Is Satyam Scandal a Silver Bullet to Stop Outsourcing
Is Satyam Scandal a Silver Bullet to Stop Outsourcing
Date: Monday, January 12, 2009 4:30 AM
<<<<< JOB DESTRUCTION NEWSLETTER No. 1956 -- 1/12/2009 >>>>>
The blogosphere is abuzz over the Satyam scandal in India. Many of them are
declaring the incident to be the beginning of the end of offshore outsourcing
and a return to "Made in America" for all things in Computer/IT. Others hope
that Satyam can be used as a silver bullet to put a stop to the H-1B visa
program.
Folks, stop drinking the KOOL-AID!
In the grand scheme of things the Satyam scandal will probably amount to very
little in terms of restoring jobs in the U.S. It might even make India more
competitive because if Satyam folds, labor in India could become cheaper,
which is the main reason we have lost so many jobs to that country in the
first place. Ex-Satyam employees will have to go somewhere and big outsourcers
like TCS (Tata) and Infosys will be waiting to offer them jobs at cut-rate
salaries. CEO Kris Lakshmikanth of Headhunters India couldn't have described
the situation better when he said:
"It is most likely that Satyam will cut 10,000 jobs next month as
the company is left with no cash to pay the salaries. The current
fiasco is likely to put pressure on salaries, which may reduce by
10 per cent due to the surplus of about 20,000 people in the jobs
market,"
NeoIT's CEO Eugene Kublanov said that the Satyam fraud case doesn't
necessarily mean U.S. customers will shun Indian outsourcing companies because
"fraud happens globally, in Houston with Enron, Louisiana with WorldCom, and
now in India." Kublanov is probably correct even considering that his
statement is somewhat self-serving since his bodyshop will be one of the
winners if Satyam falls. Keep in mind that customers of Satyam will consider
the downfall as a mere inconvenience because they may have to hire another
company to outsource to (like NeoIT), but that's just part of doing business
in our global economy. Investors will get burned as Satyam stock drops in
value and they may lose all their money if Satyam goes belly up, but again
that is just the cost of doing business. As was explained in the LA Times:
Though there's little evidence that the fraud leaked over to Indian
banks or hurt Satyam's customers, shareholders have watched the
value of their investment all but disappear. And one Indian job
website reported receiving 15,000 resumes from Satyam workers this
week.
If this scandal proves anything to transnational investors and corporations it
would be that doing business in India may be less risky than doing so in the
more criminal friendly USA. India is demonstrating that it has very little
tolerance for white collar fraud and they are showing that corporate criminals
will be swiftly punished. It is yet to be seen if most of those arrested will
bribe themselves out of trouble but so far the punishment is more severe than
anything we see in the U.S.
In contrast to India the U.S. coddles its corporate criminals by allowing them
to stay on the job with big pay raises, or giving them golden parachutes so
that they can retire in the Bahamas. When the U.S. does incarcerate CEOs or
executives it's usually in a place that resembles a country club.
Let's look at two different scandals in the U.S. and compare them Satyam to
get further perspective.
***** Satyam Scandal *****
A billion dollar scandal was uncovered in India involving Satyam Computer
Services. Satyam is the fourth-largest software company in India, employing
53,000 people at its headquarters in Hyderabad. Satyam is an international
bodyshop that has operations all over the USA -- they are the #4 biggest user
of L-1 visas and #3 biggest user of H-1B visas.
Ramalinga Raju, founder and chairman of Satyam Computer Services admitted in a
letter of resignation that Satyam has been cooking the books for years in
order to inflate their profits. Satyam means "truth" in Sanskrit, which is
doubly ironic because PriceWaterhouseCooper has been signing off on Satyam's
books for eight years.
India is showing very little tolerance for the white collar crooks at Satyam.
The entire board of Satyam was sacked but that's not all! Ramaliga and his CEO
brother were quickly arrested and thrown into jail along with their CFO,
Srinivas Vadlamani.
Be sure to check out this picture of Ramalinga as he was escorted to the
Chanchalguda Central Jail in Hyderabad, India, Saturday, Jan. 10, 2009.
