India moves to contain Satyam fraud fallout
The government has taken control, installing new board members at the outsourcing giant.
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"This incident is a black eye," Nandan Nilekani, co-chairman of Infosys, India's second-largest software firm, told the media last week. "We have been promoting Indian entrepreneurs, [the] Indian [corporate sector] as the flagship of 'brand India.' When one of the lot has deplorable behavior, then obviously it affects us all."Skip to next paragraph
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Before he fell from grace, Ramalinga Raju was hailed by investors as a visionary who shepherded his company to post profit margins exceeding 20 percent every year. Buoyantly declaring a 28 percent year-over-year revenue growth in the second quarter last year, he said: "We achieved this despite a challenging global macroeconomic environment."
But last week, Raju conceded that Satyam's revenues had been overstated by 76 percent and profits by some 97 percent. The stated operating margin of 24 percent was actually 3 percent.
The chase of huge profits and the pressure to meet investor expectations may have been behind his actions, some analysts say.
That pressure affects every major outsourcing player, Mr. Nilekani emphasizes.
"All of us who run companies must really put ethics, corporate governance, and running a transparent company in the front," he says. "If results are bad we should declare that, if profits are low we should declare that, but we should not do anything which impairs the trust of our stakeholders."
Analysts say poor accounting standards that allow manipulation of figures without being detected by Indian regulators are a key problem.
"We were disappointed but not surprised by Satyam's revelations," says Saurabh Mukherjea, head of Indian Equities, at Noble, a London-based investment bank. "Our daily encounters with listed Indian companies suggest that there are more Satyams in the pipeline thanks to enfeebled regulation, weak accounting discipline, and aggressive promoter behavior."
In his regular encounters with Indian companies listed at the Bombay Stock Exchange (BSE 500 index), he has discovered several fraudulent and unethical corporate practices.
In recent years, he has found at least 10 companies in the BSE 500 that have manipulated finances, he says, by "shifting expenses away from the current period by significantly reducing depreciation rates." At least 15 companies have "disbursed the bulk of their loans and advances to companies in which directors have an interest."
But while investor confidence in the very near term might take a knock, Mr. Mukherjea is optimistic that India Inc. will emerge from the crisis.
"In the country where accounting scandals have been exposed most frequently – the US – such scandals do not appear to have a bearing on the overall direction of the market," he says.
A year after accounting irregularities in Cendant and Sunbeam (two of the biggest such cases before Enron) were discovered in April 1998, he notes, the S&P 500 rose 17 percent.
"With the Indian market almost unprecedentedly cheap, this [might be] a good time to look for attractively valued companies," he says, "provided investors are willing to use forensic accounting analysis and primary data checks to avoid the next Satyam."