More on Satyam

We are where we are. The biggest corporate fraud in India’s history was disclosed by its perpetrator yesterday. Where we go from here, as I wrote yesterday, this is a test of our regulators. How they handle this crisis will determine how investors see the Indian market in the future. Frauds happen everywhere. But if in India, fraudsters go scot free or with just a slap on their wrists, we will damage the trust that investors – both within India and outside – must have to get back into Indian markets when things start looking up.

I find it hard to believe that this fraud was committed to inflate earnings. If that were the case, the Rajus would have sold at least some of their stock. Did they believe that this was going to continue forever? As others have pointed out, a 3% operating margin is very hard to believe. The downward pressures on rates in IT Services simply isn’t enough to cause that, assuming that salaries were on par with other IT Services companies. So the question is, where did all that money go?

I think Raju is doing a Madoff – taking the fall for the rest of the family. It is impossible to cook the books of a large company for this long without half a dozen people being complicit. That includes their auditors by the way – PriceWaterhouseCoopers – who must be held to account.

The way this investigation is carried out and its outcomes will be closely watched. The net must thrown wide to catch everyone involved. Follow the money and you will find them. The court cases should not drag out. Justice must be expedited with its proceedings as open to the public as is permitted. And along with the due punishment under law, we must seek disgorgement of ill-gotten gains. It would be a downright shame if at the end of this, just one person gets a light sentence and $1 Billion, or whatever part of it is truly missing, is never recovered.

I understand Merrill Lynch resigned the Satyam account. That doesn’t change the fact that they were advising Raju on the Maytas acquisition, which stank to high heaven.

I wonder what’s going on in the heads of Satyam’s clients? Well for one, every CIO of Satyam’s client companies will be wondering if the people from his company who were involved in the selection of Satyam did so entirely on the merits of their proposal. Next, he’ll be worried about business continuity. A major service provider that’s been delisted on the stock exchange doesn’t exactly give you the confidence that your systems are in safe hands.

On the other hand, this could be a great opportunity for a dirt cheap acquisition. If only we knew what their true accounts looked like.

What an amazing destruction of a company, its shareholders practically wiped out, dispirited employees who would be heading for the door if there were jobs out there and customers who are ruing the day they hired Satyam. And for what! Truly, greed has no limits.


  1. Mohan says:

    "As others have pointed out, a 3% operating margin is very hard to believe."

    Not really. To justify the inflated revenues, he had to hire more people (presumably, he couldn't cook up imaginary employees). So while the revenues were fictitious, costs were real. If you take the real revenues and inflated costs, operating margin will naturally go down.


    1. then utilization numbers (billed headcount/ billable headcount) would be way off. why not just lie about the headcount instead of hiring people? Although you may be right. Billed headcount is not a number that too many people in the company will know. Total headcount is much more public.


      1. Mohan says:

        He would have shown those extra employees also as billable. I hire 20% more people, show them as billable and show 20% extra revenue. My costs also go up by 20%. As long as you look at the cooked up numbers, everything tallies. Take out that 20% non-existent revenue, which is what people are doing when arriving at 3% margin, then margin goes for a toss.


  2. msathia says:

    Well for one, every CIO of Satyam’s client companies will be wondering if the people from his company who were involved in the selection of Satyam did so entirely on the merits of their proposal.
    This is the harshest fact of today not only for Satyam but for whole of IT industry. Every services company out there need to prove their management is transparent . Trusted partner has no meaning at least right now.

    I just pity the client facing people of Satyam in days to come.


  3. Krishna says:

    Certainly there is more to it than meets the eye… I even begin to suspect whether money ($115 million in 1999 $) did really change hands in SATYAM – INDIAWORLD deal… Rajesh Jain, the seller had he received that kind of money in full, would have gone much beyond floating a nondescript Netcore solutions and limping along with it. Hardly the stuff creative enterpreneurs will put up with, especially if it's a windfall of the kind he got. My vibes tell me that 10% (even that's a big deal for a portal like, khel / etc. back in 1999) would've been paid up, balance would've been stashed away in secret accounts of Raju and family.

    Yet another piece of the puzzle is how they built out fabulous real estate across geographies if all those revenues, earnings and cash balances were all cooked up. Who knows, true to tech traditions, Raju may even turn around and say all of that is an illusion, kind of 3D virtual reality gotten way too real.


  4. Satya says:


    With all due respect, I will have a slightly different view. Though I have posted it in my
    blog, I have posted it here as well!

