WASHINGTON - A US law firm has filed class action law suit against Satyam Computer Services Ltd. in a New York court on behalf of those who purchased the Indian company’s American Depository Receipts over the last five years.
The complaint by the law firm of Izard Nobel LLP in the District Court for the Southern District of New York charges the fallen Indian outsourcer and certain of its executives of violating federal securities laws by issuing materially false and misleading statements.
After Wednesday’s admission by the Company’s CEO B. Ramalinga Raju of a ‘multi-year’ fraud in which Satyam’s financial accounts and disclosures were systematically falsified, ‘the Company’s ADRs fell $8.42, or 90 percent, prior to the opening of the New York Stock Exchange,’ it noted.
Trading in Satyam Computer Services Ltd was halted on the New York Stock Exchange ahead of the market’s open Wednesday.
The stock exchange said its regulators were evaluating news related to India’s fourth-largest software company, with its shares halted until further notice.
The New York Times citing analysts said the revelations by the company’s founder ‘could cause a major shake-up in India’s enormous outsourcing industry and may force many large companies to investigate and perhaps revamp their back offices.
‘This development is going to have a major impact on Satyam’s business with its clients,’ it cited analysts with Religare Hichens Harrison as saying. In the short term ‘we will see lot of Satyam’s clients migrating to competition like Infosys, TCS and Wipro,’ they said.
Satyam serves as the back office for some of the largest banks, manufacturers, health care and media companies in the world, handling everything from computer systems to customer service. Clients have included General Electric, General Motors, Nestlé and the United States government.
In some cases, Satyam is even responsible for clients’ finances and accounting, the Times noted.
In a commentary titled ‘Satyam’s Feet of Clay’ the Wall Street Journal said: ‘Voting with your feet isn’t the best way to enforce strict corporate governance. Yet for shareholders in many of India’s family-controlled companies, it is the only option.’
Noting that investors fled Satyam Computer Services in December after it planned to buy two property companies part-owned by its founders, the Journal said: ‘Wednesday’s disclosure that the deals were a last-gasp attempt to plug a hole in the firm’s finances, inflated for years by Chairman Ramalinga Raju, underlined how right they were to be scared.’
‘The affair — dubbed India’s Enron — spotlights India’s corporate governance,’ wrote commentatator Mohammed Hadi. ‘That Mr. Raju tried spending $1.6 billion on firms unrelated to Satyam’s business and in which he had an interest, without shareholder approval, shows what he thought investors would tolerate.’
Governance watchers aren’t hopeful that the new level of scrutiny will endure, but legal changes would help, he said citing the example of Hong Kong which has made it mandatory to count proxy votes on shareholder resolutions at annual meetings.