. So this stock could fall to Rs 10 even if there is cash on the balance sheet because there would be a large number of institutional investors who have completely seen this lie and I do not think that they would want to hang on there at Rs 80-70 because of any kind of cash lying on its books.

This stock's value despite the cash or the business operations right now is probably in single digit rupees. Nobody trust this, you have just broken down the trust completely, how do you believe a management which just cooked up everything from its balance sheet to its earning statement over the last many quarters and serially quarter after quarter went on national TV and reported to the exchanges one magnificent lie after another. It is just completely preposterous.

Who do you believe now?

Satyam is a company which is listed on the New York Stock Exchange (NYSE); this is an index company, quarter after quarter it announces numbers which we take as gospel and we do a lot of analysis, every analyst does on whether margin slipped a bit and wage hikes happened and now you know that none of those numbers existed then who do you believe?. Do you believe auditors, who are supposed to be looking at these companies?

This is a fundamental issue of trust and faith which has been shaken. One can forget about the Satyam stock much that we feel very bad about Satyam shareholders that is one company. Here you stand the risk of actually losing your faith and trust in the system, which is supposed to be policing the numbers which you have faith and trust in. What happens to the auditors? This is a company which is not a fly by night small company, it is listed on a global exchange, global investor - they are supposed to be following US GAAP norms etc and quarter after quarter they keep blinkering all their investors and none of us find out till the promoter one fine day decides to confess.

Could there be more companies doing these kind of thing? What are the auditors doing? How will we ever know? You and I cannot be looking at going into and checking the bank accounts of Satyam and what they earned in a particular quarter or not. At some level there has to be an implicit code of faith that we believe what is posted on the walls of the exchange but today we cannot. So what are these people doing - these auditors and tax consultants and even rating agencies, how have they conducted themselves over the last two-three quarters. It is absolutely appalling.

Also read:

Raju admits fraud; Satyam books inflated of Rs 5040cr

Consulting stock exchanges to decide course of action: Sebi

Satyam: Infy says outsourcing may be hit

See Satyam stock at Rs 10: Shankar Sharma

Outraged auditors see action from regulators ahead

Min of Corp Affairs seeks registrar's report on Satyam

LIC still confident about Satyam's potential as a Co

FICCI, Nasscom call for revamp of corp governance norms

B Ramalinga Raju's letter to Board

Together we emerge strong: Interim Satyam CEO to employees

Raamdeo Agrawal says fraud could be to tune of Rs 7k cr

Satyam fraud big jolt to investment community: FIIs

PwC needs to be questioned, says Anil Singhvi