Posted by: John Elliott | January 7, 2009

Satyam’s Raju lifts the lid on Indian corporate fraud

Satyam's offices - a Reuters photo

Satyam's offices - a Reuters photo

I have often mentioned to businessmen visiting India how remarkable it is that many of the appalling business practices of the country’s traditional old family-controlled companies do not seem to have spread to the booming software sector – and then add that I wonder whether there are some skeletons in unopened IT cupboards.

If I am talking very privately, I have mentioned Satyam, rated till today as India’s fourth biggest software and outsourcing company, as one whose governance has been frequently questioned.

This morning’s resignation and confession of fraud – vastly inflating company results for “several years” – by  Ramalinga Raju, Satyam’s founder chairman, means the company can now be openly named for dubious business practices that have concerned (some) investors in the past. (It also means that Satyam is presumably not India’s fourth largest IT company and should not have been rated along with the other market leaders Infosys, Wipro and TCS.)

Raju has admitted inflating the figures – for example by well over $1bn in September – and has admitted that his attempt to merge the family’s Maytas construction companies into Satyam last month “was the last attempt to fill the fictitious assets with real ones“. (The Maytas attempted merger, aborted after about ten hours triggered a series of events that culminated in today’s news).

B.Ramalinga Raju

B.Ramalinga Raju

It was, wrote Raju, “like riding a tiger, not knowing how to get off without being eaten.”

This raises the question, not only about the software industry, but about how many other Satyams there are lurking in India’s hugely corrupt and politically-linked corporate world, its manipulated stock markets, and sometimes dubious auditing practices.
Raju’s is most certainly not the only family behaving in such a corrupt and fraudulent way.

How far up the league table of India’s top companies are such practices prevalent?

And how many of the family-controlled busineses that make up about half  the top 20 or 30 biggest Indian companies could one definitely rule out of the list of possible culprits? Not many, I guess! Even the Confederation of Indian Industry has today shown itself to be worried.

The Raju’s, for example, have close connections with politicians, as do many other groups, especially those in the power and construction industries. The Raju’s are very well linked in their home state of Andhra Pradesh. This was most recently visible with the chief minister, Y.S.Rajasekhara Reddy, defending the award of a Hyderabad metro railway contract to the Raju’s Maytas construction company after the award had been criticised last September by E. Sreedharan, who heads the Delhi Metro Corporation (DMRC).

Today’s astonishing confession by Ramalinga Raju stated that (this is a quote from the letter courtesy of Reuters click here for the full letter) :

“ 1.  The Balance Sheet carries as of September 30, 2008
           a. Inflated (non-existent) cash and bank balances of 50.40 billion rupees ($1.04 billion) (as against 53.61 billion reflected in the books).
          b. An accrued interest of 3.76 billion rupees which is non-existent.
          c. An understated liability of 12.30 billion rupees on account of funds arranged by me.
         d. An overstated debtors position of 4.90 billion rupees (as against 26.51 billion reflected in the books).

”  2. For the September quarter (Q2) we reported a revenue of 27.00 billion rupees and an operating margin of 6.49 billion rupees (24 pct of revenues) as against the actual revenues of 21.12 billion rupees and an actual operating margin of 610 million rupees (3 percent of revenues). This has resulted in artificial cash and bank balances going up by 5.88 billion rupees in Q2 alone. ”

As commentators today are saying, this is India’s Enron. It is also an unexpected result of the world financial crisis that is making foreign investors curb their irrational over-excitement about Indian stocks and query business practices. This raises many questions – most notably:

–      Can India’s slow and corruptly-infuenced legal system cope adequately and punish such fraud, or will the case drift away with fading memories? 

–     Where will the Raju trail lead, and who else will be implicated?

–     How implicated are company non-executive directors – who on Satyam’s board (as is often the case) include a former top bureaucrat – and auditors (PwC for Satyam)?

–     Which other company will be exposed next? There must be many candidates.


