FT : Satyam’s Taj Mahal-Scale Fraud
Thursday, January 8, 2009
The implications of the Taj Mahal-scale fraud at Satyam Computer Services are far-reaching. The admission that B. Ramalinga Raju, chairman of the fourth largest Indian information technology services group, cooked the books for years, inflating the cash on its balance sheet by $1bn, strikes at the heart of a sector central to the country’s growth story. Trust is critical in an industry based on outsourcing often highly sensitive information to far-flung locations. With Mr Raju offering himself up to the authorities, Satyam is unlikely to survive to survive as an independent company. Once worth nearly $9bn, after yesterday’s 78% fall in its shares, it presents a bite-sized target. If it is dismembered, Infosys looks to be best placed among the local companies to pick up some business, but the extent to which Satyam’s 185 Fortune 500 clients opt to switch back to western IT companies will be a critical measure of the damage the fraud does to this emblematic sector.
As the Confederation of Indian Industry has acknowledged, corporate India must reflect on ways to show it takes governance seriously. This is critical for the large number of business houses dominated by powerful family dynasties. According to a study by Moody’s Investors Service, 17 of the 30 constituent companies in India’s benchmark Sensex index are family-controlled. A loss of confidence in large-cap groups such as Wipro or Reliance Industries, for example, would be catastrophic for portfolio capital flows into India at a time when it is already pushed to finance a big current account deficit. Being audited by a Big Four accounting firm is not enough – Satyam’s books were checked by PwC for the past 6 years. Investors must use this crisis to ensure genuinely independent directors replace the legions of family friends that populate so many Indian boards.