Raju's fraud admission sends shockwaves through India Inc.

Raju admitted on Wednesday that the company had reported revenue of Rs.2700 crore against the actual revenue of Rs.2112 crore for the quarter ending September 30, 2008 (Q2). The reported operating margin was Rs.649 crore (24 percent of revenues) against an actual operating profit margin of Rs.61 crore (3 percent of revenues).

In addition, he had understated the company's liability of Rs.1230 crore and had overstated debtors' position, thereby inflating the company's cash and bank balances on the balance sheet by Rs.5040 crore.

Raju said the manipulation in the accounts had been going on for several years. "What started as a marginal gap between actual operating profits and the one reflected in the books of accounts has attained unmanageable proportions," Raju said, adding that it had assumed such gigantic proportions that he felt "it was like riding a tiger, not knowing how to get off without being eaten."

Raju said the fraudulent figures had attained unmanageable proportion as the size of the company grew and every attempt to eliminate the gap failed. The aborted Maytas acquisition by Satyam was the last attempt to fill the fictitious assets with real ones, he said.

The embattled chairman said he took the decision to inflate the profits, as he was concerned that a poor performance, combined with the fact they held a small stake in the firm, would make Satyam an easy target for a takeover. But his attempts to "keep the wheel moving" at Satyam finally ended in vain when institutional lenders sold most of the pledged shares because of margin calls, Raju said.

The disclosure has sent Corporate India into deep shock and disbelief and the courageous few said this is the right time for implementing stricter corporate governance norms.

In a statement, National Association of Software and Service Companies or NASSCOM, the consortium that serves as the apex body of the Indian IT and BPO industry, said the massive accounting fraud committed by Raju is an instance of failure of corporate governance.

"While the law will take its course, this incident is particularly unfortunate as the Indian IT-BPO industry had set very high standards of ethics and corporate governance," NASSCOM said, adding that this is a standalone case of failure of such failure and it is critical that it be viewed in this light.

"We are sure that all the stakeholders would also treat this as an isolated issue and does not in any manner a reflection on the industry or Corporate India," it said, adding that it would cooperate with the existing Satyam board to reach out to their customers and employees and guide them through the difficult period of transition.

"NASSCOM advocates the highest standards of ethics for the industry and we will work with our membership to re-commit to maintaining the highest standards of governance and transparency," NASSCOM said.

"There has been a breakdown of corporate governance, especially over a period of time. There needs to be a lot of soul searching and regulations need to be put in place to make sure it doesn't happen again. I am worried because India's reputation in corporate governance has been impacted. I do not believe this has any impact on the IT industry itself. This is an overall corporate governance issue at a firm level. But in terms of improving corporate governance, I really don't believe that is a mandate of any association," said Ganesh Natarajan, chairman of NASSCOM.

Satyam is not just listed on Indian stock markets, but was also the first Indian technology firm to list on the hi-tech US Nasdaq market and the fraud disclosure, Natarajan said, has sullied the image and reputation of India's IT industry and it will take some time to recover.

"This kind of an incident could also send wrong signals to investors and clients abroad. However, we believe the entire IT sector will not be impacted much as we consider this as a specific case of a particular firm," Natarajan said.

"The entire incident came us a shock to us. Also, this kind of a fiasco is an unprecedented one in the history of NASSCOM. We are looking into the matter on what steps can be taken. Considering the magnitude and implications of the incident, we can even look at banning the company from NASSCOM," he added.

However, Som Mittal, president, NASSCOM, said the body is not looking to ban Satyam immediately.

Incidentally, Raju was once the chairman of the apex body of the IT-BPO industry in India.

"Satyam was always seen as one of the top Indian IT companies and often represented as shining example of Indian liberalization and entrepreneurship. This fraud on the investors and employees of the company shows a systemic breakdown in audit and board oversight of the company," said Rajeev Chandrashekar, president of Federation of Indian Chambers of Commerce and Industry (FICCI).

The fraud involving Satyam was similar to what happened to Enron in the US and has dealt a severe blow to Corporate India's hopes of attracting foreign investors looking for quick gains in emerging markets, Chandrashekar said.

"What happened following Enron in the US is bound to happen here. There is definitely a need for deeper and harder look at what we have been calling corporate governance over the last few years. Questions will need to be asked to quickly establish how this happened and who caused it to happen. There have been far too many self-congratulatory awards being given out in terms of corporate governance and disclosure etc. We have to as a system - whether it is the government, regulators, bankers - take a deep look into what allowed this to continue for so long," he said.

"At the end of the day, hundreds of thousands of investors" have paid the price for the wrong-doings, which need to be thoroughly investigated by the authorities and regulators, he added.

According to Chandrashekar, the issue raises questions on the capability of independent directors to understand what's going on.

"The whole idea of an independent director on a board is that they actually take the time, have the capacity to understand what the company is doing, what the nature of the business is, and what the details of the business are. The kindest explanation for all this is that the board of directors got conned, which in itself is not a very good thing. I think independent directors have a responsibility and there is probably a discussion that needs to happen about what's the role of an independent director. Is it just independence that is the qualification or is independence and the capacity to understand the business that is required, when you get independent directors on board?" he said.