It's a wonderful scene we rarely get the pleasure to see in the U.S. when our
corporate executives are busted for fraud:
http://select.daylife.com/photo/0aHR9k8e7L0qb?q=Ramalinga+Raju
The jail they are staying in is located in the old part of Hyderabad. It's a
colonial-era jail with concrete watchtowers, a massive steel studded front
gate, and electrified wire ringing high stone walls. The Indian government
said that Satyam criminals will get no special treatment, which means they
will receive:
-- Housing in a barrack with 26 other persons
-- A brief morning walk in jail before breakfeast
-- 650g of rice, 250g of vegetable curry and 125g of dal thrice a day.
Yummy stuff, huh?
-- One blanket each and a bed-sheet in the cell.
-- A daily newspaper
Some people in India think that giving them a newspaper is being too kind
-- they demand harsher treatment!
Mr. Raju is a rags to riches story. As the story goes, he was the son of a
farmer that got a U.S. education and then became a rich man. He earned a
master's in business administration from Ohio University in the late 1970s and
founded Satyam in 1987.
Sometime after Raju was jailed he complained of chest pain. According to the
superintendent of the Chanchalguda Central Prison, a jail doctor attended to
Raju. Hopefully Raju won't do a Kenneth Lay on us before his trial. LOL! And
speaking of Enron....
***** Enron *****
Many are calling the Satyam scandal India's Enron, so it's fair game to
compare the two. The total cost of each scandal is estimated at $1 billion
(although in inflation adjusted dollars Enron was far larger), but that's
where the similarity ends. Remember when Lou Dobbs Moneyline used to have an
Enron criminal conviction scorecard that kept track of the number of days from
the date Enron declared bankruptcy until something was done to the fraudsters?
Of the 18 top executives, it took 262 days until Michael Kopper became the
first Enron executive to face criminal charges, so the score went to 18-to-1.
It took 647 days for Ben Glisan to become the first Enron executive to serve
jail time. At day 808 Dobbs reported that only 3 corporate executives were in
jail, and that included all companies involved such as Worldcom and Arthur
Anderson. There was nothing swift in the way justice was served to Enron
crooks, but it took no time at all for employees and shareholders to lose all
their money. Several newspaper editorials complained that Lou Dobbs was being
unfair to Enron executives.
***** Bernard Madoff *****
The Madoff scandal makes Enron and Satyam combined look like child's play.
So far it's estimated that investors got ripped off of at least $50 billion.
At the time of this writing Madoff is out on bail. He has been ordered to stay
in home confinement in his multi-million dollar apartment until a judge
decides what to do with him. To top it off, Newsweek published an editorial
saying that it would be unjust to throw Madoff in a jail like Riker's Island
because it's too icky.
REFERENCES:
http://www.ndtv.com/convergence/ndtv/video/video.aspx?id=50382
Video: Satyam s CFO arrested
http://cosmos.bcst.yahoo.com/up/player/popup/index.php?cl=11434245
Video: Fraud Scandal -- computer boss quits
http://www.newsweek.com/id/178674
Keep Bernard Madoff Free!
http://grassley.senate.gov/releases/2007/062620073.pdf
Top 20 L visa users in 2007
http://grassley.senate.gov/issues/upload/03072008.pdf
Top 200 H-1B employers in FY 2006
ARTICLES COPIED BELOW:
http://www.bloomberg.com/apps/news?pid=20601091&sid=a1XI6SeQe9Kk
Satyam s Raju Arrested, Board Sacked, in Fraud
http://www.informationweek.com/news/services/outsourcing/showArticle.jhtml?articleID=212701119
Accounting Scandal Rocks Indian Outsourcer Satyam
http://www.livemint.com/2009/01/12004715/No-special-favours-for-Ramalin.html
No special favours for Ramalinga Raju in jail
http://timesofindia.indiatimes.com/Satyam_may_axe_10000_employees_Report/articleshow/3953256.cms
Satyam may axe 10,000 employees:
http://edition.cnn.com/TRANSCRIPTS/0208/21/mlld.00.html
http://transcripts.cnn.com/TRANSCRIPTS/0402/19/ldt.00.html
CNN LOU DOBBS MONEYLINE -- Enron criminal scorecards
http://www.nytimes.com/2009/01/12/business/worldbusiness/12satyam.html?ref=business
3 Chief Executives of Indian Company Jailed in Fraud Case
http://www.latimes.com/news/nationworld/world/la-fg-india-scandal10-2009jan10,0,7913885.story
Satyam's $1-billion fraud shakes India
+++++++++++++++++++++++++++++++++++++++++++++++++++
http://www.bloomberg.com/apps/news?pid=20601091&sid=a1XI6SeQe9Kk
Satyam s Raju Arrested, Board Sacked, in Fraud Probe (Update1)
By Harichandan Arakali and Kartik Goyal
Jan. 10 (Bloomberg) -- Satyam Computer Services Ltd. chairman Ramalinga Raju
and his brother Rama were arrested and the remaining directors of the software
exporter sacked, as India started investigating an alleged $1 billion fraud.