    Satyam’s case is not one in a million; rather it is very much practiced in many Indian IT services companies. As some wise man has said it – “You are not a thief as long as you are not caught!” As far as I know, there are many following various corrupt practices and hopefully, this incidence will do some soul searching. However, I am more worried with the impact it is going to have on Indian IT Services and most important of all, whether we have learnt the real lesson in all these hustle and bustle.

    Short Term:

    1. More Hand Holding Will be Required by IT companies:

    Clients across the globe will now be double checking their outsourced partners after this fiasco and the western media such as NYT, WP etc. have been roughly vocal on it and some even have claimed it to be the death of outsourcing. Also the perceived lack of support the new Obama administration will now weigh heavily.

    Considering this backdrop, IT companies will have to try harder to sell to other companies for new contracts and convince with all the possible data to sale their company.

    2. The Eco-System is going to be Very polluted:

    I am sure that Satyam is now down the drain and if employees are smart they will seek other routes. And there comes the catch. When you have over 50,000 employees flooding the market and at the same time the market condition is very bad for jobs, the most valuable asset in any IT company (the employees) will now be sold very cheaply.

    The only good bet can be from some other company who is going to buy it. However, with recent statements from one company – “We are not going to buy a tainted company” – good companies may not come forward easily. Also, I believe, in such scenarios, people should refrain in making this kind of statements.

    3. Market confidence on IT companies is going to be Volatile:

    This is an era of open and wide communication available in many mediums. Prudent investors will always know about the company a bit before investing and the signs from IT companies are not positive.

    In one company, the executive chairman is well above the stipulated retirement age and his son has joined his team (on what basis!), and in another one the CEO of the company has been fined for selling more shares than required.

    Medium Term:

    1. Contracts solely based on Low Valuation are going to Vanish:

    It is no secret that Satyam has got most of its contract due to its low valuation. All its so called top tier clients have come to Satyam as its prices are much lower, sometimes even 50% lower!

    At the same time when the market is moving towards more fixed price projects, more IP based work etc., the day of pure cost arbitrage is almost nearing end. Also there is competition from others low cost destinations such as Vietnam, Philippines, Mexico etc.

    Ironically, this will be a good sign for the IT services companies in the longer run – the whole industry stated with cost advantage in mind.

    2. Tougher Times ahead in Y2009 and Y2010:

    2009 is going to the telling year for India Inc. and I expect it to continue till 2010 middle and may recover around Q3/Q4 of 2010 fiscal. Amidst all the gloom and doom and with every other company laying off, cutting costs and added to it the current scandal of Satyam, IT services companies are definitely going to have a hard time to get back on track. I do not know about the long term impact and in technology industry it is actually foolish to think of it.

    I do not see any impact on it on changes in Corporate Governance. Make no mistake; India is not the US, where the government bails out companies like GM, Lehman and the feds finally put in their rule in the short terms to change the status-quo. India is unique and the Govt. Of India is criminally negligent on simple day to day to living of its people – forget doing anything on Corporate Governance. Other companies are very much tuned towards to the US model of corporate and I do not see it being changed much. Rather the lesson is for all of us here.


    It is easy to point finger at others and say that s/he is wrong. However, I believe, we are all part of this in one way or another. Neither do I like the statement that investor confidence will be down and they may not look back at India – a normal investor should not expect 30 % percent growth y-o-y on every IT company they invest with.

    It is high time that we say that it is alright to have 10% percent growth, it is alright to be sub-1 Billion Dollar Company, it is alright to have a lower package and it should start from the very people who have made 30% percent growth a foregone conclusion. I am convinced that the whole super fast growth mentality has led to this situation.


  5. Brij Shah says:

    I second Krishna's comment above. I have long suspected the India World deal. $100 million dollars for bunch of websites did not make any sense. The money definitely was routed back in some form.


  6. Bharat Rao says:

    Apart from Raju's book cooking – which has been widely reported – the World bank story has been somewhat swept aside. That story had two components to it : installation of spyware and "improper" payments to bank employees. The latter presumably implies some kind of kickbacks paid to bank employees in return for giving channeling more work Satyam's way. That, in my opinion, will have client managements more worried than Satyam's current situation – and not just from a business continuity perspective. Was this a one-off or a pervasive practice (a la Siemens)? If it is the latter, surely a lot of people in Satyam managers would be aware of these practices. In other words, unlike the Madoff story, there are two distinct constituents here : clients and investors (of course, apart from employees). In Madoff's case, clients were the investors. In Satyam's case, the big stories pertain to how investors were taken for a ride. Is there a ticking time bomb in the other story – i..e clients (and potential improper payments?).


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