January 13, 2009
Board Tries to Chart Path for Outsourcer Hit by Scandal
By HEATHER TIMMONS and BETTINA WASSENER, NY TIMES

NEW DELHI — The newly appointed board of the fraud-plagued outsourcing giant, Satyam Computer Services, is scrambling to get money and new managers while also trying to figure out how deep problems go at the company.

The board met in Hyderabad on Monday to discuss how to extract the Indian outsourcing giant from a huge fraud scandal that has sent shockwaves through the Indian business community and cast a cloud over the country’s once-booming outsourcing sector.

The company has “working capital issues” that need “immediate attention,” said Deepak Parekh, an interim board member and the chairman of the Housing Development Finance Corporation, in a news conference after the board meeting. Satyam may have problems meeting payroll for its 53,000 employees at the end of this month, analysts say.

The board will appoint an accounting firm in the next 48 hours to review Satyam’s books, and then the board can go to a bank for financing, Mr. Parekh said. The company’s reported receivables appear to be large, and its debt is minimal, he said, but it’s unclear if either of these figures is correct. Mr. Parekh questioned what bank would be willing to finance a company in such straits.

The board is appointing new members soon, who will choose a new chairman for Satyam, he said.

Meanwhile, the three people at the center of the scandal — the company’s former chairman, his brother and co-founder and the chief financial officer — remained in jail Monday after a judge in Hyderabad adjourned bail proceedings until Friday.

The former chairman, B. Ramalinga Raju, revealed last week that he had regularly falsified Satyam’s accounts — vastly inflating its profit margins and faking about $1 billion in cash on the company’s books — as the company expanded from a handful of employees into a back-office giant with 53,000 workers in 66 countries.

Mr. Raju and his brother, B. Rama Raju, were arrested Friday. The chief financial officer, Srinivas Vadlamani, was arrested Sunday.

In a reflection of the concern that the scandal has caused in India, the government stepped in over the weekend to appoint three senior officials to the helm of the company in a bid to restore confidence.

The three — Mr. Parekh; Kiran Karnik, the former head of the National Association of Software and Services Companies, a trade group; and C. Achuthan, a lawyer and former member of the country’s market regulator, the Securities and Exchange Board of India — briefed reporters on Monday night at Satyam’s headquarters in Hyderabad.

The fraud has been called India’s equivalent of the Enron scandal. It is one of the largest ever in India and could affect the operations of Satyam’s more than 600 clients, which include one-third of the Fortune 500.

Satyam shares, which imploded after news of the scandal and the chairman’s resignation, rebounded 44 percent on Monday on hopes that the high-level concern would reassure spooked clients and investors. Despite the rise, the stock was far from recouping its losses of last week.

The implications of the scandal are reverberating well beyond Satyam, however, as the size of the fraud raises questions about regulatory oversight in India and concerns that clients and investors might shun Indian companies, particularly those with family connections and fast growth like Satyam.

The scandal is also likely to intensify pressure for improved disclosure. The World Bank, which revealed last month that it had barred Satyam in 2008 from doing business with it, said on Monday that from now on it would publicize the names of all companies that had been debarred from receiving direct contracts, “in the interest of fairness and transparency.”

Jointly with that statement, the bank announced two more Indian outsourcers — Wipro Technologies and Megasoft Consultants — had been barred in 2007 from working for it for four years. In Wipro’s case, the bank said, the company had provided “improper benefits to bank staff,” while Megasoft had “participated in a joint venture with bank staff while also conducting business with the bank.”

Wipro, which is based in Bangalore, confirmed the ban in a statement on its Web site, and said that it had been barred for offering shares of its 2000 initial public offering to World Bank employees. The World Bank makes up an “insignificant” part of Wipro’s revenue, it said.

Wipro shares tumbled 9.3 percent on Monday, while Megasoft fell a modest 0.6 percent.

Meanwhile, the Raju brothers and the chief financial officer, Mr. Vadlamani, who also has tendered his resignation, remain in prison after the magistrate’s court in Hyderabad declined to rule Monday on a petition from their lawyer, S. Bharat Kumar, seeking bail. Instead, the judge adjourned the proceedings until Friday, citing a three-day court holiday.

The judge also suspended until Friday consideration of a petition from the Securities and Exchange Board of India that its investigators be allowed to question the men.

All three were arrested on suspicion of cheating, forgery, criminal breach of trust and falsifying documents and are being held in Hyderabad’s Chanchalguda prison, a sprawling colonial-era building in the old section of the city.

