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INDIA: Satyam Scam Questions Corporate Governance

NEW DELHI, Jan 9 2009 (IPS) - India’s government, its corporate sector and its people are stunned after the founder-chairman of one of the country’s largest information technology (IT) services companies admitted to years of falsified profits and an audacious financial fraud worth 1.5 billion dollars.

The founding promoter of Satyam Computer Services Limited, Ramalinga Raju, resigned as the company’s chairman on Wednesday, putting out a confessional statement admitting that roughly 1.5 billion US dollars (or the equivalent of 70 billion Indian rupees) of the firm’s past funds were “non-existent”.

What has shocked analysts is that the money, that is now supposed to be fictitious, had been recorded in Satyam’s balance sheets and books of account that had been audited by the internationally reputed firm of auditors, PriceWaterhouseCoopers.

Raju, who is politically influential, disclosed details of the fraud in a resignation letter to the company’s board of directors forwarded to stock exchange authorities as well as the regulator of the country’s capital markets, the Securities and Exchange Board of India (SEBI).

Of the revenue reported as of Sep.30, 2008, the letter said, almost 1.03 billion dollars, or 95 percent, never existed.

SEBI’s chairman C.B. Bhave described the financial wrongdoing in Satyam as an event of “horrifying magnitude”.


The scam has dominated the India media and what is ironical is that the Indian word “Satyam” translates as “truth”.

A most alarming aspect of the episode was that Raju acknowledged that his company’s financial records had been fudged and manipulated for the “last several years”.

“It was like riding a tiger, not knowing how to get off without being eaten,” wrote the disgraced Raju in his letter.

While there were rumours that Raju had fled India, his lawyer has said he is in Hyderabad, the capital of the southern Indian state of Andhra Pradesh, where the Satyam is headquartered.

On Wednesday, Raju’s announcement had knocked the company’s stock down a crippling 78 percent and sent the sensitive index of the stock exchange at Mumbai, India’s financial capital, plummeting by a substantial 7.3 percent. The share price came down further on Friday.

This scandal came barely a week after the government in New Delhi announced an economic stimulus package to revive the markets that have been adversely impacted by the ongoing worldwide recession.

Until recently, Satyam used to be India’s fourth-largest IT company, specialising in developing computer software and business process outsourcing.

Satyam’s stock is listed on the New York Stock Exchange, it had business operations in 66 countries and counted 185 companies in the Fortune 500 list as its clients and customers.

“It’s a wake-up call for the Indian corporate sector,” said Ashok Kumar Bhattacharaya, national managing editor of Business Standard newspaper in an exclusive interview to IPS. “Companies have to stick to the rule-book,” he added.

Investors, along with Indian government agencies, are now demanding answers to why the value of their stock came down by more than 1.9 billion dollars in one day on account of a scandal that is being described as “India’s Enron” in reference to the U.S. energy company that filed for bankruptcy in 2001, leaving 5,000 people jobless and eliminating one billion dollars in employee retirement funds.

Many of Satyam’s 53,000 employees are expecting unemployment as the dimensions of the scandal unfold, investors withdraw and it is discovered how the company’s coffers are almost empty. The 1.5 billion dollar fraud outweighs the company’s entire salary bill for the last year of a little over one billion dollars.

The downfall of Raju, a 54-year old software industry veteran, began nearly one month ago when Satyam attempted to acquire two companies controlled by his sons – Maytas (Satyam spelled backwards) Properties and Maytas Infra – for 1.6 billion dollars in order to compensate for the holes in his books of account.

The deal was abandoned 12 hours after it was announced when investors objected, claiming it was an irresponsible misuse of funds and an instance of nepotism.

The Maytas deals acted as a red flag for international investors, with a host of companies like Unpaid Systems of Britain accusing Satyam of fraud, forgery and breach of contract.

Shortly thereafter, on Dec. 23, the World Bank barred Satyam from offering its computer services for eight years citing a potential trail of corruption – data theft and bribery – that led to Raju.

The last straw perhaps came on Tuesday when an Indian associate of Merrill Lynch terminated an agreement on grounds of “material accounting irregularities”.

Satyam’s worth estimated at seven billion dollars, barely six months ago, is now worth less thatn 330 million dollars.

In an IPS interview, Arun Kumar, professor of economics at New Delhi’s prestigious Jawaharlal Nehru University, said the so-called “independent” directors on the Satyam board were not truly independent and added that auditors often acted in collusion with corrupt company managers.

“I’m not at all surprised that the auditors played along with the top management of this company and allowed executives to cook books of account,” said Kumar who has authored a book on India’s illegal – or “black” – economy.

“The government is not looking to take over the companies. The corporate world must respond to this,” Kamal Nath, India’s industry and commerce minister was quoted as saying. “The government should only look at the regulatory part of it,” he added.

The government has stepped in to investigate all important directors and employees associated with Satyam who could be involved in the fraud. All those found guilty could face up to ten years in prison. The auditing licences of the partners of PricewaterhouseCoopers could also be revoked.

“The system has to be strong, but individuals make the system. The rules were in place but individuals broke these rules and threatened the system,” says Bhattacharya.

Though Raju’s resignation letter attempts to accept personal responsibility for the misdemeanours, there is a view that many others were involved and complicit.

Kumar said it was “near-impossibile that those close to the inner workings of Satyam were completely unaware of what was going on”.

Whereas some argue that the Satyam scandal will not have a long-term negative impact on the working of India’s reputed information technology (IT) industry, others say it could negatively impact India’s booming IT services which chalked up overall sales worth 52 billion dollars in 2007-2008.

Anand Mahindra, vice chairman and managing director of M&M, a leading commercial vehicles manufacturing company, went on record stating: “This development has resulted in incalculable and unjustifiable damage to Brand India and Brand IT in particular”. He added that the “whole of Indian industry should not be tarred with the same brush”.

But other corporate managers see positive fallouts to the Satyam episode. ‘’After what happened there is bound to better self-regulation among Indian IT companies,” said Puneet Kumar, a top manager at WIPRO, a globally respected, Bangalore-based IT company.

‘’Satyam was an aberration,” Puneet Kumar said. ‘’The fact is that the IT industry thrives on good reputation and every major in the business lays great emphasis on maintaining global standards of corporate governance.”

 
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