Indian regulator uncovers secret debt deal in Satyam-Maytas acquisition

Satyam founder B. Ramalinga Raju concealed a significant debt in the transaction that precipitated the US$1 billion fraud scandal at his Indian outsourcing firm.

India's stock market regulator revealed that disgraced Satyam founder B. Ramalinga Raju had a secret US$77.3 million debt arrangement in Maytas Infrastructure, at the time when his IT outsourcing firm offered US$300 million for a 51 percent stake. 
On March 28, 2013, the Securities and Exchange Board of India (SEBI) released the findings of an investigation into Maytas Infrastructure, specifically, the three months leading up to the December 16, 2008 acquisition announcement by Satyam.
SEBI investigated whether clients at two broking firms conspired with company promoters, B. Ramalinga Raju, his family, and related entities, to ensure the share price did not drop below 400 rupees. This would have triggered margin calls on debts of US$77.3 million (4.25 billion rupees), to which Satyam founder B. Ramalinga Raju was heavily exposed.
In the report, SEBI explained that Ramalinga Raju and related entities owed 4.25 billion rupees to IL&FS group (3.85 billion rupees) and SICOM (400 million rupees).
Days after Maytas was listed in October 2007, the promoters and related entities pledged their shareholding as collateral with IL&FS, SICOM, and associated firms.
If Maytas's share price dropped below 450 rupees, it would trigger a margin call and promoters would have to provide cash/cash equivalent top-ups.
This arrangement was not disclosed to the market, SEBI adjudicating officer Piyoosh Gupta wrote in the report. "If made public [the knowledge of the pledge] could have adversely impacted the price of Maytas scrip," Gupta wrote.
The details of the loans taken against the pledges by these entities, the terms of contracts they entered into and the subsequent liabilities, hinted at the possible interest of the promoter/promoter related entities in the price of Maytas scrip, noted the officer.

Share price movements

The Maytas scrip did not track the movement of the stock index in the three months prior to Satyam's acquisition announcement.
Maytas always remained above 400 rupees--finishing as high as 472 rupees on December 8, 2008--while direct competitors' share prices dropped by at least 50 percent.
This was despite the fact that Maytas revenue in 2008 dropped over the June and September quarters, from 3.91 billion rupees to 3.66 billion rupees. Profit dropped from 2 billion rupees to 1.68 billion rupees.
After a margin shortfall in June 2008, promoters pledged additional Maytas shares. In October 2008, the margin call trigger was lowered to 400 rupees.
The margin call was finally triggered in December 2008. By that time the Maytas shares plunged from an average price of 438 rupees in June/July to 181 rupees in December/January.

No links established to broking firms

However, the regulator failed to establish a link between the clients at the broking firm ("noticee") and the promoters of Maytas, or that they had any knowledge of the pledge, in order to prove the insder trading conspiracy.
"In absence of such material, it cannot be said that the buying of shares of Maytas by the Noticee was motivated by/with the purpose to maintain the price of the scrip of Maytas above a particular level," the regulator said in the statement.
Maytas results were not disclosed for December 2008 but it was later revealed in the year ending March 2009 that Maytas lost US$86 million (4.73 billion rupees) on revenues of US$302.5 million (16.64 billion rupees).
On December 17, 2008, Satyam withdrew the acquisition proposal. A month later, founder B. Ramalinga Raju confessed to inflating the company's cash reserves by US$1 billion. 


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