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Is Satyam Scandal The End Of Indian Outsourcing?

By Amarendra Bhushan for CEOWORLD Magazine Updated:January 14, 2009

After Former Satyam Chairman B. Ramalinga Raju admitted last week that he had illegally boosted Satyam’s earnings numbers and created a fictitious cash balance of more than $1 billion. Satyam Scandal exceeding $1.5 billion by Satyam Computer Services chairman and CEO Mr. Ramalinga Raju has put everyone linked to the Indian software industry in total disbelief and frustration.

The irony is that last year Satyam won the “Golden Peacock” corporate governance award from the London-based World Council for Corporate Governance (although that award was revoked late last week). It is understandable that this major accounting fraud in the background of such accolades and credence has formed a cloud of uncertainty and doubts about credibility in the entire Indian software industry. There is no doubt that the fraud committed by the management at Satyam under the certification of internationally reputed audit firms is unforgivable and has created a black mark on corporate governance in India. says M.S. Krishnan

- KPMG and Deloitte will replace Satyam’s previous auditor, the Indian unit of PricewaterhouseCoopers (PWC)
- Local media have estimated the government would have to pump up to 20 billion rupees ($410,000) into the company to keep it afloat and reassure its nervous clients and employees
- Bank deposits were instead handled by the chairman, Mr. Raju, and his brother, the former managing director of Satyam, B. Rama Raju
- Satyam Computer Services executives reaped $1.8 million from share sales in the six months
- Nine officials, including the chief financial officer, Vadlamani Srinivas, had sold a combined 267,358 shares since July 14
- Satyam was considered as one of the four pillars of the success story of the Indian software industry in the global economy
- Along with Infosys, Tata Consultancy Services, and Wipro, Satyam was known for its coveted Fortune 500 clients, innovative software projects, capacity to train thousands of software engineers, and best-in-class certification of software engineering practices.
- Proposing a selfish, high-risk acquisition; On December 16, Raju announced the board’s approval for two proposed acquisitions: To acquire 100 per cent shareholding in Maytas Properties and a 51 per cent controlling stake in Maytas Infra…
- Overvaluing the proposed acquisition; Maytas Properties, for which Raju was willing to pay $1.3 billion (Rs 6,500 crore). Some brokerage firms estimate the net worth of the company to be $225 million (Rs 1,125 crore).
- Promoters pledging their entire holdings
- Refusing to resign; On December 25, nine days after Satyam announced its aborted acquisition bid, Dr Mangalam Srinivasan, 69, took the lead and quit the board of the company. Srinivasan had been on the board of Satyam since July 1991 as an independent director.
- Not being able to utilise cash effectively; The surprising bit about the acquisitions announced by Satyam was that the promoters were keen to deploy money in unrelated businesses at a time when liquidity is scarce and conserving cash is the mantra globally. As of the half year ended September 2008, Satyam had cash of Rs 5,300 crore on its balance sheet, which it did not seem to be utilising as effectively as some of its competitors were doing.
- Messing up a sound company; Most analysts feel Satyam is still financially sound. For instance, according to Angel Broking: Satyam’s business is characterised by strong cash flow generation, low capex intensity, high return ratios and a good percentage of repeat business… But there are problems on the horizon.
- PricewaterhouseCoopers, auditors of the troubled outsourcing giant Satyam Computer Services Ltd, said Wednesday that its audit reports for the last eight years relied on potentially false data provided by the company and should be disregarded.

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