Slumdogs Or Millionaires?

By Eugene Bukoveczky | January 14, 2009 AAA

Forget about feel-good fairy tale stories about a nice kid from the wrong side of the tracks making it big on a game show, as was portrayed in the acclaimed 2008 British film "Slumdog Millionaire"; it seems that the real way to become a millionaire in India these days is to fake your company's earnings and then bail out of your company stock position before the scam collapses. At least, that seems to have been the be plotline surrounding the recent scandal in one of India's signature outsourcing IT companies, Satyam Computer Service (NYSE:SAY).

So, Who Want to Be a Millionaire?
According to a recent Bloomberg report, in the months prior to the disclosure by Chairman Ramalingu Raja that he'd fabricated more than $1 billion in cash and assets and overstated earnings for years, nine company insiders, including the chief financial officer, pocketed a tidy $1.8 million from share sales on the Bombay Stock Exchange. The combined insider selling in Satyam during this time turned out to be more than the total for the other 30 Indian companies in the country's benchmark Sensex Index. One has to wonder how the local regulators missed all of this.

Unfortunately for the rest of the company's shareholders, Satyam has been virtually wiped out as the shares have now nosedived 83% since the fraud was revealed.

More Bad News
More unsettling news for investors in the once booming Indian tech sector came in the form of another embarrassing revelation by rival IT sourcing giant Wipro (NYSE:WIT)

The company disclosed that it is barred from doing business with the World Bank for a four-year period, from 2007 to 2011. The ban stems from what the bank regarded as an "improper benefit" that was given to World Bank employees by Wipro in 2000 in the form of shares extended at the initial public offering price. While the number of shares involved is minimal and no ethical violations appear to have occurred, the fact that a similar eight-year ban was slapped on Satyam by the bank raises the possibility that something more serious may be afoot. That prompted a 12% sell-off in Wipro shares on the disclosure.

Is Indian Tech Wrecked?
So has all this scandal dealt a mortal blow to India's shining IT industry success story? Definitely not. What's more likely to happen is a reshuffling of the deck.

For industry top dog like Infosys (Nasdaq:INFY), watching disaster and disarray unfold among rivals might just be the "schadenfreude" moment required to get on top of the game. This is a major possibility, as Infosys recently reported record-breaking earnings results, which jumped an expectations-beating 33% on a 35% increase in revenues. CEO S. Gopalakrishnan was also quoted as saying that his company could win more orders in the future as customers defect from Satyam and Wipro. All this prompted a healthy 5.9% gain in the company's shares - the largest gain since November 10.

Other potential winners include U.S. operators Accenture Ltd (NYSE:ACN) and Cognizant (Nasdaq:CTSH), both of which maintain large offshore centers and service Satyam clients like Kimberly-Clark (NYSE:KMB). Both companies' shares have been steady gainers since the news of Satyam's fraud broke on January 7.

The Bottom Line
In the current tough business climate, top outsourcing clients like Citigroup (NYSE:C) and General Electric (NYSE:GE) are still going to take advantage of India's strong value proposition when it comes to doing IT work. The fact that the Indian rupee is now 19% cheaper against the U.S. dollar should also provide additional incentive to keep the outsourcing contract flow strong for the foreseeable future.

Be sure to check out our Investment Scams Tutorial to learn about other scams that can destroy shareholder value.

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