Corporate scandals tarnish shining India

India's IT industry has been the star of its economic modernisation, but the Satyam affair and other corporate governance concerns threaten serious damage. Andrew Buncombe reports from Delhi

Every day, it seems, there is more bad news, more developments that sting and shock; India Inc has been carrying itself with a little less of its usual swagger in the past week. At the centre of the disquiet, of course, is Satyam Computer Services. Last week, in an announcement that many analysts are still struggling to fully comprehend, Ramalinga Raju, the founder and chairman of the country's fourth largest software exporter, said he had intentionally overestimated, to $1.4bn, the value of the company's assets. Already the affair is being called India's Enron, as people in the IT sector, including many of Satyam's 50,000-plus employees, demand: Why did no-one stop it? Where has the money gone?

The firm's auditors, London-based PricewaterhouseCoopers (PWC), have been replaced by Satyam's government-appointed board. Yesterday, a day after it was revealed police in Hyderabad had searched the offices of PWC's Indian unit, Satyam's board said KPMG and Deloitte were taking over.

While PWC has not been accused of any failure, experts are demanding a review of corporate governance rules and demanding to know why the admitted deception by Mr Raju – currently in jail along with his brother and Satyam's chief executive – was not noticed sooner.

"No one is saying the IT sector isn't doing a good job; we don't need to have a discussion about the quality of the job they are doing," says Professor Mukul Gupta of the Management Development Institute in Gurgaon, a gleaming steel and glass satellite city near Delhi. "The problem is corporate governance. You have 50,000 brilliant people working together, delivering world-class products, but their managers are failing in governing the organisation."

There has been further bad publicity as the World Bank said it had barred two other Indian IT companies, Megasoft and Wipro, from doing business with it because of alleged bad practice. Prime Minister, Manmohan Singh is extremely concerned about the impact the Satyam affair could have on corporate India's reputation as a hitherto safe investment location. At a time when India is fighting to hold off the recession that is already hitting the West and barking at China's gate, such scandals could prove fatal.

While the country's IT sector only employs 1 million people, it is the flagship of the "New India" economy and has enjoyed remarkable growth in recent years. Now it does not help, as one observer noted yesterday, that "external services spending in the US is already slowing as banks tighten their belts". Jacob Jegher, a senior analyst at consultancy Celent, added: "Financial services firms who are considering outsourcing in foreign countries will now have an additional reason to hesitate. The risk of scandal and fraud is the last nail in the coffin."

The government is also worried about the scandal's impact on Indian stocks and the rupee, both of which have taken a hit. The Reserve Bank has sought details of banks' exposures to Satyam and other firms run by its founding family.

Underlining this unease, Mr Singh, a former finance minister credited with much of success of India's economic growth, this week met with senior ministers and ordered the Serious Fraud Squad to launch its own inquiry into Satyam. He is also considering a government bail-out to ensure Satyam has enough cash for the short term.

Ahead of a general election that could be just weeks away, Mr Singh will not want to allow a perception of inaction harm the government's chances of re-election. The corporate affairs minister, Prem Gupta, said corporate governance was an issue that the ministers and officials would return to: "We will have detailed discussions on this aspect." Experts say, it is already obvious that regulations need to be more effectively enforced.

"There has been a gap in implementation. The authorities should have stepped in before this blew up," says Professor CL Bansal, a former regulator.

If greater transparency is the name of the game, there are several steps the government could take. One would be to re-examine the law relating to benefits paid to senior employees by firms, so called "related-party transactions". Another would be to put an end to the extremely complex vehicles set up by companies both for investment purposes and to reduce transparency about ownership – a key component of the Enron affair. "Nobody knows who owns what," says Professor Sandeep Parekh, a former executive director of the Securities and Exchange Board of India who teaches at the Indian Institute of Management in Ahmedabad. "We don't really know what went wrong [at Satyam]. But whatever went wrong, it went wrong pretty badly."

Such a view may have been shared by PWC as well. While the firm has had little specific to say in recent days, citing customer confidentiality, it did say it had "placed reliance on management controls over financial reporting, and the information and explanations provided by the management... during the course of our audits [at Satyam]".

It now admits that the information it provided about Satyam's finances has been "rendered inaccurate and unreliable" following Mr Raju's confession.

For now, corporate India is holding its breath, hoping there are no more unpleasant revelations in the days ahead. Amid some suspicions that Mr Raju may not have been entirely exhaustive in his statement, people are desperate for more details.

Some may be provided in the coming days by T R Prasad, a former independent director at Satyam, who was ousted by the government along with the rest of the board last week.

Mr Prasad has indicated he will cooperate with the official investigation. "I am fully conscious of a citizen's duties and responsibilities to cooperate with any investigative agency and to comply with all court orders," said the man who was once, as the Indian government's cabinet secretary, the country's most senior bureaucrat.

In recent years, as India has enjoyed annual growth of anywhere up to 10 per cent and a flurry of headlines about "Shining India", the nation's business community may have felt it was flying high and out of reach. The Satyam affair has brought it back down to earth. With a bump.