Stock Nightmares- Events to Remember

Satyam: India’s Enron

January 07, 2009: Morning before market hours Ramalinga Raju resigned and confessed in front largest democracy of world, admitted to financial irregularities to the tune of 7000 plus crores. It was stunning enough to send markets packing even, horror encircle investors when Ken Lay of Enron was in a similar state with a companion Arthur Andersen. This time it was PwC the statutory auditor of company. I was at Manyata tech park, the first thing we discussed is something like this, ‘ guys time again to get brickbats, accountants are back in bunkers again.’ The case was handed over to CBI, independent forensic investigation was carried out by KPMG with a revamped board of directors.

Obviously, we are more interested here to know what happened? But before that few housekeeping to keep us in same tempo:

  1. First, I have been trying to clarify for some time, everything we see in our eyes is not fraud. Creative accounting is means and modes available for management to play within ambit of scope. When someone link publicly available information with another information and find some anomalies, it doesn’t necessarily a fraud. A fraud is unearthed by forensic investigation which has to be called by an authority and takes place with access to every piece of information that is available in company.

  2. A manipulation is not necessarily done to siphon money. A lot of times it may be intended to benefit shareholders, stay ahead of competition, outsmart tax authorities, to retain employees with a performance based bonus and so on. A good number of times the manipulation turns out to be Frankenstein and company landed in putting its own foot into mouth.

  3. Auditor express an opinion on basis of true and fair view of their assessment on financial statements. It is ultimately the responsibility of management to maintain corporate ethics across the board.

  4. Accounting standards and auditing standards drive the process of financials and checking in company. Like any other rules these are open to interpretation allowing flexibility in usage. The situation is unlikely to change soon as every industry has it’s unique way of accounting need, there has to be some common line drawn.

  5. Over the years accounting standards have been changing rapidly, updated. IFRS is one example where it’s trying to unify standards globally. The unique needs of industries are getting addressed with new set of guidelines and advisories. But it will take its own time.

Fair, the major events then in Satyam as unfolded:

  1. It all started with Satyam declaring it will buy stake in Maytas (promoted by Raju family).

  2. The deal was called off next day after investors took fight to board room.

  3. To pacify investors Satyam called a board meeting to consider buy back of shares.

  4. First claim of fraud against promoters by creditors for unpaid amount.

  5. World bank confirmed media, indeed Satyam banned for a year due to data theft and bribery.

  6. More noise in board room, 4 of them resigned. Ripe speculation in stock market to business restructuring including acquisition, forced stake sale, government intervention etc

  7. Promoters sell pledged shares which plunged the stake below 5%.

  8. Mr Ramalinga Raju resigns in morning and confess to all including a financial fraud. A notification to stock exchange brought down the curtain.

This doesn’t tell actual story anyway, rather a glance of over all events. We need to know what exactly happened in board, financials, operation etc. Before that something important:
What is fraud? A deception or misrepresentation that an individual or entity makes knowing that misrepresentation could result unauthorised benefit to entity or some other party. ACFE definition. Raju started with 20 employees received Entrepreneur of year award from EY in 2007. In 2008 World Council of Corporate Governance awarded leader in accountability, just before 5 months of massive fraud.

Now the point by point what I learnt and gathered, something may be missing from my understanding. You may add them here:

Raju’s exact confession decoding: Faked figures to the extent of 5040 Crore non-existent cash and bank balances against 5361 crore in books, accrued interest 376 Crore (non existent), understated liability 1230 Crore, overstated debtors by 490 Crore. Revenue was inflated from 2119 Cr to 2700 Cr on that year, margin were jacked up to 649 Cr from actual of 61 Cr.

  1. Raju claimed asset balance is over stated by 7000 Cr. How the 5000 Cr cash balance is non-existent. What happened to bank statements and BRS? Raju used his personal computer to create bank statement, falsified the bank accounts to inflate the balances that does not exist. What was auditor doing? Another story, coming soon; by the way auditor was also involved and sent to jail.

  2. Inflated income by claiming interest income from the fake bank accounts.

  3. He has created 6000 fake salary accounts and appropriated the money after deposit.

  4. Overstated revenue, how? The internal audit head created fake customer id in system and generated fake invoices to inflate revenue?

  5. The internal audit head created a false board resolution to obtain loans for company. CBI found the ADRs issued were never received by company.

Now bit of non-accounting and statements by CBI etc:

  1. The fraud activity dates back to 1999. It’s lack of social responsibility, complete disregard to corporate ethics perhaps initial intent was to overshadow the competitors.

  2. Investment bank Merrill Lynch which was appointed by Satyam to look for a partner ultimately blew off the whistle and terminated the engagement stating financial irregularities.

  3. Raju said in an explanation ‘What accounted as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. This gap reached unmanageable proportions as company operations grew significantly’.

  4. In order to close the gap he wanted to buy Mayatas so that Satyam books could have inflated again. It could have brought some real assets to books. When it get failed he confessed to fraud.

