The beginning of the year 2009 saw the biggest corporate scam coming out as Satyam Scam. It was exposed on January 7th by the way of Mr. Ramalinga Raju confessing his fudging of accounts in a letter. This scam brought out the dishonesty and disgrace on the part of the entrepreneurs and businessman and their way of handling people’s money. The financial scandal at Satyam shook the Indian corporate world, particularly software industry. Questions were raised about the quality of corporate governance, the role of auditors and regulatory bodies. The scam dented the image of India’s IT dream story worldwide and it now remains to be seen as to how software companies would deal with their tarnished image.
False profits and cash resources were exhibited in the financial statements to create an illusion of a highly profitable business which duped gullible small investors. The financial manipulation had been going for seven long years but neither the so-called “independent directors” nor the professional auditors discovered it. They collected huge fees without discharging their duty to safeguard the investors’ interest because they were puppets in the hands of Mr. Raju. As the accounting firm, Arthur Anderson, did in the Enron case, Pricewaterhouse Cooper Capital, the celebrated audit firm, did in the Satyam case, both failing to uncover the fraud. This shows how hollow the grandiose concept which goes by the name of “corporate governance” is. Banks and financial institutions allowed Raju to open thousands of accounts without question. Raju was allowed inside knowledge of government policies, development plans and projects even before the blue-prints were prepared. This enabled him and his association Maytas Infra, to bid for projects on favourable terms. The whole government system was harnessed to subserve Raju’s interests. Now the bubble has burst and it is obvious how rotten to the core the whole system has become.
Impact of Raju’s revelations of the rigged Satyam account books was immediate. Within hours, Satyam stocks plunged over 82%. It dragged the benchmark Sensex index down 7.3% to close at 9,586.88 on Wednesday. The New York Stock Exchange halted trading in Satyam stock. India’s National Stock Exchange expelled Satyam from all its equity indices and the BSE and several domestic followed the suit.
The short and long-term impact of the Satyam scandal is upsetting. The scandal emerged at the worst possible time, when capital was scarce and foreign institutional investors (FIIs) are anyway pulling funds out of India and other emerging markets in the wake of a global credit crunch. The stock market was beginning to show signs of recovery, responding positively to measures by the government and the Reserve Bank of India to stimulate the economy but now it has been scuttled by the Satyam scandal. “One Satyam does not make the entire Indian software industry,” said Narayana Murthy, founder of India’s second-largest IT company, Infosys Technologies, describing the scandal as an “isolated case”. “It does not represent India. It just represents one individual and one company,” Even so, the scandal did impact the Indian economy and the IT sector.
At that time Murthy had said that in the short term, investors will start looking deeper into all companies they want to invest in but once they realize that things are not all that bad and that most companies are decent and managements honest, they will regain their faith. But those new to the Indian market or considering investing there for the first time may be scared away. This betrayal of trust could have a major impact on the entire Indian tech services industry. The industry has spent 20 years building up credibility with Western clients, but this disaster will make many US and European clients rethink their reliance on Indian outsourcing. Offshore outsourcing falling off a cliff cannot be expected, but there will be serious repercussions.
However, the general verdict from Bangalore-based business process outsourcing companies was that Satyam’s clients will simply move to the bigger companies, TCS, Infosys and Wipro most likely to benefit. More broadly, the scandal has raised serious questions over the quality of corporate governance in India and has put under doubt the credibility of an array of actors in the unseemly drama – the independent directors on the board, the company’s statutory auditors, credit rating agencies and bankers, among others.
There’s another impact that most people won’t be aware of. Raju, through his Byrraju Foundation, has been a leader in bringing economic development to farm communities in his home state of Andhra Pradesh, and also in providing emergency medical services to people of the state. It seems like everything collapsed and all that is gone now. It’s a tragedy not just for him and the employees of Satyam, but for the entire country.
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