The brothers were detained on charges including forgery, breach of trust and
criminal conspiracy, Inspector General V.S.K. Kaumudi told reporters in the
southern city of Hyderabad.
Officials have seized documents and the nation s accounting body is examining
auditor PricewaterhouseCoopers LLC s local unit, Corporate Affairs Minister
Prem Chand Gupta said.
"The developments so far indicate that the current board of Satyam has failed
to do what it was supposed to do," Gupta told reporters in New Delhi. "The
government is committed to punish everyone found guilty, including the
auditors."
Satyam, India s fourth-largest software exporter, plunged for a second day in
Mumbai trading on concern it may run out of money after Raju said he falsified
the accounts "for several years." The scandal, whose scope is being likened to
the 2001 bankruptcy of Enron Corp., has shaken confidence in Indian companies
and accounting standards.
"The fact that the audited accounts don t represent true and fair picture
raises an issue that is bigger than the Satyam scandal," said M. Damodaran,
former chairman of the Securities and Exchange Board of India. "If some guy
has taken liberties with the system, the person or persons has to be
identified and punished."
Tougher Rules
Houston-based Enron s 2001 bankruptcy wiped out more than 5,000 jobs and
$1 billion in employee retirement funds. The Enron scandal triggered tougher
U.S. accounting rules and the creation of a board to oversee auditing firms
that review the financial statements of publicly traded companies.
Ten directors nominated by the government will meet next week to appoint
managers at Hyderabad-based Satyam, Gupta said.
Satyam canceled a board meeting scheduled for today after the board was
replaced, it said in an e-mailed statement.
Interim Chief Executive Officer Ram Mynampati said Jan. 8 he was unaware of
the false accounting that may force Satyam to restate earnings as he relied on
audited statements. The local unit of PwC said in a statement the same day
Satyam s accounts were supported by "appropriate audit evidence."
The scandal has eroded $2.2 billion in shareholder wealth, drawing calls from
executives and auditors to accelerate the investigation. More than two days
after chairman Raju claimed he d padded Satyam s books, the company s auditors
and interim management had yet to confirm any irregularities.
Shares Fall
Satyam fell 17.35 rupees to 22.9 rupees yesterday. The Bombay Stock Exchange
removed Satyam from its benchmark Sensitive index, a day after the National
Stock Exchange also dropped the stock from the Nifty.
"We believe the Satyam incident marks a turning point in investors attitude
toward corporate governance," Suresh Mahadevan, an analyst at UBS AG, said.
"In future, companies perceived poor on corporate governance or following
aggressive accounting practices will trade at larger discounts compared to
their peer group."
India s stock market regulator plans to review working papers of auditors at
companies forming the nation s main stock indexes, the regulator said in a
statement in Mumbai. The Securities and Exchange Board s Committee on
Disclosures and Accounting Standards will hold a peer review of the auditor s
working papers on quarterly and full-year financial statements.
Meet Investigators
Raju had planned to meet investigators from the Securities and Exchange Board
today, his lawyer S. Bharat Kumar said before the arrests. Raju had been
summoned by regulators yesterday though wasn t given sufficient notice, he
said.
Raju, 54, and his younger brother will be produced before a magistrate within
24 hours, inspector general Kaumudi said. The offences carry a maximum
sentence of 10 years and the brothers can t apply for bail, he said.
Government officials have seized Satyam s documents and a team from the
ministry of corporate affairs has started inspecting eight group companies,
Gupta said.
"It s the prime concern of the government to ensure the operations of the
company continue uninterrupted," Gupta said.
Satyam employs about 53,000 people and has offices from the U.S. to the U.K.,
Brazil and Australia. The company writes software and manages computer systems
for clients including ArcelorMittal, the world s largest steelmaker, and
Nissan Motor Co., Japan s third-biggest carmaker.
