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Unhappy holiday season for Satyam

David Mitchell | Jan. 6, 2009
Over the holiday period an acrimonious disagreement between Satyam and the World Bank was in evidence

Over the holiday period an acrimonious disagreement between Satyam and the World Bank was in evidence, illustrated by the volume of press coverage in the traditionally quiet media season. The dispute is centred around claims that Satyam had provided improper benefits to Bank staff and [failed] to maintain documentation to support fees charged for its subcontractors resulting in Satyam being declared ineligible to receive direct contracts for a period of eight years.

The dispute risks damaging short-term business for Satyam, but also the market more widely

Ovum logoSatyam is obviously very concerned about the damage that the affair could cause to its reputation and its revenues. So much so that on Christmas Day it issued objections to the World Bank statements, declaring that Satyam formally requested today that the World Bank immediately withdraw those statements, that it issue a new statement apologizing to Satyam for the harm done to the company due to the Banks actions, and that it provide Satyam with a full explanation of the circumstances related to the Banks inappropriate statements.

Although this dispute has been happening behind closed doors for some time, with the initial temporary suspension of Satyam having taken effect in February 2008, the timing is very unfortunate for Satyam. It came less than a month after the previously announced acquisition of Maytas Infra and Maytas Properties was called off following adverse investor reactions. This acquisition also resulted in action being brought against Satyam and some of its senior staff by its client the mobile payments specialist Upaid, which alleged that the acquisition was an attempt to strip all surplus cash from Satyam cash that would otherwise be available to pay Upaid, if Satyam had lost the case. 26 December saw the problems made worse by the resignation of Dr Mangalam Srinivasan, one of the independent directors of Satyam.

While none of this is helpful to Satyam, it is also likely to cause wider market repercussions. The credit crunch, bank recapitalisations and the $50 billion Ponzi fraud scheme alleged perpetrated by Bernard Madoff have damaged consumer and business confidence in both the corporate governance and regulatory supervision arrangements of the financial services sector. It will take some time for the financial services sector to recover from this damage. If the IT sector, and the outsourcing sector in particular, is tarred with the same brush then that sector will also suffer more deeply than the credit crunch impact alone would have caused. In addition, Satyam and others may well continue to suffer, even if the World Bank dispute is amicably resolved downstream without fault residing with Satyam.

 

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