INDIAN COMPUTER GIANT ADMITS COOKING THE BOOKS

UNCLAS SECTION 01 OF 02 CHENNAI 000007 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN EINV PGOV KCRM IN SUBJECT: INDIAN COMPUTER GIANT ADMITS COOKING THE BOOKS ¶1. (U) Summary: The chairman and founder of Satyam Computers Limited, one of India's premier information technology (IT) firms, admitted in a resignation letter on January 7 to committing large-scale fraud. The admission was the most recent in a series of blows that has seen the company's stock price collapse, leading the Bombay Stock Exchange to suspend temporarily trading in the company's shares. Already reeling from the worldwide economic slowdown, some of India's big IT firms fear that the reputation of the entire sector may now be tainted. End Summary. A true Indian blue chip -------------- ¶2. (U) Hyderabad-based Satyam Computers Limited, with annual revenues of more than USD 2 billion and more than 50,000 employees worldwide, is India's fourth-largest IT firm. It has offices in 66 countries (including the United States),and claims to have more than 180 of the Fortune 500 firms as clients. Satyam's services include business-process outsourcing, consulting, and engineering. Services to companies in the banking and financial services sector comprise its largest portfolio. It is one of the bluest chips in India's premiere service industry. A really bad quarter -------------- ¶3. (U) Satyam's recent string of bad news began in September, when media reports began appearing suggesting that the World Bank -- one of Satyam's many high-profile customers -- had fired Satyam and ruled out working with the Indian company for at least eight years. The reports vary in the details, but it appears that the World Bank accused Satyam of violating security protocols and failing to adequately protect data entrusted to it. ¶4. (U) More bad news for Satyam arrived in mid-December, when the company made a USD 1.6 billion bid for two companies involved in infrastructure development and real estate, Maytas Infra and Maytas Properties. The deal made little sense to most shareholders, who criticized the company's leadership vociferously, accusing it of using company money trying to bail out two firms in non-related businesses promoted by Satyam Chairman B. Ramalinga Raju's sons. (Maytas is Satyam spelled backwards, noted critics arguing that the deal made sense only on familial, but not financial, grounds.) Raju formally backed out of the deal days later, but fierce criticism directed at him and Board members continued, particularly from institutional investors (including some U.S. ones, such as Fidelity). The company's stock price nearly halved during this fiasco, falling from approximately INR 250 in late November to around INR 150 by late December. (The price has since fallen to INR 20 on January 9.) Nothing is ever so bad it can't get worse -------------- ¶5. (U) Already in hot water with shareholders over the Maytas brouhaha, Raju then stunned the Indian corporate world on January 7, sending a letter to the Bombay Stock Exchange via Satyam's Board announcing his resignation and confessing to having cooked Satyam's books for years. Specifically, Raju admits in the letter to overstating profits, understating debts, and creating false accounts, including showing over USD 1 billion in non-existent cash on the balance sheet. (The full text of the letter is available online at: http: //in.reuters.com/article/idINIndia-3732152009 0107.) The letter also announced the resignation of Raju's brother (with the confusingly similar name of B. Rama Raju),who served as Satyam's Managing Director and Board member. Unexpected, to say the least -------------- ¶6. (U) Raju's admission caught nearly everyone by surprise. The company and its founder had long been the darlings of the IT world. Its offering of American Depository Receipts (ADRs) on the New York Stock Exchange (the company's shares trade in Bombay) in 2001 was heavily over-subscribed. The company boasted alliances with industry giants including Microsoft and Germany's SAP. Ernst & Young, praising Raju for his entrepreneurship and devotion to good corporate citizenship and philanthropy, named him its Indian Entrepreneur of the year in 2007. The same year, the Federation Internationale de Football Association (FIFA),world soccer's governing body, appointed Satyam as its "official technology provider." As recently as September 2008, Satyam announced a major deal with Caterpillar Inc. to develop the heavy-equipment maker's customer research capabilities. Fallout may go beyond Satyam -------------- CHENNAI 00000007 002.2 OF 002 ¶7. (U) Criminal charges have not (yet) been filed, but media report that the Stock and Exchanges Board of India (SEBI) and the Registrar of Companies (RoC) have begun investigations into both Satyam and PricewaterhouseCoopers (PwC),its accounting firm. (Local media report that two class action lawsuits against Satyam have already been filed in New York, as well.) The negative fallout from this case may extend far beyond Satyam, however. IT executives here tell us regularly that their businesses, which often involve handling clients' most sensitive data, depend critically on maintaining an impeccable level of trust with their customers. Our contacts in the IT industry tell us now that they fear Raju's fraud may have profoundly negative implications for India's IT industry as a whole, which is already weathering a difficult economic storm as many U.S. and European clients cut back on spending and postpone signing new contracts. ¶8. (SBU) An Infosys executive, noting that foreign investors are generally wary of emerging markets, anyway, said that this "could not have come at a worse time," adding that the "scandal will only reinforce existing perceptions of poor corporate governance" in India. A top official at Mindtree emphasized that this "sad" episode opened many questions about the efficacy of oversight agencies in India and abroad. A Cognizant executive told us that the implications for the industry would be "huge," noting that he expected Satyam's downfall to drag down the share price of other Indian IT companies as well, resulting in a "lowered ability to raise resources." Comment: "India's Enron" -------------- ¶9. (SBU) Some commentators are already referring to Satyam as "India's Enron." At a time when India's IT companies are already facing a challenging environment, Satyam's collapse is extraordinarily unhelpful, to say the least. All of India's big IT companies, accustomed to growing at more than 20 percent per year, are facing -- at best -- much slower growth than they are used to, if not outright decline. If the industry gets tarred as disreputable by the Satyam scandal, then India's IT glitterati may face even more challenging times ahead. SIMKIN