Raju brings down Satyam, shakes India
By Sudha Ramachandran
BANGALORE - Byrraju Ramalinga Raju's shock resignation on Wednesday as chairman
of Satyam Computer Services, which he founded and helped develop into India's
fourth-largest computer software firm, and confession to fraud running into
millions of dollars has threatened to undermine the remarkable growth story of
the Indian economy in general and its information technology sector in
particular.
Raju, 53, confessed in a letter to Satyam's board of directors to inflating
profits for years with "fictitious" assets and non-existent cash. The fraud, he
said, began in an attempt to cover up a "marginal gap between actual operating
profit and the one reflected in the book of accounts". It swelled over the
years to
"unmanageable proportions as the size of the company operations grew
significantly". Raju said that about US$1.04 billion, or 94% of the cash listed
in assets at the end of the company's second quarter in September, was
fictitious. It simply didn't exist.
It does seem that as Satyam grew, so did the magnitude of the fraud it was
perpetrating on shareholders, employees, indeed the world. It couldn't be more
ironic. The name "Satyam" is derived from the Sanskrit word satya, which
means "truth".
Headquartered in the southern city of Hyderabad, Satyam specializes in business
software and offers back-office outsourcing and consulting services. Set up in
1987 with just 20 employees, it has grown to be one of the torchbearers of
India's new economy, now operating in 66 countries and with 53,000 people on
its payrolls.
What makes the fraud all the more shocking is that Satyam was no fly-by-night
operator. It was audited by widely respected international auditing firm
PricewaterhouseCoopers and had respected independent directors on its board.
Satyam was listed on the Bombay and New York Stock Exchanges and had 700
companies on its list of clients, 185 of which are Fortune 500 companies.
It seemed to be in fine financial health. In the fiscal year to March 2008,
Satyam reported a 46.3% rise in revenue to $2.1 billion. In October, Raju
announced better-than-expected results, saying he was "pleased" that the
company had "achieved this in a challenging global macroeconomic environment,
and amidst the volatile currency scenario that became reality". The company's
future seemed rosy. Raju announced that revenue in the fiscal year ending March
2009 would rise by up to 21% to between $2.55 billion and $2.59 billion.
Satyam also won prestigious contracts to look forward to. It had been named
official software provider for the 2010 FIFA football World Cup in South Africa
and the 2014 event in Brazil.
Satyam seemed in safe hands. Not only were profits robust but global awards
honoring its governance were rolling in. Raju won the Ernst & Young 2007
entrepreneur of the year award. Just three months ago, Satyam was honored with
an award from the London-based World Council for Corporate Governance for
excellence in corporate governance.
While Satyam's fall was unexpected and rapid, a cloud that developed over the
company in October gave little indication of what lay in store, when the World
Bank, a Satyam client, said it was considering action against the company for
installing spy software on the bank's computers and bribing its officials.
More directly related to Raju's downfall this week was the rejection by Satyam
shareholders on December 16 of his attempt to have the company buy two
construction firms in which his sons held stakes. It was seen then as a bid to
help out his sons (it turns out that it was actually aimed at covering Raju's
fudging of Satyam's books).
The shareholder revolt shook Raju's credibility and sent Satyam share prices
plunging. A week later, the World Bank confirmed it was blacklisting Satyam
from business for eight years. Three days later, the Satyam board began to
hemorrhage, with four directors resigning one after another. Then on December
30, one of Satyam's largest investors announced that it could sell its stake.
The crisis deepened with financial institutions offloading shares.
The growing crisis that Satyam seemed to be in, however, did not indicate the
extent of the rot in its system. That became apparent only with Raju's shocking
confession on Wednesday.
The impact of Raju's revelations of the rigged Satyam account books was
immediate. Within hours, Satyam stocks plunged over 82%. It dragged the
benchmark Sensex index down 7.3% to close at 9,586.88 on Wednesday.
The New York Stock Exchange has halted trading in Satyam stock. India's
National Stock Exchange has expelled Satyam from all its equity indices and the
Bombay Stock Exchange is expected to follow suit. Several domestic and foreign
brokerage firms, including Credit Suisse, Religare and Angel Broking, suspended
their coverage of Satyam shares.
The medium- and long-term impact of the Satyam scandal is worrying. The scandal
has emerged at the worst possible time, say analysts: when capital is scarce
and foreign institutional investors (FIIs) are anyway pulling funds out of
India and other emerging markets in the wake of a global credit crunch. In
2008, FIIs pulled out some $13.5 billion from Indian stocks and the Sensex
index fell at least 50% last year.
