Satyam's search for truth

Let's review the curious case of Satyam Computer Services Ltd., the Indian outsourcing giant that collapsed in a heap of fraud, intrigue and unsavoriness earlier this month. Satyam has been likened to an Indian version of Enron Corp. If anything, the company's still-unfolding narrative is more epic, worthy of a Bollywood extravaganza, although no one has broken into song, the dancing is verbal and the ending hasn't been written.

Even the name radiates drama in a perverse sort of way. Satyam is the Sanskrit word for "truth." If ever there was an ironically named company, this is it.

Unlike Enron, which quickly filed for Chapter 11 and eventually liquidated, Satyam may well live on. The Indian government quickly stepped in and seized control of the company's board, with an eye on rehabilitation. Indian experts on finance and restructuring believe bankruptcy is unlikely and that a sale to another company remains possible. Larsen & Toubro Ltd., a diversified engineering and technology company, has emerged as a leading contender.

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What is comparable to Enron, however, is the impact of the scandal. The sudden downfall of one of India's star corporations has prompted questions about everything from the reliability of Indian corporate governance to the accountability of independent directors and outside auditors. Foreign investors in India's stock market have already been hammered by a steep fall over the past year. The Satyam scandal adds another level of insecurity.

"This has put India on the defensive," says Sumant Batra, managing partner of the New Delhi law firm Kesar Dass B & Associates and perhaps the country's top legal authority on bankruptcy and restructuring.

"There is now a tendency to paint India Inc. with the same broad brush and this is unfortunate ... and unfair."

A new company's act is now in parliament, and the Satyam scandal will undoubtedly influence policy, Batra believes. Two issues possibly affected: better disclosure of both related parties transactions and pledged shares. "There are genuine, bona fide reform measures taking place," Batra says.

The new board has ordered an audit of the company's past few years. After that is completed, says Batra, the government will determine if Satyam falls under the category of a "sick company," which would then require mandatory revival and rehabilitation. In the interim, it's theoretically possible for creditors to attempt to put Satyam into liquidation, Batra adds, but this is unlikely.

"Government has made a determination that Satyam is a 'systemically important' institution and that the new board will try to put the company back on track," adds Indian Institute of Management finance professor TT Ram Mohan, in an e-mail exchange. "I do not believe that Satyam is now in danger of going into bankruptcy."

The chain of events began in late December, when Satyam's board unanimously approved the acquisition of both a property development company and an infrastructure development concern. These were ventures that had nothing to do with Satyam's core business, but everything to do with ownership. Maytas (Satyam spelled backward) Properties Ltd. and Maytas Infra Ltd. were the domains of the children of Satyam founder and chairman B. Ramalinga Raju. Maytas Properties was privately held. The Raju family held 35% of Maytas Infra, which is publicly traded.

Satyam agreed to pay $1.6 billion in cash for the two companies. That provoked such outrage from shareholders and analysts that Raju withdrew the offer within 24 hours.

The damage was done to Satyam's credibility, however. Institutional investors began to dump shares.

The real bombshell came earlier this month, when Raju admitted in a letter to his board and widely leaked that he and his brother, Satyam managing director B. Rama Raju, had cooked company accounts to the Indian rupee equivalent of $1 billion.

He acknowledged cash reserves were nonexistent and claimed he had padded profits for years by a massive bookkeeping sleight of hand.

Raju justified this not for personal aggrandizement -- he was, after all, India's 10th richest individual, with a net worth of more than $1 billion -- but to better portray the health of the company and protect management.

"The concern was that poor performance would result in the takeover, thereby exposing the gap," he said, adding in a flourish: "It was like riding a tiger, not knowing how to get off without being eaten."

The deal with Maytas, Raju asserted, was a last-ditch effort to clear the books and avoid detection. He implied that Satyam would "buy" the two companies, but actually not transfer any money and that his family, and presumably the other shareholders, would absorb the loss.

Problem is, even this truth telling may not be true. Raju disappeared from sight for a couple days. Then, in the words of the Indian press, police "nabbed" him and his brother and threw them, along with the company's CFO, Vadlamani Srinivas, in Chanchalguda jail in the eastern city of Hyderabad, where Satyam is based. No kid-glove treatment there. The Rajus share a jail cell and a single toilet with 40 other prisoners, mostly petty thieves and bootleggers, according to local press accounts.

They were due to be released on bail Jan. 23.

After several days of interrogation by undoubtedly persuasive police, Raju has changed his story, or so the India media now say, quoting the public prosecutor. The prosecutor alleges Raju admitted he skimmed the company for an old-fashioned reason: greed. The money in part funded numerous secret accounts, which capitalized on insider information and traded in Satyam shares and was used to acquire thousands of acres of land. It also appears that secret funds flowed into the two Maytas companies.

The prosecutor alleges that the Rajus and Srinivas forged bank deposit documents. Even so, PricewaterhouseCoopers, Satyam's outside auditor, faces withering criticism for not detecting the massive fiddle. There are calls for both the government and the country's self-governing accountancy board to sanction the firm. While not being exactly effusive in its comments, PwC maintains it was also duped and is cooperating with authorities. (A PwC press representative in India didn't respond to an e-mail seeking comment.)

Cold comfort, but rival Ernst & Young named Raju its India entrepreneur of the year last year. No word about whether the award has been rescinded.

Satyam's former directors are being pilloried as well. Scorn has been heaped on former board member Krishna Palepu, a Harvard Business School professor. In an Indian Express commentary that questioned in the harshest language possible Palepu's motivation in the Satyam board -- "greed" is one word that can be printed -- the author pointed out that Palepu's Harvard bio extols his work "on how to make corporate boards more effective, and on improving corporate disclosure."

After most of the board had either resigned or been arrested, the government's Corporate Affairs Ministry took command of Satyam's board, saying it had no plans to put money into the company. "It would be very unusual for the exchequer to bail out a private company," former Economic Affairs Secretary CM Vasudev told NDTV. "It's never happened in the past." He likened the government's role to that of a "short-term ICU."

Despite this limited intervention, some Satyam clients are beginning to flee, Indian media report. Based on a review of Satyam's contracts, a research report from Edelweiss Securities Ltd. predicts the company will lose about 25% of revenue this year.

Shares in Satyam continue to trade heavily. The share price has plunged 95% since its 52-week high and 80% since Raju supposedly came clean.

Conventional wisdom says Satyam will eventually be sold off, though in a highly reduced state.

In addition to Larsen & Toubro, potentially interested parties include the Indian manufacturing giant Mahindra & Mahindra Ltd., which owns a technology outsourcing division. An article last week in the Economic Times speculated that outsourcer Patni Computer Systems Ltd. is also interested.

These days, lawsuits are flying in both the U.S. and India, and "the issue for any acquiring firm is contingent liabilities" from these lawsuits, Mohan writes. But he believes that "this threat will recede once the firm recovers."

Meanwhile, one distraught Satyam employee ingested poison and committed suicide, fearing for his job. And Indian press reports say Srinivas also attempted suicide before being arrested. It could have been a scene right out of Bollywood.

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