Satyam Computer Services Ltd., considered the poster child of India's information technology age, has shocked the world with a scandal of major proportions. The chairman of Satyam, a name that literally means "truth" in Sanskrit, said he cooked up key financial results, including a fictitious cash balance of more than $1 billion, raising doubts about the IT revolution hype in India that has attracted many international companies and significant foreign investments to the nation of over one billion people.
The Wall Street Journal is reporting that B. Ramalinga Raju, founder and chairman of Satyam Computer Services Ltd., said in a letter of resignation that he also overstated profits for the past several years, overstated the amount of debt owed to the company and understated its liabilities. Eventually, he said, the scheme reached "simply unmanageable proportions" and he was left in a position that was "like riding a tiger, not knowing how to get off without being eaten."
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. Mr. Raju ended his letter by acknowledging his misdeeds and said, "l am now prepared to subject myself to the laws of the land and face consequences thereof". While the Satyam scandal is being dubbed as "India's Enron", Raju's admission is in sharp contrast to Enron chairman Ken Lay's defiance in the face of massive evidence against him. Indeed, Raju's words are rare in the annals of corporate confessions and acceptance of personal responsibility by a top leader.
Deeply worried by the fall-out from the Satyam scandal, other Indian firms are downplaying it. "I'm very sure that this is just an isolated incident which has nothing to do with the industry that it is in, the business that it is in, or the country it is in. It has to do with individuals and the specific company," Mr. Suresh Senapathy of Wipro told the Wall Street Journal.
The analysts, however, are not as sanguine as Mr. Senapathy. "I think it's going to be a mixed bag for the other offshore IT-services firms," said George Price, an analyst at Stifel Nicolaus & Co. "Both investors and clients and potential clients are going to be more concerned about how stable their providers are."
In the wake of Satyam revelations, the company's market valuation has dropped by nearly 80% in two days. India's benchmark Sensex index has plunged 7.2%, as investors reassess level of risk in the Indian market amid serious concerns about corporate governance and accounting standards across Indian industry.
In Thursday trading, there were continuing fears that the Satyam scandal will affect other companies and hurt foreign investment. ICICI Bank tumbled 11%, Reliance Industries sank 13%, and Reliance Communications skidded 17%. However, shares of rival software firms outperformed the broad market, with Infosys Technologies gaining 1.7% and Wipro rising 0.2%.
Even before the Satyam scandal and despite the 55% drop in India's benchmark Sensex in 2008, relative valuations were high. The market's PE ratio, based on expected earnings for the next 12 months, is 60% higher than emerging markets as a group and 72% higher according to its price-to-book ratio. The roughly 2% yield on the Sensex is minuscule compared to regional markets offering upwards of 5%.
India's market cap overtook its GDP in May 2007. By January 2008, it had reached 180% of GDP, extraordinarily high compared to 131% for the U.S. during the dot-com bubble and 150% for Japan at its market peak. In July, the market-cap ratio dropped below 100%. What it means is that even if the Indian economy continues to do well over the next two decades, GDP would have to more than double for the market cap to return to its previous heights without an equities bubble. If the economy keeps growing at 7.2%, that doubling would take at least ten years.
Hong Kong-based Political & Economic Risk Consultancy Ltd. has recently rated India as the riskiest of 14 Asian countries, not including Pakistan and Afghanistan, it analyzed for 2009. Satyam scandal is likely to add additional risk if the Indian authorities and corporate sector fail to take measures to restore investor confidence in India's publicly traded companies.
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1 year ago
7 comments:
What an irony....Satyam means truth...
Mr.Haq,
You should stop your anti-India stance in your blog.
Not only Satyam, there could be 1000s of other corporates in India who could be fudging their accounts. But how does that impact Pakistan's reeling economic conditions for the past several decades?
Instead you must put some thought into how to uplift the economic conditions in Pakistan and make it an attractive destination to investors.
I remind you again - Be Pakpositive and not Indianegative.
N
Mumbai
India
Mr. Anonymous - Go and spread your message to your forign ministry as well. May be you dont realize that India used to be a part of Pakistan and India always lives in our heart. For me, all Indians regardless of religion are very dear indeed (except for that war monger Jaydev!).
We understand each other so well yet we can't even live as good neighbours. World is suffering in th hands of Britian, Israel, and US. We all should try to become humble China or Iran or Venezuela.
Anonymous,
You say, "You should stop your anti-India stance in your blog."
How is writing about Satyam anti-India? I don't understand your logic. Have you read the entire post? There is nothing anti-India in it. Let's not paint all criticism of India as anti-India.
And why do you think I should restrict myself to writing about Pakistan? How did you make that decision for me? As a writer and observer, I have the freedom to write about any topic that interests me. This is not a government or commercial publication bound by any one other than me as a writer.
India is the greatest example of crony capitalism which has created 50 billionaires (vs one in Pakistan) in a sea of poverty with 76% of Indians (vs 60% of Pakistanis) living on less than $2 a day.
Here are excerpts from a recent piece Mohan Murti, former director of CII in Europe, wrote for the Hindu newspaper:
In a popular prime-time television discussion in Germany, the panelist, a member of the German Parliament quoting a blog said: “If all the scams of the last five years are added up, they are likely to rival and exceed the British colonial loot of India of about a trillion dollars.”
