At last some progress is being made to sort out the future of Satyam Computer Services, the Indian software company that was rocked last week when its founder and chairman, B.Ramalinga Raju, resigned and admitted fraud that started several years ago and exceeded $1bn in recent months.
Raju and his brother have both been arrested and the company’s chief financial officer is being questioned by investigators. But these moves happened slowly after last week’s revelations, indicating that the Rajus’ political and bureaucratic friends were trying to protect the two men and slow down investigations – as they will no doubt continue to do for many months and years.
Even now Raju is being treated as a hero by supporters who rallied round a magistrate’s house when he was being detained. DNA, a Mumbai-based daily newspaper, reported yesterday that they included dozens of Satyam employees, plus people from the large Raju clan. “Raju is not a cheat. he has not defrauded anyone. We don’t know why he is being shown as a fraudster,” said one of them. Others blamed the media for over-stating what has happened – an accusation that was thrown at this blog in several comments when I first wrote about Satyam’s problems last month.
This afternoon three new board directors, appointed over the weekend by the government, met in Hyderabad, the south Indian high-tech city when Satyam is based. Led by Deepak Parekh, one of India’s most respected bankers and finance industry leaders, the three took over responsibility from the previous board which has been dismissed. They decided to appoint a new accounting firm, plus a new ceo and chief financial officer. More board directors will be appointed soon and the full board will then take over running the company – maybe with the help of government funding.
Many questions have to be answered. How many people inside and outside Satyam were complicit in the fraud? Did top non-family management know what was happening? Did top managers realise that Satyam’s publicised results far exceeded the work that their businesses were carrying out? What was the role and culpability of PwC, the auditors who approved accounts, which should have been questioned because of massive and unaccounted cash holdings?
But the tentacles of this crisis 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 countries).
I have been talking to friends and contacts over the past few days about how many family controlled groups switch funds between businesses, and how this is practiced by some of India’s best known groups. “Everyone knows that,” I was told, “they’ve always done it!”, when I mentioned one famous name that obviously cannot be written here.
A large software company (not one of the big three) was also mentioned as having well known fraudulent practices.
But where Raju seems to have exceeded his peers is in the scale of his cooking-the-books. Not only did he brazenly switch funds, but – as he admitted last week – he massively inflated earnings figures in order to keep Satyam ranked as India’s fourth largest software business.
There has been concern for many years of the Rajus’ deals but, as happens in India (and elsewhere), nothing was done by regulatory authorities, presumably because of close political connections.
The Raju family runs other companies, notably Maytas which has large-scale infrastructure and construction businesses. Maytas finances are closely inter-linked, privately, with publicly-quoted Satyam, even though there was no public declaration of those links.
Both companies have extensive political and bureaucratic contacts in Delhi and in the state of Andhra Pradesh, where Hyderabad is the capital. Rajus’ close contacts include Chandrababu Naidu, the state’s last high profile and tech-savvy Telegu Desam chief minister who was in power during Satyam’s main growth period, as well as Y.S.Rajasekhara Reddy, the current Congress Party chief minister.
Often when such companies grow quickly, and especially when they have activities in industries such as infrastructure, their equity investors frequently include regional and national politicians, who always need somewhere to park the massive bribes that they gain while in office. The politicians usually choose companies that will produce good returns, which can be used to fund political and other activities.
But the politicians do not expect their money to decline in value. Business World, an Indian business weekly magazine, reported this weekend that a politician with a stake in Maytas told Raju to “make up for the fall in the value of his equity with cash”.
This story has a long way to run…………..