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As if last year wasn't bad enough.
Satyam Computer Services' founder and chairman B. Ramalinga Raju hassent India Inc into a tailspin by confessing to accounts fudging in a letter to the company's board and SEBI inwhat is being seen as the country's biggest corporate fraud ever: Rs 8,000crore and counting. Raju resigned after revealing that he had significantly inflatedthe company's earnings and assets for years.
Giving details of the irregularities, Raju said the company's balance sheetas of September 30 carries "inflated (non-existent) cash and bank balancesof Rs 5,040 crore (as against Rs 5,361 crore reflected in the books)."
It also carries "an accrued interest of Rs 376 crore which is non-existent,understated liability of Rs 1230 crore on account of funds arranged by me,overstated debtors position of Rs 490 crore (as against Rs 2651 crore in thebooks."
The USD 2-billion Satyam also reported a revenue of Rs 2700 crore for theSeptember quarter and an operating margin of Rs 649 crore (24 per cent ofrevenue) as against the actual revenue of Rs 2112 crore and an actual operatingmargin of Rs 61 crore (3 per cent of revenue).
"This has resulted in artificial cash and bank balances going up Rs 588crore in Q2 alone," Raju said, adding that the gap in the Balance Sheet hasarisen purely on account of inflated profits over a period of last severalyears.
While Raju maintained that neither he nor the co-founder and managing director, B. Rama Raju, had "taken one rupee/dollar from thecompany" and that the board had no knowledge of the situation, there areunanswered questions as to how the auditors and others did not come to know --or acquiesced in -- the fraud that was perpetrated over a number of years.
Obviously, tough questions will have to be answered not just by Raju butalso by its auditors, bankers, board of directors and other financial officers.
But that is no consolation for India's fourth largest IT company, its shareholders or its 53,000employees with operations in 66 countries.By the end of the day, the company, so far ranked just after Brand India'sbiggest poster boys -- Infosys, TCS and WIPRO -- had lost astaggering Rs 10,000 crore in market capitalisation as investors reacted sharplyand dumped shares, pushing down the scrip by 78 per cent to Rs 39.95 at BSE.
But while the magnitude of the fraud may not have been suspected, it wasn'tas if Satyam had not been under a cloud of suspicion for some time. There hadbeen reports in October 2008 that the company had been banned from World Bank contractsas it was accused of installing spy software on some World Bank computers. Satyam denied the accusation.On December 24, the World Bank confirmed without elaboration on the cause that Satyam had beenbanned for eight years. The same month also saw what Raju described as "the aborted Maytas acquisition deal"which he says now, "was the last attempt to fill thefictitious assets with real ones. Maytas' investors were convinced that this isa good divestment opportunity and a strategic fit... But that was not to be. What followed in the last several days iscommon knowledge."
Satyam,meanwhile, said Board member Ram Mynampati has been appointed interim CEO. "We are obviously shocked..," he has said in a statement posted on the company's website.
'Shocked' sums up the state of the industry as well. Terming it "an event of horrifying magnitude", SEBI has ordered aprobe.
Brand India
The impact goes beyond much Satyam. Already reeling under the impact ofglobal financial crisis, the biggest worry is for India's IT industry, and BrandIndia and for the impact of the scam on confidence of lay investors andshareholders.
The IT industry body, NASSCOM, however, prefers to see this as a "one-off" case: "This is not in any manner a reflection on industry or corporateIndia". A view echoed by FICCI and CII. But not every one is as sanguine. "This fraud onthe investors and employees... shows a systemic breakdown in audit and boardoversight... Questions will need to be asked," FICCI President RajeevChandrasekhar said.
The issue raises uncomfortable questions over accounting standards in India as a whole, asinvestors and others would wonder whether similar scams might lie buried elsewhere.It would also make many large corporations to investigate and revamp their backoffices which would have an impact on the Indian outsourcing industry as awhole.
The issue also goes much beyond India as the company has also been listed on the New York Stock Exchange(NYSE) since 2001, and on Euronext since January of 2008. It has been audited by PricewaterhouseCoopers since its listing on theNYSE.
The silver lining so far, however, is the market response, according tosome experts, who point to the fact that the companies known for strongcorporate ethics and better good corporate governance outperformed all thosewhich have even a whiff of irregularities or financial scandal surrounding them,even as the BSE index tanked by over 749 points.
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- Original Fax: Please Click Here.
- Latest Updates: Wires
- Earlier coverage: Outlook Business
