Ramalinga Raju: India's Mr Enron

Ramalinga Raju christened his fledgling IT company 'truth'. As it turned out, he perpetrated India's largest ever corporate fraud, with striking parallels to the Enron scandal.

What gods of misfortune were looking down in 1987 when Ramalinga Raju named his fledgling IT company Satyam? The name means "truth" in Sanskrit. Yet in the wake of India's largest ever corporate fraud, the question we're all asking now, says Time magazine, is "what's Sanskrit for Enron?"

The comparison is compelling, not least because Satyam was as heavily garlanded with good governance and "creative entrepreneur" awards as Enron. Numbering the bluest of blue chips among its clients, it claimed to service one-in-three companies in the Fortune 500. Indeed, Raju was considered such a big-hitter that when Bill Clinton visited Hyderabad in 2000 he was invited to share the president's podium, notes the FT. His personal style, however, was very different from that of Enron's bombastic chief. A thoughtful man, with a penchant for reading Marx and Karl Popper, he lived in a modest Hyderabad bungalow and "was quiet to the point of being dull". Colleagues say it was difficult to know what he was thinking, says The Singapore Straits Times: some called him "the man with the Mona Lisa smile".

Having confessed to manipulating the books for "several years" to inflate profits, as well as inventing a $1bn cash pile, Raju is now banged up, with his brother and co-director, Rama, in a holding cell with 40 other inmates "and only one Indian-style squat lavatory between them", says the Times. As "how-the-mighty-fall" contrasts go, it could hardly be more dramatic. Raju's mea culpa has sent shockwaves through India. He claims to have cheated in full view of the company's auditors, banks and stockmarket authorities. "It was like riding a tiger, not knowing how to get off without being eaten," he claimed in a five-page letter last week. Raju was driven on by a desperate quest to keep up with the Joneses, says the Los Angeles Times. It rankled that his company continued to trail India's Big Three outsourcers: Tata, Infosys and Wipro. He consistently underbid competitors, thereby putting pressure on profit margins. Satyam, it seemed, "was willing to do deals at all costs".

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Born into a well-to-do fruit farming family in the rural southern state of Andhra Pradesh, Raju, 54, had a comfortable start in life, says The Hindu. After studying by "kerosene lamp" at his local school, he gained an MBA from Ohio University. His big break came when he spotted an opportunity in the mid-1980s to offer code-writing services to big US firms. In a move that became legendary in the Indian IT industry, he travelled to Illinois and parked his operation outside the HQ of tractor-maker John Deere. When it became clear that the job could be done remotely, says The New York Times, Raju persuaded John Deere to let him do the work from India. "That trial helped give birth to the country's outsourcing industry" and elevated Raju to the top ranks of India's richest men.

Although an international pariah, in his home village of Bhimavaram "he remains a favourite son", says the FT: "one who may have stolen from strangers but who looked after his own people". One local IT student claims he remains an inspiration: "I still want to work for Satyam one day and become as successful as Raju." It should be an interesting trial.

Nepotism is a perennial problem for Indian firms

The biggest scam in Indian corporate history is "shocking beyond belief", says The Hindu (India). Six months ago, Satyam had a market value of $7bn; following last week's thunderclap, it had slumped to $330m. "Raju has cheated me and millions of shareholders," says one Mumbai businessman. "The god of IT has failed me." More worrying is the spectre of widespread corruption in India's most profitable industry, says the FT. Hence the clobbering that the Sensex index took last week. The Indian Prime Minister personally intervened to replace the Satyam board and succeeded in restoring some calm.

But the scandal may prompt investors to question all corporate results "as India's once-hot economy slows," says The Wall Street Journal. At the heart of the problem is India's continued reliance on family firms, says The Economist. About half of the 30 firms in the Sensex are run by dynasties who trace their roots back to the closed economy of India's past. Raju is a typical product of this so-called "promoter system" in which founding families continue to wield effective control, appointing relatives to key positions and building dizzying networks of holding companies, says Richard Orange in the Evening Standard. The first sign that Raju had been fiddling the books came in December when he attempted to plug the hole in Satyam's balance sheet with assets from the family's property company, Maytas. When times are good, it's easy to siphon cash in and out of companies. But the collapse of India's equity and property markets has changed all that. One wonders how many other promoter families "are pondering how to fill holes in their balance sheet".