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India Economy: Satyam’s Demise and the Future of India’s IT Industry

Posted by Manish Agrawal on Thursday, 22 January, 2009

“Dear Board Members,

It is with deep regret, and tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice:

1. The Balance Sheet carries as of September 20, 2008

a. Inflated (non-existent) cash and bank balances or Rs.5,040 crore (as against Rs. 5361 crore reflected in the books)

b. An accrued interest of Rs. 376 crore which is non-existent

c. An understated liability of Rs. 1,230 crore on account of funds arranged by me

d. An over stated debtors position of Rs. 490 crore (as against Rs. 2651 reflected in the books)”

And so continued the confession letter of Chairman Ramalinga Raju, former Chairman of Satyam Computer Services, further outlining the accounting cover-ups. It attempts to exonerate Raju’s wife and the Board of Directors by saying they knew nothing of the scandal. It also says that, “…neither me, nor the Managing Director took even one rupee/dollar from the company and have not benefited in financial terms on account of the inflated results.”

When a young Ramalinga Raju founded Satyam Computers in 1987 he had big dreams and an ambitious vision. The small software company quickly grew to international prominence with thousands of employees, and emerged as one of India’s premier consulting and information technology services companies. Then on 7 January, 2009, at 10:53am, Raju sent out a fax to the Satyam Board of Directors confessing to having falsified the accounts. What ensued was India’s version of the US Enron scandal.

With bailouts in vogue during these financially-strained times, the prospect of Satyam being saved by the government has been raised. Millions of dollars worth of projects are at stake, and this seems to be a simple solution to recover them, especially for the state government in Andhra Pradesh (Satyam is based in Hyderabad, Andhra Pradesh) which has committed nearly Rs 30,000 crore in various infrastructure projects with Satyam and other companies run by Raju and his family.

But that’s not going to be so easy. Prime Minister Manmohan Singh is adamantly against using tax payers’ money to rescue a firm whose problems were created by one person acting maliciously. His senior cabinet colleagues said, “There is no question of any bailout package.”

One minister posed the question, “The government can intervene if a particular sector is under stress. But how can the government intervene when Satyam seems to be a case of the promoter running away with the money?”

Delhi fired the entire board of Satyam, and Raju and his brother Rama (who was a Satyam director) were arrested. They were charged with criminal conspiracy and forgery. The US $1 billion corporate fraud case is India’s biggest ever. They face life in prison.

A new board was appointed, consisting of Kiran Karnik, the former head of technology group Nasscom; Deepak Parekh, who is in charge of the Housing Development Finance Corporation; and C Achuthan, previously from the Securities and Exchange Board of India.

“The board’s first priority would clearly be to restore the company’s credibility, customer confidence and employee morale,” noted Corporate Affairs Minister Prem Chand Gupta.

“Such a board will provide the necessary vision, along with responsible and accountable leadership to the company in this hour of crisis.”

“I think it’s a first good move towards restoring client confidence,” said Sudin Apte, analyst from research group Forrester. But we still have a long way to go. We still have to see how quickly the reality of this scandal comes out in the world.”

This will certainly put a damper on the Indian IT industry and its reputation, as well as the accounting and auditing procedures used. Ernst & Young is taking over the Satyam books from PWC, for what that’s worth. Many felt India was largely immune or at least protected from global financial shocks, but when they originate in India it’s another story.

Thousands of university graduates had been promised jobs in Satyam, and the existing 53,000 worldwide have uncertain futures.

But now, many American and European companies will undoubtedly lose trust in Indian IT firms. IT outsourcing and various types of FDI are likely to slow even more than they already have been amid existing financial turmoil.

Fears of similar fraud festering in other firms exist. The Financial Times wrote, “Its disclosure will ring alarm bells for hundreds of Fortune 500 companies across the world that entrust their most critical data and computer systems to Indian outsourcing companies and threatens to damage the country’s reputation as a place to do business.”

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