  1. […] and now there is a fresh possible fraud case emerging that some observers say could prove as big as Satyam, India’s fourth largest software and outsourcing company, which collapsed at the beginning on 2009. Satyam and its allied […]

  2. […] and… and an earlier one: […]

  3. […] first of the state’s crises came a year ago with the collapse of Satyam, a leading Hyderabad-based software company that was owned by the family of its then chairman, Ramalinga Raju. The Rajus were closely linked […]

  4. […] not in Satyam Computer Services, the leading Indian software company whose founder and chairman, B. Ramalinga Raju resigned on January 7 and admitted to years of […]

  5. […] go far wider than Satyam and its software business and, as I wrote last week post in a post titled Satyam’s Raju lifts the lid on Indian corporate fraud, this story illustrates much that is wrong with companies in India (and many other […]

  6. The coziness of politicians and corporations is truly a problem in India. But then, it’s not going to be easy to break the relationships between politics and business that was formed during the years of the Great Indian Red-tape Raj and because that relationship has been only weakened and not destroyed, there will surely be more bumps along the road.

    I’m an Indian (who currently lives in India) and I see it as rather foolish to either deny the problem or to wash it off as something that exists in other places too.

    I also think that India is the new kid on the block and will have to answer hard questions unlike the US, Europe and Japan in the face of scams. The only thing to do is to keep cleaning up till such time as India does have a reputation as a good, clean place to do business.

  7. Thanks for the response John. The intention was not to treat corporate fraud lightly, but the pragmatism that I speak of refers to a fraud type of issue that can occur in any nation at any time. Despite the existence of oversight boards in several jurisdictions, it is very difficult to catch corporate fraud since it often occurs at the highest levels. The exception being China where you’ll not be able to do business without first taking the local councilman and his son into confidence.

    Having said that, I am surprised to see other readers refer to pro-India responses as being nationalistic. Having done business around the place, I would say that India is a better place to do business.

    You underestimate the power of your writing, that too coming from a respected South Asia correspondent. You should be highlighting the fact that there is a generational change that is occurring in India’s board rooms and middle management. Frequently, younger people find themselves at the helm of business, and I have found that corruption is despised, and most exec teams subscribe to the “do no evil” mantra.

    Corruption at the government level however is obscene, and that is what you should be targeting in India.

  8. It doesnt matter as long as human being exists, there will be scandals. Look at Enron, MCI world com, Mad off, banking scandals UK and France, Samsung, Siemens, Parmalat, Sub prime scandals in USA. Greed is responsible for all these scandals. Bribes in India are called political contributions in USA. Whatever may be, ultimatly poor investors have to pay for all these scadals.

  9. thanks Sam for commenting here on my post, which is a slightly shortened version of the one above – and does not have a reference to PwC and auditing that I inserted after it had gone up on the FT site.

    I am not panning “the whole IT industry” – nothing above suggests that. I refer to “India’s hugely corrupt and politically-linked corporate world, its manipulated stock markets, and sometimes dubious auditing practices”.

  10. Let’s be clear. This is a Satyam AND PWC corporate fraud. Why the focus on “skeletons” in Indian closets, alone? If PwC have “bent the rules” in 1 country, there could well be other cases of PWC fraud.

    Notice that I am not tainting the whole accountancy and auditing industry. Innocence till guilt is proven, is how the justice system works. However, John, you seem to have panned the whole of India’s IT industry in your article in FT. What gives? Why are you not questioning the KPMGs, Ernst & Young, and Deloittes of the world?

  11. Its blind nationalism, a certain cross section of society in this country don’t seem to like it very much when India is criticized or when unpleasant issues are raised, by people whom they consider to be not Indian. Which I have to say is a ridiculous notion.

    The piece made a number of points that have been raised by different people on a variety of platforms. The issues the piece covered have been concerns raised in the aftermath of the scandal by global institutional investors, domestic institutional investors, and without question by the Indian media itself.

    It is a poor accusation. There are indeed questions that need to be asked in India on a constant basis, covering all aspects of society. It is really rather irrelevant who asks the questions, what is more important is whether the questions themselves make sense.

    My point is fraud or corruption by no means is unique to India, it happens all over the world all the time, so I am not entirely sure why in the aftermath of the Satyam, the perception of risk should have increased so dramatically, or questions started emerging over the entire industry in India. That does not make sense to me, given we don’t apply that logic anywhere else.

    There is a larger issue at play and that is one of Indian corporate governance which is abysmal on many levels, which is the main reason for the perception being discussed.

    It is completely fair to use this event to start pressuring Indian companies to adopt better governance and practices, especially with so many family owned or run listed companies.

    If you are Indian or have lived here for any length of time you will most certainly be familiar with just how badly the ruling class behaves, which is why there is the fear of skeletons existing in other companies cupboards.