The announcement by the government to reconstitute the Satyam board will also
reinforce employee and stakeholder confidence, the National Association of
Software and Service Companies, a lobby group, said in an e-mailed statement.
Buy Satyam
Outside the group s corporate headquarters, four canvas sheets about 6 feet by
8 feet are draped with employees signatures, handprints and messages.
"Satyam will come back," one message reads. "Save Satyam, save Raju," says
another. A third, "Buy Satyam Stock." On each of the red, green, yellow and
blue-painted canvases is printed "The Spirit of Satyam," like a watermark.
"This current management needs to go so that the 50,000 jobs are saved and
client commitments are kept," Richard Rekhy, chief operating officer of KPMG
in India, said. "It is the image of India and corporate India at stake."
The fall of Raju, named Ernst & Young Entrepreneur of the Year in 2007, began
three weeks ago when Satyam proposed paying $1.6 billion for Maytas Properties
Ltd. and Maytas Infra Ltd., both tied to his family. The plan was scrapped 12
hours later, after investors called it a "woeful misuse of cash." Raju said
the sale was designed to plug the hole in Satyam s balance sheet.
"To my non-auditor mind it is reasonably clear that something like this could
not have been hidden from audit for so long," former regulator Damodaran said.
To contact the reporter on this story: Kartik Goyal in New Delhi at
kgoyal@bloomberg.net.
Last Updated: January 9, 2009 14:09 EST
+++++++++++++++++++++++++++++++++++++++++++++++++++
http://www.informationweek.com/news/services/outsourcing/showArticle.jhtml?articleID=212701119
Accounting Scandal Rocks Indian Outsourcer Satyam
Founder and chairman B. Ramalinga Ramu's quick departure sends customers
scrambling to evaluate how the company's financial fraud will impact their own
IT operations.
By Marianne Kolbasuk McGee, InformationWeek Jan. 7, 2009
URL:
http://www.informationweek.com/story/showArticle.jhtml?articleID=212701119
Satyam customers need to move swiftly in evaluating how the Indian
outsourcer's newly revealed financial fraud will impact their own IT
operations, say analysts.
In a bombshell disclosure, Satyam founder and chairman B. Ramalinga Ramu quit
Wednesday, admitting in a five-page resignation letter that the company had
been meticulously inflating its financial figures for years.
"People are blown away by this. There's never been anything close in scale to
this fraud in the IT services business," said John McCarthy, VP of research at
Forrester Research. "Clearly, customers can't ignore this situation." Satyam
clients need to be assessing the impact "and rolling out recovery plans" for
Satyam-provided IT services that now need to be moved to other vendors or
brought back in house, he said.
Outsourcing consulting firm NeoIT has several urgent recommendations for
clients, said the firm's CEO, Eugene Kublanov. "Literally, in the next couple
of days, the next week, be prepared with a risk mitigation plan," he advises
Satyam customers.
Satyam customers need to "fully understand the Satyam situation," which in a
worst-case scenario could have the company being unable to pay its workers and
vendors and filing for bankruptcy, and in a best-case scenario containing the
situation to "the boardroom" and emerging with a black eye, Kublanov said. The
most likely scenario, though, is that the outsourcer will have "a change of
control," with Satyam being bought or merged with another services provider.
"In any of these scenarios, there will be disruption in service" for Satyam
clients, Kublanov said. "This situation is extremely shocking and, frankly,
very disrupting to clients."
In an acquisition or merger, the new owners may not want to honor the
contracts that Satyam signed with clients, especially if Satyam had been
providing specific services at very low prices, said Kublanov.
"A big company may not accept those prices," he said. "These days, everything
is up to negotiation." If a client has Satyam supporting critical
applications, the client could find itself forced to renegotiate a new deal
with a new owner "if all of a sudden a large company like IBM or HP is
supporting those critical applications," he said.
"A lot will depend on buyer power versus supplier power," in getting an upper
hand in any contract renegotiations, he said.
Forrester's McCarthy said that Satyam as of last June is estimated to have
about 631 clients, from which about 60% of revenue comes from United States-
based companies. However, only about 237 of Satyam's accounts spent more than
$1 million a year of business with the company, he said. That means some of
that work could be more easily absorbed by other parties, he said.
