Bringing Down the House

What started with 1.6-billion-dollar acquisition fiasco of family firms a month ago has ended in B. Ramalinga Raju, chairman of Satyam Computer Services, bringing the whole house down with him. What’s more troubling is that the scam by Satyam, which means truth in Sanskrit ironically, is threatening to shake the Indian software industry as well.

The scam has already sent stock market spiraling out of control. Satyam’s share prices fell down 78 percent to Rs 39.95 and, since Satyam stock holds a 1.56 per cent weight in the 30-share bluechip index, Sensex lost 749 points, and counting, on Wednesday itself.

The benchmark index also, as an aftereffect, lost over 400 points. The company’s shares nosedived 90 percent in the United States, where it is listed on the New York Stock Exchange. All up, as the panic spread, nearly 270 million shares changed hands on the fateful day in both the bourses.

Satyam Scam – The Ramifications
Analysts have begun bringing issues like corporate governance up anew soon as the scam surfaced. As an upshot of the fiasco, investor confidence has taken a sound beating. After all, if you cannot trust Satyam, which scrip can you trust?

Religare’s Amitabh Chakraborty, president—Equity, said, "Investors now need to pursue due diligence before investing in a company. Take a careful look at the cash position in the balance sheet. Enquire with the bankers."

The company had a fabricated balance sheet. In his letter to the company board, B. Ramalinga Raju, who’s pretty much pulled a Harshad Mehta by the looks of it, Rs 7000 crore being no mean sum, came clean and revealed that the cash and bank balances of Rs 5,040 crore were fictitious. Balance sheet as on Sept. 30, 2008 read Rs5,361 under this category. No wonder then that analysts value Satyam stock’s net value somewhere around peanuts worth, taking into account fictitious cashes, debtors’ interests, accrued interest and misquoted liabilities.

Not only for Satyam, the fiasco can unleash pretty harsh times for the whole software industry of India. Anita Gandhi, head-institutional business, Arihant Capital, was quoted by The Economic Times of India as saying, "The Indian technology industry was a very important driver for the country's stock market for nearly a decade. Satyam's fraud is expected to lead a severe blow to the entire industry with investors being more cautious going ahead.

“This raises serious questions on the entire due diligence process conducted by the auditors of Satyam. What is more surprising is the chairman's confession after his resignation. This means, all along, he did have vested interest in keeping the investors in darkness."

In a corporate state of affairs like this, where one of the biggest companies can pull a financial swindle like this and not get caught for 7 long years, domestic investors as well as the foreign institutional investors are expected to stay away or at least proceed with vigilance. Kapil Shah, analyst with DBM Wealth Management had this to say on investors’ confidence, "The sectors which have done extraordinary well in a very short span of time such as IT and realty attracted distrust as Satyam's case has made investors uncomfortable about these companies."

But Wipro Technologies, another one of the four biggest software giants from India, on the other hand, played down the ramifications for Indian IT industry, saying that the scam is one of its kind and will not recur. "We are shocked by the recent news reports on Satyam, stating alleged multi-year misstatement of revenues. Wipro strongly condemns any attempt to mislead stakeholders. Global standards of corporate transparency are very high and we are confident that this is an isolated case and not representative of the IT industry," Executive Director and CFO Suresh Senapaty of Wipro Limited said.

But this Wipro observation does not go down well with analysts who are saying that Wipro is just trying to salvage the severely battered reputation of Indian software industry.

And the rap is on…
Raju has obviously taken the whole rap on himself as he said, “I am now prepared to subject myself to the laws of the land and face consequences thereof.” But the buck doesn’t stop here. For Raju to have pulled the scam off, whole heap of other parties are to be involved.

According to R. Chawla, a Gurgaon-based chartered accountant, MD, senior finance staff auditors are all hand in glove on this as it is “just not possible” for the scam to have happened without their involvement, “What were its Auditors, who are being counted in Big-5 auditing firms in the world, doing? Not even a budding auditing firm can be fooled into accepting bank balance figure fudged by Rs 5000 Crore? Was it their simple mistake or something big behind the scene, which is yet to unfold?”

The Economic Times also discerned the company's auditors’ role in the fraud, as it wrote, "The image of Satyam's statutory auditors, PricewaterhouseCoopers, has been tarnished as voices are being raised at the possibility that the auditors were hand-in-glove with the conspirators in the…scam."

The writer is the chief editor at themoneytimes.com and can be contacted at [email protected] or [email protected]