A stunned India Inc, rattled investors and the government were left to pick through the debris to salvage what is left of Satyam Computer Services after its founder and chairman admitted to committing the country’s biggest financial fraud.
Satyam, the fourth-largest software service provider, imploded on Wednesday, sending its stock crashing by 80%. In a five-page letter, detailing years of financial deception, Satyam chief Ramalinga Raju owned up responsibility and put in his papers.
The shame and scandal has shocked India Inc, and left lakhs of investors and 53,000 staffers out in the cold. Here's looking into how this Rs 7,000-crore hole in the books may impact Satyam's employees, investors, auditors, management, clients and corporate India, specifically the IT companies.
Does Satyam's loss result in gain for its bigger rivals, TCS, Infosys and Wipro to be specific? Yes, say analysts. According to whom, the debacle may force the clients of beleaguered Satyam to review their contracts and look at other offshore suppliers.
"Satyam clients will naturally be concerned and many clients will be forced to review their contracts and talk to the other offshore suppliers in the account about potentially taking over work from Satyam," said a Forrester Research analyst.
According to a senior executive from a rival IT firm, Australian telecom company Telstra, which contributes $20-25 million to its revenues, had already decided to split a new contract worth $200 million among three Indian vendors. “There was intense competition among Satyam and other offshore vendors earlier but Telstra now seems to be more tilted towards Infosys and EDS-Mphasis. Satyam seems to have lost the race,” said the official, whose company was one among the bidders for the contract.
Another partner and customer of the company, Cisco Systems said that a proposed investment in Satyam subsidiary (Satyam Global Lifenet) could be in jeopardy.
However, allaying the fears of employees and clients in the Asia-Pacific, Satyam today said it is committed to its customers in the region. "Satyam as an organization remains committed to its customers in (the) Asia Pacific, a region which continues to offer promising growth," said Satyam's Senior Vice-President (Asia Pacific, Middle East, India and Africa) Virender Agarwal, based in Singapore.
The fourth largest software company's clients include General Electric, Nissan Motors and General Motors.
It is very clearly anxious moments, sleepless nights and heartburns for the over 53,000 employees of Satyam Computers as they conjure up worst case scenarios like non-payment of salaries, project cancellations , layoffs and equally bleak prospects outside.
As the company's management tries to reassure shocked employees, jobs sites have got flooded from resumes of hundreds of Satyam employees. "Till Tuesday evening, there were about 7,800 people from Satyam who had posted their resumes on job sites. By Wednesday afternoon, it has gone up to 14,000. By the end of the day, the numbers may be much higher," said Kris Lakshmikanth, CEO of Headhunters India.
However, job consultants believe that in the current economic climate when the IT industry is already facing tough time, Satyam employees might have to settle for lower salaries outside. Also, with most IT companies already announcing a hiring freeze, it is an employers' market.
On its part, the new leadership team is sending out mailers and open letters to its employees to keep the faith. Earlier, Ram Mynampati the interim CEO, had said, "We recognise that our associates have committed a significant part of their careers to build Satyam. We will pursue all avenues to secure their future in the company." “Operations are all continuing. We do not envisage any problems in paying salaries to our employees in future,” a Satyam official told media.
In a letter to the Centre, Andhra Pradesh chief minister Rajasekhara Reddy too has expressed concern about the fate of Satyam employees.
The Satyam fraud couldn't have come at a worse time for the IT Inc already reeling under slowdown. The incident has put the sector in limelight, and for all the wrong reasons. Fears are being expressed that the scam may affect investors’ confidence in the sector already facing rough weather.
For years, Satyam and larger rivals such as TCS, Infosys and Wipro were feted as among the new ambassadors of Indian industry with their corporate governance practices winning accolades around the world and their strong growth rates luring investors.
The shaken apex body of Indian software industry issued a statement expressing "shock" and at the same time emphasising it to be "a stand-alone case of failure of corporate governance, and not a systemic failure of corporate governance among Indian IT companies".
Besides Nasscom, Satyam rival and the second-largest IT firm and Nasscom member Infosys too issued a statement stating "(The) Satyam fraud is an aberration ... I don't think it would shake clients faith in other Indian IT companies." Suresh Senapaty, executive director and CFO, Wipro said, "Global standards of corporate India are very high and we are confident that this is an isolated case and not representative of the IT industry."
While the Satyam episode could temporarily cast a cloud over Indian IT firms, IT in India is unlikely to be as affected. Allaying the fears that India's IT image would be tainted, a Forrester analyst said,"I look at it as an isolated case and don't think Satyam developments would have any impact on India's position as an offshore location. But if similar trend of fraud continues in Indian IT vendors' space, then there is a good enough reason to be concerned."
