A sneezing cold is not always pneumonia and concerns that the US$1.5 billion fraud at Satyam Computer Services raised for the Indian software sector and wider economy may be overstated. Yet skeletons tumbling out of the Satyam cupboard have forced the Indian government into hurried damage control.
Investigators are now looking at whether the trigger for the Satyam fraud, confessed to on January 7 by chairman Ramalinga Raju, was a greedy land deal gone bust, rather than problems in the company's software and outsourcing business.
Those problems are not limited to the confessed fraud. The World Bank said in December it had imposed an eight-year ban on Satyam for providing "improper benefits" to bank employees. This week, Wipro, India's third-largest software exporter, revealed that it had been barred by the World Bank more than 18 months ago for four years for offering bank employees shares in its 2000 stock offer in the US.
Growth at Satyam's main competitors in the country unhit by scandal certainly continues strongly, as clients overseas place orders as they cut costs amid the global recession.
Infosys Technologies, India’s second-largest computer-services provider, this week said profit in the last three months of 2008 climbed 33%, the fastest in six quarters. Sales jumped 35%.
Sales at Tata Consultancy, the country's biggest exporter of software, gained 24%, although net profit rose only 1.6%, hit by a 2.51 billion rupee foreign-exchange loss after the Indian currency dropped 19% against the US dollar last year. Wipro is due to report its earnings on January 21.
Goldman Sachs Group this month said revenue growth at Indian computer-services companies may slow to 6% this year, as global information-technology spending shrinks 4%, Bloomberg reported.
The National Association of Software and Service Companies (NASSCOM), an Indian industry body, is more optimistic, claiming the industry will increase export revenues 20% to $60 billion by March 2010.
Nine days after Raju confessed in a letter to his board of directors to faking profits for eight years and creating a non-existent cash balance of $1.5 billion, the Satyam website continues to forecast an increase of about 20% in net profit for the year ending March 31.
While no definite pointer has emerged so far on the mechanics of the Satyam fraud, one trail points to $6 billion worth of local governmental contracts to Maytas, an infrastructure development company that Raju's family has owned and run for the past 23 years. Maytas, Satyam spelt backwards, is run by Raju's two sons, Teja and Rama.
Raju, in judicial custody until January 23, has reportedly confessed to interrogators that he diverted Satyam funds in speculative land deals for Maytas. He came unstuck after land prices crashed in his home state of Andhra Pradesh.
Political parties, including the Communist Party of India, have asked Prime Minister Manmohan Singh to order a "high-level probe" into this aspect of the fraud, which could involve Raju personally owning about 4,000 hectares of land.
More immediate concerns for the central government include reassuring domestic and foreign investors of the good health of India's economy and ensuring January salaries being paid to 53,000 Satyam employees.
Manmohan, who holds the government's finance portfolio, said on January 8 that the Indian economy would remain among the fastest growing in the world this year, with a 7% growth rate.
"Despite the global economic downturn, the fundamentals of our economy continue to be strong," he told delegates to the Pravasi Bharatiya Divas, the annual meeting of Indians living overseas. "Much of India's growth is internally driven and we can maintain a strong pace of growth in coming years."
External Affairs Minister Pranab Mukherjee continued the reassurance song on January 13, at a joint press conference in New Delhi with visiting British Foreign Secretary David Miliband. He said the "basic fundamentals are strong" for the Indian economy and "there is no need to hit the panic button".
Even so, a sense of betrayal by Satyam dominated sentiment on the streets. "I lost 5 lakhs [US$10,126] after the Satyam fraud," 40-year-old Ramesh Gupta told Asia Times Online, while standing with small groups of investors morosely gazing up at the electronic ticker atop the Bombay Stock Exchange (BSE) building on Thursday, after seeing the BSE Sensex dive by over 340 points. "I'm going to look more closely at the promoters of companies I next invest in."
Satyam stocks, which plunged about 80% on Raju's initial confession, tanked 33% on Thursday, reducing the market capital of the company to less than $450 million from over $7 billion in 2008. Amid an overall bear market and with the chairman of a bellwether company in jailed, the black statue of a charging bull outside the 28-storey exchange building looked appropriately caged behind spiked metal barriers.
Gupta, a former secretary of the Bombay Shareholders Association, predicted more checks for fraud at other clients of Satyam's auditor, PricewaterhouseCoopers (PwC). Gupta in particular queried the credibility of PwC and its operations in Dalal Street, Mumbai's financial center. "Why does PwC get four times the fee than other auditors of companies such as Infosys?," he asked.
The Hyderabad police have raided the PwC office since the fraud confession by Raju. The multinational auditor, with offices in 150 countries, is yet to explain how it passed Satyam's fudged accounts for eight years, apart from a statement of the obvious on January 14 saying that its audited Satyam accounts were "not reliable".
Multinational auditors KPMG and Deloitte have now been appointed to check Satyam's affairs, said Deepak Parekh, a senior banker and one of the new six-member, government-appointed Satyam board of directors to delve into the scandal.
The fraud opened numerous credibility cracks, bringing market regulators, various governmental institutions and market analysts themselves under investigation.
The Institute of Chartered Accountants of India (ICAI), which is looking into the role of PwC, is also likely to question market consultants Ernst & Young on its valuation of two Maytas companies, as well as the basis on which E&Y declared Raju the "E&Y Entrepreneur of the year 2007".
ICAI is itself under the cosh, with the Mumbai-based Small Investors Grievances Forum declaring India's top chartered accountants body, the second-largest in the world, to be among respondents in High Court public interest litigation filed by the forum on the Satyam fraud.
The stock market regulator, the Securities and Exchange Board of India (SEBI), has announced investigations into allegations of insider trading among senior Satyam officials. However, decisions by SEBI, which does not have an impressive track record against insider dealing, can and has on occasion been overruled by its oversight body, the Securities Appellate Tribunal on appeal.
Satyam executives made $1.8 million from share sales in the six months before the scandal broke and the stock price crashed, filings by the company to the Bombay Stock Exchange show. Chief financial officer V Srinivas and eight other officials sold a combined 267,358 shares after July 14, more stock than the combined insider sales at 30 companies on India's benchmark index, according Bloomberg.
The Reserve Bank of India has also ordered an investigation, while the central government has asked the Serious Frauds Investigation Office, under the Ministry of Corporate Affairs, to probe the scam. Government concern over what answers emerge from these investigations will be sharpened by the impact they might have on the prospects for the wobbly ruling coalition, which faces general elections in April.
The plethora of investigating agencies has not impressed cynics who fear too many sleuths probing the Satyam soup may be a complex coverup for senior politician friends of Raju.
Eyebrows are also being raised at Raju having a battery of 25 lawyers to prove he isn't guilty after admitting his guilt, though this could be Raju's interpretation of his confessional letter where he said he is "now prepared to subject myself to the laws of the land" - by stretching the slow arm of Indian law as long as he can.
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