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Let the bourse take its course

Shareholder activism nailed Satyam. The State should not try to bail it out, writes N Chandra Mohan.

india Updated: Jan 19, 2009 13:26 IST
N Chandra Mohan

The corporate misdemeanours of Satyam Computer Services Ltd have been widely referred to as India’s Enron. The obvious comparisons are the fraud in their balance sheets with the connivance of world-class auditors, the speed with which both high-flying companies crash-landed and the prospect of class-action lawsuits. However, a more important commonality is that both companies embodied the worst form of crony capitalism as they benefited from a highly collusive relationship with the government.

B. Ramalinga Raju, Satyam’s founder Chairman, and the firms owned by his family prospered from their close proximity to the Andhra Pradesh government in securing thousands of acres of land and big-ticket contracts. The rationale for inflating profits of Satyam was to ensure that its scrip boomed at the bourses, so that Raju could liquidate his holdings at a huge profit to invest in land. The contracts due to government patronage included irrigation projects, a port facility and the Hyderabad metro rail project.

Enron, for its part, also leveraged its access to the highest levels of the US government. When the good times finally came to an end post-9/11, the latter felt committed to save the then seventh largest American firm from going under. India happened to be an important element of that rescue plan. Towards this end, the all-powerful National Security Council even served as a sort of concierge service for the beleaguered Chairman of Enron, Kenneth Lay, and India’s then National Security Advisor.

From September 14 to November 9, 2001, the Bush administration mounted intense pressure on the Indian government to agree to a $1.2 billion settlement of Enron’s stake in the Dabhol power plant. The company ratings were only a notch above junk and it urgently needed an infusion of a billion dollars to stave off a ratings downgrade below investment grade. A desperate Enron lowered that demand to $800 million. But India didn’t oblige, thanks to its vigilant Power Minister. The rest, as they say, is history!

In l’affaire Satyam as well, the highest levels of the government similarly intend to salvage the firm. To be sure, the UPA government faces the compulsion to save the India story from being tarnished when the world economy is passing through its gravest crisis. It also makes for sound realpolitik to ensure that Satyam’s 53,000 employees are not without work when the national elections are slated for April-May 2009. But troubling questions arise when there is loud thinking by the government to bail out this company.

Although the government denies that it is cobbling together any such bailout package, it is already neck deep in rescuing the poster boy of corporate misgovernance. It has appointed six members to Satyam’s board to ensure that the company remains a going concern. There is also a need to restore overall confidence so that clients stick with the company. The board has also appointed new auditors to clean up Satyam’s balance sheet that has been cooked up over the last seven years, as per Raju’s candid admission.

Doesn’t all of this set a dangerous precedent for India Inc? In a market economy, companies rise and fall. Those that fail pass into the hands of a bigger company. Left to itself, this would have been the fate of Satyam as it would have come under a new management that is more committed to corporate governance. There is no warrant for the government to take on a more ‘hands-on’ approach to ensure that the company doesn’t go bust or finds a strategic partner. Will it do the same for others who run into trouble?

The government’s options are perhaps limited when crony capitalism is rampant. It is a fact that most of the billionaires among India’s top businessmen operate, by and large, in oligopolistic markets in which a few producers dominate and in sectors where the government has conferred discretionary privileges on a few. That this should be happen even in the case of Satyam, which took off when economic activity was delicensed, deregulated and decontrolled, is itself a damning indictment of reforms since the 1990s.

Looking ahead, the best way the India story can be strengthened is by addressing the key problem that has come to the fore with the sordid Satyam episode. If the country is not to become associated with lax corporate governance, the need is to enforce it more rigorously. It is high time the regulator, the Securities and Exchange Board of India, is given punitive powers to crack the whip against companies that do not adhere to listing agreements between companies and the stock exchanges, among others. Examples must be made of big companies that violate corporate governance norms.

Raju almost got away when he sought to purchase the two companies owned by his family as that would have filled fictitious with real assets on Satyam’s balance sheet. While the company board approved that proposal, the shareholders revolted. Perhaps, this is the first time such activism stayed the hand of our business families. Greater shareholder activism is what is required to ensure that India Inc is better governed.

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