MUMBAI - A sneezing cold is not always pneumonia and concerns that the US$1.5
billion fraud at Satyam Computer Services raised for the Indian software sector
and wider economy may be overstated. Yet skeletons tumbling out of the Satyam
cupboard have forced the Indian government into hurried damage control.
Investigators are now looking at whether the trigger for the Satyam fraud,
confessed to on January 7 by chairman Ramalinga Raju, was a greedy land deal
gone bust, rather than problems in the company's software and outsourcing
business.
Those problems are not limited to the confessed fraud. The World
Bank said in December it had imposed an eight-year ban on Satyam for providing
"improper benefits" to bank employees. This week, Wipro, India's third-largest
software exporter, revealed that it had been barred by the World Bank more than
18 months ago for four years for offering bank employees shares in its 2000
stock offer in the US.
Growth at Satyam's main competitors in the country unhit by scandal certainly
continues strongly, as clients overseas place orders as they cut costs amid the
global recession.
Infosys Technologies, India’s second-largest computer-services provider, this
week said profit in the last three months of 2008 climbed 33%, the fastest in
six quarters. Sales jumped 35%.
Sales at Tata Consultancy, the country's biggest exporter of software, gained
24%, although net profit rose only 1.6%, hit by a 2.51 billion rupee
foreign-exchange loss after the Indian currency dropped 19% against the US
dollar last year. Wipro is due to report its earnings on January 21.
Goldman Sachs Group this month said revenue growth at Indian computer-services
companies may slow to 6% this year, as global information-technology spending
shrinks 4%, Bloomberg reported.
The National Association of Software and Service Companies (NASSCOM), an Indian
industry body, is more optimistic, claiming the industry will increase export
revenues 20% to $60 billion by March 2010.
Nine days after Raju confessed in a letter to his board of directors to faking
profits for eight years and creating a non-existent cash balance of $1.5
billion, the Satyam website continues to forecast an increase of about 20% in
net profit for the year ending March 31.
While no definite pointer has emerged so far on the mechanics of the Satyam
fraud, one trail points to $6 billion worth of local governmental contracts to
Maytas, an infrastructure development company that Raju's family has owned and
run for the past 23 years. Maytas, Satyam spelt backwards, is run by Raju's two
sons, Teja and Rama.
Raju, in judicial custody until January 23, has reportedly confessed to
interrogators that he diverted Satyam funds in speculative land deals for
Maytas. He came unstuck after land prices crashed in his home state of Andhra
Pradesh.
Political parties, including the Communist Party of India, have asked Prime
Minister Manmohan Singh to order a "high-level probe" into this aspect of the
fraud, which could involve Raju personally owning about 4,000 hectares of land.
More immediate concerns for the central government include reassuring domestic
and foreign investors of the good health of India's economy and ensuring
January salaries being paid to 53,000 Satyam employees.
Manmohan, who holds the government's finance portfolio, said on January 8 that
the Indian economy would remain among the fastest growing in the world this
year, with a 7% growth rate.
"Despite the global economic downturn, the fundamentals of our economy continue
to be strong," he told delegates to the Pravasi Bharatiya Divas, the annual
meeting of Indians living overseas. "Much of India's growth is internally
driven and we can maintain a strong pace of growth in coming years."
External Affairs Minister Pranab Mukherjee continued the reassurance song on
January 13, at a joint press conference in New Delhi with visiting British
Foreign Secretary David Miliband. He said the "basic fundamentals are strong"
for the Indian economy and "there is no need to hit the panic button".
Even so, a sense of betrayal by Satyam dominated sentiment on the streets. "I
lost 5 lakhs [US$10,126] after the Satyam fraud," 40-year-old Ramesh Gupta told
Asia Times Online, while standing with small groups of investors morosely
gazing up at the electronic ticker atop the Bombay Stock Exchange (BSE)
building on Thursday, after seeing the BSE Sensex dive by over 340 points. "I'm
going to look more closely at the promoters of companies I next invest in."
Satyam stocks, which plunged about 80% on Raju's initial confession, tanked 33%
on Thursday, reducing the market capital of the company to less than $450
million from over $7 billion in 2008. Amid an overall bear market and with the
chairman of a bellwether company in jailed, the black statue of a charging bull
outside the 28-storey exchange building looked appropriately caged behind
spiked metal barriers.
Gupta, a former secretary of the Bombay Shareholders Association, predicted
more checks for fraud at other clients of Satyam's auditor,
PricewaterhouseCoopers (PwC). Gupta in particular queried the credibility of
PwC and its operations in Dalal Street, Mumbai's financial center. "Why does
PwC get four times the fee than other auditors of companies such as Infosys?,"
he asked.
The Hyderabad police have raided the PwC office since the fraud confession by
Raju. The multinational auditor, with offices in 150 countries, is yet to
explain how it passed Satyam's fudged accounts for eight years, apart from a
statement of the obvious on January 14 saying that its audited Satyam accounts
were "not reliable".
Multinational auditors KPMG and Deloitte have now been appointed to check
Satyam's affairs, said Deepak Parekh, a senior banker and one of the new
six-member, government-appointed Satyam board of directors to delve into the
scandal.
The fraud opened numerous credibility cracks, bringing market regulators,
various governmental institutions and market analysts themselves under
investigation.
The Institute of Chartered Accountants of India (ICAI), which is looking into
the role of PwC, is also likely to question market consultants Ernst &
Young on its valuation of two Maytas companies, as well as the basis on which
E&Y declared Raju the "E&Y Entrepreneur of the year 2007".
ICAI is itself under the cosh, with the Mumbai-based Small Investors Grievances
Forum declaring India's top chartered accountants body, the second-largest in
the world, to be among respondents in High Court public interest litigation
filed by the forum on the Satyam fraud.
The stock market regulator, the Securities and Exchange Board of India (SEBI),
has announced investigations into allegations of insider trading among senior
Satyam officials. However, decisions by SEBI, which does not have an impressive
track record against insider dealing, can and has on occasion been overruled by
its oversight body, the Securities Appellate Tribunal on appeal.
Satyam executives made $1.8 million from share sales in the six months before
the scandal broke and the stock price crashed, filings by the company to the
Bombay Stock Exchange show. Chief financial officer V Srinivas and eight other
officials sold a combined 267,358 shares after July 14, more stock than the
combined insider sales at 30 companies on India's benchmark index, according
Bloomberg.
The Reserve Bank of India has also ordered an investigation, while the central
government has asked the Serious Frauds Investigation Office, under the
Ministry of Corporate Affairs, to probe the scam. Government concern over what
answers emerge from these investigations will be sharpened by the impact they
might have on the prospects for the wobbly ruling coalition, which faces
general elections in April.
The plethora of investigating agencies has not impressed cynics who fear too
many sleuths probing the Satyam soup may be a complex coverup for senior
politician friends of Raju.
Eyebrows are also being raised at Raju having a battery of 25 lawyers to prove
he isn't guilty after admitting his guilt, though this could be Raju's
interpretation of his confessional letter where he said he is "now prepared to
subject myself to the laws of the land" - by stretching the slow arm of Indian
law as long as he can.
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