The Satyam saga should be seen as a chapter in a larger epic: the rise of the global Indian company. The theme of this tale is how thousands of traditional Indian family firms are being transformed into world-beating corporations. What matters is that Satyam’s fate should make India Inc. move along the right evolutionary path.
Unfortunately, in focusing on resurrection, than policy reform, the Indian government is doing the opposite.
Instead of trying to restore Satyam, New Delhi should reduce it to a footnote of infamy. The best way to improve investor confidence would be a swathe of aggressive corporate governance reforms. Analysts say that Satyam got BPO contracts by undercutting the market by 20-30 per cent. If so, it would mean that Satyam earned peanuts from its glittering client roster.
The facts are still awaited. But it seems Raju either tried to hide the financial hole by falsifying profits or diverting them into lucrative realty deals. He says he began sprinkling pixie dust on the ledgers seven years ago. This matches what Satyam’s books show: the entries for ‘cash and bank balances’ in the company’s cash flow statements versus those in its balance sheets began diverging in fiscal 2002. By last fiscal year, there was a difference between the two. Given this, it makes no sense for New Delhi to resuscitate Satyam. The Manmohan Singh cabinet may be impressed by the multinational contracts Satyam has, but these are a burden if the company isn’t making as much money on them as its rivals.
BPO companies, as infotech consultants Gartner have pointed out, “are unlike hardware or software in that they focus on a relationship with a ‘trusted partner’, rather than on a product”. Lose that trust and they are nowhere. On the other hand, they are easy to break up. Indian BPO firms should be taking away Satyam’s clients and the staff attached to those contracts before the deals go to the Philippines. After Satyam, all investors are anxious to know whether this sort of trickery is commonplace in corporate India. What actually scares investors is the ease with which Raju defrauded them.
There is a reason for this fear. Institutional investors, especially foreign ones, put their money as much on a larger growth story as they do on individual firms. If India is on a long-term growth trajectory, it only matters slightly which specific firm you buy into. But here, it’s largely a private corporate story. Investing in India is thus investing in its private sector. Hence the shock regarding Satyam. The world is now wondering as to whether Satyam is representative of India Inc. Investors are watching the amount of post-scandal regulatory zeal being shown by New Delhi. So far, more zeal is being directed to nationalising Satyam than to finding ways to tighten accounting standards, strengthen fraud punishment and update the 52-year-old Companies Act.
Preventive reforms include the provision of protection for private sector whistleblowers; such guarantees only exist for State-owned firms. The government also needs to break the Institute of Chartered Accountants of India’s hammerlock on regulating the profession. As one would expect from a bunch of guardians who guard themselves, the institute has banned only one accountant from practising in the past three years. Accountants have sidelined the reforms recommended by the Naresh Chandra committee — including rotating accountants and independent quality review boards. Punitive reforms have to start with an updated Companies Act.
The present maximum penalty for falsifying accounts is Rs 5,000 fine and two years in jail. The new Bill doesn’t go much further than put together various old amendments that had been in legislative limbo. Then there is the decrepit state of the government watchdogs. Consider the Serious Fraud Investigation Office: staff strength: 10, convictions: 0. There is another bigger issue at stake. Satyam’s fall could mark a major, and necessary, evolutionary stage in post-liberalisation corporate India. Surveys have shown that about a fifth of all listed Indian firms have fuzzy corporate governance — though not necessarily on Satyam’s scale.
The bulk of the suspect firms were small family enterprises or large State-owned corporations. Corporate India needs to push even harder than officialdom for anti-fraud reform. Otherwise, thousands of small firms will find it impossible to persuade investors to provide the capital they need to grow.
The pre-Satyam stock market culture in India was about massaging profits to beat analysts’ expectations and boost share prices. Now capital is scarce and Satyam has frightened investors. The same wannabe corporations should now woo foreign capital by getting themselves tightly audited balance books and inquisitorial boards. Credit Suisse Group Ag has predicted Indian firms, post-Satyam, will report lower than expected earnings because they will focus on cleaning up their books.
This would be a welcome shift in India Inc — away from youthful boosterism to a mature go for governance. The tale will move forward with governance reforms. It will not by bailing Satyam out.