Hyderabad: In what could be an indication of times to come for the fraud-hit Satyam Computer Services Ltd, one of its largest clients and a Fortune 500 company, State Farm Insurance Co., has terminated its contract with the Indian technology vendor.
The US-based insurance service provider announced its decision to terminate its contract on Friday. Following a board meeting on Saturday in Hyderabad, Satyam had said the company has been “in conversation with customers” who had “expressed their continued support”.
While the value of the contract or its material impact on Satyam could not be immediately ascertained byMint, a US daily Pantagraph, based in Illinois, Chicago, where State Farm is headquartered, reported on Saturday that at least 400 on-site staff of Satyam may be unemployed in the wake of termination of the contract.
Unanswered questions: Satyam founder B. Ramalinga Raju. Harikrishna Katragadda / Mint
State Farm could be one of Satyam’s largest clients but the size of the contract is not known. A Satyam spokesperson declined to comment on the size of the contract and the impact of its termination.
According to an analyst with a Mumbai-based domestic brokerage who does not want to be identified, State Farm Insurance is a $50 million (Rs244 crore) client and one of the top 10 clients for Satyam.
“Ensuring continuity of service is the board of directors’ top priority, and Satyam is working diligently to ensure all our customers’ goals and needs are being met. While we are disappointed in State Farm’s decision to discontinue services, our executives are reaching out to clients around the world and at this point, well over 90% of our clients have committed to continuing with Satyam,” the spokesperson said.
State Farm did not respond to a Mint questionnaire on this development.
“The current uncertainties surrounding Satyam’s future and potential impact to State Farm resulted in this decision,” the insurance firm said in a statement, according to Pantagraph.
Research firm Forrester has recently said that Satyam as a vendor could be a risky proposition given the recent developments, and its clients should actively pursue risk mitigation strategies to prevent dependence on Satyam.
Satyam founder and chairman B. Ramalinga Raju confessed in January to fudging the company’s accounts over several years to the tune of Rs7,136 crore by overstating bank balances and showing non-existent cash. Raju, his brother and managing director B. Rama Raju and its chief financial officer (CFO) Srinivas Vadlamani have since been arrested.
Meanwhile, on Saturday, in response to a petition from the Andhra Pradesh Crime Investigation Department, or CID, a Hyderabad court granted police custody of the Raju brothers and Vadlamani. On Sunday, CID officers were interrogating the three in an effort to understand if the accounts were merely inflated or money was actually siphoned off from the company.
Earlier on Saturday, Satyam’s new six-member board, which met for the second time in less than a week, appointed an internal auditor, two law firms to advise the board on legal issues as well as a three-member audit committee consisting of board members T.N. Manoharan (chairman), C. Achuthan and S.B. Mainak. Chennai-based chartered accountancy firm Brahmayya and Co. has been appointed as internal auditors of the company and Amarchand and Mangaldas as well as Suresh A. Shroff and Co. as legal advisers to the board.
The board also discussed speeding up collection of receivables, besides appointment of a chief executive and a CFO. Till the leadership issue is resolved, the board will continue to meet every week.
The board, which is in talks with banks to raise funds to meet operating capital needs, said that last week had seen definite improvements in collections. Collection of receivables will continue to be a “major priority for the business leaders and the board”, a company release said.
Meanwhile, on Sunday, Andhra Pradesh finance minister K. Rosaiah said the state government will not take any hasty decisions on projects handled by Maytas Infra Ltd, a company where the Raju family owns a 36% stake.
Maytas Infra’s major projects include the Rs12,312 crore Hyderabad Metro Rail project, the Rs1,590 crore Machilipatnam port project, the Rs3,627 crore Pranahita-Chevella irrigation project package-5 and the Rs2,119 crore Pranahita-Chevella irrigation project package-7, all of which are in Andhra Pradesh.
In a related development, Venkat Changavalli, chief executive of Emergency Management and Research Institute or Emri, another Raju initiative, sought to allay fears about Emri being impacted. He clarified states provide 95% of funding for its operations and that except in Andhra Pradesh, all Emri assets are owned by the states themselves. Changavalli was responding to allegations that Emri was used as a front to siphon off public money.
He said Emri’s fund utilization is transparent, besides being audited and reviewed by the state authorities at regular intervals.