Satyam fraud likely to trigger new regulation

Ramalinga Raju's fraud has rocked the Indian outsourcing industry

The huge financial fraud committed by the chairman of Satyam, India's fourth largest software and services company, has raised serious questions about the way in which Indian companies are scrutinised.

Leading industry sources argue that regulation will greatly benefit the Indian outsourcing industry and that, while Satyam's financial deception could bring about its downfall, the rest of the Indian outsourcing industry will be largely unaffected.

Satyam chairman Ramalinga Raju admitted on Wednesday to inflating company profits by 50.4bn rupees (£682m) over the past seven years, causing the company's stock to plummet by more than 60 per cent.

Nasscom, India's IT trade organisation, which sets the tone for public policy regarding software and services, said it was an isolated incident.

"This is a standalone case of a failure of corporate governance, and it is critical that it be viewed in this light," said a Nasscom spokeswoman. "This is not in any manner a reflection on the industry or corporate India."

But key industry sources said the incident is likely to trigger new auditing regulations in India, and cause outsourcing customers to increase their investigation of providers' due diligence procedures in the short term.

Duncan Aitchison, president of outsourcing consultancy TPI, drew similarities between the Satyam events and the 2001 Enron scandal in the US. The accounting fraud brought into question the transparency of US accounting practices, and led to increased regulation and reporting requirements for all US corporations.

Richard Sykes, an independent strategic analyst and adviser, said that, although all Indian IT firms are likely to be subject to increased scrutiny following the Satyam incident, once they prove themselves - and he said he has great confidence that all the big names will - the industry will soon be back on track.

"The reputation of a key centre in our global industry has been badly tarnished, but certainly not fatally," he said.

Anthony Miller, an analyst at TechMarketView, believes that Satyam's problems in recent months were down to the poor leadership of Raju rather than any systemic problems in the Indian outsourcing industry.

He gave examples such as Raju's failed attempt at purchasing his sons' construction firms, and the fact that the World Bank had blacklisted Satyam after claiming that the firm had supplied the bank's staff with improper benefits.

Miller also said that, if more regulation is introduced, the general outcome will be positive for the industry, despite Indian companies having to pay to comply. Providers will be able to use their compliance to demonstrate successful governance processes to outsourcing buyers, he said.

Kris Gopalakrishnan, chief executive of Satyam rival Infosys, agreed. "The whole incident is deplorable and the government and regulators must investigate the matter to get to the bottom of this," he said.

"They should also make the necessary changes to regulations so that such incidents do not happen in the future."

However, even with increased opportunities to prove that it can be trusted, Satyam has little chance of regaining the position it has held in the market for the past 20 years.

Forrester Research analyst John McCarthy said the scandal will prompt many Satyam clients to review their contracts and talk to other offshore suppliers about potentially taking over work from Satyam.

Miller was even more pessimistic. "There is no future for Satyam as an independent company now," he said. "And it can write off any new business deals in the next few months because potential customers will not know who they will be dealing with in a few months' time."