Bangalore: The scam involving Satyam Computer Services Ltd isn’t the first to to strike India’s software industry, although the scale of the accounting fraud to which chairman B. Ramalinga Raju has confessed may be unprecedented for the country.
In the past decade, companies such as DSQ Software Ltd, Pentasoft Technologies Ltd and Pentamedia Graphics Ltd have collapsed amid scandals over insider trading and other corporate malpractices.
Raju, who founded Satyam in 1987, admitted on Wednesday to having fudged the Hyderabad-based company’s accounts over several years to the extent that Rs5,040 crore of cash that’s on the books has vanished.
His confession and resignation came three weeks after the company controversially proposed, and then cancelled, the acquisition of two building companies owned by his sons. The deal, which triggered a debate over corporate governance in India, was killed after investors revolted and drove down Satyam’s share price.
In March 2006, Indian authorities arrested Dinesh Dalmia, chief executive of DSQ Software, for fraud and inducing US investors to part with $100 million (Rs486 crore now) for investment in substandard equipment for operating a back-office firm out of India.
This was five years after DSQ Software collapsed in the 2001 stock market scandal, following charges of insider trading by Dalmia. He is currently facing trial and is lodged in a Kolkata jail.
Both Pentasoft and Pentamedia Graphics collapsed after their promoters in 1999 diversified from the software and animation services business into new ventures such as resorts and multiplexes.
This was similar to what Raju attempted in his botched bid to diversify into real estate and infrastructure businesses.
There were others such as SSI Technologies Inc., an arm of SSI Technologies Ltd, which figured in the K-10 stocks of broker Ketan Parekh, who led the 2002 market collapse and was arrested later for alleged share price manipulation.
Kalpathi Suresh, the chief executive of SSI, eventually sold the software services and software education businesses to PVP group.
While Raju admitted that the fraud in Satyam had taken place over several years, a former Union secretary of economic affairs claims that the ministry of corporate affairs had initiated in August 2002 an investigation of Satyam for fudging its books.
“It was a half-hearted attempt (by the department). Nothing emerged out of it,” said E.A.S. Sarma, the former bureaucrat. “Satyam was talked about in the same breath as DSQ and GTB (Global Trust Bank Ltd). A thorough investigation now will open up what the truth is”.
Analysts say that the magnitude of the Satyam scandal would impact the information technology industry more now. The DSQ and Pentasoft scandals involved small firms and erupted at a time when software exports were low.
“It was a different era, now the sector is more exposed to customers than ever before. It will be tough,” said Sabyasachi S. Prasad, director of Mindplex Consulting, an offshore advisory firm.
Another firm, which advises overseas clients about moving work to India, said it will call for a more thorough inspection of a local company before recommending it.
“Irrespective of the company, we will advise clients to do more scrutiny. Till now we didn’t, but who knew such thing can happen with companies like PwC (PricewaterhouseCoopers) doing audit of Satyam,” said Avinash Vashishta, chief executive of Tholons Inc.