The export-led Indian software industry, an incredible success story now reeling under the impact of the global economic meltdown, has been given another rude jolt with revelations of serious fraud in the country's fourth largest software enterprise, Satyam Computers. The huge fraud, the biggest in India's corporate history, is reminiscent of the Enron scandal.
With the company's chairman B. Ramalinga Raju acknowledging that he had perpetrated the fraud over the years by fudging accounts to the tune of over $21.6 billion by showing imaginary cash and bank balances, non-existent interest income, understated liabilities and overstated position of dues owed to the company, the entire software industry is in deep shock and groping desperately to salvage its credibility.
Raju, who quit as Chairman and was subsequently arrested, has left the company in tatters. On the day his letter to the stock market regulator SEBI was released to the public the share price of Satyam tanked by 79 per cent, taking the sensitive Mumbai index crashing from 10,425 points to 9,587 points.
The federal government has acted swiftly to sack the entire board of directors, replacing them with government-appointed directors as an interim measure. For a company that employs 53,000 workers, the crisis of confidence is taking a very heavy toll. The account books are being scrutinised and even Satyam's auditing firm PriceWaterhouse Coopers is under a cloud.
The Satyam bubble could not have burst at a worse time. The US market has been delivering Indian IT firms about 50-60 percent of their revenues every year. Understandably, the US slowdown combined with the appreciation in the rupee has led to a sharp reduction in growth. The crisis in the global mortgage market has also affected revenue from banking, financial services and insurance. As a result, Indian software majors Tata Consultancy Services, Infosys and Wipro are turning to Latin America, Africa, Middle East, Europe, Japan and China to diversify their client base.
Even before the Satyam thunderbolt struck, the US slowdown had hit India's software giants, with companies freezing wages and cutting increments, slowing hiring and even handing out pink slips, putting the brakes on – although not stopping – a heretofore seemingly unstoppable upward trend in the country's most glamorous industry. There has been a perceptible drop in the percentage of increase in sales and net profits but the overall growth is still healthy.
The Indian National Association of Software and Service Companies had estimated that the country's technology sector would have created 50,000 fewer jobs in 2008 than the preceding year, although it predicted the sector would still have added 200,000 workers by year's end. India's technology outsourcing companies have laid off about 10,000 employees since September, 2008, according to the Union for Information Technology Enabled Services, a labour group that represents technology workers. The Satyam fiasco could swell the figures further in the new year.
However, most industry analysts believe the problems are short-term. A recent estimate by software industry body Nasscom has predicted that the industry would be short more than 200,000 professionals by 2012. Another recent white paper "India's Role in the Globalization of the IT Industry" by Evalueserve, a Knowledge Process Outsourcing firm, has said: "by 2015-2016, the number of professionals working in the IT industry will grow tenfold (from 2001-2002) and the total revenue will grow 22 times."
Says the study: "This means the IT industry is likely to employ 3.75 million professionals and record almost $US200 billion in revenue by 2015-16. The industry may be passing through a rough patch because of a slowdown in the US economy and high inflation rates, but this stage will pass. India will create the second largest IT services labour pool after the US within the next seven to eight years. That's not all, domestic IT industry's contribution to India's GDP is likely to rise from 0.8 percent in 2006-07 to 2.65 percent by 2015-16.''
Some industry insiders even insist that the global crisis will actually benefit companies in India, as Western businesses seek to cut costs by moving jobs overseas. "It's certainly not irrational exuberance," said Nandan Nilekani, co-chairman of Infosys, one of India's best-known technology outsourcing firms.
The downturn is exposing a deeper concern: India has become the world's front office, handling customer service calls, and its back office, helping to process payments and run accounting and other computer systems. But it has not yet become the head office — making major new products, pioneering marketing techniques or helping to shape corporate strategy.
While India's trump card is the vast technical manpower resources it has at its command, the corporate world would be watching how it deals with the Satyam crisis.
Swift reforms to plug the loopholes in the system so that such a fiasco is not repeated could go a long way in restoring credibility of the entire software industry. But on the other hand, political wheeling dealing to bail out Satyam in an election year a while neglecting to improve the lax standards of monitoring could prove costly for this nascent but promising industry for which good credentials abroad are vital.