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Surviving 'India's Enron'

Chairman and founder of Satyam Computer Services, Ltd. Ramalinga Raju at a press conference in Hyderabad on October 17, 2008. (Noah Seelam/AFP/Getty Images)

Chairman and founder of Satyam Computer Services, Ltd. Ramalinga Raju at a press conference in Hyderabad on October 17, 2008. (Noah Seelam/AFP/Getty Images)

by Pramit Pal Chaudhauri

Originally published in the Far Eastern Economic Review, January 14, 2009

The arrest last week of Satyam Computer Services, Ltd., Chairman B. Ramalinga Raju for falsifying corporate figures is being called "India’s Enron." The Indian government’s decision to replace Mr. Raju’s entire board underlines how great a shock the Satyam fraud has been to the Indian establishment. Indeed, this is the first time the government has superseded a private corporate board. But then Satyam, once the country’s fourth-largest information-technology firm, is more than just any old company—it’s long been seen as an icon of the new Indian economy.

The fraud was revealed when Raju sent a fax to the Securities Exchange Board of India on Jan. 7 and admitted Satyam had falsified profits and that its 50 billion rupees in cash reserves were notional. An earlier attempt to fill this financial hole by buying up the Maytas real-estate firms of his sons had been shelved because of shareholders’ outcry at what seemed like crony capitalism. When DSP Merrill Lynch, after inspecting Satyam’s books, concluded it could not find a merger partner and that, as legally required, it would have to report why to SEBI, Raju realized the game was up. The confessional fax followed.

In part because Mr. Raju’s version of events has yet to be verified, the larger consequences of the Satyam scandal for India are unclear.

The fallout could be severe. India’s growth story has been fundamentally different from China’s in a number of ways. But a crucial difference has been that foreign investment into India has been largely through stock purchases rather than, as in China’s case, the building of plants.

Investors have placed their bets on the Indian private sector, that it would both grow and become more professional. As a senior Citigroup executive told the press, "The India story has been whether a dynamic private sector can outgrow a dysfunctional government."

The question being asked is whether Satyam is a sign that even the Indian corporate story is less than what it seemed. This is not merely because Satyam was in 2007 India’s 19th most valuable company, but also because it was a firm from a sector heralded as emblematic of an India matching the best standards in the world.

Most investors have so far treated Satyam as a one-off, the odd rotten apple that inevitably comes up in a capitalist barrel. Maintaining this viewpoint will depend on three things:

First, evidence that Satyam’s ability to cook its books for several years was more about its auditor, Pricewaterhouse, and Mr. Raju’s celebrity status than the Indian regulatory system. On paper, the country’s financial regulations and corporate governance standards are broadly on par with the West. However, implementation is a different story. For example, of the 100 posts in the Serious Fraud Investigation Office over 30 are presently vacant. A ban on fully owned subsidiaries of multinational auditing firms means Indian-based firms are small and parochial.