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Before The Fall
- Till recently, Satyam was one of India’s top 4 IT firms
- Won Golden Peacock for corporate governance in Sept ’08. Now revoked.
- Raju was the 2007 E&Y Entrepreneur of the Year
- Was listed on NYSE, had big clients like GE, Nestle
- Set up 108 EMRI, other corporate social initiatives
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Will Satyam survive?
Not in its current form. With a weak cash position, day-to-day running could become impossible. A sellout is unlikely till probe is over, though a management change by government diktat isn’t ruled out. Potential suitors are hovering around.
Are 53,000 jobs on the line?
The present management says jobs will be protected, and a new team in the boardroom will be under pressure to do so too. But if clients leave in droves, don’t rule anything out.[Click here for webupdate]
What happens to Raju?
Could be arrested soon, and will be prosecuted on several counts as CEO of the company. If Maytas’s finances are linked to Satyam’s, he could be in more trouble.[Click here for updatesand follow the links therefrom]
Will auditors PwC be held responsible?
Most likely, because it cleared the accounts. It doesn’t help matters that everyone isbaying for its blood. PwC says it followed "applicable auditing standards".
Impact on Indian IT sector?
There could be a crisis of confidence and the sector may lose its premium valuation. While TCS, Infosys and Wipro have enough reputation to pull through, medium to small firms might find it tough.
Will Maytas escape action?
Unlikely, as the Centre has ordered a probe into Satyam subsidiaries as well as the Maytas books. Its high-profile projects could be affected or get delayed, though.
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—Shardul Shroff, Corporate lawyer
—R. Chandrasekhar, Rajya Sabha MP, FICCI chief
"Sensations die with breaking news. What we must know is that it may be happening in our own organisations."
—Subroto Bagchi, MindTree co-founder
"It’s major fraud. The 4-5 items mentioned in Raju’s letter would need at least 200-250 entries in the books."
—Richard Rekhi, KPMG
—Rashesh Shah, Edelweiss Capital
—Ved Jain, ICAI president
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But the Rs 7,000-crore fraud at Satyam Computer Services smells terribly different. It’s not only the sheer scale of monies and skulduggery involved and the worrying implications for India’s IT sector, the Satyam saga puts the entire corporate foodchain into question—from directors and auditors to analysts and the media. Worse, as the can of worms is yet not fully opened, Satyam threatens to mar India’s image as a business destination at the worst possible time.
For this is no ordinary company. "Earthy" for sure, but till three months ago Satyam was one of India’s most respected companies and among the country’s top four IT stars—boasting an NYSE listing as well as clients from Fortune 500 companies like General Electric.
| System of the down: Satyam CEO B. Ramalinga Raju |
Really? As the legal eagles get ready—class action suits have already been filed in the US—and the regulators swing into action, not many are buying Raju’s story (see The Case of the MissingMatrix). The company has an interim CEO, and while he verifies the financial situation ("not encouraging"), everything is up for grabs. The company is already in free-fall, its survival as well as the fate of its 53,000 employees uncertain. Will the culprits down the value chain actually be bought to book? How will it impact the Rajus’ other businesses, since we know so little at the moment? Finally, will this deal a body blow to the image of India’s IT sector and companies in general?
Indian industry was quick to react and tried to distance itself from Satyam. Most reactions called it a one-off case and not a reflection of the "working of Indian industry". Fearing a regulatory clampdown, industry body CII said "it would be inappropriate for this to be the basis of questioning of general governance standards in other companies". What is worrying is that many leading Indian companies have a reputation for nudge-and-wink accounting and corporate governance standards. Says Rajya Sabha MP and FICCI president Rajeev Chandrasekhar: "This fraud on the investors and employees shows a systemic breakdown. Questions will need to be asked...."
Clearly, credibility is at stake here, particularly in the competitive and we’re-so-clean IT services sector. India Development Foundation director Shubhashis Gangopadhyay warns, "Satyam does not represent the entire software/BPO sector. However, this will bring all companies, including the software/BPO sector, under closer investor scrutiny."
If Raju’s letter is true, then Satyam’s operating margins are as low as 3 per cent—that would put immense pressure on all IT firms to justify their numbers. Also, at a time when outsourcing might well become a touchy topic in the US with Obama in the Oval Office, it might just make it that much tougher. Subroto Bagchi, co-founder of IT firm MindTree, says, "Sensations die with breaking news. What we must know is that it may all well be happening in our own organisations."
