Satyam, PwC Agree to Pay USD 17.5 Million to Settle the Dispute with SEC
The unfortunate saga of India’s IT outsourcing giant Mahindra Satyam (Satyam Computer Services) has taken a new turn. After reporting a record loss of Rs 130 crore for the fiscal year ended the previous March since the biggest IT fraud was uncovered by the ex-chairman of Mahindra Satyam, a new deal has been struck between the newly formed Mahindra Satyam and its former auditor PricewaterCoopers (PwC) to settle the dispute by paying an amount of USD 17.5 million to the US Securities and Exchange Commission (SEC).
Out of the total settlement fee of USD 17.5 million, Mahindra Satyam will shell out USD 10 million while India-based affiliates of PwC will contribute USD 7.5 million.
Responding to the news, Cheryl Scarboro, Chief of the SEC’s foreign corrupt practices act unit, claimed, “The fact that Satyam’s former top officers were able to maintain a fraud of this scale represents a company-wide failure of extreme proportions”.
Though the SEC lambasted the PwC of allowing the manipulation of fake inflation of actual assets of the company, the latter has reportedly refused to admit the allegations levied by the SEC and further, stressed on upgrading the audit practices followed in the company.
Satyam Chief Admits Huge Fraud
Adeel Halim/Bloomberg News
Ramalinga Raju, chairman of Satyam Computer Services, resigned Wednesday after disclosing he had systematically falsified accounts of the giant outsourcing company.
By HEATHER TIMMONS and BETTINA WASSENER
NEW DELHI — Satyam Computer Services, a leading Indian outsourcing company that serves more than a third of the Fortune 500 companies, significantly inflated its earnings and assets for years, the chairman and co-founder said Wednesday, roiling Indian stock markets and throwing the industry into turmoil.
Satyam Computer Services Limited
The chairman, Ramalinga Raju, resigned after revealing that he had systematically falsified accounts as the company expanded from a handful of employees into a back-office giant with a work force of 53,000 and operations in 66 countries.
Mr. Raju said Wednesday that 50.4 billion rupees, or $1.04 billion, of the 53.6 billion rupees in cash and bank loans the company listed as assets for its second quarter, which ended in September, were nonexistent.
Revenue for the quarter was 20 percent lower than the 27 billion rupees reported, and the company’s operating margin was a fraction of what it declared, he said Wednesday in a letter to directors that was distributed by the Bombay Stock Exchange.
Satyam serves as the back office for some of the largest banks, manufacturers, health care and media companies in the world, handling everything from computer systems to customer service. Clients have included General Electric, General Motors, Nestlé and the United States government. In some cases, Satyam is even responsible for clients’ finances and accounting.
The revelations could cause a major shake-up in India’s enormous outsourcing industry, analysts said, and may force many large companies to investigate and perhaps revamp their back offices.
“This development is going to have a major impact on Satyam’s business with its clients,” said analysts with Religare Hichens Harrison on Wednesday. In the short term “we will see lot of Satyam’s clients migrating to competition like Infosys, TCS and Wipro,” they said. Satyam is the fourth-largest outsourcing firm after the three named.
In the four-and-a-half page letter distributed by the Bombay stock exchange, Mr. Raju described a small discrepancy that grew beyond his control. “What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew,” he wrote. “It was like riding a tiger, not knowing how to get off without being eaten.”
Mr. Raju said he had tried and failed to bridge the gap, including an effort in December to buy two construction firms in which the company’s founders held stakes. Speaking of a “deep regret” and a “tremendous burden,” Mr. Raju said that neither he nor the co-founder and managing director, B. Rama Raju, had “taken one rupee/dollar from the company.” He said the board had no knowledge of the situation, nor did his or the managing director’s families.
The size and scope of the fraud raises questions about regulatory oversight in India and beyond. In addition to India, Satyam has been listed on the New York Stock Exchange since 2001, and on Euronext since January of 2008. The company has been audited by PricewaterhouseCoopers since its listing on the New York Stock exchange.
Satyam has been under close scrutiny in recent months, after an October report that the company had been banned from World Bank contracts for installing spy software on some World Bank computers. Satyam denied the accusation but in December, the World Bank confirmed without elaboration on the cause that Satyam had been banned. Also in December, Satyam’s investors revolted after the company proposed buying two firms with ties to Mr. Raju’s sons.
