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