It remains unclear what their chances of bail are. Mr. Kumar, their lawyer, reiterated Monday that he believed they had a “good case” for being released on bail.

Ramalinga Raju is in poor health, suffering from “various ailments, including unstable blood pressure,” according to Mr. Kumar, who added: “We believe and hope prison authorities will take the appropriate medical care in the facility, otherwise it amounts to a human rights violation.”

If bail is not granted, the three men will remain in prison until Jan. 23, when they are scheduled to appear in court for a preliminary evidentiary hearing.

Heather Timmons reported from New Delhi and Bettina Wassener from Hong Kong. Jeremy Kahn contributed reporting from Hyderabad, India.

Indian scandal shakes Silicon Valley
By John Boudreau, Mercury News
Posted: 01/09/2009 07:03:22 PM PST

The massive fraud that threatens Indian software giant Satyam Computer Services has sent tremors 9,000 miles to Silicon Valley, long an investor, partner and promoter of the South Asian country's rising tech industry.

The Satyam scandal, centered on $1 billion worth of falsified financial statements, is a severe blow to the image of India Inc. and is causing executives in the Bay Area to balance the risks of outsourcing against the cost savings. It highlights the dangers of U.S. companies handing over critical work to outsourcing firms halfway around the world that they cannot control.

There is no evidence that U.S. companies directly lost money from the Satyam fraud. However, many could suffer production delays or other indirect losses.

"The question everyone is asking is: Is this the classic cockroach? If you see one, are there more around?" said Vivek Paul, former vice chairman of Wipro Technologies, India's third largest software services company, and now a Silicon Valley investor. "History has proven they never come in ones."

Satyam's 53,000 employees, including hundreds in the Bay Area, could lose their jobs. Numerous Fortune 500 companies, which rely on the Hyderabad-based company to handle services such as billing and managing back-end systems, may have to scramble to find new outsourcing partners.

Tech companies that entrust proprietary information with overseas partners are reviewing their trustworthiness. And the Satyam scandal, which exposed the lack of transparency and potential for corruption among family-owned businesses in India, could cause investors to pull back.

India's emergence as a global tech hub during the last decade has rearranged the global software industry. India's $52 billion software and services industry, including homegrown companies such as Infosys, Tata, Wipro, and Satyam, forced competitors in the West to embrace a global workforce to save money and gain footholds in emerging markets. Valley companies now employ tens of thousands of engineers in Bangalore and other major cities in the South Asian country.

The full extent of outsourcing by U.S. companies to India is unknown. However, more than $2 billion in venture capital, mostly from the valley, has been funneled into India in the past four years, according to Dow Jones VentureSource.

Satyam has dealings with numerous valley companies, but those companies typically decline to discuss their relationships with Indian outsourcers. Moving jobs overseas has been a highly charged political issue in the United States.

"It's something we are not commenting on," said a Hewlett-Packard spokeswoman in response to questions about Satyam.

Cisco Systems has had negotiations with Satyam about collaborating on a project, and once considered investing in the company, said a company spokesman. "We do not expect the situation to have any material impact for Cisco," the company said in a statement.

Applied Materials has a "supplier relationship with Satyam and they have employees assisting us here and in India," company spokesman David Miller said in an e-mail. "Beyond that our policy is not to comment on our suppliers' businesses or the nature of our business with them."

But experts say that at the very least, Satyam's implosion could cause customers to flee to a competitor, and that in turn could drive up the costs of outsourcing over the short term.

"If I were a customer of Satyam, I would be concerned about the stability of the company's workforce," said outsourcing expert Michael Murphy, a partner with Pillsbury Winthrop Shaw Pittman in San Francisco.

The fraud also spotlights how many tech executives from the valley sit on boards of Indian companies. Satyam's board included Vinod Dham, father of Intel's Pentium microprocessor, and Krishna Palepu, a Harvard Business School professor and a corporate governance expert. Both resigned from the board. In an e-mail, Dham said it was not "appropriate" for him to comment about Satyam this time.

Frequently, valley-based board members attend board meetings "by phone in the middle of the night," said Rafiq Dossani, a Stanford University research scholar who specializes relations between Silicon Valley with India.

"They are probably waking up to some realities,' Dossani said. " You better not trust management. You have to ask about margins, visit clients. You are being paid a few hundred thousand dollars. You just can't pocket the money and sleep."

Late last week, Indian authorities arrested Satyam's founder and chairman, B. Ramalinga Raju, a familiar face in the valley who has admitted to misstating financial statements. Authorities also dismissed the remaining Satyam board members and ordered a review of the country's largest publicly traded companies.

