Satyam scam: Credibility of Brand India IT

under cloud
8 Jan 2009, 0457 hrs IST,Shelley Singh & Shailesh Dobhal,ET Bureau
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NEW DELHI: Satyam Computer Services chairman B Ramalinga Raju’s admission he had
cooked the company’s books has undoubtedly left India’s fourth-largest software exporter
struggling to survive the fallout, but his misdeeds may cast a cloud over the squeaky-clean
profile of the entire sector, and by extension, the rest of the Indian corporate sector.

For years, Satyam and larger rivals such as Tata Consultancy Services, 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.

This looks set to change after Mr Raju announced on Wednesday Satyam’s famed cash pile was
almost non-existent and its revenues and profits were inflated.

“In the short term, companies will definitely get painted by the same brush and Indian IT
companies could come under a cloud,” says L&T Infotech CEO Sudip Banerjee, who till
recently worked with Satyam’s larger rival Wipro Technologies.
The impact of Mr Raju’s misdeeds was visible on the Indian stock markets on Wednesday as
investors exited the stock in a big way. Satyam shares plunged nearly 78%, and dragged down
the broader market. Peers such as HCL Technologies closed 15% lower.

Some experts believe the damage will not be limited to the technology sector. “The impact is
more on India Inc’s credibility, rather than brand India IT, as it is a wider problem and not sector
specific,” Future Brands CEO Santosh Desai said.

Raman Roy, chairman and managing director of Quatrro BPO Solutions and regarded as father
of Indian outsourcing, said the onus will now be on India’s technology sector to prove it does not
have anything wrong in its accounting practices.
That must be frustrating for the sector’s top executives, most of whom have spent long years
differentiating India’s IT sector from the rest of Indian industry as they built their firms to take
on some of the mightiest in the world. It took a lot of hard work for Indian IT companies to build
reputations that enabled them to stand alongside global names such as IBM, Accenture, HP, Cap
Gemini and Atos Origin.

For an industry born in the late 1980s and gained traction around and after the Y2K crossover,
Satyam’s revelations could not have come at a worse time. The global economic slowdown has
slowed growth and forced them to fight harder for business in the $800-billion global IT services
market.
Some believe while the $50-billion Indian IT sector could find customers questioning the quality
of their books, it could also perversely be seen as a coming of age of the sector.

“The image of Indian IT existing as a standalone beacon unsullied by the goings on in the society
around it has come unstuck. The assumption that since it’s the IT sector, so it won’t do fraud is
proven wrong. IT is now as much part of the Indian business, with all its attendant ills. And with
it Indian IT has kind of become real,” BBH India managing partner Partha Sinha said.

While the Satyam episode could temporarily cast a cloud over Indian IT firms, IT in India is
unlikely to be as affected. Large overseas companies will still need to cut costs, and India will
remain a preferred destination for doing so.

In the short term, overseas firms could still go to more familiar global names such as IBM or
Accenture or CSC, all of which have significant operations in India. “The Indian global IT story,
which was built on efficiency and costs not clean books, will not suffer any credibility issues
globally as long as efficiency is not compromised,” said Mr Sinha.

“There could be a shift in customer loyalties. The solution for global customers will be delivered
by multinationals if not Indian players,” says Avinash Vashistha, CEO of Tholons, which advises
global firms on offshoring.

While the immediate impact on brand India IT could be negative, some experts believe such
things are common around the world and can be easily restored by further strengthening
governance practices in the sector.

“Every country has such incidents. Corporate governance standards of Indian IT, particularly the
non-family owned firms, are very good and I believe brand IT will not suffer in the long run,”
added Mr Banerjee of L&T Infotech.
The Serious Fraud Investigation Office will probe also Maytas infrastructure as part of the Satyam
financial scam probe.
Corporate affairs minister P C Gupta said on Monday evening that initial investigations suggest a
clear nexus between Satyam, Maytas properties and Maytas infrastructure
Earlier, the Andhra High Court dismissed Ramalinga Raju's revision petition against his police
custody. But SEBI still did not get to question Raju on Monday as a court order on the body's petition
to question him was postponed till January 22.
Meanwhile the CID is questioning the Raju brothers and former Satyam CFO Vadlamani Srinivas .
They are also looking into their e-mails and phone records over the last one month.
Meanwhile, Andhra chief minister Y S R Reddy reiterated his government did not flout any rule in
awarding the Hyderabad metro rail project to Maytas.
But how deep and how wide is the rot inside India's fourth largest software company?
Sources tell CNN-IBN the company is facing serious money crunch, and needs Rs 1,110 crore to
tide over the crisis and Rs 500 crore to pay the January salary to employees.
Meanwhile a search is also on for a new CEO for the embattled IT firm. Network-18 learns that the
board is looking at a 10-day time period to pick someone to head the company. Over 40 applications
have come in so far.
There is now also a question mark on the number of employees Satyam has. It is reported that
Satyam has 53,000 employees.
How they did it
Investigators are now reportedly coming across evidence of insider trading by the promoters even
before the scandal broke.
The big takeaway from the Registrar of Companies report is that the top management of Satyam -
the directors and senior officials - sold shares ahead of the Big Bang revelation by Raju.
The reports say Satyam books have been overstated by Rs 5,000 to Rs 6,000 crore, leading to an
inflated stock price that helped the top management make money.
Who sold what?
Raju has claimed that no one else in the company was privy to the fudging of accounts. But
exclusive information with CNN-IBN suggests insider trading.
BSE figures show a number of senior people in the company, including Raju and CFO Vadlamani
were reportedly selling Satyam's shares over the last 22 quarters.
In June 2001, Raju had nearly 23 per cent shares. By December that year, his share was down to
22.4 per cent.
In September 2002, it fell to 21.6 per cent which fell a year later to just over 19 per cent.
In 2004, Raju's holding was 16 per cent which fell to 14 per cent in 2005, 11 per cent in 2006. In
2007 it was in single digit.
By September 2008 Raju's share was just 8.27 per cent.
BSE figure also show Vadlamani sold 92,538 shares while the then CEO Ram Mynampati sold
700,000 shares plus 2,50,000 ADRs.
Apart from these, other senior officials also reportedly sold large number of shares. Sources say
they include one Kiran Cavale who reportedly sold 400,000 shares and 10,000 ADRs and one Rajan
Nagarajan who reportedly sold 430,000 shares and 70,000 ADRs.