The Truth About Satyam Computers From Ramalinga Raju + India’s First Corporate Scandal
By Kamla Bhatt • Jan 8th, 2009Category: Business, Ideas, India, Technology
January 7, 2009 will go down as a black day in corporate India for this was the day India was hit by its first major market/corporate scandal leading to the collapse of the stock of a major Indian IT corporate house. Ramalinga Raju, founder and Chairman of Satyam Computer Services Ltd, India’s 4th largest IT services company, admitted to fraud and inflating the revenue and costs and resigned from the company and the board. Raju admitted that he falsified the account books at Satyam. The $1.04 billion listed in assets is non-existent according to Raju reports The New York Times. Raju’s claim that neither he nor his family benefited and got any “rupee” from Satyam in all these years is not lost on those who are reporting and reading about the scandal.
The irony of the meaning of Satyam has been highlighted by many media reports. Satyam is derived from the Sanskrit word for truth and honesty. The company turned 21 years old recently.
Satyam is listed on the Bombay Stock Exchange, The New York Stock Exchange (NYSE) and Euronext. Earlier today NYSE stopped trading Satyam’s stocks. There are reports that Satyam maybe removed from the Indian stock exchange.
It was during the last quarter of 2008 that the first signs that something was seriously wrong with Satyam surfaced. First, there was news that the World Bank had banned Satyam from doing business with it. Then in late December 2008 there was an aborted attempt by Raju to acquire Maytas, a real estate and infrastructure company for over $1.5 billion. The intensity and the swiftness of response questioning the logic of the acquisition took Raju by surprise prompting him to withdraw the acquisition offer. The infrastructure company was owned by his extended family members. Questions were raised then about the role of the board and in response some of the independent board members resigned including Vinod Dham. There was a board meeting scheduled for the early part of January 2009 and there was that famous email that Raju sent Satyam employees asking for their support. It seemed that Satyam was getting back on track after these two major setbacks.
And then came the bolt out of the blue this morning. Early this morning a letter from Raju surfaced where he admitted to fudging the numbers and that Satyam’s limited assets were non-existent. Here is the link to Satyam Ramalinga Raju’s letter admitting to fraud.
Raju’s letter writes Joe Leahy of Financial Times ”reads like the words of a villain in a Bond film helpfully laying out his whole dastardly plan for his audience at the end of the movie.”
Satyam’s admission of fraud has sent shockwaves throughout the corporate sector in India, specifically the Indian Information Technology sector. The Satyam Computer corporate scandal has been dubbed as India’s Enron, and allegedly the largest corporate fraud in India. Some of Satyam’s marquee cleint list includes Citibank, Nissan, Qantas Airways, GE and others. The company has about 52,000 people on its payroll with offices located in different parts of the world.
This corporate scandal raises troubling questions at many levels and can potentially have a huge impact on India’s image as a major IT service provider. It was Information Technology sector that put India on the global map about 10 years ago. This was right after the global Y2K challenge was effectively handled by a clutch of Indian IT companies like Satyam, Wipro, TCS, Infosys and others. Prior to that it took years of hardwork and pounding of different pavements around the US, UK and other European countries before the Indian IT sector got its global stamp of approval. IT was the the center piece that helped create and mold India’s positive image abroad and helped position it as a key player in the emerging knowledge economy. Prior to that India was labeled as the world’s largest democracy that was poor and backward with a a sluggish “Hindu” rate of growth. Ever wondered why so many IIT and other engineering students left India from 1960s until recently? There were no opportunities for them and that is the story you will hear time and time again from engineers and doctors, left India in search of better economic opportunities. But all that changed quite a bit with the liberalization of the Indian economy and the growth of the Indian IT and BPO sector in India.
Satyam’s case raises many questions at different levels. What now for Satyam since Raju has admitted to fraud? What are the options for Satyam? “The best option is a quick sale to one of Satyam’s competitors. But we doubt any company—listed or unlisted—would want to dive into the troubled waters right away. A better option would be a sale to a private equity fund or a vulture fund at a deep discount,” suggests Indian newspaper Mint.
