335. Satyam Scam: Addressing Systemic Issues

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Network for Social Accountability (NSA) Democratizing Debate on Development Satyam Scam: Addressing Systemic Issues
	Prasenjit Bose 21 January 2009 The flutter created by the revelations of a gigantic fraud at Satyam Computer Services seems to be developing into a storm. As the repercussions of the Satyam scam unfold, corporate India and their backers in the Government are trying to project this more as an aberration, albeit a serious one. There is a visible reluctance to acknowledge, let alone address, the systemic issues involved. While unearthing the real magnitude and modus operandi of the scam and bringing the perpetrators to justice remain central concerns, ignoring the systemic issues will only serve to perpetuate the status quo and spawn many more such scams in future. Stock Market Obsession In the period since liberalization, Indian corporates, backed by the Government and cheered by the mainstream media, have sought to emulate the American financial and corporate governance systems. The many pitfalls of the American system have been badly exposed in the recent sub-prime meltdown and the consequent bankruptcies of leading financial entities. One of those pitfalls is that liberalized capital markets lead to an obsession with the stock market valuation of firms. This obsession gets compounded when the earnings of top managers, and even the employees, become contingent upon the share prices of firms. The incentive to make huge sums of money in a very short period, through speculative capital gains rather than real value addition, is built into the system. The scandals involving Enron, WorldCom and other American companies in the early years of this decade had borne this out. Those firms had manipulated their books in myriad ways basically to inflate their profits in order to gain from higher stock prices and market capitalization. Their game got over once the ICT bubble burst. In Satyam’s case too, as per Ramalinga Raju’s confessional statements, the cooking of accounts to inflate profits was going on for years. His explanation that such manipulations were necessitated to ward off takeover threats does not hold any water since he, along with his cohorts in the Satyam Board, has been selling Satyam shares on a regular basis: the promoters’ stake in Satyam fell from over 25% in 2001 to around 5% in January 2009. Those responsible for cooking the books of Satyam have clearly gained from it. Far from the authorities smelling any rat in such corporate behaviour, Ramalinga Raju was bestowed with several Corporate Governance awards till as recently as 2008. This is because making big bucks in quick time is the name of the game in town. The fraud has come to light only after Ramalinga Raju’s confession. It is obvious that the confession was made not out of any sudden change of heart but because his game ran out of steam in the aftermath of the recent market meltdown. Thus, at the heart of the matter is both the incentive as well as the enabling environment for such frauds built into a liberalized financial system. Regulatory Failures Advocates of the free market often argue that the problem is not with liberalized markets but with their inadequate or improper regulation. However, the very essence of liberalization is deregulation. Therefore, liberalization and meaningful regulation cannot go hand in hand. The reason why oxymorons like “liberalization with regulation” are parroted by the corporates and their backers is because they do not want effective corporate and financial market regulation. In Satyam’s case it is evident that all the regulatory mechanisms in place have failed. The independent Directors of the Board, the auditors, SEBI as well as the Ministry of Company Affairs (now rechristened as Corporate Affairs) have either been complicit in the fraud or were sleeping. PriceWaterhouse has now admitted that it has been certifying Satyam’s accounts virtually without any actual audit, simply relying on the company’s own financial statements. This is not the first time that PriceWaterhouse has been indicted; it was the auditor for the Global Trust Bank too which eventually collapsed; yet nothing happened to PriceWaterhouse. The SEBI is now trying to probe insider trading charges against the Satyam Board members. It never cared to take a closer look into the affairs of Satyam all these years. While ensuring exemplary punishment for all those responsible for the complicity or regulatory oversight in Satyam’s case is necessary, that is not going to solve the basic problems. The extant system of audit for private companies need to be reworked so that genuinely independent auditing is ensured. Penal provisions for errant auditors and independent directors also need to be strengthened. Even these steps would not suffice till the incentives for speculation built in the liberalized financial markets themselves are choked off. Enforcing effective regulation would mean not to tinker with the system at its fringes but overhauling the system itself. Unless the rules of the game are changed, big businesses, their auditors as well as the market regulators are going to continue playing the same game, with frauds like Satyam spilling out in the open from time to time. New-Age Cronyism Added to the avenues for making speculative capital gains through the stock market, corporates in India today are also the beneficiaries of new-age cronyism, in forms such as tax breaks and land deals. All the big Indian IT companies enjoy an almost zero tax regime. Besides, they are liberally conferred with huge tracts of land at throwaway prices, which are then commercially exploited through real estate development. Ramalinga Raju seems to have taken this new-age cronyism to greater heights by floating real estate ventures like Maytas Infra and Maytas Properties. These companies were then heavily rewarded with land and big PPP contracts in irrigation, roads, railways and ports amounting to over Rs. 30000 crore by the Andhra Pradesh Government, including the Hyderabad Metro Project. Alongwith the Andhra Pradesh Government, several other State Governments are also alleged to have awarded lucrative contracts to run emergency and ambulance services to EMRI, an NGO run by Satyam Computers, without floating tenders. It is being strongly suspected that Satyam’s funds may have been siphoned off by Ramalinga Raju into some of these projects. Pampering big business with such overwhelming largesse is a sure recipe for instilling recklessness. While a probe into the affairs of Maytas companies is essential to unearth the financial dynamics behind the Satyam scam in its entirety, the institutionalization of corporate aggrandizement in the name of “incentives” need to be forsaken forthwith. While the Central Government is primarily culpable for pushing such a policy regime, the State Governments today are competing among each other to prove their “investor friendly” credentials, judged in terms of the degree to which they are willing to indulge in cronyism. It is not surprising that it is Narendra Modi who has left everyone behind in this race for corporate aggrandizement, winning accolades from some “captains of industry” as the most suitable Prime Ministerial candidate. It is high time that the danger posed by the Frankensteins that have been let loose by the liberalization process is realized across the political spectrum. Concluding Observations The legitimate interests of the 50000 plus employees of Satyam need to be addressed. This implies ensuring that the enterprise continues to function viably and jobs and salaries are protected. The correct picture of Satyam’s balance sheet is yet to be revealed. Therefore it is not possible to estimate at this stage whether the enterprise continues to be financially viable or if not then who should bear the costs of its revival and continued viability. Bailing out Satyam by using tax payers’ money, as some have suggested, would amount to yet another sordid instance of socializing private sector losses. Moreover, in Satyam’s case the losses have resulted from the fraudulent acts of its Chairman and other Board members. If resources need to be mobilised for Satyam, confiscating Ramalinga Raju’s ill-gotten wealth would be an ethically desirable alternative. Public funds can be used in a private company only in return for proportional equity stakes for the Government. The larger systemic issues remain crucial. Addressing them meaningfully involves moving away from today’s paradigm of liberalized markets and rethinking corporate governance and market regulation in a different setting altogether. [The author works as Convenor, Research Unit, CPI (M)]	Contact Us Publications Join our Mailing List See What others Say about NSA NSA Databases NSA Advisory Board Go to Policy Brief Contents Page ********************
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Satyam Scam: Addressing Systemic Issues

Stock Market Obsession

Regulatory Failures