The stock market was beginning to show signs of recovery in the last few days,
responding positively to measures by the government and the Reserve Bank of
India to stimulate the economy. That tentative rally has now been scuttled by
the Satyam scandal.
Government officials and major players in the IT sector have been quick to
describe the Satyam scandal as a one-off incident. "One Satyam does not make
the entire Indian software industry," said Narayana Murthy, founder of India's
second-largest IT company, Infosys Technologies, describing the scandal as an
"isolated case". "It does not represent India. It just represents one
individual and one company," he said. Infosys is due to report is results for
the three months to December 31 on January 13.
Even so, the scandal could impact the Indian economy and the IT sector.
FIIs are large shareholders in the publicly traded Indian software companies,
which have grown wealthy on the back of outsourcing business from the US and
Europe. At Infosys Technologies, the FII holding is 41%, at Satyam's smaller
rival HCL Technologies it is 18% of the 33% held by non-promoters. Will they
now think twice, even abandon India?
"There is a strong possibility investments in India will be affected," Jigar
Shah, senior vice president at Kim Eng Securities told Reuters. The image of
Indian companies will be severely dented, said Pradip Kanakia, national head of
marketing, KPMG. "The fallout will be massive," he told Times of India.
"Foreign investors will look at Indian companies more cautiously than before."
Some have indicated that the Satyam incident itself isn't altering their
investment policy in India but that this could change if signs of widespread
irregularities among Indian companies, a "systemic problem", emerged.
"In the short term," said Murthy, "investors will start looking deeper into all
companies they want to invest in, and rightly so. Once they realize that things
are not all that bad and that most companies are decent and managements honest,
they will regain their faith."
But those new to the Indian market or considering investing there for the first
time may be scared away. "For anyone who is new to India and has not invested
in the country before, India will become a no-no," says Anoop Bhaskar, who
heads equity investments at UTI Asset Management Co, India's third-largest
mutual fund.
There are fears that the brazen fraud will also scare away outsourcing clients
abroad. Clients will think twice now before outsourcing to India, say some
analysts.
However, the general verdict from Bangalore-based business process outsourcing
companies is that Satyam's clients will simply move to the bigger companies,
with India's top three IT companies - Tata Consultancy Services (TCS), Infosys
and Wipro most likely to benefit. Fund managers are unwilling to downgrade the
credibility of India's IT companies or the economy in general just yet. Infosys
shares gained more than 1% in early trade on Thursday after also strengthening
on Wednesday, when Wipro also rose, while TCS declined less than 1% after the
Satyam scandal broke.
More broadly, the scandal has raised serious questions over the quality of
corporate governance in India and has put under doubt the credibility of an
array of actors in the unseemly drama - the independent directors on the board,
the company's statutory auditors, credit rating agencies and bankers, among
others.
Observers say that as shocking as the fraud that Satyam perpetrated for several
years is the role of its statutory auditors. Satyam's account books were being
audited by PricewaterhouseCoopers (PwC) for the past eight years. How did the
auditors not catch on to fraud of such magnitude?
This will not be the first time that PwC's credibility has come under a cloud.
In 2005, the Reserve Bank of India barred PwC from bank audits after it found
that the firm under-provided for non-performing assets of Global Trust Bank. It
faces investigations on its alleged failure to spot a 21 million euro fraud at
Greencore Group's mineral water division.
Key to how FIIs and overseas clients react to the Satyam scandal could be what
steps the Indian government and regulatory agencies take. "As long as
regulatory agencies in India and the US and concerned authorities take quick,
stern action and investigate this matter thoroughly and justly, this will
pass," Murthy said.
Some believe that Raju's confession is only the tip of the iceberg and that
there is much that lies beneath. From a family of farmers, Raju first dabbled
in building construction and textiles before he stepped into IT. He was the
architect of Hyderabad's transformation into Cyberabad. Satyam's headquarters
in the city is a landmark people visit.
In a bid to explain why he didn't come clean earlier on the fraud he
perpetrated for so many years, Raju said: "It was like riding a tiger, not
knowing how to get off without being eaten."
On Wednesday, Raju was ready to dismount the tiger. He stepped down as chairman
of Satyam Computers and said he was ready to face the law of the land. What was
once a glorious corporate career came to an undignified end.
Sudha Ramachandran is a Bangalore-based correspondent.
(Copyright 2009 Asia Times Online (Holdings) Ltd. All rights reserved. Please
contact us about
sales, syndication and
republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
