Satyam Fraud May Delay India Economic Rebound, Limit Investment

Jan. 15 (Bloomberg) -- An Indian economic recovery may be delayed as alleged fraud at Satyam Computer Services Ltd. undermines investment, one of two key growth drivers.

“The financial irregularities at Satyam will deal a further blow to investor sentiment at a time when global and domestic risk appetite is already depressed,” said Tehmina Khan, an economist at Capital Economics Ltd. in London. “Overseas investors will be even more wary of returning to India.”

India’s economy is being pummeled as the global recession cuts demand for exports and job losses hurt consumer spending. The stock market tumbled 12 percent in the four days after Satyam’s former chairman Ramalinga Raju on Jan. 7 admitted he had been falsifying the company’s accounts for years and had overstated its assets by more than $1 billion.

The loss of confidence may make it harder for Indian companies to secure borrowings from overseas to fund investment, which accounted for about one third of economic growth in the quarter to Sept. 30.

“This has happened at a very crucial time when the economy is facing a slowdown,” said Shubhada Rao, an economist with Yes Bank Ltd. in Mumbai.

Some foreigners are already heading for the door. Overseas funds have sold 18.77 billion rupees ($384 million) of local shares since Satyam’s Raju admitted to the fraud, compared with purchases worth 9.75 billion rupees between Jan. 1 and Jan. 6, according to data from the Securities & Exchange Board of India.

Investors Flee

Overseas borrowings and the sale of new shares on the stock market provided Indian industry with about 40 percent of total funding in the year to March 31, 2008, according to Capital Economics’ Khan.

“These sources of funding have dried up as overseas investors have fled and confidence in equity markets has evaporated,” she said.

Foreign investment into India was already slowing before the Satyam revelations, as the world’s worst financial crisis since the Great Depression prompted funds to withdraw from emerging markets.

India may experience capital outflows of between $10 billion and $15 billion in the six months to March 31, compared with inflows of $107 billion in the prior fiscal year, according to Chetan Ahya, an economist at Morgan Stanley in Singapore.

“To the extent that capital inflows have suddenly witnessed a sharp fall, India is now continuing to face a growth shock,” Ahya said.

Stimulus Package

The pace of expansion in India’s $1.2 trillion economy has slowed for two straight quarters. The government is forecasting 7 percent growth this fiscal year, the slowest since 2003, as exports plunge and industrial production slows.

To spur growth and stimulate consumer demand, Prime Minister Manmohan Singh’s government on Jan. 2 unveiled a second stimulus package to inject capital into banks and allow overseas investors to double purchases of debt. On the same day, the central bank slashed interest rates for the fourth time in less than three months.

Singh has also eased overseas borrowing rules for Indian companies to enable them to access funds for business expansion from abroad. The government in September last year allowed companies building roads, ports, utilities and other infrastructure projects to borrow as much as $500 million from overseas, compared with an earlier limit of $100 million.

To minimize the damage to India’s image caused by the Satyam imbroglio, the government last week sacked the board of the company and arrested Raju. The government is also open to the idea of extending financial help to Satyam, according to Trade Minister Kamal Nath.

Shares Plunge

Satyam shares have plunged 83 percent since Raju’s Jan. 7 admissions, compounding a record slump in Indian equities as the global credit crunch forced the company’s customers including Citigroup Inc. to cut spending on computer services.

“The government is concerned about the fate of the thousands of employees and shareholders of Satyam,” Prem Chand Gupta, minister for corporate affairs said Jan. 13. “No stone will be left unturned to safeguard their interest.”

At stake are the jobs of more than 50,000 employees at India’s fourth-largest software company and the work it does for overseas clients, including ArcelorMittal, the world’s largest steelmaker, and Telstra Corp., Australia’s biggest phone company.

“The Satyam fraud case will tarnish the image of the entire Indian software-services industry, which resurrected the Indian economy and helped India establish itself on the global map,” said C.L. Bansal, who teaches corporate law at Management Development Institute in Gurgaon, near the capital New Delhi.

Prompt Action

Indian technology firms including Tata Consultancy Services Ltd., the nation’s largest software exporter, Infosys Technologies Ltd., and others had revenues of $52 billion last fiscal year, equal to about 5.5 percent of gross domestic product, according to the National Association of Software and Service Companies.

“The promptness with which the government has responded underlines the fact that it wants this over with quickly and prevent any impact on the image of the country as an attractive investment destination,” the Management Development Institute’s Bansal said.

India will need about $500 billion in the five years to 2012 to build the infrastructure required to sustain economic growth at around 8 percent and help reduce poverty, according to Prime Minister Singh, who is seeking re-election before May.

Still, the biggest hurdle to foreign investment in India may be the global credit crunch rather than concerns that the Satyam scandal will scare off investors, some analysts said.

“Indian companies will indeed have problems raising funds overseas in the coming year -- as they are already -- but this has more to do with conditions in international credit markets than any corporate fraud in India,” said James McCormack, head of Asia-Pacific sovereign ratings at Fitch Ratings Ltd.

“The eventual recovery of the Indian economy will thus depend on the international economy and international capital markets, not investor concern with respect to Indian corporate governance,” he said.