The Satyam fiasco has put the spotlight on the role of external auditors in a company. Enron & Worldcom had changed the world of auditing from ‘Big 5’ to ‘Big 4’. The brazen fraud at Satyam has the potential to shrink it to ‘Big 3’, at least in India. The falsification of accounts by Satyam for the past several years has put a question mark on the very survival of its auditor, PricewaterhouseCoopers (PwC).
Institute of Chartered Accountants of India (ICAI) has decided to issue a show cause notice to PwC. ICAI President Ved Jain said, "We have set the ball rolling. On the basis of statements made by Ramalinga Raju, ICAI has already initiated proceedings against the concerned auditor."
PwC had audited about 139 companies in India in the last fiscal. Of this, 97 are listed and 45 are part of BSE 500 Index. A few of these companies are already reviewing their relationship. For instance, Glenmark Pharma has said its board will decide on January 27 on whether to propose a change in the auditor.
Some other large companies audited by PwC include Maruti Suzuki, United Breweries, United Spirits, GMR Infra, Piramal Healthcare and Marico.
The incident has hurt public perception of Corporate India. Howsoever one-off incident one may term it, it is likely to hurt shareholders' confidence in India Inc. No doubt, India Inc reacted with shock and dismay to the scam. The VC and MD of Mahindra and Mahindra, Anand Mahindra in a statement said that the development had "resulted in incalculable and unjustifiable damage to Brand India and Brand It in particular."
He however, reiterated that the whole of the Indian industry, "should not be tarred with the same brush" as most companies "uphold the hightest standards of corpaorate governance and this will help us mitigate the damage done to India's image."
In a write-up in ET, Rahul Bajaj said, "It is likely to dent the public credibility about the concepts of corporate governance that the Indian industry has been so assiduously trying to cultivate for the last ten years."
An accounting fraud was the last thing investors in India would have imagined as a trigger for a reversal in investor sentiment. The Satyam accounting fiasco has come at a time when the sentiment is already brittle and is likely to affect the image of Indian companies among foreign portfolio investors.
Fund managers said the revival of India’s position as a preferred investment destination would depend on the speed of regulatory action to salvage the situation. “The regulators would have to take drastic measures to regain the confidence of foreign investors in Indian companies as frauds like these will have greater implications on emerging markets than developed markets,” said a CIO with a leading private mutual fund.
National Association of Small Investors (NASI), a registered NGO, has said that it will file a complaint against scam-hit software exporter Satyam Computer Services for "cheating shareholders and investors".
"This is a financial attack on the country. We are filing a complaint against Satyam, with the Economic Offences Department (EOD), for cheating the shareholders and investors," NASI president Pradeep Bhavnani told PTI.
Law firms in the US have begun filing class-action complaints against Satyam Computer Services and its executives for securities fraud. The lawsuit has been filed on behalf of all buyers of Satyam ADS between January 6, 2004 and January 6, 2009.
On Wednesday, Satyam's ADS fell $8.42, or 90%, before opening of the New York Stock Exchange. The exchange suspended trading in the ADS after the disclosure by Satyam.
Although Ramalinga Raju has gone out of his way to make out that none of the other board members and senior executives of Satyam were aware of the fraud, the law of the land is expected to take its course and Raju and any other director/executive found to be involved in the scam are liable to be prosecuted on charges punishable with imprisonment up to 10 years.
Some of the more serious penalties that Raju and others are likely to face under various laws are:
* Section 23 of the securities contract regulation Act 1956, that imposes a penalty of imprisonment up to 10 years and fine up to Rs 25 crore. The adjudicating officer of SEBI (Securities and Exchange Board of India) is empowered to award such punishment to directors and management executives for violating the listing agreement by making false and inaccurate disclosures in the company's quarterly and annual results. The penalty is severe because of the enormous damage that the investors are liable to suffer on account of false disclosures.
* Section 24 of the SEBI Act 1992 that imposes a penalty of imprisonment up to one year for infringement of any provisions of the law or rules and regulations, including fraudulent and unfair trade practices (FUTP).
* Section 477-A of the Indian Penal Code, that imposes a penalty of imprisonment up to seven years. The police may on their own or on the recommendation of the serious fraud investigation office (SFIO) invoke this IPC provision meant to punish those found to have falsified accounts "willfully and with intent to defraud."
* Section 211 of the Companies Act that imposes a penalty of imprisonment up to six months. The company law board is empowered to punish those who are found to have "willfully" failed to comply with the requirements of law relating to the annual financial statement.
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