In India, investors are accustomed to some "leakage," often in the form of a member of a family business siphoning off some profits but keeping an eye on the company, said one Silicon Valley executive with extensive dealings in India. The Satyam scandal, though, has upended that arrangement, said the executive, who asked not to be identified. "It's fundamentally shaken investors."

While further revelations about Satyam are sure to come, most experts don't believe they will have long-term harm on outsourcing in India.

"What it will do is make outsourcing customers a little more cautious about who they contract with, and more mindful of the financial risks associated with outsourcing," Murphy said. "Until recently, no one was concerned about that."

But if the attention to this scandal exposes corruption in other Indian companies, the budding business relationship between the United States and India could be at risk, warned investor Paul.

"If there were to be one more mea culpa from an Indian company, we'd have a problem,' he said.

Satyam scandal could be 'India's Enron'
Falsely inflated profits at outsourcing firm shakes confidence in India
Reuters
updated 11:42 a.m. ET, Wed., Jan. 7, 2009

BANGALORE, India - The head of Indian outsourcing firm Satyam Computer Services resigned on Wednesday, disclosing that profits had been falsely inflated for years.

Satyam's shares plunged almost 80 percent. India's biggest corporate scandal in memory threatened future foreign investment flows into Asia's third-largest economy and cast a cloud over growth in its once-booming outsourcing sector.

Bombay's main benchmark index tumbled 7.3 percent and the Indian rupee fell.

Ramalinga Raju, founder and chairman of India's fourth-largest software services exporter, said in a statement that Satyam's profits had been massively inflated over recent years but no other board member was aware of the financial irregularities.

"If a company's chairman himself says they built fictitious assets, who do you believe here? This has put a question mark on the entire corporate governance system in India," said R.K. Gupta, managing director at Taurus Asset Management in New Delhi.

Raju, who founded Satyam more than two decades ago and who took it public in 1991, said about $1 billion, or 94 percent of the cash on the company's books, was fictitious.

The 54-year-old Satyam chairman came under close scrutiny last month after the company's botched attempt to buy two construction firms partly owned by its founders. Raju said on Wednesday that was a final attempt to resolve the problem of the fictitious assets.

"It was like riding a tiger, not knowing how to get off without being eaten," Raju said in his letter, adding he was prepared to face up to the legal consequences.

Satyam said its managing director and co-founder B. Rama Raju, Raju's brother, had also resigned. It did not give any reason for the resignation.

The company's difficulties multiplied when the World Bank, a major customer, barred Satyam from new business, citing "improper benefits" given to World Bank officials.

"In a bull market people forgot about it (corporate governance)," said Singapore-based Ashish Goyal, chief investment officer at Prudential Asset Management. "In a bear market chickens are coming home to roost, so it gets highlighted at a time like this."

Just three months ago, Satyam received an award from a group of Indian directors for excellence in corporate governance.

By close of trade, Satyam's share value slumped to about $550 million from around $7 billion as recently as last June.

New York-listed Satyam specializes in business software and back-office services for clients such as General Electric and Nestle.

"I think there is no future for this stock. This case for India is similar to what happened to Enron in the U.S.," said Jigar Shah, senior vice-president at Kim Eng Securities.

"It will not stop at Satyam. Many more companies will come into scrutiny like that. There is a strong possibility investments in India will be affected."

The scandal set off a wave of condemnation from Indian market regulators and government officials, and prompted banker Merrill Lynch to terminate its engagement with Satyam.

"It's going to impact the Indian outsourcing industry. Customers are going to be concerned about offshoring firms in India," said Sudin Apte, country head of Forrester in the western city of Pune.

Satyam said it would go ahead with a planned board meeting on Saturday to consider a share buyback following a rash of broker downgrades even after its acquisitions were called off last month.

Former Satyam chairman arrested
Founder of India outsourcing firm accused of cheating, forgery
LINK

HYDERABAD, India - Indian police on Friday arrested B. Ramalinga Raju, the founder and former chairman of beleaguered outsourcing giant Satyam Computer, days after he admitted he doctored the company's accounts to the tune of $1 billion.

Satyam's balance sheets were riddled with "fictitious" assets and "non existent" cash that could no longer be concealed after a deal intended to save the struggling company was abandoned, Raju admitted Wednesday in a letter to the company's board.

Raju and his brother, former managing director B. Rama Raju were arrested in the southern city of Hyderabad, according to S.S. Yadav, the top police official of Andhra Pradesh state where the company is headquartered. Hyderabad is the capital of Andhra Pradesh.