However, while most Satyam clients likely have diversified their outsourced IT
work, with different aspects being performed by more than one IT services
vendors, companies typically don't diversify vendors for the same kind of
work. So, for instance, if Satyam is providing app development work, the
customer's other IT services vendors are likely performing other types of
service.
McCarthy agrees that Satyam's situation makes it a target for an acquisition,
but said a potential buyer could be scared off by the lawsuits and other
issues that will undoubtedly ensue. Still, a purchase of Satyam could be a
good boost for a company that acts quickly to move in and contain an exodus of
clients, McCarthy said. "A company that wants to bolster its SAP maintenance
business could move quickly on this."
The Satyam fraud case doesn't necessarily mean U.S. customers will shun Indian
outsourcing companies in general, because "fraud happens globally, in Houston
with Enron, Louisiana with WorldCom, and now in India," said Kublanov.
However, the situation could bring red flags to other Indian companies.
"This has implications on corporate governance, but also on regulatory
oversight in India," he said.
+++++++++++++++++++++++++++++++++++++++++++++++++++
http://www.livemint.com/2009/01/12004715/No-special-favours-for-Ramalin.html
No special favours for Ramalinga Raju in jail
During the day, Raju s relatives went to the jail, but prison officials
declined their request to meet him because the rules do not allow such visits
on a SundayC.R. Sukumar and Lison Joseph Hyderabad: After his first night in a
prison cell, Satyam Computer Services Ltd founder B. Ramalinga Raju woke up to
have a brief morning walk in the jail premises followed by a breakfast of
pulihora, or tamarind rice.
Later in the afternoon, Raju complained of chest pain and, according to K.
Newton, superintendent of the Chanchalguda Central Prison, a jail doctor
attended to him. Raju was all right after the treatment, Newton said.
Raju skipped lunch, but had bread and tea in the afternoon and had an hour-
long discussion with brother Rama, according to prison officials who did not
want to be named. The jail serves chicken curry, rice and rasam on Sundays,
but it was not known whether Raju had any of it.
During the day, Raju s relatives went to the jail, but prison officials
declined their request to meet him because the rules do not allow such visits
on a Sunday.
According to the jail manual, prison inmates are to be given 650g of rice,
250g of vegetable curry and 125g of dal thrice a day. A prison official said
the Raju brothers were given a blanket and a bed-sheet in the cell.
They asked for and were given newspapers.
The brothers are housed in a barrack with 26 other persons remanded to
judicial custody, according to the official. Jail authorities said there were
strict instructions from the state government that no special treatment should
be extended to the Raju brothers, who were shifted to the jail on Saturday
after their arrest on Friday.
The instructions were given in the light of criticism that jail officials had
doled out favours to Nagarjuna Finance Ltd promoter K.S. Raju, who was under
judicial custody after the firm defaulted on payments to depositors to the
tune of Rs100 crore.
Jail authorities had permitted K.S. Raju to shift to a city hospital on
medical grounds, but the government, responding to criticism, replaced the
prison s superintendent with Newton.
Srinivas Vadlamani, the chief financial officer of Satyam, who was produced
before a magistrate and remanded to custody till 24 January on Sunday, will
now be a fellow prison inmate of the Raju brothers and lodged in the same
barrack.
c.sukumar@livemint.com
+++++++++++++++++++++++++++++++++++++++++++++++++++
http://timesofindia.indiatimes.com/Satyam_may_axe_10000_employees_Report/articleshow/3953256.cms
Satyam may axe 10,000 employees: Report
8 Jan 2009, 2045 hrs IST, PTI
NEW DELHI: With a big questions mark on its cash position and a minimum outgo
on salary estimated at Rs 500 crore a month, Satyam may lay off over 10,000
employees next month, says a recruitment firm.
"It is most likely that Satyam will cut 10,000 jobs next month as the company
is left with no cash to pay the salaries. The current fiasco is likely to put
pressure on salaries, which may reduce by 10 per cent due to the surplus of
about 20,000 people in the jobs market," Headhunters India CEO Kris
Lakshmikanth said.
Satyam interim CEO Ram Mynampati while admitting that the cash position is not
encouraging, the company, however, has taken care of salary for December.
Lakshmikanth said till Tuesday evening there were about 7,800 people from
Satyam who had posted their resumes on job sites and by Wednesday afternoon,
it has gone up to 14,000.
The uncertainty about jobs is killingly painful for the 53,000 employees of
Satyam, especially when the industry is going slow on recruitment.
