Satyam Scandal Takes Toll on Hyderabad

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The city's IT industry was born from those institutions, independent of political ties. "Bangalore has deep professional roots," says Mohandas Pai, director at Infosys, the city's leading IT player.

A young chief minister of Andhra Pradesh, Chandrababu Naidu, concluded that information technology was the key to changing the destiny of his impoverished state. By 2000, Naidu had dubbed his new vision "Cyberabad," and placed his hopes in tech entrepreneurs such as Raju. Farmers-turned-builders got fat state contracts to build highways and develop IT parks. In two years, Hyderabad was in full competition with Bangalore for the IT and biotech pie. As Bangalore choked on its own growth, companies gratefully shifted to Hyderabad.

One of those was Alliance Global Services, a $50 million provider of software services based near Philadelphia. Unable to find affordable talent in Bangalore, it moved its 40-man operation to Hyderabad, where it now has 300 employees. Though the company intends to stay in Hyderabad, in the wake of the Satyam scandal Alliance is worried about its reputation. Alliance Chief Executive John Castleman says that while U.S. customers may not be aware of the location of the Indian companies they hire, "maybe they should be, given the potential for local politics to play a role in corporate governance in India."

"Crony Capitalism"

Hyderabad's dodgy reputation extends to its professional class. Accounting firm KPMG runs a busy practice in India that helps companies spot fake degrees and exaggerations of job experience. While Hyderabad isn't alone in this sort of activity, it's the embellished-résumé capital of India, says Garuav Taneja, who runs the KPMG operation. In the city's Ameerpet neighborhood, a fresh college grad with no experience can better his job prospects with a $200 set of fake documents. "It's a highly lucrative and openly run business in Hyderabad," says Taneja.

Some in Andhra Pradesh are trying to change the system. EAS Sarma, a former top economist in the Finance Ministry in New Delhi, now lives near Hyderabad. He's battling to reverse Satyam's December purchase of 50 acres of state property along an endangered coastline. Satyam bought the land for what Sarma says was just 10% of its market value, resulting in a loss of at least $52 million for the state. He is also demanding details of property sales to 14 Hyderabad companies that he says are closely connected to the state government. "It's crony capitalism," Sarma says. "Giving away cheap land is not promoting industrialization; creating a corruption-free environment and simplified procedures is." A government spokesman declined to comment on the matter.

The biggest beneficiary of Hyderabad's distress may be its rival to the south. Infrastructure bottlenecks in Bangalore have been a boon for Hyderabad in recent years. But now, Bangalore is in the process of building new roads and even a subway. And to ensure transparency, the government is providing citizens a quarterly update on the progress of development projects. "Here, business and political interests don't converge," says Manish Sabbarwal, who runs TeamLease, India's largest temp agency, based in the city. In Bangalore, "they occupy powerful but separate and parallel universes."

Kripalani is BusinessWeek's India bureau chief.