India rocked by Satyam scam

Chair of outsourcing firm with offices in Canada resigns after revealing profits massively inflated

Ramalinga Raju visited Toronto four years ago to discuss how Indian outsourcing firm Satyam Computer Services Ltd. was using Canada as a beachhead to gain access to the huge U.S. market.

But on Tuesday, the Satyam chair was waving a white flag of surrender after he admitted to a massive accounting fraud that caused the company's stock to plummet by nearly 80 per cent while casting a cloud over India's emerging economy.

Raju, who founded India's fourth-largest software services exporter with his brother and brother-in-law two decades ago, shocked investors and the Indian business community by tendering his resignation and revealing that Satyam's profits had been massively inflated over the years.

He claimed that about $1 billion (U.S.), or a staggering 94 per cent, of the cash on Satyam's books was "artificial" or "non-existent" and apologized to the company and its stakeholders.

"What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years," Raju wrote in his statement of resignation. "Every attempt to eliminate the gap failed. It was like riding a tiger, not knowing how to get off without being eaten."

He added that no other board member was aware of the financial irregularities at Satyam, which in Sanskrit means "truth."

It is the biggest corporate scandal in India's memory, dubbed "India's Enron" by analysts, and one that has raised questions about regulatory oversight and the role of Satyam's external auditors, global firm PricewaterhouseCoopers.

As well, the scandal promises to shake up India's once-booming outsourcing sector while possibly threatening foreign investment.

The fallout could even extend to Canada, where the Indian outsourcing industry had carved out a niche in southern Ontario because of proximity to the U.S. heartland.

"They find a presence in Canada useful because, in addition to doing business with Canadian clients, they also want to do business with American clients," said Bernard Courtois, president of the Information Technology Association of Canada, which counts some of Satyam's competitors as members.

Satyam maintains computer networks and has provided a range of back-office outsourcing services for such blue-chip clients as Citigroup Inc., General Electric Co. and General Motors Corp. The U.S. government has also been a client.

In Canada, Satyam boasts a client roster that includes four of the country's big five banks.
With offices in Toronto, Montreal and Calgary, the company also does business in the Canadian health-care sector and donated $1 million earlier this year to Hamilton's Mohawk College to build "the first working prototype of Canada's national blueprint for electronic health records."

In 2004, Satyam opened its first Canadian development centre in Mississauga with about 100 workers as part of an industry-wide effort to ameliorate concerns some U.S. companies had about the optics of sending jobs overseas. Canada was seen as a "nearshore" compromise with its slightly cheaper labour, English-speaking workforce and attractive tax benefits.

"There are some (U.S.) customers who feel a great affinity to the Canadian market," Raju told the Star in Oct. 2004.

Gary Teelucksingh, Satyam's senior vice-president for the Americas, did not return calls to his Mississauga office yesterday.

Satyam's competitors – Infosys Technologies Ltd., Tata Consultancy Services Ltd. and Wipro Ltd. – also operate Canadian development centres in Toronto, Mississauga and Windsor.

Outsourcing and, particularly, offshoring of jobs has been a potent political topic in recent years.

"In the U.S., it was this sort of irrational behaviour caused by a mindset that was concerned about illegal immigration and security concerns post-9/11," said Courtois.

But the outsourcing boogeyman never really reared its head in Canada, in part because the country has benefited from jobs shipped north from the U.S. – a trend Courtois expects will continue to accelerate. "I think with the current economic crisis, more people are going to take a look at it," Courtois said.