Satyam scandal sparks demand for better governance
Media personnel wait outside the office of the Satyam Computer Services Ltd. in Hyderabad, India, Thursday, Jan. 8, 2009. Indian business leaders are demanding that authorities beef up corporate governance after an accounting scandal engulfed major outsourcing company Satyam Computer, shaking investor confidence. (AP Photo/Mahesh Kumar A.)
By ASHOK SHARMA
Associated Press Writer
NEW DELHI (AP) – Indian business leaders are demanding that authorities beef up corporate governance after an accounting scandal engulfed major outsourcing company Satyam Computer, shaking investor confidence.
Infosys Technologies Ltd., another big outsourcing company, said Thursday the fraud was deplorable and that the government and regulators “must investigate and make necessary changes to regulations so that such incidents do not happen in future.”
The whereabouts of founder and Chairman B. Ramalinga Raju, who quit Wednesday after admitting that he had doctored Satyam’s books for years, inflating profits, was unclear, said company spokeswoman Archana Uttapa.
Trading on India’s stock exchanges was closed Thursday because of a holiday, but on Wednesday, news of the fraud at Satyam Computer Services Ltd. dragged down the benchmark Sensex stock index 7.3 percent – with Satyam’s shares plummeting nearly 78 percent.
The chief minister of Andhra Pradesh, the south Indian state where Satyam is headquartered, wrote Thursday to Prime Minister Manmohan Singh asking him to appoint a management team that could restore confidence in the company and help protect its employees and investors.
The scandal, though, could ripple far beyond the Satyam offices.
It comes at a delicate time for India’s information technology companies, which are struggling against a global slowdown and waning economic growth at home. India’s IT firms derive 40 percent of their global revenues from financial services clients.
The company employs 53,000 people – among the 2 million Indians working in the country’s booming high-tech industry, which last year brought in an estimated $40 billion. Satyam’s clients include a slew of Fortune 500 companies including Nestle, General Electric and Ford Motors.
Holders of the company’s U.S.-listed shares – which have been halted from trading on the New York Stock Exchange while regulators investigate – have filed two class action suits against Satyam, the law firms representing the investors said in separate statements.
The suits filed by Vianale & Vianale LLP and Izard Noble LLP allege Satyam and its top executives issued false and misleading financial statements and violated federal securities laws, the statements on their websites said.
“Much more than the fate of one company and its investors is at stake here, the scandal could taint the entire edifice of outsourcing,” the Hindustan Times, one of India’s most widely read newspapers, said in an editorial.
“This is a home-grown disaster,” said The Indian Express.
A leading business grouping, the Confederation of Indian Industry, has demanded that the loopholes in regulation, accounting, audit and governance that allowed such lapses be addressed with urgency.
Amar Ambani, a vice president of brokerage firm India Infoline Financial Ltd., said the manipulation of accounts at Satyam had the potential to severely dampen foreign institutional and direct investment into India.
“This raises serious doubts about the involvement of auditors and independent directors in the working of a company,” Ambani said.
With the scandal raising questions about the quality of corporate governance in India, there were plenty of comparisons to the collapse of U.S. energy giant Enron Corp.
“India’s strength in recent years has been its ability toproduce great companies, and allowing that reputation to fall by the wayside is not in anyone’s interest,” the Indian Express continued, adding that Enron’s failure came in an economy more regulated than India’s.
Satyam’s balance sheets – riddled with “fictitious” assets and “non existent” cash – contained a $1 billion hole that could no longer be concealed after a deal intended to save the struggling company was abandoned, Raju said in a Wednesday letter to the board.
Satyam, which means “truth” in India’s ancient Sanskrit language, had “inflated profits over a period of (the) last several years,” Raju said in his letter, which was released to the Bombay Stock Exchange.
But one analyst said that while panic would be an immediate fallout of the Satyam scandal it would not have a lasting impact on either India’s outsourcing industry or the country’s investment potential.
“In the U.S. you had the Enron case and that didn’t shake the investor confidence in the U.S,” said Surjit Bhalla, managing director of Oxus Research and Investments in New Delhi. “The global slowdown is ten times more important in terms of what will happen to the outsourcing industry than Satyam.”
Satyam sought to downplay Indian media reports saying many employees were worried about their jobs and getting their resumesready.
“There is no concerted move by employees to quit and find new jobs as of now,” said Uttapa, the company’s spokeswoman. “All Satyam offices are open and working as normal,” she said.
Associated Press reporter Muneeza Naqvi in New Delhi contributed to this report.
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