Why Satyam’s going to screw India for a long, long time …

So, one of India’s biggest technology companies has just imploded. Call me a pessimist, but the impact on Indian technologies companies is going to be terrible. And startups may well have to bear the brunt of the general distrust that will be the order of the day from now on.

Here are the bare facts (from the Reuters report):

1. Ramalinga Raju, founder and chairman of Satyam Computer Services, India’s fourth-largest outsourcer, said in a statement the company’s profits had been inflated over recent years but no other board member had been aware of the financial irregularities and then resigned.
2. The shocking revelation came after Satyam’s botched attempt last month to buy two construction firms partly-owned by the company’s founders and as the World Bank, a major customer, barred Satyam from new business, citing “improper benefits” given to Bank officials. Satyam has demanded those comments be retracted.
3. last June. The company’s value has slumped to little more than $500 million from around $7 billion as recently as
4. The scandal set off a wave of condemnation from Indian market regulators and government officials, and prompted banker Merrill Lynch to terminate its engagement with Satyam.

N0w, from the letter Raju wrote that drove Satyam’s stock down to sub-50 rupee levels, here’s the pertinent bit:

The gap in the Balance Sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance). What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew significantly …

… Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in a take-over, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten.

The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas’ investors were convinced that this is a good divestment opportunity and a strategic fit. Once Satyam’s problem was solved, it was hoped that Maytas’ payments can be delayed. But that was not to be.

Riding tigers is always a bad idea. Right, so let’s just call this for what it is: Satyam wasn’t doing as well as the other IT majors. The promotors were worried that they would lose control of the company if people found out. So they lied a little. And then, the lie took on a life of its own. Oh, and the independent auditors didn’t smell the lie for six long years.

Does that sound suspiciously familiar … if it does, you have identified the problem: Satyam isn’t unique.

Company after company in this great country of ours takes great pride in cooking the books, greasing wheels and fantasy billing. Sometimes to avoid taxes, sometimes to maintain control, sometimes to get a contract … the list is long, and eventually the price of doing business in India.

It’s a cultural thing, you see. From a very early age, we are introduced to the parallel economy: a place where every paise counts for just that much more. Where bills are optional and cash transactions are very very special. Where suitcases are more important than handshakes and contracts.

Foreign money also brought with foreign expectations — audits, public statements, quarterly targets, and interviews on CNBC during results season.

So, Indian industry decided to do what Indians have always done with foreigners — smile, adopt their customs on the face of it, and adapt the customs to suit our own particular sensibilities … shareholders be damned.

And while the big four/five auditors came in promising international standards, they made one mistake: they hired Indians to conduct the audits. Not Indians fresh out of college, but Indians who had already spent years cooking books.

So where does that leave me.

Poorer for one. My wife owns Satyam stock. And since we haven’t offloaded it and have no plans to do so, I may end up being the single largest shareholder as the rest of the world sells.

But mostly I’m scared.

What Satyam and Raju have done is going to haunt Indian business for a very very long time. For one, I won’t be surprised if similar stories emerge from other listed Indian companies, and not just in the tech space. And even if the stories don’t emerge, I’m certain that the stories exist. It’s going to be a function of how well our CAs can bury them.

And since there’s a good chance foreign investors are going to feel the same way about Indian companies, bye bye capital. Oh yes, I can almost hear you thinking — deliver growth and the money will come, after all money managers need returns. The problem with that is delivering growth requires customers to have confidence in you. And our IT companies are dependent on foreign customers who’re not going to be showing confidence anytime soon.

With the new US president promising tax breaks to companies who don’t ship jobs overseas, things can only get interesting from here on. I use interesting here as the Chinese do — as a curse that Indian industry will have to deal with.

Thank you Raju/Satyam.

UPDATE: KushanMitra & Codelust make a couple of good points on twitter — new accounting standards on the way, and lots of demand for commerce students. Follow them

Recovered from the site’s WordPress archive, where it was published on 2009-01-07.