The aftermath of Satyam debacle

The unravelling of Satyam, one of the IT big four, has been so dramatic, so dense with meaning that it is hard to make sense of all of it at one go.

Shafey Danish
The unravelling of Satyam, one of the IT big four, has been so dramatic and so dense with meaning that it is hard to make sense of all of it at one go. There is the immediate, here and now of the issue; what would the government do, what should the investors do, and so on. Then, there are the long term, big picture, implications. Before we talk about any of these things let’s look at the story so far. Satyam, founded in 1987, made a bid to acquire Maytas (Satyam spelled backwards) Properties in December last year. The value of Maytas Properties was a whopping USD 1.6 billion. The price of the company was immediately seen as being hugely inflated and a bid by Ramalinga Raju to benefit his sons, who control Maytas. The quick and the brutal lashback from investors in the company saw the share prices plunge 30%, and the Satyam Board quickly reversed its decision. But the issue refused to die down. How did Satyam get to the point of offering this huge lolly to his sons? What was the Board doing while the Chairman was taking this decision? Even as speculation of all sorts did the rounds, Satyam saw an exodus from its Board. Three of its Board members resigned within a few days. In January this year, Ramalinga Raju resigned from the Chairmanship and in a letter wrote of his financial misdeeds, which made trade pundits fall out of their chair. Ramalinga Raju, in his resignation letter, said that the company has been following the (mal)practice of inflating its income for several years. Now that events had caught up with him, Raju in a moment of remorse divulged what he had been doing was wrong. And with a guilt-heavy conscience declared that he was ready to face the law of the land. The fraud, totalling nearly Rs 7000 cr, is huge. If we go by what Raju said in his confessional letter, it started as a marginal difference in the actual profits and the profits shown by the company’s books, which the management kept within wraps. The gap later became bigger, but the management still chose not disclose it. Then came the meltdown, profits slumped, and in a bid to bail out, Raju’s decided to pitch for Maytas at an inflated price. The move was meant to show that the (non-existent) extra money went into buying Maytas. The actual payment was supposed to be a fraction of the shown cost; the payment too was to be deferred. This theory assumes that Raju is not lying in his letter, and that he really did not mean to profit from the fraud - an assumption we cannot easily make. In another reading of the case, one could say that Raju inflated his company’s profits so that he could offload his shares at a high price. The fact that he held just over 5% in the company before the whole thing blew up in his face not only came as a shock to the company, it seems also to actually point to this conclusion. But the reality can only be determined by an investigation, specifically at the time when Raju offloaded his shares. This particular fraud is, by its nature, different from the ones that have surfaced before. Harshad Mehta’s was not a company scam, neither was Ketan Parekh nor the Telgi fraud. This is more of the type of fraud perpetuated by Enron. In fact, so it is being seen: India’s Enron. The firm was being audited by PricewaterhouseCoopers, an internationally renowned auditing firm. It must have had its accounts checked by competent Chartered Accountants. How did then a fraud of such huge proportions remain buried over the years? The investigations so far seems to point to the fact that PwC auditors had been, very subtly, brought off. The investigators think that the oversight is quite inexplicable. They have raided the offices of PwC and seized documents relating to Satyam. In a bizarre twist, PwC has itself disowned its accounts saying that they cannot be relied. It says that the auditing was based on the statements made by the management, which they trusted. That is precisely the point: they were there to verify those very accounts. Indeed, not just immediate action (which has been taken in the delisting of the company from the BSE and NSE) but a thorough investigation needs to be mounted. There is that parable like quality to the story: a poor farmer’s son works hard, establishes a company which rises like a meteor in the corporate sky to become one of the best and the biggest in its field. A staple tale of inspiration, which says hard work and talent can achieve it all. Flip the tale in the light of recent developments and it says miracles do not happen overnight, fast got is usually ill got, and it is better to go slow and steady than to flash ahead. It also says that spin doctoring, fiddling with the accounts can get you far on the road to success, but it will never see you through the last post. Those roughly are the main philosophical thoughts that come to mind. Come a little down and there are implications for the global business as well. The Satyam episode like the Enron affair before it, is a stark reminder as to what could happen if we build a financial system that rewards quick profits and meteoric rises. The stock market reacts to disclosures of profits made by the company - more the profits, greater the rise in share prices. There really is no buffer through which this connection between disclosures (real or fictitious) and actual rise in share prices gets mediated. In fact sheer lies, told with enough audacity, can create real wealth in the current financial system. When the sky really falls, it falls on the heads of common investors. The global financial crisis was the result of the same mix of dodgy business practices and the propensity to make a quick buck at whatever cost. Though the global implications in themselves are such as to merit a thesis, the issue has very grave ramifications for the Indian economy as well. One should not see the fall of Satyam as the fall of a single company. The chill caused in the Indian Inc is due to much more. The Indian growth story began with the boom in the ITeS (IT Enabled Services) sector. The BPOs came, testing and coding followed, KPOs, RPOs and LPOs came. The money that started pouring in - a trickle by global standards, a deluge by Indian ones - sowed a million dreams. Suddenly every sector started booming. Newly rich people needed goods, so retailed boomed; they needed houses so realty boomed; they needed bikes and cars so auto boomed. Financial services, telecom, luxury goods, you name it – all sectors grew with leaps and bounds. India started dreaming of leaving its dark days behind. The Satyam issue suddenly has brought us face to face with our worst nightmare – that one day it will all disappear like a fond dream at the touch of the morning chill. Even though virtually all sectors of the Indian economy have grown, IT remains one of the key growth engines. It is not a stand alone industry; it supports many, many others. A cold here would make the economy catch a fever. In the worst case scenario, global investors, already pulling out money from markets around the world, would hurry up to do so out of India. They would be so spooked that investment in India itself will dry up. The havoc that such an eventuality can play on the economy is incalculable. But such a reversal looks quite improbable. What can actually happen is that global investors would be spooked to some extent, but would not turn away completely. Financial regulatory bodies would come up with a swathe of measures to close the loopholes and that will be that. After all we live in a post Enron world. There is one more aspect that comes to my mind. Post Satyam’s debacle, Infosys has gone to the extreme step of treating Satyam and its employees as untouchables. It has not only categorically refused to participate in a buyout, but has ordered that people from the company should not be hired. This is a sheer over-reaction. Firms are not individuals. A change in management should turn it once again into a good company. But equally its failure would not only put 65,000 workers out of job, but also affect six crore people in other industries. This is a behemoth of a problem. While a government bailout is not called for - companies should pay for their malfeasance - a private buyout should be actively pursued.