On Dec. 30, analysts with Forrester Research warned that corporations that rely on Satyam might ultimately need to stop doing business with the company. “Firms should take the initial steps of reviewing the exit clauses in their current Satyam contracts,” in case management or direction of the company changed, Forrester said.
The scandal raised questions over accounting standards in India as a whole, as observers asked whether similar problems might lie buried elsewhere. The risk premium for Indian companies will rise in investors’ eyes, said Nilesh Jasani, India strategist at Credit Suisse.
R. K. Gupta, managing director at Taurus Asset Management in New Delhi, told Reuters: “If a company’s chairman himself says they built fictitious assets, who do you believe here?” The fraud has “put a question mark on the entire corporate governance system in India,” he said.
News of the scandal — quickly compared with the collapse of Enron — sent jitters through the Indian stock market, and the benchmark Sensex index fell more than 5 percent. Shares in Satyam fell more than 70 percent.
Just a few months ago, Mr. Raju was trying to persuade investors that the company was sound. In October, he surprised analysts with better-than-expected results, saying he was “pleased” that the company had “achieved this in a challenging global macroeconomic environment, and amidst the volatile currency scenario that became reality.”
But by late December, it seems he had little support from the board or investors, and four of the company’s directors resigned in recent weeks. Satyam recently retained Merrill Lynch for strategic advice, a move that is generally a precursor to a sale.
Mr. Raju said in his statement that he “sincerely apologized” to shareholders and employees and asked them to stand by the company. “I am now prepared to subject myself to the laws of the land and face consequences thereof,” he said.
Heather Timmons reported from New Delhi and Bettina Wassener fro
At the turn of the 21st century, India’s southern city of Hyderabad transformed itself from a tourist attraction known for its royal complexes to a booming IT hub with massive foreign investment. Today, a few years later, the city is caught up in a political crisis which, many say, has delivered a blow to its brand value.
Hyderabad, the current capital of Andhra Pradesh, plays host to over 1300 IT companies. The city is often referred to as Cyberabad (Cyber city) and houses the Indian headquarters for leading IT giants like Microsoft, Google, Facebook, Amazon, Wipro, Motorola, DELL, to name a few. Hyderabad’s IT industry alone is said to have fetched US$ 7.4 billion from exports in 2008-09.
Protests
However, last month’s protests organised by leaders of the Telangana movement, which demands a separate statehood for the region, has caused much discomfort to IT businesses in Hyderabad, says L Suresh, president of the IT and ITES Industry Association of Andhra Pradesh (ITSAP).
The general strike in Andhra Pradhesh by supporters of the secessionist movement, which lasted for nearly 36 days, left both IT companies and its employees in a state of disarray.
“The cost of operations for companies went up by nearly 5 per cent because we had to arrange for private buses, taxis and other modes of transport to get employees to work because public transport wasn’t working,” says Suresh. Apart from transport, companies also had to invest heavily in back-up energy reserves to overcome the power outages.
Everyday difficulties faced by employees while getting to work and back have definitely had an impact on the employee morale. “Not just that, they are worried about their children not attending school for so many days since the teachers have gone on strike as well. That affects productivity,” Suresh says.
The state transport employees and school teachers resumed duties on October 18 along with a few other government workers in the mining sector.
Brand Hyderabad
Surprisingly, the IT industry’s output hasn’t registered any significant decline despite the current turmoil, says Suresh: “At the ground level, in terms of attendance there has been no real impact, because the companies invested in providing ways to get their employees to work. We made sure that the client projects were delivered.”
However, what has taken a beating is Brand Hyderabad. “It took us so many years to build Brand Hyderabad. There are so many well-known Fortune 500 companies based here. So many MNCs. People are concerned about the prolonged nature of this political battle,” says Suresh.
Most IT companies have survived the recent agitation owing to back-up stations in other cities like Delhi and Bangalore. There is speculation that because of the nature of the ongoing political tug of war, IT companies based in Hyderabad might forward their operations to a larger extent to other sites.
Quick decision
While Telangana’s fate lies with the central government, IT companies in Hyderabad are hoping for a quick solution out of the existing stalemate.
“It doesn’t really matter whether Hyderabad will be part of Telangana or will remain autonomous or will go with unified Andhra Pradesh. All that matters is a quick decision. If we know that in five years such and such is going to be the outcome of this political situation, companies can keep that in mind and look forward,” says Suresh.
