Satyam scandal leaves cloud over Indian IT

Indian offshore providers go to great lengths to project an air of legitimacy and trustworthiness in order to allay the fears of customers nervous of sending chunks of their business halfway around the world.

So as the staggering extent of corruption at Satyam Computer Services, one of India’s largest IT outsourcers, was revealed throughout January 2008, the rest of the sector would not have felt the glee of a competitor scuppered, but the shame of an industry whose reputation has been severely tainted.  

The beginning of the end of what is now known to be a shockingly audacious campaign of fraudulent accounting by Satyam chairman B Ramalinga Raju and his small band of co-conspirators occurred on 15 December 2008. That day, the company announced a curious $1.6 billion bid to acquire two companies, Maytas Infra and Maytas Properties, which were founded by Raju and his two brothers in 1988 and in which they all held significant stakes.

Investors were not convinced that the acquisition of two property and infrastructure companies offered any benefit to Satyam itself, and blocked the deal.

There followed a number of resignations by Satyam board members, presumably as they became aware of the extent of fraud. Then, in a letter dated 6 January, to all-round shock and amazement, Raju revealed in great detail what he had been up to.

“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,” the letter began, before explaining that recorded in Satyam’s accounts was a total $1.45 billion of revenue that simply did not exist.

Raju also admitted that the bid to acquire the Maytas companies had been a last-ditch attempt to replace Satyam’s imaginary cash with real funds before it was no longer possible to cover up the extent of the fraud.

He was promptly arrested on charges of criminal conspiracy, cheating, forgery, misappropriation of funds and criminal breach of trust. Other arrests followed, including that of his brother, CEO Rama Raju and CFO Vadlamani Srinivas.

More details of the dimensions of the fraud have since emerged since the arrests, including how Raju allegedly created a network of 300 companies to move funds around and how, according to Indian police, the company’s head count was overstated by around 12,000 people (although Satyam officials dispute this).

How all of this could have been achieved without a company-wide conspiracy remains to be seen. But at this stage, investigators report that the locus of dishonesty was very much Raju and those closest to him.

“If you go into the systematic inspection and investigation of the structure of the company, you come to the conclusion that the whole thing revolves around the Raju family,” India’s corporate affairs minister Prem Chand Gupta told reporters.

But the Raju family aren’t the only ones now facing some difficult questions; there are plenty of parties who should have spotted that something was up. Two employees of PricewaterhouseCooper, Satyam’s auditors, have been arrested and the company’s Indian audit head has resigned.

Satyam’s customers have been understandably unnerved by the revelations, and several have already withdrawn their custom, including US firm, State Farm Automobile Insurance. Other customers such as BP, Unilever, Thomson Reuters, Barclays and GlaxoSmithKline will be hoping that an acquisition by a rival can rescue all that they had invested in Satyam.

In the interim, the Indian government officials who have effectively taken charge of the company have named its chief delivery officer AS Murthy as chief executive and Kiran Karnik, former head of Indian industry association NASSCOM as chairman.

A senior executive at one of Satyam’s flagship customers told Information Age that “Satyam has very little time – weeks at most – to find a buyer or we will make job offers to the several hundred staff currently working for us indirectly in India, as well as on site in the UK.”

Given the complexity of the fraud, customers are not convinced of a positive outcome. The uncertainty over the company’s historical financial results makes the establishment of a valuation difficult, and as customers begin to withdraw contracts, that uncertainty will grow, says a long-standing Satyam customer.

“In situations like these, the crisis can spiral in on itself; Satyam has a whole supply chain of suppliers who don’t know where they stand,” he said. Moreover, customers are also worried that staff working on their contracts will leave in large numbers, drawn by the opportunities at Satyam’s more stable rivals. “That adds further risk to our projects and services.”

Class action suits by investors are also flying in Satyam’s direction, again making acquisition tricky.

The jury is still out on whether the scandal will have implications for India’s IT industry, and the subcontinent’s economy as a whole.

The absence of “objective investor scrutiny of the reported performance” of Indian IT companies allowed the episode to take place, according to analysts at security consultancy Kroll. Condemnations such as that are sure to make investors more wary of Indian IT ventures, at least in the short term.

But the industry’s customers – aside from Satyam’s own – are less affected, according to Duncan Aitchison, EMEA president of outsourcing advisory TPI. “I haven’t picked any sense that customers see endemic shortcomings in the Indian IT sector,” he says. “Buyers will be seeking assurances [from their Indian IT providers], but there is only so much you can do. You can’t legislate for scandals of this kind.”

Pete Swabey

Pete Swabey

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

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