Satyam services scam: software sector’s image tarnished

[LahoreEstate]

THE information technology (IT) sector has always stood out as a shining example of a modernising India, where young, highly-educated professionals interacted with counterparts from around the world, expanded their business empires and focussed on their goals, instead of hobnobbing with politicians in Delhi, or socialites in Mumbai.

While heads of most business firms – especially family-controlled ones – behave like feudal lords, treating subordinates with contempt, but acting slavishly while dealing with political masters, the new crop of IT magnates are different.

While many ‘old economy’ businessmen, with revenues of less than $1 billion are to be seen at all the right places in Delhi and Mumbai – attending political dinners, page-three parties, film dos and beauty pageants – and their pictures splashed all over the social and business pages of newspapers, the ‘new economy’ barons are conspicuous by their absence at such glittery events.

The top three Indian IT companies – Tata Consultancy Services (TCS), Infosys Technologies and Wipro Technologies, each with a turnover in the range of $4 billion to $6 billion – are headed by low-profile executives. S. Ramadorai, the CEO and managing director of TCS; N.R. Narayana Murthy, the founder-chairman of Infosys; and Azim Premji, the Wipro chairman, are known to avoid the limelight.

In fact, some of these professionals-turned-IT magnates do not even own fancy cars or palatial homes; they travel economy class even while travelling abroad, avoid 5-star hotels and a flashy lifestyle.

India’s software and IT services exports were projected to touch the $50 billion mark in financial year ending March 31, 2009, by the National Association of Software and Services Companies (NASSCOM), the industry lobby. However, the projections were made much before the full impact of the financial crisis that has sent several leading economies into a recession were felt.

Industry analysts expect growth to taper down from the previous 30 to 35 per cent to less than 20 per cent (NASSCOM had projected a growth rate of 21 to 24 per cent for the current fiscal).

But India’s IT and software sector is in for even tougher days ahead, especially with the collapse of Satyam Computer Services, the fourth-largest software exporter. The Satyam scam, in which founder and promoter – and the disgraced former chairman – B. Ramalinga Raju confessed to having fudged the books of accounts to the tune of nearly $1.5 billion, has left the industry shell-shocked. Worse, the scandal threatens to tarnish the image of the Indian software sector globally, an image that has been built assiduously over the past decade by the likes of Ramadorai, Murthy and Premji.

* * * * *

THE Satyam scam has come as a rude jolt to the United Progressive Alliance (UPA) government, which was hoping that the Indian economy would remain largely unaffected by the raging global financial crisis.

Foreign investor sentiment in the Indian stock markets have plunged following Raju’s revelations about how he managed to window-dress the account books of Satyam and con other executives, auditors, regulators and thousands of investors for years.

What is worrying the UPA government is Raju’s close links to the Congress government in the southern Indian state of Andhra Pradesh, which will also go to the polls in April/May, when general elections are due.

Though Satyam was the fourth-largest software services exporter from India, it had a lot of credibility problems. Raju was never in the same league as the top bosses of the other three firms. But despite this, it managed to get itself listed on the New York Stock Exchange about eight years ago.

Belonging to a land-owning farming family, his obsession for land led to the crisis that felled the $2 billion-plus software exporter, putting at risk the careers of over 50,000 employees.

Satyam’s problems arose after Raju and his sons went about on a land acquisition spree. His sons promoted two firms, Maytas Infrastructure and Maytas Properties, hoping to capitalise on the boom in property prices in Hyderabad.

The capital of Andhra Pradesh, together with Bangalore – the IT capital of the country – has been witnessing explosive growth ever since the IT industry began raking in the billions by exporting software and other services.

While companies like TCS, Infosys and Wipro began acquiring land for their own captive use – to set up software parks and other facilities – Satyam’s promoters decided to aggressively divert funds into the real estate sector.

In this they were encouraged by politicians, both from the Congress – which came to power in 2004 – and the regional Telugu Desam Party (TDP), which was ruling the state for about a decade before that.

But with Raju in jail now, politicians from both the parties are distancing themselves from the disgraced tycoon. Both YSR Reddy, the Congress chief minister, and N. Chandrababu Naidu, his predecessor and TDP leader, are now engaged in a battle of words, accusing each other of backing Raju.

The Satyam scam threatens to emerge as a major political issue in the run-up to the general elections and also for the Andhra Pradesh assembly elections.

* * * * *

THE UPA government in Delhi consequently decided to act quickly to staunch the damage from the Satyam crisis. Besides jailing Raju, his brother and Srinivas Vadlamani, the company’s chief financial officer, the government also sacked the board of Satyam, replacing it with hand-picked executives including Deepak Parekh, the much-respected chief of the Housing Development Finance Corporation (HDFC), and Kiran Karnik, a former NASSCOM chief.

“We don’t need any government grant or bailout package,” remarks Karnik. “If a bank gives money we are comfortable.” According to him, Satyam is “a very bankable proposition from the balance sheet and account statements.”

According to Prem Chand Gupta, the corporate affairs minister, Satyam has not sought any aid package. Ashok Chawla, the economic affairs secretary, has also ruled out any direct government support or bailout to the company.

There are fears that the cash-starved company would not be able to meet even its immediate obligations, including pay salary to the 53,000-odd employees; hence, there were calls for a government bail-out.

Analysts expect the new board – which will soon be selecting a new management team, including a CEO – will take at least six months before sorting out the complicated accounts and setting the company back on course.

So far, none of its major clients have abandoned Satyam. However, there are fears that some of them might shift their loyalties, opting for any one of the other top three Indian software firms.

Satyam offices in Hyderabad have been taken over by investigators, including those from the Serious Fraud Office and the Securities and Exchange Board of India (SEBI), the capital market regulator. The Andhra Pradesh government wants the Central Bureau of Investigation (CBI) to take over the Satyam probe.

The new board has also replaced PricewaterhouseCoopers (PwC), Satyam’s auditors, with Deloitte and KPMG. PwC offices in Hyderabad have been raided by the police in search of incriminating documents.

As for the two Maytas firms, the Andhra Pradesh government – which had favoured it with multi-billion-rupee contracts, including construction of a metro system in Hdyerabad – is busy cancelling the contracts. Maytas Infrastructure had won nearly 60 projects across over a dozen states.

The Andhra Pradesh government also is learnt to have invested about Rs300 billion in infrastructure projects awarded to Maytas and its partners. In fact, one of India’s most respected infrastructure experts, E. Sreedharan, who was responsible for the success of Delhi Metro, had warned of a political scam a few months ago, when the Andhra government was offering hefty incentives to Maytas Infra.

But instead of heeding to Sreedharan’s warnings, the Andhra Pradesh government removed him as a consultant to the Hyderabad Metro. Today, an embarrassed chief minister Reddy is trying to deny links to Raju and his family members.

http://www.dawn.com/2009/01/19/ebr12.htm