Tuesday, January 20, 2009

Satyam Scam

The scam at Satyam Computer Services, the fourth largest company in India’s much showcased and fiscally pampered Information Technology (IT) industry, has raised widespread fears that India could also be sitting on an equally—if not even more—devastating powder keg of what might be called financial terror.
The irony lies in the name Satyam, meaning truth. The real truth is that Byrraju Ramalinga Raju, the politically connected promoter-Chairman of Hyderabad-headquartered Satyam Computers, was lying for years to shareholders, employees and the world at large, building up to India’s largest-ever corporate fraud of over Rs. 7,000 crore. The country was for several years cooking its books by inflating revenues and profits, thus boosting its cash and bank balances; showing interest income where none existed; understanding liability; and overstanding debtors position. Ramalinga, after admitting to the Board of Directors that accounts were fudged to the tune over several years. His brother, B. Rama Raju, also resigned as Managing Director and Chief Executive Officer (CEO).
What is known as of now is that over an extended period of time, the promoters decided to inflate the revenue and profit figures of Satyam. In the event, the company has a huge hole in its balance sheet, comprising non-exitent assets and cash reserves that have been recorded and liabilities that are unrecorded.
Undercover Scam
The Satyam fraud, reportedly planned and perpetrated over seven years, was more meticulously devised and executed than any hit-and-miss terror attack. What makes it even more scary was that it was conducted not only in full public view, but in the glowing limelight of public approbation: Satyam was the darling of not just the Sensex but of the national and international corporate world. Its dazzling client roster included no less than 185 of the corporations on Forbes 500 list. And even as the undercover scam was in full swing, Satyam was honoured with an award for good corporate governance.
The most obvious casualties of the Satyam scam are of course the investors, foreign and domestic, institutional and retail, who have seen their share values explode like suicide bombers. The walking wounded include Satyam employees, who might lose their jobs, without any severance compensation, and the company’s creditors who could similarly be left in the lurch.
In fact, the real damage done by the Satyam blow-up is to the credibility of Brand India as a whole and not just in terms of IT. The First World routinely categorised India as part of a generic Third World malarial swamp where corruption, graft and shoddy inefficiency were as much an accepted part of the environment as physical squalor, contaminated water and intestinal disorders often given the general tag of ‘Delhi belly’. Post-economic liberalisation, this tarnished image of India began to get a make-over, largely thanks to the enhanced transparency and accountability supposedly infused into the system by the enlarged role of private entrepreneurship.
It is becoming increasingly clear that the brand of capitalism India is exporting does not pass muster in the West. Wipro and Megasoft have followed Satyam on to the World Bank’s blacklist for trying to win contracts by offering inducements to its staff.
The New Team
In a positive development and intervention to put Satyam back on track, the Government has reconstituted its board, inducting three distinguished professional: banker Deepak Parekh, former NASSCOM Chief Kiran Karnik and former head of Securities Appellate Tribunal C. Achutan. The new board should extent all cooperation to the investigating agencies in ferreting out all murky details of this present scam.
The inquiry should not linger in view of the involvement of multiple agencies. Speedy investigation, foolproof prosecution and stringent punishment for the culprits have to be the top priority. The first priority of the new board is to instill confidence in employees, investors and clients as well as ensure business continuity. Given the magnitude of the scandal, it is likely that the Central Bureau of Investigation (CBI) will be brought in. However, it mist be remembered that cases like Satyam scam have dragged on for years in the courts. Neither specific legal provisions nor the specialised prosecuting agencies have really helped in speeding up the process. Although not strictly comparable, the Harshad Mehta-led stock market scandal of 1991-92 prompted a flurry of activities to speed up the legal processes, including the setting up of a special court at Mumbai.
In this grim scenario comes a silver lining. Satyam’s rivals, particularly Infosys and TCS, have displayed commendable ethical behaviour—or practical sense—by not poaching on the beleaguered firm’s top professionals or its business clients, who might be looking for a switchover. The image of the IT sector, the biggest foreign exchange earner for the country, has been damaged and needs to be restored.It would require a big effort and long time to gulf the bridge the gulf.

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