Friday, January 9, 2009

Satyam Scandal - India's Enron

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Letter to Satyam's Shareholders
Satyam's boss Mr. Raju wrote a letter to his shareholders yesterday admitting that he was trying to cover up the losses at Satyam, and in doing so got caught up in a vicious cycle of lies and debts.

He says this attempt to hide the losses from investors and shareholders was like "riding a tiger, not knowing how to get off without being eaten".

According to Mr Raju's statement, about $1bn (£0.65bn), or 94% of the cash on the company's books, was made up - and analysts say it was the manipulation of the cash flow which could have been one reason why the deceit was undetected.

Reactions from Shareholders and Analysts
Analysts and shareholders were shocked when news of Satyam's scandal broke out. They were shocked that that the biggest-ever corporate fraud in the country could have escaped unnoticed for so many years. Many analysts called Mr. Raju's letter as a suicide note. This is India's Enron. There was talk of corporate governance a few weeks back with the alleged Satyam-Maytas deal which was called off due to Institutional investor's response. The dust did not settle and the biggest Indian corporate scandal broke out. Satyam's shares plummeted on the news by 75%, dragging down India's stock main market by 7%. This will put the spotlight on Indian companies, and overseas investors will be wary of putting their money here without taking a good, hard look at the company's books. Many analysts mentioned that Satyam and its former CEO could be put under list of class action suits both in US as well as India.

- Aberdeen International sold 3.6 crore shares (5.3%) at Rs 42.6 per share and exits completely from Satyam computers

- Swiss Finance, 100% sub of UBS AG sold 1.37 crore shares at Rs 80 per share and exit Satyam

- Fidelity Investment sold 40 lac shares at Rs 108.96 per share.

- Morgan Stanley sold 47.7 lac shares at Rs 68.68 per share.

Future of Employees and Clients
Most of the Indian IT companies which were in forefront for takeover of Satyam earlier have pulled out after the news of the scandal came. There is just no cash available with the company. Even though the recievables are strong, it still does not make a good buy for any company. Interim CEO, Mr. mentioned that top priority will be business continuity. It would reach out to its clients and gain their confidence. Their next priority will be employees. Though the future of 53,000 employees still is uncertain with a recruiting agency saying that 10,000 employees may be sacked in the next month as the company does not have cash to sustain. It may well be a rumor but certainly not the best of situation for any Satyam's employee.

Role of Auditor
Many analysts were blaming Auditor PWC for the scandal as they could not catch something that was brewing for years. Pricewater House Cooper has however issued a statement today saying in their statement that they have conducted the audit as per relevant accounting standards. They have conducted the audit with ample evidence which one needs in an auditing assignment. However, this is too shallow a statement for anyone to believe. The responsibility of not able to find the scandal and basically not do its job properly lies with PWC, whether they agree to it or not.

Role of Regulators and law enforcement agencies
The regulator, SEBI and the law enforcement agencies are finalizing a host of serious charges against the auditors because of a fraud of this kind cannot be conducted without the negligence of the auditors. When asked Mr. Narayan Murthy on what could restore Indian IT's image - he mentioned a couple of great points. The first one was related to regulators and law enforcement agencies taking serious and swift action against the culprit, even before NASDAQ starts the proceedings against Satyam. The second one was related to Indian IT firms now being open to more regulations and be ready to answer more queries/clarifications from clients and stakeholders.

Future of Indian IT
Though Satyam scandal has definately dented Indian IT's image, future of Indian IT cannot solely depend on this. Indian IT has gained tremendous respect and visibility world over and it cannot be lost because of one bad apple. IT as a sector is going through some tough times because of the global financial crisis. Though this news has not come at a right time, but Indian IT still has a great future ahead and it will definately tide over this crisis as well.

Read the letter that Raju wrote to stakeholders

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