Shares of Wipro (NYSE:WIT) are off nearly 8 percent today after the company disclosed that in 2007 the World Bank banned it from contract bids from 2007-2011 and included it on a list of firms "providing improper benefits to bank staff."
Wipro said in 2000 it allowed employees and clients to buy shares at its IPO price and allowed the World Bank to participate in the plan, where staff and their families ultimately bought 1,750 shares for $72,000. Wipro said all participants signed a conflict of interest statement saying the share purchase "did not violate any ethics or conflict of interest policies of their company."
Wipro downplayed the World Bank's contribution to its business, but any hint of further impropriety in the Indian outsourcing sector is unwelcome. Investors are still nervous after the Satyam Computer Services scandal, a massive $1billion dollar financial fraud known as "India's Enron" that has led to the arrest of Satyam's former Chairman Ramalinga Raju and his brother and Satyam cofounder B. Rama Raju.
The sector, already beset by a slowing economy, is likely to remain under pressure as its key customers including American financial firms face slower growth and tightened budgets. The Wipro news dragged the Sensex, which tracks the Bombay Stock Exchange, down nearly 300 points as record selling continues, though Satyam (SAY) shares were up today after the company appointed a new board. Last week Citigroup noted the disruption in the Indian IT services market would help larger players, but picked industry leader Infosys (NYSE:INFY) as its favorite, saying Wipro "will continue to trade at a discount to Infosys given expected sub-par growth in the coming years." With faith in Wipro badly shaken, there is little reason to expect that to change now.