By BOB DAVIS in Washington, D.C., and NIRAJ SHETH in New Delhi
January 12, 2009, 11:34 P.M. ET
In another blow to India's already-reeling technology industry, the World Bank disclosed it had barred two Indian outsourcing firms, Wipro Technologies and Megasoft Consultants Ltd., from doing work with the bank's headquarters.
Just last month, the bank revealed it had blacklisted Satyam Computer Services Ltd. for eight years. The co-founder of Satyam, B. Ramalinga Raju, has since shocked the industry by admitting to cooking his company's books by more than $1 billion.
The World Bank said Wipro Technologies, a unit of Wipro Ltd., had been banned in June 2007 for four years for "providing improper benefits to bank staff." World Bank staffers said the benefits included stock offered to the bank's former chief information officer, Mohammed Muhsin, who left the World Bank in 2005. Bank officials said Satyam was also debarred because of offers of stock to Mr. Muhsin.
Joshua Hochberg, an attorney for Mr. Muhsin, said his client did not determine which companies were awarded contracts and the World Bank didn't find that Mr. Muhsin "interfered with Bank contracting."
"Mr. Muhsin made all financial disclosures required of him by the Bank," Mr. Hochberg said. "He paid for all shares he purchased and reported them in line with the Bank's disclosure policy."
A World Bank spokesman declined to comment on Mr. Muhsin. He said that World Bank rules prohibit employees from using their positions for personal gain.
Barred by World Bank
Wipro said its representatives had offered the World Bank, through the bank's chief information officer and staff, shares in Wipro's initial public offering in 2000. Three World Bank staffers purchased a total of 1,750 shares for approximately $72,000 at the IPO price, Wipro said.
Wipro said the stock was part of what's called a directed share program, which allowed Wipro employees and clients to purchase its American depositary shares, which trade on U.S. exchanges.
"If we knew about [the World Bank's debarment policies], we wouldn't have done it," said Suresh Senapaty, Wipro's chief financial officer.
Megasoft Consultants, a unit of Megasoft Ltd., was banned in December 2007 for four years, the World Bank said, for "participating in a joint venture with bank staff while also conducting business with the bank." Bank officials said Mr. Muhsin was not involved in that case.
G.V. Kumar, chief executive of Megasoft, said the company hasn't done any business with the World Bank since 2004 and it doesn't anticipate any financial impact from the announcement.
Until this past weekend, the World Bank didn't routinely disclose the names of the companies it debars for what it calls "direct" contracts -- contracts with the World Bank itself. The secrecy, the bank said, let it move more quickly.
After a Wall Street Journal article that discussed that policy, the World Bank released Sunday the names of the three companies that it had blacklisted from this type of contracting.
The bank had barred Satyam in September for eight years, also for allegedly providing "improper benefits to bank staff," but the bank didn't announce that until December.
Investors -- their confidence in the Indian tech industry already rattled by Satyam -- sold Wipro shares, pushing them down 9.3% Monday to 227.35 rupees ($4.73) on the Bombay Stock Exchange.
Some industry analysts said the announcement about Wipro and Megasoft could complicate efforts by the Indian tech industry to get back on its feet in the wake of the Satyam fraud. The stigma of a World Bank ban may make customers more hesitant to sign contracts, analysts said.
"There's likely to be a slowdown in the volume of business flowing into India in the short term as the perception is definitely going to turn negative in the wake of today's developments," Harit Shah, an analyst at Mumbai-based Angel Broking, said Monday.
The Indian outsourcing industry, a beacon for this country's economy and an employer of two million people, had already been hit by the global economic slowdown before news of Satyam's scandal broke.
To be sure, India still holds several competitive advantages over most other outsourcing destinations, including low wages and a much larger pool of skilled engineers and programmers than competing locales like the Philippines or Vietnam. "There is no other alternative now," said Sudin Apte, an analyst at Forrester Research.
Investors will get fresh insight into the state of the Indian tech industry from rival outsourcing firm Infosys Technologies Ltd., which is due to report its third-quarter results Tuesday.
—Romit Guha, Satish Sarangarajan and Rumman Ahmed contributed.