Further, possibility of a takeover too looks distant as the accounting fraud
done by the company would make it difficult for any firm to evaluate its
correct market value, which is compounding the worries of the employees.
IT-BPO union Unites Professionals general secretary Karthik Shekhar said, "In
case of any lay off at Satyam, we may take legal action."
"We have received over 7,000 hits since the news break. Yesterday, in one hour
we have seen over 800 hits (no of people visiting the site) from Hyderabad.
People have been enquiries on how the union can help them,"
Shekhar added.
+++++++++++++++++++++++++++++++++++++++++++++++++++
http://edition.cnn.com/TRANSCRIPTS/0208/21/mlld.00.html
CNN LOU DOBBS MONEYLINE
Former Enron Executive Indicted; Cable Deal Helps Rally Stocks
Aired August 21, 2002 - 18:00 ET
So tonight, we're happy to finally make a significant change to the
scoreboard. Thirty-seven-year-old Michael Kopper, a former managing director
at Enron becomes the first Enron executive to face criminal charges tied to
the company's collapse. The number of days it took to get this conviction,
262.
http://transcripts.cnn.com/TRANSCRIPTS/0402/19/ldt.00.html
DOBBS: Today he posted a $5 million bond and is freed.
To update our criminal scoreboard tonight, 113 executives in all of corporate
America have now been charged. 20 of them from Enron. Only three people have
been sent to prison. It has been 808 days since Enron filed for bankruptcy.
Joining me now for more on the Skilling case and the developments today in the
Martha Stewart trial, our senior legal analyst, Jeffrey Toobin. Jeff good to
have you here.
First, a long time to get to Jeffrey Skilling.
+++++++++++++++++++++++++++++++++++++++++++++++++++
http://www.nytimes.com/2009/01/12/business/worldbusiness/12satyam.html?ref=business
January 12, 2009
3 Chief Executives of Indian Company Jailed in Fraud Case By JEREMY KAHN and
HEATHER TIMMONS HYDERABAD, India -- The brothers who founded the outsourcing
company Satyam Computer Services have been interrogated and jailed, and
Srinivas Vadlamani, who resigned as chief financial officer after a huge fraud
was disclosed there, was arrested as well on Saturday night.
Inspector General V. S. K. Kaumudi of the police crime investigation unit said
that Mr. Vadlamani was being held on charges of criminal conspiracy, forging
accounts and cheating as part of the same case that has been registered
against the Satyam founders, B. Ramalinga Raju and B. Rama Raju.
On Sunday, Mr. Vadlamani was remanded to judicial custody by a magistrate on
Sunday until at least Jan. 23. He was then sent to join the Raju brothers in
Hyderabad s Chanchalguda prison. Also on Sunday, police officials said that
they had raided the residences of all three men, and removed several boxes of
documents from the home of B. Ramalinga Raju s in the upscale neighborhood of
Jubilee Hills.
B. Ramalinga Raju resigned as chairman in a letter to the company Wednesday in
which he confessed to faking profit and revenue. Charges being considered
against Mr. Raju and his brother include cheating, forgery, criminal breach of
trust and falsifying documents, the authorities said.
Like Mr. Vadlamani, the two are to remain in judicial custody until Jan.
23, and will be held in the Hyderabad prison. Located in Hyderabad s old city,
the prison is a sprawling colonial-era jail with concrete watchtowers, a
massive steel studded front gate and electrified wire ringing high stone
walls.
On Sunday the government of India announced a new board for Satyam. P.C.
Gupta, India s minister of corporate affairs, speaking at a press conference
in New Delhi, said the government had selected three "eminent persons" to
serve on Satyam s board, the minimum number of directors required under Indian
law. The three are Deepak Parekh, the chairman of the Housing Development
Finance Corp., Kiran Karnik, a former head of the National Association of
Software and Services Companies, the country s leading information technology
trade association, and C. Achuthan, a lawyer and former member of the
Securities and Exchange Board of India, the country s market regulator.
Mr. Gupta said that the board would meet within the next 24 hours and decide
who would serve as Satyam s new chairman. The government dismissed Satyam s
old board on Friday. He said the new board could select other directors as
required. In India, a board may have up to 10 members and Satyam s former
board had nine directors.
