Author: Raghbendra Jha

Satyam Computer Services, India’s fourth largest IT firm and a leading outsourcing company that counts General Electric, General Motors, Nestle, the US Government, Qantas and National Australia Bank amongst its clients, suddenly collapsed on 7th January 2009. The script for this debacle appeared to come straight from Enron. Like Enron, Satyam cooked the books and showed highly inflated assets. In his letter to the Satyam Board, CEO Ramalinga Raju admitted that of the 53.6 billion rupees in cash and bank deposits which Satyam listed as assets at the end of the second quarter of 2008-09, 50.4 billion rupees or US1.03 billion did not exist.

However, the similarity with Enron ends there. Whereas Enron was a loss-making enterprise that kept hiding its losses until they could be hidden no longer, Satyam is still a profitable company. In the past year, Satyam’s profit was not Rs. 6.49 billion as it claimed but Rs. 0.61 billion. Once Satyam’s true balance sheet is taken into account its margin last year was only 3 %, much lower than that of other IT majors.

Other Indian IT majors including Infosys and TCS continue to do well. Thus, on 13th January, Infosys posted a 33% year-on-year rise in net profit to 16.41 billion rupees (US$338 million) in the fiscal third quarter that ended on Dec. 31. This is an indicator that the problems at Satyam are nothing new. Naturally, the company’s auditors and, to a lesser extent, the regulatory agencies including SEBI and the Researve Bank of India shared the blame for Satyam’s fall.

Consequences followed. Mr. Raju was arrested for fraud. Satyam’s entire board was reconstituted with some heavyweights like Kiran Karnik, Deepak Parekh and C Achuthan becoming directors. New auditors have been appointed and the regulatory agencies are gong through Satyam’s books with a fine-toothed comb. The company asked for cash to pay its employees (who until recently numbered in excess of 50,000 worldwide) but the government has refused to bail the company out. These are all indications that Satyam may yet be resurrected, though no doubt it will be smaller and perhaps even split up into several entities.

It appears that, at least in the short run, Satyam’s travails have not had a major impact on the Indian corporate sector. Stock prices on the Bombay Stock Exchange Sensex recovered from this shock in no more than a couple of days. (The Sensex fell again following global stock market cues). Other IT majors such as Infosys could easily fill in most, if not all, of the vacuum left by Satyam. The rapid and decisive response of the regulatory agencies showed that at least one part of governance – reacting to a crisis – has been well handled.

This leaves one nagging point. Why were there not sufficiently transparent early warning systems in place? By some accounts the fudging of books by Satyam had been going on for years. It was only when Satyam tried to acquire Maytas (Satyam spelt backwards) in October 2008 and failed that it started being suspected that Satyam’s assets were inflated. As shown in a number of recent cases, the problem of inadequate early warning systems exists in many countries (including some highly developed ones like the US) and is not unique to India. So, while the Indian authorities seems to have handled the crisis quite well, they, along with regulatory agenices all over the world, need to perfect the forensic art of picking up early warning signals.

In Sanskrit, Satyam means “the truth”, a label which this company certainly failed to live up to. It is ironic that this falsehood was picked up when Satyam tried to buy a company with the name “truth spelt backwards”, and Satyam was finally exposed for what it really is.

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This entry was posted on Monday, January 19th, 2009 at 3:00 pm and is filed under Corporate Governance, Events, Governance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.