Thursday, January 8, 2009

Satyam Scandal Hurts Confidence in India

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.

Related Links:

Mumbai Attacks' Economic Impact

World Economy Worst in Sixty Years

Is it Time to Invest in South Asia Again?

Is Bombay Bubble Bursting?


Anonymous said...

What an irony....Satyam means truth...

Anonymous said...


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.


Anonymous said...

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.

Riaz Haq said...


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.

Riaz Haq said...

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.

Riaz Haq said...

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.

Riaz Haq said...

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.

Riaz Haq said...

The #Satyam IT scandal: How #India’s biggest corporate fraud unfolded as investors lost billions of $$ via @qzindia

The verdict is finally out on India’s biggest corporate fraud.
A special court under India’s Central Bureau of Investigation (CBI) on April 10 held the founders and former officials of outsourcing firm, Satyam Computer Services, guilty in an accounting scam worth Rs7,000 crore ($1.1 billion). B Ramalinga Raju, the company’s former chairman, has been sentenced to seven years in jail.
The case, which is also called the Enron of India, dates back to 2009. Six years ago, Raju wrote a letter to the Securities and Exchange Board of India (SEBI) and his company’s shareholders, admitting that he had manipulated the company’s earnings, and fooled investors. Nearly $1 billion—or 94% of the cash—on the books was fictitious.

Riaz Haq said...

The Axact Scandal and Pakistan’s Growing Tech Sector

Axact has posted a response on its Web site that accuses the Times of defamation and promises “strict legal action.” Others will undoubtedly push back as well. The author of the Times story, Declan Walsh, was the paper’s Islamabad correspondent before he was expelled from Pakistan in 2013 for reasons that remain unclear. Some conspiracy-minded Pakistanis believe the article is a fabrication meant to malign their country.

Still, many Pakistanis have long suspected that Axact was involved in unsavory activities. When Axact was accused of improprieties in the past, the company’s response on at least one occasion was a precursor to how it has replied to the Times: The company filed a defamation suit.

One big unknown is the potential impact on Pakistan’s information technology sector. India may be more widely recognized for its IT successes, but Pakistan has enjoyed its fair share of achievements. In recent years, Technology Review recognized an IT expert at Lahore University of Management Sciences as one of the world’s top young innovators, and several Pakistani software applications earned international awards. Although Pakistan is a relatively small player in global IT, its ranks are growing, with about 1,500 registered firms and 10,000 IT grads entering the market annually.

In spite of all the challenges, including the energy crisis, political instability and lack of promotion, the IT industry has shown great character and grit in winning global recognition. There have been many success stories in the various IT domains, such as finance, healthcare, telecom and mobile applications. As per Pakistan Software Export Board (PSEB), Pakistan’s share of global IT sales is $2.8 billion, out of which $1.6 billion accounts for the country’s exports of software and IT enabled services. There are 1,500 registered IT firms in the country and over 10,000 IT graduates enter the market every year. Pakistan has mainly focused on higher end software products and solutions, whereas India and Philippines have grown in more basic IT enabled services, such as software and services outsourcing.

Riaz Haq said...

US$ 100 million+ #FakeDegrees industry. In US alone, 100,000 sold annually average $1000 each. … … #cnn #AxactScandal

London, England (CNN) -- With competition still fierce in the jobs market, some people might be tempted to beef up their resume by buying a fake degree.
The problem of fake degrees is nothing new, but the Internet has made it easier than ever to obtain a bogus qualification.
George Gollin, a board member of the U.S.-based Council for Higher Education Accreditation, told CNN he estimates that more than 100,000 fake degrees are sold each year in the U.S. alone. Of those, around one third are postgraduate degrees. He added that a bogus degree will typically cost $1,000.
By trade, Gollin is a physics professor at the University of Illinois. He first became interested in degree mills after being spammed with offers of fake college degrees.
According to a story in Wired Magazine, his interest turned to outrage after he stumbled upon news of a forensic psychologist who had purchased her degree. "Here's this person who's untrained doing therapeutic interventions," he told Wired. "I thought, 'Jesus, this is really bad.'"
The institutions that sell these fake qualifications are known as either diploma mills or degree mills. Diploma mills issue fraudulent diplomas supposedly granted by real universities, while degree mills pose as real universities.
According to Gollin, setting up a degree mill is simply a matter of creating a Web site that looks like it belongs to a genuine university. The Web site includes a way for customers to pay for their qualifications online and a place for prospective employers to contact to verify the degree is genuine.
Some degree mills award degrees on the basis of the buyer's supposed "life experience," while others require a small amount of coursework. One degree mill required about a week's worth of coursework to earn a masters degree.
Gollin said this token coursework is largely for the customers' benefit -- to help them convince themselves they have earned their qualification.
While some people might be duped into believing they are obtaining a legitimate qualification, Gollin said that almost everyone buying from a degree mill knows they are getting a fake.
"Anyone who's had any contact with a real college curriculum knows how hard you have to work," Gollin told CNN. "If you can get a whole PhD over the course of one week and you don't know that's not legitimate, then you're just dumb."
But for some, knowingly buying a fake degree is an easy way of improving their job prospects.
"Generally, fake degrees are usually bought for economic advantage for people who are seeking promotion or seeking to get jobs where the employer wants them to have a degree," Gollin told CNN.
Those people come from all walks of life. Gollin gave the example of one American who bought a Bachelor's degree in nuclear engineering, and who's now working in the control room of a nuclear power plant.
He also cited a U.S. degree mill that sells fake PhDs to real medical doctors for $10,000, and added that unqualified doctors have been jailed in the U.S. after attempting to practice medicine with a medical degree bought online.
According to the story in Wired, Gollin was instrumental in the case brought against a degree mill which operated various bogus universities, including Saint Regis University.

