After Satyam, Educomp under scanner for fudging accounts

The Pioneer 

Manipulating turnover figures to hike share prices is said to be a common practice in India. Satyam did it. Others are doing it too. But shareholders and various Government agencies have woken up only after Ramalinga Raju confessed to fudging Satyam accounts. Now that the entire fraud in the IT company has come to light, all agencies, including the Securities and Exchange Board of India (SEBI), have announced investigation of all companies listed on the National and Bombay Stock Exchanges.

The modus operandi by companies like Satyam is more or less the same. They witness very high rate of growth in sales and net profit and consequent sharp increase in share prices. Once the share price reaches its peak, the promoters begin selling them. They normally offload their own holdings, then tap the national and international financial markets for raising loans by pledging shares and raise funds which remain unused. Sometimes the money is diverted to unquoted subsidiaries.

Another company that attracts attention is Educomp Solutions Limited, a globally diversified education solution provider and one of the leading players in this sector.

The rapid growth in the company’s turnover, hefty profits made by the promoters in trading in its own shares and high outstandings the company has from the market, funds invested in unquoted subsidiaries and loans raised from financial markets by pledging overpriced shares, most of which remain unutilised, have raised eyebrows and need answers. The Pioneer sent a detailed questionnaire to its Chairman and Managing Director Shantanu Prakash, on Thursday (January 15, 2009). It was stated by the company that Prakash was travelling and the questions could not be replied immediately.

While The Pioneer awaits the company’s response, our analysis of the company’s balance sheet show that the promoters made over Rs 250 crore in the stock market in trading in their own shares. According to information from the balance sheets, the promoters held 1.08 crore shares as on March 31, 2006. The holding came down to 95.10 lakh shares on June 30, 2008, which means the promoters sold more than 13 lakh shares of their company during the period between March 31, 2006 and June 30, 2008. Assuming that the shares were sold at an average of high (Rs 5600) and low (Rs 384.5) during the period, ie at Rs 2992 per share, the promoters raked in Rs 388 crore.

However, the analysis of periodic sales show that the promoters raked in Rs 250 crore from trading in their own shares. The maximum shares (5,25,000) were sold between March 31, 2006 and September 30, 2006 when the average price of high (Rs 751) and low (Rs 384.5) works out to Rs 567.5 per share. If the shares were sold at this average, the promoters raked in Rs 29.76 crore during the period.

But the killing was made between December 31, 2007 and June 30, 2008 when the promoters sold 1.47 lakh shares at an average of Rs 4093.5, earning Rs 60.37 crore. During this period, the share price touched its all time high of Rs 5600.

Another glaring fact in the balance sheet is extraordinary high growth in the company’s sales and also in its debtors. The company, in any year, has more than 50 per cent of sales shown as receivables from the market. According to experts, such high outstandings in education was unusual.

According to the balance sheet, the company sales jumped from Rs 52.30 crore in 2005-06 to Rs 106.57 crore in 2006-07, to Rs 262.1 crore in 2007-08 and is expected to touch Rs 335.08 crore by the end of 2008-09. The company’s debtors also jumped substantially during these years and were more than 50 per cent of the sales.

In 2005-06, the debts stood at Rs 29.86 crore (57 per cent of the sales). They jumped to Rs 57.41 crore during 2006.07 (53.8 per cent), Rs 165.31 crore in 2007-08 (63.07 per cent). Satyam Computer incidentally also had debtors list which was unnaturally high.

The promoters, according to the balance sheet, also raised Rs 314.94 crore as FCCB. Strangely, most of it, approximately Rs 250 crore, is lying as fixed deposits in the SBI London branch. Apparently, the company was not in need of funds but encashed its high price in the stock markets to garner as much liquidity as possible.

The company has also floated several subsidiaries which are not quoted in the stock markets who have received total of Rs 80 crore from Educomp as loans and advances. It appears that Rs 314 crore the company raised through FCCB, Rs 220.75 crore have been parked with SBI London as fixed deposits and the remaining funds diverted to these subsidiaries.

The analysis of the cash flow statement of the company also reveals some startling facts. The company has utilised Rs 183.4 crore for creation of fixed assets out of which Rs 117.53 crore have been spent on purchase of computers and accessories alone. Rs 25.82 crore is shown to have been spent on software and knowledge-based contents purchased from its subsidiaries.

The company has more than 4500 employees, mostly graduates. The total cost of these employees has been shown at Rs 35 crore per annum, which works out to Rs 7000 per month. The inquires from the market reveal that it appears to be understated by at least Rs 15 crore a year resulting in high profits and therefore putting upward pressure on the company’s share prices.

It cannot be said with certainty that the company would have fudged figures as was done by Satyam. However, its rapid increase in sales, more than 50 per cent of it not being received and consequent rise in net profit and share prices beating the best in the country, do raise several questions.

5 thoughts on “After Satyam, Educomp under scanner for fudging accounts

  1. Educomp is dealing with Govt departments mostly.How do they get the contract one may ask.Anyone who has dealt with even a small Govt department, knows how the dealings are done e.g. RTO, or Municipal Corporation, Octroi etc.Can you believe that their operations will be honest? If they are dealing with Government, then some politicians and bureaucrats are definitely being paid off. Company may be dealing with school children and educating them, but investors are not school children.They know.Satyam also said in the beginning “ALL RUMOURS” so did Enron.
    Let us see where Educomp will lead us.Hyderabad need not get the distinction of being the scam capital of India.Other cities are great rivals.One being Gurgaon.God help Educomp investors.
    HAHAHA.

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  2. Hi,

    My name is Sumita and I work with Educomp in Corporate Communications.

    As you can imagine, we’re taken aback by the anonymous rumours and reports in certain sections of the press alleging Satyam-like fraud with Educomp.

    I know this sounds official and ‘spokesperson-y’, but I must say that the rumours stem from false and baseless allegations and are probably designed to deliberately damage our stellar reputation.

    In terms of action, we’ve done two things – we’ve posted a comprehensive reply to the allegations on our website and we’ve also filed a complaint with the Economic Offences Wing to identify the person(s) who caused the mischief.

    I hope you will read all the information at hand and come to your own conclusions. Please do treat rumours as just that – and ignore them.

    Thank you for your time,

    Warm regards

    Sumita Kaul
    Corporate Communications, Educomp
    sumita.kaul@educomp.com

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  3. The explanations offered by Educomp is not convincing. There are many skeletons in the cupboard. I pity for the small investors who invested their hard earned money in the equity shares. Educomp has also betrayed the small investors. If they are clean they come out with all the facts. By the time ultimately the truth is out, like RamalingaRaju, the promoters will certainly sell their substantial shares in the present price and the small investors will be on the road

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  4. There is no smoke without fire. Then why the hell the promoters sold substantial part of their shares at a high price. Small investors are taken for a ride. Do not blame the recession for everything. In India the dishonest methods adopted by the promoters are only the reasons for the colossal loss of the small investor. The politicians are also hand in glove with these dishonest promoters. Ultimately they will come out scot free after just spending a few days in jail. They invest their money in benami accounts and elsewhere. God please save the small investors

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  5. Educomp’s MD Mr.Shantanu has categorically denied the news and has said that some brokerages may have malified intentions in spreading wrong news.
    Rgds
    Vivek Karwa
    98-405-405-75

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