Mr. Gupta also said that the government would consider requests from Satyam s
large shareholders for seats on the board, but that it was up to the new board
to decide who would be invited to join. Lazard, the French investment bank
that has increased its stake in Satyam to 7.4 percent, has said it is seeking
input into the company s decision-making, but has not yet requested a seat on
the board.
"All options are open," Mr. Gupta said. "Whatever is in the interest of the
company, then the necessary steps will be taken."
In a statement released Sunday, a company spokesperson described the
announcement of the new board members as "the best news we ve received in the
past four weeks."
"This is a vital stabilizing development for Satyam, and it marks the
beginning of a new chapter in the company s history," the statement said.
Mr. Gupta said that government investigators looking into the accounting fraud
that has brought Satyam to the brink of bankruptcy have made "commendable
progress in the case" over the past three days, but he declined to reveal any
specifics about what investigators have uncovered.
"It is important to ensure the continuity of the company in the interest of
its shareholders, employees, customers and other stakeholders both in India
and abroad," Mr. Gupta said.
Satyam, one of India s largest outsourcing companies, is struggling to survive
after the revelations of fraud, and the government has taken control of the
company s board. B. Ramalinga Raju said in his letter that no board members
were aware of the fraud at the company. S. Bharat Kumar, lawyer for the Raju
brothers, said in an interview that he believed the two had a "good case" for
being released on bail, but the police said they intend to push to keep the
brothers locked up while awaiting trial.
Satyam, which counts one-third of the Fortune 500 companies among its clients,
employs 53,000 people, about two-thirds of them in India.
Government agencies have moved quickly since Wednesday to shore up the company
and to reassure investors that Indian publicly traded companies are safe. They
passed new rules Friday that will require the largest public companies on
India s stock exchange to submit their numbers to additional review by outside
auditors. Lazard Asset Management, Satyam s largest shareholder, is agitating
for a voice at Satyam. The money management arm of the investment bank Lazard
has asked the Indian government to be consulted on any changes at the company,
and sent letters to India s corporate affairs minister and the market
regulator, SEBI, with that request, a Lazard representative said Saturday.
Jeremy Kahn reported from Hyderabad and Heather Timmons from New Delhi.
+++++++++++++++++++++++++++++++++++++++++++++++++++
http://www.latimes.com/news/nationworld/world/la-fg-india-scandal10-2009jan10,0,7913885.story
Satyam's $1-billion fraud shakes India
Outsourcing giant Satyam's chief Ramalinga Raju admits to posting fake profits
for years. It is unclear how the fraud went undetected, but analysts don't
expect an industry-wide fallout.
By Mark Magnier
January 10, 2009
Reporting from New Delhi -- It's a classic rags to riches to rags story.
The son of farmers leaves his village behind, moves up from textile mills to
real estate to IT outsourcing for multinational firms. He emerges as one of
India's wealthiest and most famous entrepreneurs -- until he reveals that his
empire was floating on an accounting lie and it all comes crashing down.
The U.S. has its Wall Street meltdown and the Bernard Madoff investment
scandal. India has Ramalinga Raju, who appears to have perpetrated the
nation's largest corporate scandal in recent memory.
What has people really scratching their heads is the way the 54-year-old Raju,
co-founder of Satyam Computer Services Ltd., chose to signal the game was up:
with what some have dubbed a "come-and-get-me" letter released Wednesday that
detailed how he'd perpetrated the fraud.
In his mea culpa, Raju lays out how small amounts of fake profits and cash
accounts built up over several years until the gap between real and imaginary
assets eventually approached $1 billion.
"It was like riding a tiger, not knowing how to get off without being eaten,"
he wrote. He added that he alone was responsible, his board was blameless and
that even top managers had no idea of the fraud.
Some observers are skeptical. "It's impossible to believe he acted alone,"
said Surjit Bhalla, managing director of Oxus Fund Management in New Delhi.
The government appears to agree.
Late Friday, it stripped Satyam's directors of their power, ordered them
replaced by independent board members and arrested Raju and his brother on
charges of conspiracy, forgery, fraud and criminal breach of trust, according
to local media reports. The arrests ended two days of speculation that he had
fled to Texas; Dubai, in the United Arab Emirates; or some other distant
hideaway.
Questions have also been raised about how top global accounting firm
PriceWaterhouseCooper signed off on Satyam's books for eight years and how
regulators in India, Europe and the United States apparently failed to pick up
any whiff of problems. The accounting firm has denied any wrongdoing and
pledged to cooperate with authorities.
