Satyam takes shine off India's family-run corporates

By Rina Chandran and Devidutta Tripathy

MUMBAI (Reuters) - An admission of fraud by the chairman of India's Satyam Computer Services has rocked a deep-rooted faith in the family-run businesses which still dominate much of India's corporate landscape.

About half the top 30 companies on India's benchmark index are controlled by their founding families, traditionally revered by shareholders and employees alike.

That respect took a beating on Wednesday when B. Ramalinga Raju quit and said profits of India's fourth-biggest software exporter had been inflated over several years.

"It's not exactly what India needed now," said Seema Desai, analyst for Asia at risk consultancy Eurasia Group in London. "It is a stark reminder that we need tighter rules."

Shares in New York-listed Satyam, which means "truth" in Sanskrit, slumped nearly 80 percent.

India's family-run firms have held sway for more than a century, with conglomerates such as Tata, Birla and Reliance dominating industries from steel to telecoms.

"We've deified our companies and their chiefs, confused our sense of national pride and given up a healthy skepticism for a don't-ask-don't-tell policy because no one wanted their bubble (to) burst," said Anantha Nageswaran, chief investment officer for Asia-Pacific at Bank Julius Baer in Singapore.

Once depicted in Bollywood films as mini empires with a near feudal system of governance, the opening of the economy in the early 1990s, tighter regulations and greater foreign investor interest have forced family firms to clean up their act.

For millions of Indians, entrepreneurs such as Reliance Industries founder Dhirubhai Ambani and mobile tycoon Sunil Mittal represented hope that even a school teacher's son or a small business owner could achieve wealth and fame.

But many family firms still battle issues such as nepotism, mismanagement, weak boards and a lack of transparency.

Long-drawn out succession battles such as the standoff between the Ambani brothers and the public spats among the Birlas as well as the Bajajs have taken off some their sheen.

CLEANER ACCOUNTS

IT companies such as Tata Consultancy Services, Wipro, Infosys Technologies as well as Satyam were deemed shining examples of India's liberalization, with their manicured campuses, Western-style cafeterias and contracts with Formula One motor racing teams and soccer authority FIFA.

"There was an expectation that these newer companies will have better systems, cleaner accounts compared to older companies with their more complex cross-holdings," said Eurasia's Desai.

India's $50-billion IT industry had grown at a scorching pace on the back of outsourcing demand from Western firms. Now, in addition to the economic crisis which has already slowed their growth, they will come under greater scrutiny.