Wipro, Megasoft join Satyam's ranks, barred by World Bank for direct contracts

In December, the World Bank said it found Satyam ineligible for direct contracts for a period of eight years, effective from last September, on grounds of bribery, fraud and business malpractice. The disclosure sent the stock of the IT outsourcer, already struggling to regain investors confidence on account of the botched $1.6 billion Maytas deal, plunging more than 10 percent. Satyam subsequently described the statement by the World Bank as inappropriate, and demanded an apology from the bank but the World Bank stood its ground.

On Monday, the World Bank made a public disclosure that it had found Wipro, India's third largest technology outsourcer and a key component of the benchmark index, ineligible for direct contracts since 2007 until 2011, citing conflict of interest policy. Similarly, the US-based Megasoft Consultants - an associate company of Bombay Stock Exchange (BSE)-listed Megasoft has also been banned from directly bidding for contracts from the World Bank for four years since 2007.

The World Bank said it had found Wipro ineligible for direct contracts four years since June 2007 as it was "providing improper benefits to Bank staff."

Megasoft, the World Bank said, was barred for an identical period beginning December 2007 for "participating in a joint venture with Bank staff while also conducting business with the Bank."

Besides Wipro and Megasoft, two non-IT companies, Delhi-based Nestor Pharmaceuticals and Gap International, and an individual, Surendra Singh, have been blacklisted for violating the World Bank's guidelines. The blacklisted names were made public by the World Bank on Monday in the interest of fairness and transparency.

The bans, the World Bank said, were imposed with respect to its corporate procurement program. All three companies were involved in different contracts and their debarments are not related, the World Bank said, adding that it would step up its fight again fraud and corruption within the institution and in projects it finances in developing countries.

The disclosures are in line with the new norms followed by the World Bank since late 2006. The World Bank has also said it will publicly list the names of companies debarred from its corporate procurement on a regular basis henceforth.

The shocking disclosures sent the stock of Wipro tumbling 9.30 percent to Rs.227.35 on the Sensex. In the broader index, Megasoft fell to an all-time low of Rs.13.80 before paring its losses and closing down 0.6 percent at Rs.15.75.

However, Wipro said the ban would have little impact on its business operations or earnings. "In 2000, as part of our initial public offering (IPO) of American Depository Shares (ADS) to our employees and clients in the US, our representatives made an offer to World Bank employees to purchase the shares at market price under the Securities and Exchange Commission approved Directed Share Programme (DSP). The World Bank, however, directed the offer to the family members and friends of its employees. Though they purchased 1750 shares for about $72,000 at the IPO price ($52.48), they signed a conflict of interest statement that purchasing the shares did not violate any ethics or conflict of interest policies. The programme objective was to involve employees and customers with the public offering to expand our recognition and brand. A majority of the shares sold under the DSP were allotted to our employees. [Later] The World Bank determined in June 2007 that Wipro would be ineligible to contest direct contracts from 2007-2011," Wipro said in a regulatory filing with the Bombay Stock Exchange on Monday, in line with the revised disclosure policies that mandate that the company must reveal its vendor status with the World Bank.

However, Wipro said that its cumulative revenues from the World Bank are less than a $1 million in the past 8 years. "Our inability to get future business from World Bank will not adversely affect our business and results of operations. To date, Wipro's revenue from the World Bank is insignificant," it added.

According to Girish S. Paranjpe, joint-CEO of Wipro's IT business, the shares offered by the company to World Bank employees were too little to amount to an inducement. "It was a goodwill gesture. We have done nothing wrong or unethical," Paranjpe said, adding that Wipro did not discuss the ban earlier as it was a World Bank policy not to discuss such investigations.

But once the bank had changed its position, Wipro thought it proper to issue a statement and clarify, Paranjpe said. "I am surprised at the timing of the statement by World Bank. This is a more than an eight year old story," he added.

"In light of the current developments, we decided it was better to disclose more rather than less," Wipro CFO Suresh Senapaty said, adding that he is not worried that Wipro stock plunged on the debarment news. "It takes time for people to come to terms with this. Once people understand the story, the stock will be back," he said.

"Let me reaffirm that Wipro was right from a legal as well as ethical standpoint. We believe what we did was right and we did it in the right manner," said Wipro chairman Azim Premji in an email to employees.

The Hyderabad-based Megasoft made a similar statement assuring investors that the debarment would have no adverse financial impact on the company as from 2004 it had discontinued providing services to the World Bank and the revenue from the development bank was insignificant.

