Satyam means "truth" in Sanskrit, an ancient Indian language. But Satyam Computer Services, one of the country's biggest software and services companies, revealed some alarming truths about Indian capitalism.
The company's founder and chairman, B. Ramalinga Raju, confessed to a $1.47 billion fraud on its balance sheet, which he and his brother, Satyam's managing director, had disguised from the company's board, senior managers and auditors for several years. "It was like riding a tiger, not knowing how to get off without being eaten," Raju wrote.
The tiger carried Raju deep into the woods. Quarter after quarter, he inflated Satyam's profits, even as operations expanded and costs grew. The company, listed on the New York and Bombay stock exchanges, now claims to have 53,000 employees, and customers in 66 countries, including 185 companies in the Fortune 500. In its books for the third quarter, it reported $1.03 billion of cash and $77 million of earned interest that do not exist. It also understated its liabilities by $250 million and overstated the money it is owed by $100 million.
The ride took a final turn Dec. 16, when Raju tried to buy two firms owned by his family, Maytas Properties and Maytas Infra, for $1.6 billion. Satyam's supine board approved the proposal but shareholders revolted. They thought it was a brazen attempt to siphon cash out of Satyam, in which the Raju family held a small stake, into firms the family held more tightly. In fact, it turns out, it was Raju's last desperate attempt to plug the hole in Satyam's balance sheet with Maytas' assets.
The deal was swiftly aborted. In the aftermath, four non-executive directors quit, hoping to salvage their own credibility, and Raju's creditors came knocking. They dumped most of the Satyam shares he had pledged as collateral for the $250 million in loans. The ride was over. The daunting task of rescuing Satyam falls to Ram Mynampati, its chief operating officer, now interim chief executive.
The task of rehabilitating corporate India is equally daunting. It has long basked in the reflected glory of its information-technology firms. Run by cerebral, clean-living professionals, they employ India's brightest youngsters and serve the bluest of blue-chip companies. Those digital ambassadors have lent corporate India a certain mystique, said Sharmila Gopinath of the Asian Corporate Governance Association (ACGA), based in Hong Kong. But that reputation rests largely on the efforts of one or two companies, such as Infosys, which are impeccably run. Investors delude themselves if they think standards in most Indian technology firms, let alone the rest of its 9,000 listed companies, are close to those set by Infosys.
The illusion persists because it is not easy to gauge corporate governance objectively. ACGA's own 2007 ranking of corporate governance placed India third out of 11 Asian countries, behind Hong Kong and Singapore, but far ahead of China, in ninth place. India's financial-reporting standards are high; its principal regulator, the Securities and Exchange Board of India, is independent of the government, and its business press is enthusiastic. But enforcement is weak, loopholes large, and shareholder activism is lackluster.
The government has introduced a bill that would allow shareholders to pursue class-action lawsuits, but it will probably lapse when elections are called sometime before May. Even if a new government enacts the legislation, India's cumbersome courts tend to delay justice to the point of denying it.