What will happen to Satyam’s employees? Contracts are bound to be canceled or not renewed and projects are likely to be put on hold. This is an extreme case. Chances are that the impact of the current crisis will unfold gradually and could be managed and contained. But in the short run there is bound to be some kind of impact. There are bound to be layoffs if projects are canceled. Employees will have to find new jobs and in this bleak economic market it is going to be difficult for them to find a job easily. For many people this will perhaps be the first time that they get that dreaded pink slip.
What about the auditors, PriceWaterhouseCoopers, who were supposed to be auditing the books and keeping track? Questions are being raised on what they were doing? How did such an accounting error go undetected for so many years? Some of Satyam’s board members are questioning the role of the auditor.
What about governance issues in Indian companies? What is the role of the board of directors? What kinds of changes and regulations will be introduced as a result of this fallout? In an ironical twist Satyam recently got a prestigious award for corporate governance by the London-based World Council for Corporate Governance. reports Bloomberg. Earlier today the council withdrew the award.
As India steps out of its socialist past into a free market economy one of the by-products will be market scandals. Look around and you will notice there are other market and corporate scandals all around you in different parts of the world. More skeletons will tumble out of the Indian business closet. It is bound to happen. India consistently makes it to the list of most corrupt societies in the world and you have to wonder why? The question is this: will better rules, regulations and governance policies be put in place? Can you instill confidence in employees, clients and shareholders in the future? Can you create a framework and environment to conduct business in an ethical way with integrated values? This chalta hai attitude or anything goes attitude needs to be replaced.
Links to Satyam Scandal:
Satyam Ramalinga Raju’s Letter
Mint’s timeline on Satyam Scandal
Financial Times on Ramalinga Raju: Hero who crashed and burned
Wall Street Journal: Friends Try to Reconcile Two Sides of Raju
Technorati tags: Satyam Computers, Ramalinga Raju, Ramalinga Raju Letter, Indian corporate scandal, PriceWaterHouse Coopers and Satyam, India, IT, Hyderabad
Dear Bhatt,
I do agree with whatever you said in your blog, especially the last sentence that ‘chalta hai’ attitude needs to be replaced. Yes that is true, if we (India) want to project to the world as clean and really serious about handling corruption, it is high time that our officials act and frame strict rules from hereafter and put an end to the chalta hai attitude.
And our politicians and other higher officials will keep on going back to corruption until and unless there comes a force, out of the common man’s world, which instills fear among wrong doers.
I hope, there comes a movement in our country, one day, which will put an end to the corruption and strive towards the progress with unity, integrity and honesty. Then, i predict, that India will be respected not only by it’s people but by the entire world.
Dear Bhatt,
I think that Ramalinga Raju’s confession is still not completely honest. I feel strongly that there is a lot beyond what Raju has claimed it to be for the following reasons:
1. How can an audit company not find a single misentry in the records for years?
2. How can both internal audit and external auditors fail to catch even a single discrepency in the records?
3. How can Raju and his brother alone (as he claimed it to be) has done the fraud without the knowledge of any other person? This is too good a statement to believe..
4. How can Raju inflate the amount and the finance department of Satyam not aware of it?
Overall, i believe there are a lot more people involved in the scam than what Raju stated it to be.
[...] Bhatt has a detailed post about the scandal, starting with the hints of trouble with the World Bank ban, and all the questions this fraud has [...]
It is very sad to see a well-regarded company fall because of one individual’s quest for fame. WSJ mentioned today that Mr. Raju always felt that he was not given the same respect as the other majors and I have a feeling that drove him to overstate revenues, profits and thereby cash flows.
I feel more sad for all those hard-working and loyal employees. Satyam is known to have the lowest attrition rate and this will definitely impact employee loyalty even more and across all Indian companies. Employees will trust less and less their employers.
