For over a decade, we were sold a big lie. We believed that the Indian IT industry was the most transparent, ethical, efficient, and non-political of all sectors. We were told that companies like Infosys and Wipro and icons like N.R. Narayana Murthy and Azim Premji have set the best standards in corporate governance and business ethics. Finally, we were convinced that the IT sector's business model could sustain for decades; that India will always be the prime global outsourcing destination.
None of this is totally correct. It's now time to see the IT glass as half-empty, not half-full. Even the doyens have fallen from grace, from their pillars erected so high that the leaders seemed like demi-Gods. We are not talking about Satyam and B. Ramalinga Raju. Wipro announced that it was blacklisted by the World Bank because of corruption charges, which the company claims is not material. Infosys has been accused, rightly or wrongly, of amassing a huge land bank at low prices due to political connections, much like real estate sharks.
A caveat is needed here. We are not saying that everything is wrong with the IT sector. What we are claiming is that not everything is right about it. Since its origins in the 1990s, Indian IT has had black spots that got overlooked in the powerful glare of glory that it enjoyed. Either you could not see them, or you chose to ignore them as aberrations. As is the case with Satyam, which is being treated as an isolated case of greed.
After Raju's confession, it is imperative to look at the soft underbelly of the software industry. It's critical to go behind the glassfronted veneer of IT offices and uncover what's inside them. These offices, once seen as shining bastions of integrity, are covered in shadows today. "What makes IT distinct from manufacturing is its intangible nature. A tangible product lends itself to external checks, but an IT firm is relatively free from some of them," says Delhi-based corporate lawyer Nitesh Sinha.
The Dubious Years | ||
|---|---|---|
| 1990s | H-1B visa scam | Indian firms misused America's visa scheme to do body-shopping. They ill-treated several tech employees. |
| 1990s | Laundering black money | After its tax-free status for export earnings, IT became a preferred route to convert black money into white. |
| 1999 | Resurgence of penny stock firms | The New Economy boom led to the creation of small firms that were either non-existent or had skeletal offices. |
| 2001 | Hard knocks for software | Hit by declining IT spends by clients, Indian vendors slashed billing rates and, hence, margins to get new business. |
| 2004 | Quarterly pressures | IT firms became FIIs' most-favoured stocks; some promoters used illegal ways to show consistent growth. |
| 2008 | Global crisis | The revenues from clients in sectors like financial services, telecom and manufacturing reduced drastically. |
Cut to the late 1990s, when the H-1B visa scam rocked Indian IT. The US policymakers revealed that the visa, issued to techies, was misused by Indian firms. Fictitious firms, set up by promoters using their US-based relatives and friends as fronts, did body-shopping or traded in manpower required by the American clients. Non-technical people bribed their way through, and were encouraged to do so, to get the visa. Genuine workers were mistreated by Indian promoters.
When India made software exports earnings tax-free, the IT firms were embroiled in another scandal. They became one of the preferred routes to launder black money. Since no goods were involved, it was difficult to check the nature of the work, and firms could raise fictitious bills to show money illegally stashed abroad as legitimate export income. And tax-free too.
During the heady days of the New Economy boom in the late 1990s and early 21st century, many such firms were floated. The Enforcement Directorate uncovered a few such scams. In 2000, one visited dozens of companies while doing a piece on IT penny stocks, whose prices had zoomed a few hundred percentage points within months. Some of these firms were non-existent and many had nothing more than a nameplate.
Don't think of this as an aberration. Nasscom has nearly 1,000 Indian members, which generate 95% of India's revenues from IT and ITeS. India earned $34 billion from exports by these segments in 2007-8, and the top 20 firms accounted for over $20 billion. This implies that the total revenues of the 980 other firms were less than $14 billion, or an average of $14 million (Rs 56 crore at Rs 40 to a dollar) per firm. At least 200-300 companies would have an annual turnover of a few lakh rupees each.
An editorial in the January 2005 issue of Chip magazine raised similar issues. It said that while the US Department of Commerce put the figures for software imports from India at $1.6 billion in 2002-3, CII and Nasscom stated that India's exports were $6.3 billion and $9.5 billion, respectively. Later, Nasscom reduced its figures but the discrepancy remained. The editorial hinted that IT was being used to launder money.
Ever since IT became the blue-eyed boy of the stock markets, there has been pressure on promoters to deliver results, quarter after quarter. Arjun Malhotra, who heads the US-based Headstrong, feels that this has forced the IT biggies to shelve strategic decisions. For instance, none of the 10 biggest firms have made large acquisitions because that would dent earnings in the short term and their shares might get hit.
In addition, promoters may have resorted to creative accounting for fear of the financial sword that hangs over their heads every quarter. They left no stone unturned to grab new business and retain existing clients. This was especially true during downturns when, firms like Satyam and others in the mid-level segment quoted ridiculously low rates. Satyam is believed to have quoted rates that were a fifth of its competitors. Once such rates became known, it was difficult for other IT firms to charge more.
Over a few quarters, and then over a few years, it became like a ponzi scheme. A firm had to generate new streams of revenues at low billing rates to show topline growth. And they had to show fake profits, which were getting squeezed by the day. It was at this stage that there were rumours of kickbacks by IT firms in their bid to get new clients.
A combination of pressures—and arrogance— got to some senior managers and promoters. Phaneesh Murthy of Infosys was accused of sexual harassment in the US, which was settled out of court by Infosys for $3 million. Arun Jain of Polaris was arrested in Jakarta, but was subsequently released, because of a commercial dispute with an Indonesian bank, Bank Artha Graha. There were accusations that many IT firms were sitting on large, unused land banks that had been allotted at low prices.
The point we are making is that Indian IT is weak, shaky and there may be deep cracks beneath the surface. It's high time Nasscom joined hands with revenue intelligence agencies to take a hard look at the operations of its own members. This will be a boon for investors, who will then be able to take correct decisions about IT stocks. IT associations should encourage whistle blowers to come out in the open with their charges. This will only enhance India's global image, and in the end, Indian IT firms will emerge stronger. They should not be afraid of losing revenues in the short term.
For once, we are waiting for our phones to ring.
