VZCZCXRO2998
RR RUEHAST RUEHBI RUEHCI RUEHLH RUEHNEH RUEHPW
DE RUEHCG #0007/01 0090553
ZNR UUUUU ZZH
R 090553Z JAN 09
FM AMCONSUL CHENNAI
TO RUEHC/SECSTATE WASHDC 2033
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHNE/AMEMBASSY NEW DELHI 3450
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHNSC/NSC WASHDC

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