The "Saint Regis" degree mill was estimated to have made $7 million from selling fake qualifications to more than some 9,600 customers in 131 countries, according to Wired.

In 2008, the couple behind the Saint Regis degree mill were each jailed for three years.
In the U.S., and other countries, it is illegal to issue what purports to be a university degree without the approval of a government agency. But degree mills are often set up in such a way that makes it very hard to track down the people running the operation.

Riaz Haq said...

Politicians, Fake Degrees and Plagiarism
June 16, 2013 - 8:14pm
Philip G. Altbach
Last February Kenya’s Commission on Higher Education refused to recognize degree certificates from unrecognized higher education institutions. The article in University World News, noted that numerous politicians were claiming such “degrees,” including several ministers. At the same time, the University of Düsseldorf in Germany withdrew the doctoral degree of the Minister of Education after an investigation for plagiarism. In 2013 the same university revoked the PhD awarded to Science and Education Minister, Annette Schavan, also for plagiarism. In 2011, the German minister of defense, Karl-Theodor zu Guttenberg, was forced to resign after plagiarism was found in his doctoral dissertation. The prestige of holding an advanced degree in Germany is particularly high, and thus the temptation to cut corners perhaps quite high as a result.
In Pakistan when the constitution required that candidates for public office hold university degrees, fake degrees were rampant. The Pakistani Supreme Court ordered that the degrees of elected candidates had to be verified, a process became more complicated and controversial than anyone could have imagined. In 2012, rather than pursue the offenders, the constitution was amended to eliminate the degree requirement.
In "A Plague of Plagiarism at the Heart of Politics," Times Higher Education, focuses on a series of plagiarism cases among top officials in several countries, including Romania, where academic degrees seem to be available for sale.
Are politicians more prone to this kind of hanky-panky than others in society? Is degree fakery and plagiarism a global epidemic? Are there effective means of checking on the veracity of academic work? One Pakistani provincial chief minister said, when accused of having a fake degree, “A degree is a degree. It does not matter if it is real or fake.” This type of fraud pervades the corporate sector as well. In February of this year nine people were put on trial for the involvement in providing fake graduate degrees to executives of major international corporation including many in the Fortune 500.
It seems that we have reduced university education to a credential and, as a result, reduced its meaning and value. After all, there are many paths to a credential, some less ethical than others. As the news articles referenced above indicate, fraud is not limited to diploma mills—established universities are vulnerable as well.
What is to be done? There is no way of stopping duplicitous behavior of this sort. Those who wish to cut corners regardless of principle will, of course, find ways. Technology has made forgery and plagiarism easier to commit but sometimes also easier to detect. Oversight by a reliable and transparent quality assurance regime is essential, as are national systems that make public (and easily accessible) the accreditation status of academic institutions and its degrees. These measures go hand in hand. Public awareness of fraudulent practice and aggressive sanctions are critical. In the cases cited in this blog, an attentive media, public watchdogs, and public censure drew attention to the fraud and created an atmosphere where perpetrators suffer consequences. Indeed, it is likely that whistle blowers and journalists will be key elements in protecting society from infractions of this kind in the future. Perhaps continuing publicity and effective controls will help but it is doubtful that the temptation to claim unearned credentials will disappear.
Clearly we need to stop taking degrees on a CV at face value. Sadly, the fraud of a few throws into question the degrees dutifully earned by thousands as a result of their intellectual commitment and hard work. Sadly, we now live in a world where the potential misdeeds of a few cause us to question the deeds of all.

Riaz Haq said...

A Rising Tide of Bogus Degrees in #America, World. #FakeDegrees scam goes well beyond #AxactScandal #Pakistan

The problem of bogus degrees and predatory schools goes well beyond one company in Pakistan. Still, the startling revelations that one outfit could cast such a wide net of duplicity give Congress and federal regulators the incentive they need to become much more aggressive at exposing fraudulent companies that pose as legitimate schools for the purpose of selling bogus degrees or luring people into costly but useless courses that lead nowhere.

Some customers are essentially complicit in the scam, reaching out to Axact for the express purpose of buying fake degrees. But people seeking a legitimate education have been seduced into enrolling in online courses that never materialized or cajoled into believing that their life experiences were sufficient to earn a diploma. In one instance, a woman who called to inquire about a high school diploma was surprised to receive a diploma in the mail after taking a 20-question test online.

The websites linked to Axact provide everything from high school diplomas for about $350, to doctoral degrees for $4,000 and above. Salesmen sometimes impersonate American government officials, then bully customers in buying forged or falsely acquired State Department certification documents for thousands of dollars. Meanwhile, the company has denied any wrongdoing.

Axact, however, is hardly the only actor in this arena. In their book titled “Degree Mills: The Billion-Dollar Industry That Has Sold Over a Million Fake Diplomas,” the former F.B.I. agent Allen Ezell and his co-author, John Bear, set forth staggering statistics about comparable or similar frauds.

They assert that there are 3,300 unrecognized universities worldwide, many of them selling degrees at all levels to anyone willing to pay the price, and that more than 50,000 Ph.D.s are purchased from diploma mills every year — slightly more than are legitimately earned. The fact that fake medical degrees seem particularly easy to come by raises obvious safety concerns.

Congress, which has paid only glancing attention to this problem, needs to focus on it in a sustained way. That means getting federal agencies to devise a coherent plan for curbing these kinds of abuses.