India’s fraudulent wake up call

The Satyam scandal has brought forgotten corporate governance issues back out into the open in India, which could effect future deal flow, writes Siddharth Poddar.

Private equity investments have flowed into India over the last few years and all had seemed well. There was the occasional voice of caution and sometimes concern that sought to shed some light on how Indian companies were managed and run. However, the bull run was on and many private equity investors made a lot of money exiting their portfolio companies by listing them on the ever-soaring stock markets.

‘Little can go wrong in India’ was the mantra guiding many fund managers in the last two years. The returns were there for the taking, and you were either investing there or missing out.

Siddarth Poddar

However, all that is likely to change now, given the scale and scope of the fraud that the management of Hyderabad-based Satyam Computer Services has been involved in. Satyam is one of the world’s largest IT services company and counts among its clients more than 180 of the global Fortune 500 companies. That its founder and chief executive officer B Ramalinga Raju has admitted to inflating company revenues to the tune of about $1.4 billion over the last few years is only the beginning. The true extent of the fraud has yet to be discovered.

This scandal has brought the focus back onto corporate governance issues in India – something that in the Indian growth story it had been more convenient for investors to forget.

Just how this scandal will influence private equity firms, particularly foreign ones investing in India, will be interesting. For the private equity industry in India, the scandal could not have come at a worse time. The stock markets have tanked by more than 50 percent since January 2008, the economy’s slowing down, and private equity investments have slowed considerably as well. The total value of private equity investments in India fell 45 percent from $19 billion in 2007 to just $10.4 billion last year, according to data from accounting firm Grant Thornton.

Of late, private equity fund managers investing in India have talked about deal flow gradually picking up as vendors become accustomed to the reduced valuations of their companies.  Furthermore, the effects of the credit squeeze have not been as pronounced in India in terms of dealmaking, considering that leverage does not play a major role in Indian transactions.  

With the Satyam fiasco, all that’s likely to change. Many private equity firms could now be re-evaluating their strategies for India, at least in the short term. How many Satyams could corporate India unknowingly be providing refuge to? Unless India gets its act in order and implements tougher corporate governance measures, and more importantly acts on them, investors are now likely to be skeptical about committing capital to companies there.