  5. A large amount of cash should have been a red flag to auditors. They should have conducted further investigations, also auditors never bothered to get independent confirmation from banks regarding deposit made. The auditors were paid twice the revenue than what they were paid for a similar company they audited.

A number of factors contributed to fraud. Greed, competition, creative accounting practices, excessive interest in maintaining stock prices, huge executive compensation and so on.

Major source: ACFE, fraud study report.

There are few more points, let me see if I can collate them. Some point of time lets discuss about mother of all frauds i.e. Enron.

Stay safe folks!


Much needed awareness thread. So, to verify the solvency, financial health and the most important creative accounting, I use I hope many would be aware of this portal. However this is to add to the folks who don’t know this.

The Altman Z-score
The Altman Z-score is a widely used measure that applies an algorithm that has been found to have useful predictive value on the likelihood of a business going bankrupt. Keep in mind that this is a likelihood and not a prediction. From a company’s financials, it may look likely that bankruptcy looms, but the management may well succeed in improving matters. For more details you can read on here, they’ve explained in detail.

Piotroski F-Score
In the Piotroski F-Score is a composite score of financial health, an easy to use single number that gives an overall financial score to a company. Stocks are rated on a score of 0 to nine based on nine parameters, nine being the best. Since the score is based on recent performance, we can say it represents the current financial strength relative to the recent past. The detailed note on the Piotroski F-Score.

Modified C-score
Modified’s C-score is a most interesting measure, and as some investors would say, a most crucial one in India. It gives a likelihood that a company has been dressing its books. When their operational parameters worsen, and the stress starts showing in the financial numbers, a lot of businesses try to be a little creative with their accounts so that investors don’t take to their heels.What we have here is a probabilistic score that measures a company’s resemblance to other companies where the accounting has been creative. The higher the C-score, the higher is the probability that something is suspect. More on the Modified C-score.

This how lupin’s essential check looks like:


  • These checks won’t be applicable for banks and finance stocks.

there is never one cockroach in kitchen


Brilliant statement to discussion here. In fact I was reading something last week by Richard Thaler. He says cockroaches are classic crowd like you have mentioned. But their productivity is far superior when they work in group. When they are alone they just become idle. Would that mean manipulators have to work together to make more manipulation. :rofl:


But Noida Toll bridge was giving huge dividend payout of 50-70% for 5 consecutive years before judgement went against them. So return of money existed. Even PPFAS mutual fund was holding significant stake till judgement. Do you view NTBCL case as management scam/fraud ?

Also please brief on how to use youtube in evaluating management quality?

noida toll was not mgmt scam.
when i did youtube search, i landed on below link. Also I know it was very painful for commuters to bear the toll. I belong to Mumbai, and the tolls in Mumbai are really painful as the price is high (Rs.35 per visit / Rs.1000 per month) considering it is used for daily commute to office and people have been paying for these tolls daily / monthly basis for many decades.

In other developed countries, toll can be v good investment for reasons

  1. no political risk
  2. transparency in timeline for tolls to be collected
  3. tolls are cheap (e.g. tolls in Chicago cost you $0.5 per visit / per month would be lesser) - so commuters don’t mind paying.

I would say what happened to noida toll bridge was unfair to the company.In india profit is still a dirty word.

1 Like

I don’t think profit per se is a bad word. It’s when companies try to squeeze profits from products/services that are deemed to be positive rights by people that fierce opposition is provided.
Example - Electricity, Water supply, Roads
Hence, in such companies there isn’t much scope for margin expansion. The moment companies decide to raise tariffs vehement resistance will be provided by the people which will later lead to government intervention. That’s probably the reason why utility companies are seldom good investment opportunities, at least in India.
I wouldn’t blame the people either. For years, cost of survival has outrun salary growth. It’s indeed a delicate situation.


I do not know of any place in the world where toll bridges have been subjected to this kind of regulation.A deal is a deal and must be honored.Once the contract has been signed you cannot say that capitalism and market forces should be suspended for social reasons.


I completely agree with you. Honoring contracts is fundamental to a healthy business environment. But, as unfortunate as it is, to garner brownie points, politicians exert their influence and make unreasonable demands. Demands that may be anti business but pro people.

Having worked in this sector , my experience is Noida toll was one of initial experiments in PPP mode and concession agreements went through lot of changes post that to balance stakeholders risk. For example, there are specific clauses to protect BOT owner if traffic is much lower by giving extra years but if it goes too high (with specifications ) then a way to check super extra profits . The key idea is to ve a healthy stakeholder ecosystem considering the social theme. May be court realized this is one of initial cases and can’t go by what was drafted long back (I ve never gone through its concession agreement). However, political uncertainty remains a risk in road sector from 3 angles - construction, execution and maintenance . One must read about Kolhapur and fate of BOT there to get a sense of political concentration risk. The most wierd thing I think is to list one road asset as a company. Companies maintain a pack of road projects distributed by BOT,EPC,HAM by geography , by client State vs nhai n in many different ways just to balance portfolio risk but may be those were initial days when company got listed.