One German business daily which wrote an editorial on India said: “India is becoming a Banana Republic instead of being an economic superpower. To get the cut motion designated out, assurances are made to political allies. Special treatment is promised at the expense of the people. So, Ms Mayawati who is Chief Minister of the most densely inhabited state, is calmed when an intelligence agency probe is scrapped. The multi-million dollars fodder scam by another former chief minister wielding enormous power is put in cold storage. Prime Minister Manmohan Singh chairs over this kind of unparalleled loot.”
An article in a French newspaper titled “Playing the Game, Indian Style” wrote: “Investigations into the shadowy financial deals of the Indian cricket league have revealed a web of transactions across tax havens like Switzerland, the Virgin Islands, Mauritius and Cyprus.” In the same article, the name of one Hassan Ali of Pune is mentioned as operating with his wife a one-billion-dollar illegal Swiss account with “sanction of the Indian regime”.
A third story narrated in the damaging article is that of the former chief minister of Jharkhand, Madhu Koda, who was reported to have funds in various tax havens that were partly used to buy mines in Liberia. “Unfortunately, the Indian public do not know the status of that inquiry,” the article concluded.
“In the nastiest business scam in Indian records (Satyam) the government adroitly covered up the political aspects of the swindle — predominantly involving real estate,” wrote an Austrian newspaper. “If the Indian Prime Minister knows nothing about these scandals, he is ignorant of ground realities and does not deserve to be Prime Minister. If he does, is he a collaborator in crime?”
The Telegraph of the UK reported the 2G scam saying: “Naturally, India's elephantine legal system will ensure culpability, is delayed.”
This seems true. In the European mind, caricature of a typical Indian encompasses qualities of falsification, telling lies, being fraudulent, dishonest, corrupt, arrogant, boastful, speaking loudly and bothering others in public places or, while traveling, swindling when the slightest of opportunity arises and spreading rumors about others. The list is truly incessant.
Here's Newsweek calling for overhaul of India's judicial system after the ludicrous Bhopal verdict:
More than 25 years after a pesticide plant in the central Indian city of Bhopal spewed a toxic cloud that killed as many as 25,000 people, an Indian court last week finally sentenced seven former executives involved in the disaster. They’ll receive two years in prison (pending appeal) and pay fines equivalent to $2,100—the maximum punishment allowed under current law, but one considered so lenient that many in India are demanding far tougher corporate liability laws.
But what India really needs is an overhaul of its judicial system. The Bhopal case is hardly unique in its length: the country’s trial courts have a backlog of close to 30 million cases, and Delhi alone has more than 600 pending civil cases and 17 criminal ones dating back 20 years or more. The Delhi court’s chief judge estimates that it would take 466 years to work through the backlog. A major reason for the pileup is that there are simply too few people on the bench: India has only 11 judges per million citizens (America has 110 per million). India likes to call itself a nation of laws. But as the Bhopal verdicts prove, having laws is one thing—delivering justice is quite another.
Here is a NY Times Op Ed by Nobel Laureate Paul Krugman on questions about rule of law in US foreclosures crisis:
The accounting scandals at Enron and WorldCom dispelled the myth of effective corporate governance. These days, the idea that our banks were well capitalized and supervised sounds like a sick joke. And now the mortgage mess is making nonsense of claims that we have effective contract enforcement — in fact, the question is whether our economy is governed by any kind of rule of law.
The story so far: An epic housing bust and sustained high unemployment have led to an epidemic of default, with millions of homeowners falling behind on mortgage payments. So servicers — the companies that collect payments on behalf of mortgage owners — have been foreclosing on many mortgages, seizing many homes.
But do they actually have the right to seize these homes? Horror stories have been proliferating, like the case of the Florida man whose home was taken even though he had no mortgage. More significantly, certain players have been ignoring the law. Courts have been approving foreclosures without requiring that mortgage servicers produce appropriate documentation; instead, they have relied on affidavits asserting that the papers are in order. And these affidavits were often produced by “robo-signers,” or low-level employees who had no idea whether their assertions were true.
Now an awful truth is becoming apparent: In many cases, the documentation doesn’t exist. In the frenzy of the bubble, much home lending was undertaken by fly-by-night companies trying to generate as much volume as possible. These loans were sold off to mortgage “trusts,” which, in turn, sliced and diced them into mortgage-backed securities. The trusts were legally required to obtain and hold the mortgage notes that specified the borrowers’ obligations. But it’s now apparent that such niceties were frequently neglected. And this means that many of the foreclosures now taking place are, in fact, illegal.
This is very, very bad. For one thing, it’s a near certainty that significant numbers of borrowers are being defrauded — charged fees they don’t actually owe, declared in default when, by the terms of their loan agreements, they aren’t.
Beyond that, if trusts can’t produce proof that they actually own the mortgages against which they have been selling claims, the sponsors of these trusts will face lawsuits from investors who bought these claims — claims that are now, in many cases, worth only a small fraction of their face value.
And who are these sponsors? Major financial institutions — the same institutions supposedly rescued by government programs last year. So the mortgage mess threatens to produce another financial crisis.
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