According to Megasoft, the World Bank had approached them in 2007 seeking details about its operations in China and had objected to their having a joint venture with an ex-employee of the World Bank. "We had by then even shut down our China operations. They objected to us having a joint venture with an ex-employee of the World Bank and chose to debar us on that ground," the company said in a release.

"The logic that we applied then was that the World Bank was no more our customer, and we were also shifting our focus from the onsite staffing services that we used to provide to the Bank. So, the ban was not going to have any impact on our financials," said G.V. Kumar, managing director and CEO, Megasoft.

"Megasoft has always maintained high levels of corporate governance and have made disclosures about all our operations including about Megasoft China," Kumar said, adding that the company had presumed that the World Bank would not make it public, as it would not be of any material importance to it.

According to Kumar, Megasoft started providing IT staffing services to the World Bank since 1996 but decided to discontinue the service in 2004. During that period, the total revenue from the Bank was around $6-7 million.

In 2003, Kumar said, Megasoft had set up a 50:50 joint venture called Megasoft China with Ben Hu, a former World Bank employee. "Hu had left the Bank in 2001 and had joined Megasoft's board in 2003. We had made his appointment public and found nothing wrong in appointing him, as it is an industry practice to appoint former World Bank or IMF servicemen on company boards," Kumar said.

However, in 2006, the China operations were shut down as "it was not successful," Kumar said, adding that Hu continued to remain on Megasoft's board until 2007.

Later in 2007, the World Bank approached Megasoft while investigating its procurement policies and "since we were no longer their vendor, we agreed to it and gave all details of our venture," Kumar continued.

Subsequently, the World Bank said that Megasoft had violated its policies. "It was internally decided to not contest the ban, as the World Bank is a large institution and we are a small company. Moreover, it was not of any material importance to us. We have not transacted any business with the Bank from 2004 and where is the need to come out with its list barring us now?" Kumar said.

Megasoft provides telecom software products to wireless operators and offshore application development and maintenance services (ADMS). It has over 100 clients worldwide, including IBM, Liberty Mutual and Sun Chemicals, and has operations in Britain, Germany and Singapore.

However, brokers are unhappy, as the IT outsourcers had suppressed the fact that they were banned until the World Bank decided to go public. The negative sentiment in the IT sector, they said, is likely to persist for some time. "People are apprehensive there might be more such disclosures and there are wild rumours doing the rounds," said Gaurang Shah, chief manager at Geojit Financial Services.

"Most of the IT stocks are likely to suffer amid the disclosure made by the World Bank and concerns of quarterly earnings announcement," said Arun Kejriwal of research and investment advisory firm KRIS.

According to Sandip Sabharwal, chief investment officer at Mumbai-based J.M. Financial Mutual Fund, which manages assets worth $1.2 billion in equities and bonds, Wipro and Megasoft have done the right thing by explaining their vendor status. "In this environment, companies will make disclosures just to be sure they aren't perceived to be lacking in transparency," Sabharwal said.

"We have not yet come out of the Satyam fiasco, so any news like this hits sentiment," said Tejas Doshi, research head at Sushil Finance, referring to the $1 billion-plus accounting fraud revealed by Satyam last week that has shaken the corporate world.

However, Wipro would soon be back on its feet, Joshi said. "There is a blip, but people are likely to put this aside because the business impact of this is not great for Wipro," he said.

Agrees Dr. B.V. Naidu, former director of the Software Technology Parks of India (STPI). "Some of these ripples are expected when you have a sector like software that has witnessed tremendous growth path. In the long run, the Indian IT industry will withstand all these ripples and cruise ahead," he said.

According to Frances Karamouzis, IT analyst at Gartner, the debarment would not affect Wipro's operations or revenues much. "Wipro has done nothing wrong, as its share sales were approved by the SEC," she said.

Agrees H.V. Harish, the Bangalore-based partner at research and advisory firm Grant Thornton. "It's part of a cleanup act for the World Bank, a practice which was permitted earlier but is now being questioned," he said.

"We continue to believe that Wipro is one of the best corporates in India in terms of corporate governance. However, such disclosures increase apprehension amongst investors in the backdrop of the Satyam fraud. We believe that it would be in the best interest of Indian IT companies to be prompt in disclosing price sensitive information to investors given nervousness post the Satyam debacle," said JPMorgan Asia Pacific Equity Research in a note to its clients.

Forrester Research (FORR) analyst John McCarthy believes the Wipro news ultimately will have little effect on its international clients. "The Wipro issue is eight years old - which raises the question why it took the World Bank seven years to figure it out," McCarthy said.