The Confederation of Indian Industry (CII) has responded to Raju's admission of fraud with shock and disappointment and said there is an urgent need to examine the loopholes in regulation, accounting, audit and governance that allowed such lapses to occur and address them immediately.

Though the incident cannot be the basis of questioning the general governance standards in other companies, CII president K.V. Kamath said, Corporate India must reflect on ways to demonstrate its quality of governance and enhance the confidence of stakeholders.

The Associated Chambers of Commerce and Industry of India (ASSOCHAM) too expressed shock and suggested setting up of an investigative committee.

"The government should hasten process of investigating the matter so that the confidence of investors in Indian corporate world is retained and not shaken at any cost," Sajjan Jindal, president, ASSOCHAM, said in a statement.

"It is a very serious issue which has come to limelight, leading to resignation of the chairman of Satyam Computer and all possible efforts should be initiated so that those that have committed corporate frauds in the company are exposed and lesson drawn for others so that such fraudulent practices in corporate world are never repeated and investors keep investing in corporate sector," he added.

The apex bodies of chartered accountants and company secretaries in India - ICAI and ICSI - said Satyam's financial wrong-doings has become a disgrace to Corporate India and anybody found guilty would be punished.

"We will ensure that to any person who has not worked according to our standards and our expectations, severe punishment be given," ICAI President Ved Jain said.

According to Jain, ICAI would initiate its own proceedings and collect facts and information about the incident and if any member is found guilty, they would be severely punished, including being barred from practicing for a lifetime.

"All one needs to prove is he was the party to the fraud. He can be booked under the Companies Act and the Chartered Accountants Act...in case of negligence by the chartered accountant, we have a severe punishment," Jain said.

Echoing a similar tone, ICSI president Keyoor Bakshi said the body would take vigorous action "if any member (is) found guilty."

There are disciplinary provisions in the Company Secretaries Act and if Satyam's company secretary is found guilty then the maximum ICSI can do is suspend membership, Bakshi added.

PricewaterhouseCoopers (PwC) is Satyam's auditor while G. Jayaraman is Satyam's company secretary in question.

Infosys Technologies, India's second-largest software exporter, has called the incident "deplorable" and "a good warning signal for all management" to conduct themselves in "the most legal and ethical manner."

According to N.R. Narayana Murthy, the co-founder and non-executive chairman of Infosys, the manipulation of accounts shows a total failure of corporate governance. "I only hope that relevant authorities get to the bottom of this and take appropriate action," he said.

However, Murthy said though in the incident would leave investors shocked, it would be for a short-term and in the long-term the market would bounce back when they realize that Satyam is an "isolated case."

"It is important to remember that one Satyam does not make the entire Indian software industry. I believe it is an isolated case. I want foreign investors to realize that there are many honest managements and good companies in this country. While what has happened at Satyam is totally regrettable, I believe that it does not represent India. It just represents one individual and one company. Investors will consider this as an extreme case," Murthy said.

"In the short term, investors will start looking deeper into all companies they want to invest in, and rightly so. Once they realize that things are not all that bad and that most companies are decent and managements honest, they will regain their faith," he said.

The IT bellwether has a strong reputation for corporate governance.

Agrees Suresh Senapathy, CFO, Wipro, India's third largest technology outsourcer. According to Senapathy, Satyam's case is isolated and should not be associated with any industry.

However, he said the incident would leave a bitter taste in the market and while shareholders would feel more vulnerable, clients would tread the market more warily.

According to Anand Mahindra, vice chairman of Tech Mahindra, a leading IT services and solutions provider to the telecom industry and a unit of tractor and utility vehicle maker Mahindra & Mahindra, the Satyam fraud has damaged the credibility of Indian IT companies abroad and he hopes that Satyam's new task force will takes charge of the situation. "I am very angry at this development because, I think, it's done an incalculable and unjustifiable damage to the image of India abroad in a generic sense, particularly to the image of Indian IT, which was ironically what led the creation of Brand India in the past decade," Mahindra said.

"It's done damage to the credibility of corporate governance of independent directors in India's boards. What's most distressing I think is that these people (like Raju) have been role models for the new entrepreneurs in India. These were role models of people who came from no family business backgrounds who started with nothing and they were role models for the whole generation of people and you created perhaps cynicism and disillusionment with that same segment," he said, adding that it is of paramount importance that the issue be dealt with haste in order to salvage Satyam's reputation and rectify the situation.

Meanwhile, the London-based World Council for Corporate Governance which had awarded Satyam with the Golden Peacock Global Award for Excellence in Corporate Governance in September said it was reviewing the situation. "In wake of unfloding events which is most unfortunate, we have decided to take away the award from Satyam Computers. We're planning to withdraw the branding," said Manoj Raut, a New Delhi-based spokesman at the Golden Peacock Awards Secretariat. "The council will be meeting shortly to check the legal perspectives and how to go about it."