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India moves to contain Satyam fraud fallout

The government has taken control, installing new board members at the outsourcing giant.

By Anuj ChopraCorrespondent of The Christian Science Monitor / January 12, 2009

Numbers Game: Ramalinga Raju, chairman of outsourcing firm Satyam, admitted last week to committing fraud.



Pune, India

The $1 billion fraud unearthed last week at a leading Indian outsourcing firm has spawned fears it could tarnish the image of India overseas as an outsourcing powerhouse, thus impeding business prospects.

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Two days after B. Ramalinga Raju and his brother Rama Raju were taken into judicial custody for orchestrating the fraud, labeled widely as "India's Enron," the Indian government, in damage-control mode, swooped in to take control of Satyam, the beleaguered outsourcing company they cofounded. On Sunday, it appointed three leading businessmen to the board of Satyam Computer Services Ltd.

Last week, Mr. Ramalinga Raju admitted to concocting key financial results of Satyam Computer Services Ltd. "for years," while vastly overstating revenues and bank balances.

The magnitude of this fraud – the worst ever witnessed by corporate India – has sent shock waves across the country. Particularly unpalatable is the fact that Mr. Raju was no fly-by-night cash embezzler, but the chairman of India's fourth-largest outsourcing company. Satyam boasts of being the back office of more than 185 Fortune 500 companies, with a network spanning 66 countries. Many analysts fret this scam could impede the growth of the country's $40 billion outsourcing industry, long hailed as the engine of India's economic resurgence.

"For years, Raju was lionized as one of the whiz-kids of the IT [information technology] sector," says Paranjoy Guha Thakurta, a New Delhi-based commentator. "There is no doubt this is a heavy blow to India Inc.'s [squeaky-clean] reputation overseas."

It isn't clear if the Satyam scam will deter multinational companies from outsourcing business to India or entrusting Indian outsourcing firms – attractive for their cheap labor and efficiency – with sensitive confidential data.

The National Association of Software Services Companies, India's IT watchdog, emphasizes that Satyam's case is an exception.

"This is a stand-alone case of the failure of corporate governance, and it is critical that it be viewed in this light," it said in a statement.

But it is a blow to the outsourcing industry, reeling under a slowdown. "The timing could not have been worse," the Indian Express, a national daily, editorialized Thursday. "We are less than a fortnight away from the inauguration of the least globalization-friendly American president in decades. At the cusp of a possible attitudinal shift in US policy towards offshoring, the collapse of one of the biggest Indian outsourcing companies amid allegations of ethical breaches is simply catastrophic."