Satyam, based in Hyderabad, provided back-office operations for hundreds of
corporations, including billing and system integration and technology support.
The company grew from its original 20 employees to 53,000 people in 66
countries. Raju picked up 185 Fortune 500 clients -- General Electric, Nestle
and Microsoft among them -- becoming an example of India's high-tech ambitions
while drawing the ire of U.S. and European labor groups fearful of job losses.
Though there's little evidence that the fraud leaked over to Indian banks or
hurt Satyam's customers, shareholders have watched the value of their
investment all but disappear. And one Indian job website reported receiving
15,000 resumes from Satyam workers this week.
"Raju has cheated me and millions of shareholders," said Rajesh Shrivastava,
43, a businessman who owns 5,000 shares. "I still fail to believe that I have
almost lost everything. The god of IT has failed me."
Those who have spent time with Raju describe him as a modest, thoughtful,
seemingly honest man.
"All of us who know him are quite shocked," said Kiran Mazumdar Shaw, managing
director of Bangalore-based Biocon, a biotech company. "I always thought I was
such a good judge of character. Obviously I'm not."
In retrospect, Raju's story is rich with such ironies.
"Satyam" means "truth" in Sanskrit. And Raju's shelves groaned under the
weight of honorary doctorate degrees and good-governance and creative
entrepreneur awards.
But not everyone was impressed with the chief executive who loved science
fiction, spicy Andhra Pradesh food and hiring people who could speak his
native Telugu language.
"If you walk around Dalal Street, our equivalent of Wall Street, there's
surprise but not shock," said Ramesh Damani, a member of the Bombay Stock
Exchange.
"There was always a sense there was creative bookkeeping, although not
necessarily fraud."
Traders speak of a smell test that left Satyam trading at lower price-to-
earnings multiples, a measure of earnings potential, than other Indian IT
giants in its class such as Infosys Technologies Ltd. The company seemed
willing to give away far too much to reach a deal with brand-name global
companies, said a lawyer involved in several deals with Raju.
The lawyer, who spoke on condition of anonymity, said that in retrospect,
Raju's way of doing business suggested that it was more important to announce
impressive deals and prop up the stock price than it was to adhere to strict
profit-and-loss benchmarks.
"Other firms had a clear bottom line," he said. "Satyam was willing to do
deals at all costs."
But Raju, who got a business degree at Ohio University and was one of the
first to see the business potential in the Y2K scare, still has some
supporters.
Residents of the village of Bhimavaram, where he grew up and created jobs,
have rallied behind him. And some have applauded the way he left the stage.
"To me Raju was a hero, and will always be a hero," said Sharad Kumar, 38, a
businessman. "You tell me: How many people dare to come out in open and
confess to such a thing? . . . What Satyam did was basically to make middle-
class Indians dare to dream."
Analysts said the rising tide of hot money going into emerging markets in
recent years and India's tech boom made it possible to keep the scam going for
years.
"It was the best game in town," said Raamdeo Agrawal, managing director of
Mumbai-based Motilal Oswal Securities. "The whole world loves you and you get
hooked on it."
But in recent months, as the global economy soured and credit dried up, the
walls started to close in. In desperation, Raju tried to engineer a "purchase"
of two family firms last month, a deal that allegedly would have allowed him
to post money transfers that didn't take place.But shareholders grew
suspicious given the $1.6-billion price tag and Satyam's sudden desire to move
into the completely unrelated infrastructure businesses.
A further blow came when the World Bank dropped its business with Satyam,
citing "improper benefits" given to bank officials. And in what may have been
the last straw, DSP Merrill Lynch was called in to broker a sale, only to
resign as the company's advisor Tuesday. Raju released his letter the
following morning.
"That may've been the trigger," said Manoj Vohra, director of India research
with the Economist Intelligence Unit.
Analysts said that in the short term, this bombshell could dent the reputation
of "India Inc." But barring another scandal, it would probably be recognized
for what it is -- a case of irregularities by one company.
"I hope this is a wake-up call for everyone the world over," said Shaw, the
biotech executive. "We've seen an economy of greed, fueled by scams and loose
regulations leading to this recession. Good governance has never been held at
a [proper] premium."
mark.magnier@latimes.com
Special correspondent Rajiv Singh contributed to this report.
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