    The economist in its piece asks the what incentives do Indian companies have to change, well the short answer is if there is perceived transparency and good governance, the stock trades at a premium to rivals, and capital raising becomes easier.

    For me the question of the moment, is bankruptcy in India. It is pretty clear how the Americans treat it, and the Europeans, but I have no idea how is it handled in India, because as far as I know, this is probably going to be the largest one. Usually the Indian response to anything of this kind of this size is to nationalise, so I doubt there is any precedent.

  12. thanks for your comment Chetan – and good that you spotted this Riding the Elephant post on

    But I’m surprised that you dismiss corporate fraud so lightly – indeed almost condoning it by accusing me of having a “colonial hangover” – do tell us more.

  13. John

    I am appalled at your comments. You make it sound that India was the worst place to do business ever. On the lines of your thinking, the US should have been dead and buried as an investment destination in 1929.

    Since when did corporate fraud kill a nation? In the same vein, the East India Company should have decimated Britain.

    FT seems to be beset by skeptcism over pragmatism. And please take your colonial hangover out the door.

  14. Its corporate fraud, I am not entirely sure why people all of a sudden question India as an Investment destination or which other companies here might have issues.

    Korea was not questioned after Samsung, nor was its consumer electronics industry. The US was not really questioned as a destination after Enron & Worldcom. France’s banking not really debated after its two banking scandals, and one has to wonder why the same kind of questions are not being thrown at the US fund management industry after the ponzzi scheme there.

    So one has to ask why the sudden fear over India, or the questions over its IT industry? fraud at one by no means implies there must be fraud at others, why on earth would people think that?

    One could argue that corruption, nepotism cronyism, and fraud are uniquely Asian, or even Indian “values”, but I have to say that everything that I have encountered since the turn of the century suggests to me that these are characteristics of people in general. Family businesses dominate in India as they do in Asia and indeed even in Europe if we get right down to it. So perhaps it is right to fear uncontrolled rogue elements within a company, but I have to say I think those fears are overstated.

    I think if we were to confine the discussion to say India’s largest 100 companies, it would be wrong to suggest that there are any more ethically challenged companies in India then there are anywhere else , to suddenly fear it as an investment destination more so than anywhere else, and to argue that there is a concern that other companies may have skeletons in their closets more so than anywhere else.

    These things, they happen all over the world, greed, fear, and idiocy whatever the reason for the fraud, it is really not specific to culture or nationality and if we are going to ask questions about which companies have skeletons in their closets then we have to ask that question about companies globally, it would be naive to confine our fears to India alone.

  15. The Satyam episode exposes the way most Indian companies are run. John has rightly wondered if there could be many more skeletons in the cupboards of the big daddies of the corporate world.

    Remember the way CAG ordered a special audit of Reliance Communications revenues after Kotak Finance alleged that the sharing between telecom and internet services was distorted ! What were the auditors doing?

    In fact, I wholly agree with the latest code of ethics put up by CVC that auditors of all companies be changed every three years. In fact, I would go a step forward and suggest that auditors of private companies should be appointed by the CAG like the PSU units so that complete independence and impartiality is maintained. When the same audit firm continues for ages with fat fees, obviously a cosy relationship develops.

    In many cases, I know audit firms had to give way when aviricious managements could not get them to rubber stamp their cooked up accounts. There is little protection for such honest acts right now.

  16. Hi John, You are absolutely right in your statement – whether there are some skeletons in unopened IT cupboards. I would rephrase it to whether there are many skeletons in unopened cupboards of corporate india!
    Yes, going by the way the laws are being framed so that common people dont understand it and the powerful people with money power can understand the way they want it… there is little that can happen…other than ofcouse a movement to wake up and wake others and make the world a better place to live in!

  17. Funnily enough I said at the start of 2008 that I expected a major financial scandal at some stage of the year: I was out by a few days! I doubt that any of the others in the big IT league suffer from the same problem – none are family concerns anyway. But elsewhere…..
    As we see in this case it is the external investor who ultimately pulls the rug. And those of us in the ethics business have long pointed out this problem with “contextual ethics”. But it is not easy to know how to avoid them. The repercussions could be severe for the re-building of a fragile economy; and on the elections?…..

  18. Dear John, What you have written is absolutely right.

  19. Do hint at the other candidates…I’m sure there are at least three in petroleum, media and realty

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