I only hope things are cleaned up fast. Having seen how companies like Enron and many others have unraveled, it may be wishful thinking on my part.
Prasad
“Mr. Raju always felt that he was not given the same respect as the other majors…”
Was there a similar scamming behavior on Mr. Raju’s part in his previous businesses before he set up Satyam? One stockmarket player who has been keeping track of various companies believes so. That will explain why respect eluded Raju.
This is not India’s first corporate scandal. It is the first of this magnitude. Other frauds involved Global Trust Bank, DSQ Software (Square D) etc.
Thanks all for sharing your thoughts.
Kaps: This was not the first corporate scandal in India. I remember DSQ and some of the top management there were brilliant people, who have moved on to other companies. DSQ was not a public company. What is different about Satyam is the magnitude and scale and the fact that accounting and other errors went undetected for so long. India has one of the most complex legal landscapes to do business.Then there is the fact Satyam listed on the US and European stock exchanges too…how cd there be failures at so many levels?
Satyam will not be the first corporate scandal if you go by what has happened in the business history of other free market economies and the scandal skeletons that are strewn in their landscape. Scandals are symptoms that something is wrong with the system and the system needs to get fixed. The system consists of people, who are politicians, bureaucrats, business people, lawyers etc. They are the one who come up with a set of rules and procedures etc. etc. It is also important to instill a value of ethics and trust. When greed takes over you will notice that the first casualty are your ethics and integrity. Once you have lost your ethical compass it is very difficult to regain I suspect…but hopefully I am wrong.
Kamla
how one can just inflate figures and pay 12.5% service tax and 30% income tax. It is totally false statement and nobody pays taxes and show huge profits every quaterly.
shravan kumar
gali gali main shor hai ramlingam raju chor hai
All these inflated accounts, inflated egos are bygones in the era. The fact is Mr.Raju made the company, invented the policy and made business, appreciate the man who had the guts to go global from nothing, employed many fromrural and semi urban India, gave them a feel of being international, provided drinking water and other perks to may villagers in Andhra Pradesh where the government even after collecting income tax from fellow citizens do not give anything in return except , power cuts, farmer suicides, low health and sanitation, poor education and no mid day meals.DO NOT ASK THE SKY WHEN YOU ARE UNFIT. Talking telugu and having a few dosas is not corporate world, where there many SHERLOCKS.C
[...] along with Deepak Parekh and C. Achuthan. Just days before that in a stunning turn of events Ramalinga Raju, Chairmand founder of Satyam declared he had faked the profits and revenue for his company. And [...]
Hello everyone,
I have been dealing with a number of Indian businessmen for the past 5 years and trust me; almost every one of them is trying to loot you in every possible manner. Forget about foreigners being looted, Indians cheat each other to such an extent that it crosses sanity. I shouldn’t generalize because some of them are honest but unfortunately that number is a very small minority and it becomes impossible to deal with fraud companies because they have the backing of government and of course rowdy gangs! Sometimes I got the feeling that an ice cream vendor on the streets of panjim is equal to people like satyam’s ex chairman raju in terms of honesty and integrity. I’ve done business with Americans and Britishers, and yes there are elements like raju but they are not chairman or CEO! I accept the fact that Mr. raju made satyam a big company but the path he chose is seriously wrong. It is fair for World Bank to ban such fraud companies from making business and it should actually take more initiatives to ban companies like satyam, which unfortunately are in majority across the sub-continent. In my point of view, I recommend the Indian government to hold training sessions for business leaders including the famous ones for business ethics and of course fair business policies! Imagine, the kind of corruption in companies like satyam, if the CEO or chairman is caught doing wrong things then think about his subordinates!
Kamla,
Square D / DSQ was infact was a listed public company when the scandal happened.
http://en.wikipedia.org/wiki/DSQ_software
There were accounting irregularities as well (not of the same magnitude as Satyam) in the DSQ case.
[...] Bhatt discusses the Satyam computer scandal, India’s first big scale corporate fraud and raises some questions. [...]