At a larger level, the role of Satyam’s auditor— PricewaterhouseCoopers—has come into serious question. Auditors Outlook spoke to feel it’s impossible for an auditing firm of that reputation to overlook the important step of ratifying cash positions against bank statements. Agrees K.H. Vishwanathan, ED, RSM Astute Consulting, one of India’s biggest auditing firms, "It’s too naive to accept that they (PwC) weren’t aware of something as big as this.... It’s a total failure of professional ethics." PwC is playing it safe, stressing it followed "applicable auditing standards" and promised to cooperate with authorities.
If it is proved that PwC colluded, the Institute of Chartered Accountants of India (ICAI) could subject the audit partner to disciplinary action—which includes suspending the firm. "For a fraud of this scale, it is not likely that only Raju was aware of it," warns Vishesh C. Chandiok of auditing firm Grant Thornton. Richard Rekhi of KPMG adds "the 4-5 items mentioned in Raju’s letter would need at least 200-250 entries in the books".
There are three scenarios: the auditor was negligent and did not cross-check statements; Satyam doctored bank statements; or the auditor deliberately ignored the matter. ICAI president Ved Jain says if it is the latter, it is a most serious matter, especially since this was not a one-time affair.
Worryingly for PwC, this is not the first time it’s been in the news unfavourably. In 2006, Delhi-based NGO Parivartan used file notings to unravel a controversy behind the award of a contract to PwC by the Delhi Jal Board. PwC was initially at the 10th position among the bidding firms till the World Bank pressured the Delhi government to bring it up by re-bidding and changing the selection criteria. Ultimately, the privatisation plan was scrapped. Currently, a probe is on and PwC may well bear the brunt of outrage over the role of the external auditor.
Interim CEO Ram Mynampati (2nd from right) talks to the media on Jan 8, ’09
Jain, among other sceptics, is also suspicious that Raju’s confession of irregularities is a ploy to hide bigger irregularities or even let the family-owned Maytas off the hook. A key issue is of culpability, and it is evident that Raju’s confession will have to be "verified". Obviously, the spotlight will be on Maytas, which has some prized projects in AP. K. Thiagarajan, CEO of Maytas Properties, is upbeat, for now, "We are a separate, independent company...for us, it’s business as usual."
Experts, however, have their doubts. Corporate lawyer Shardul Shroff says, "The admission may save the assets initially, but if it is established that the other assets have links to the falsification, they may be used to pay the penalty on the promoters." In any case, the long arm of the state is expected to swing into action—one may expect probes into projects awarded to the Raju family, including the Rs 12,000-crore Hyderabad Metro Rail project (see No Mortar, Not Even Bricks). Different angles are emerging with the arrest of Maytas Infra’s CEO P.K. Madhav for an earlier case at Nagarjuna Finance.
While the Satyam-Maytas-Rajus link will be in the spotlight, the silence of the independent directors—and the speed at which Satyam’s proposed buyout of Maytas was cleared by the board—raises many concerns. Was the star-studded board aware of the financial problems? Especially since Dr Rammohan Rao—who has resigned as dean of the prestigious Indian School of Business—was heading the company’s audit committee. Rashesh Shah of Edelweiss Capital says, "If a director says he hasn’t looked at the accounts of a company, then it is an abdication of responsibility."
So, what happens to Satyam now? Will it survive? It looks unlikely that the company will pull through in its present form, given the loss of credibility not just from the financial irregularities but also the World Bank data fraud case. Says Apurva Shah, head of research at Prabhudas Lilladher: "Satyam’s existence as an independent entity is questionable as clients may not be ready to do business with it after this." So either Satyam will have to sell parts of its businesses—or merge with a company ready to take it on. However, despite its clients and established business model, its massive workforce might be a disincentive. Also a total sellout will be difficult as Satyam needs to be revalued and that will take time considering the current turmoil.
The next few weeks will be crucial as the extent of the fraud is brought to light. Satyam’s future is uncertain. For India, which has been harping on its successes in software, it’ll mean a lot more probing questions for some time to come. That’s why this fraud will not be forgotten in a hurry. Hopefully.
By Arindam Mukherjee with Venugopal Pillai in Hyderabad, Arti Sharma in Mumbai and Lola Nayar in New Delhi
