Satyam chairman quits amid fraud scandal

In a shock admission that will rock the India’s IT sector – and its business culture as a whole – the chairman and founder of IT outsourcer Satyam this morning confessed to a billion dollar fraud campaign designed to make the company’s performance look better than it was.

In a letter to the company’s board of directors, which can be read here, Ramalinga Raju revealed the extent of the fraudulent accounting. A total $1.45 billion of non-existent cash has been fraudulently added to Satyam’s accounts.

Details of how this was possible without a company-wide conspiracy have yet to emerge, but the motivation appears to have been to make Satyam’s ailing performance appear better than it was. According to the fraudulent figures, Satyam grew revenues by 24% in its most recent financial quarter – a reasonable rate for the high-growth Indian IT services industry. In truth, however, the growth rate was closer to a disastrous 3%.

Satyam’s share price has fallen by more than 70% since the announcement.

Signs of trouble began with a bid by Satyam to acquire two companies, Maytas Properties and Maytas Infra, that Raju himself had set up and that were run by his sons. Seeing that there was little justification for the acquisitions, shareholders revolted and successfully blocked the deal.

But the acquisitions, which would have effectively moved millions of dollars from Satyam’s coffers into the Rajus’s pockets, aroused suspicions around the corporate governance of the company.

In his letter today, Raju described the Matyas acquisitions as “the last attempt to fill the fictitious assets with real ones”.

Shortly after the deal fell through, several independent directors of the company tendered their resignations. It now appears as though they then saw the extend to which Raju had been cooking the books.

A sub-plot in this episode concerns a report by FOX News in October which alleged that World Bank had banned Satyam contractors from its premises after one of its key financial systems was hacked. In December, World Bank declared Satyam ineligible for future contracts for providing “improper benefits” to employees.

It is now widely expected that Satyam will be acquired, although reports linking the company to BT spin-off Tech Mahindra have been denied.

The damage to the company’s brand may well be irreparable, and it could infect the Indian IT industry – and economy – as a whole. That Raju was able to get away with inventing revenues for as long as he did suggests a woeful lack of governance, and investors will be asking other Indian ventures some searching questions. That could result in tighter regulation, possibly inflating the cost of doing business in India.

Pete Swabey

Pete Swabey

Pete was Editor of Information Age and head of technology research for Vitesse Media plc from 2005 to 2013, before moving on to be Senior Editor and then Editorial Director at The Economist Intelligence...

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