The founder and chairman of Satyam Computers, Ramalinga Raju, has resigned from the Satyam board. In response to his resignation as chairman of the company, shares of the IT Company  fell 62% and at press time stood at  Rs64. He will continue as the Chairman till the Board finds a replacement.

Following the news, Merrill Lynch has also terminated its engagement with the company.

In a letter to the board of directors, Raju said that Satyam’s balance sheet as on Sep 30, 2008, carries an inflated  - that is to say non-existent -  cash and bank balance of $1.03 billion (Rs 5,040 crore) as against $1.1 billion (Rs 5,361 crore) reflected in the books.

Further, it carries an accumulated interest of $77.3 million (Rs 376 crore) which is non-existent. An understated liability of $253 million (Rs 1,230crore) on account of funds arranged by me. An over stated debtors position of $100.8million (Rs 490 crore) as against $545million (Rs 2,651 crore) in the books.

For the second quarter ended Sep 30, 2008, the company reported a revenue of $555million (Rs 2,700 crore) and an operating margin of $133million (Rs 649 crore) (24 per cent of revenues) as against the actual revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore (three pre cent of revenues). This has resulted in artificial cash and bank balances going up by $121 million (Rs 588 crore) in the second quarter alone.

The letter further says that the gap in the balance sheet has arisen purely on account of inflated profits over the period of the  last several years. What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew significantly with an annualised revenue run rate of $2.3billion (Rs 11,276 crore) in the September quarter of 2008 and official reserves of $1.7 billion (Rs 8,392 crore).

As the promoters held a small percentage of equity, the concern was that poor performance would result in a takeover, thereby exposing the gap. The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. To quote: “It was like riding a tiger, not knowing how to get off without being eaten.”

A task force comprising eminent members such as Subu D, TR Anand, Keshab Panda and Virendra Agarwal and AS Murthy, Hari T and Murli V has been formed in the last few days to address the situation arising out of the failed Maytas acquisition attempt.

Ram Mynampati is speculated to be the Chairman of this task force to immediately address some of the operational matters on hand. Merrill Lynch would be entrusted with the task of exploring some merger opportunities. Ram Mynampati has been President of Commercial and Healthcare Businesses of Satyam Computer Services  since October 2002.

In the letter, Raju has apologised to all Satyam staff and stakeholders for the current situation.

Raju says that neither he nor the managing director sold any shares in the last eight years except for a small proportion sold for philanthropic purposes.

A net amount of $253 million (Rs 1,230crore) was arranged to Satyam and not reflected in the books to keep operations going by resorting to pledging all the promoter shares and raising funds from known sources by giving all kinds of assurances. Significant dividend payments, acquisitions, capital expenditure to provide growth did not help matters. Every attempt was made to keep the wheel moving and to ensure prompt payment of salaries to the associates. The last straw was the selling of most of the pledged shares by the lenders on account of margin triggers.

Raju also acknowledged that neither he nor the managing director took have benefited in financial terms on account of the inflated results. He said that none of the board members had any knowledge of the situation in which the company is placed. X

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