Are there more Satyams out there? (Comment)

The confessional letter written by Ramalinga Raju in the first week of 2009 about the massive fraud perpetrated at the country’s fourth largest software company, Satyam, has opened a Pandora’s box. The scam by Raju and his family could ultimately emerge as the mother of all corporate frauds in this country as even the initial investigations are revealing all kinds of manipulation.

The story of greed will rope in many players apart from Raju and his family members as clearly this level of fraud needed many more associates to continue over a period of six or seven years. The reputed multinational accountancy firm, PricewaterhouseCoopers (PwC), has already fallen in the police net with two of its leading executives having been arrested in Hyderabad. As the investigations continue, there is no doubt more big fish will get caught in this complex web of intrigue woven by Raju.

Shocking as these revelations are, one must pause for a moment and have a look at the overall state of corporate governance in the country. Veiled hints have been thrown by industry representatives that this may not be the only company that is manipulating accounts for the benefit of the public.

It is well known that even some of the largest corporates in the country have set up many shell companies for purposes of investment. These companies operate in the stock market at the behest of their parent companies, though ostensibly there is no link between them. There has never been any concrete proof of manipulations or scams though there has always been speculation in corporate circles about these companies.

But the Securities and Exchange Board of India (SEBI) does not seem to have taken the initiative to delve deeper into these issues even though many of the parent companies play a major role in determining the movement of the stock markets.

It is also tacitly acknowledged and accepted that family-owned concerns operate on an ethical code different from that of professionally managed companies. Of course, many family businesses have professionalised their managements over the years like the Goenkas and some segments of the Birlas. In the past, however, it was one of Indian industry’s worst kept secrets that the ‘lalaji’ companies, as they were known, had developed fudging of the accounts into a fine art.

The scenario changed drastically after economic reforms were launched in the 1980s and 90s. A liberalised economic environment led to the rise of many corporates being set up in a professional manner by first generation entrepreneurs. Sunrise industries like computers and software were among the sectors where such corporates stole the limelight. HCL and Infosys were among this lot and the rise of Satyam seemed to be a mirror to these success stories of the software sector.

In fact, the idea that Satyam could be like any of the ‘lalaji’ companies of the past would have been pooh-poohed as Raju had built up an impregnable public image of being yet another Narayanamurthy or Azim Premji. No wonder then that warnings issued by people as eminent as Delhi Metro chief E. Sreedharan or former finance secretary E.A.S. Sarma about the possibility of Satyam being involved in fraudulent activities was never taken seriously by the authorities.

What has made the Satyam issue even more grave is the involvement of a highly respected accounting firm like PwC in the whole affair. Incidentally PwC is already being probed in some other cases including that of the Global Trust Bank. The Institute of Chartered Accountants of India is understandably shaken over the affair which has cast a pall over this entire sector.

But it has also recognised that the auditors of the scam-hit company have not done their job. If they had, it would not be possible for Raju to have hidden the fact that the company’s profits of Rs.7,000 crore/70 billion ($1.43 billion) were non-existent. It is thus high time that SEBI and other regulatory agencies like the Registrar of Companies investigated accounting practices not just in Satyam but the whole host of other corporates that may still be doing ‘creative accounting’ and thereby defrauding shareholders.

Right now, the new board of directors is struggling to keep the company afloat and ensure that the thousands of employees are not thrown out of work. On this aspect, it must be pointed out that even the number of employees is now being doubted with some media reports indicating that the head count may be about 40,000 rather than the 53,000 officially on the rolls. In any case, the numbers are large and the new board of directors has brought about a collective sigh of relief with their announcement that salaries will be paid on time.

It is to the credit of the new board that they are trying to act as swiftly as possible while allaying the fears of the employees. Boston Consulting Group has been brought in as a management adviser which is likely to give some support to the new directors who have a gigantic task on their hands. Apart from dealing with employees, they also have to give a comfort level to the many customers who have decided to retain their loyalty to the firm. Simultaneously, they are evaluating prospects of selling off the company to the several suitors.

While the future of Satyam and its employees hang in the balance, the larger question of the credibility of the IT sector is creating unease among most of the key players. Infosys, for instance, is trying to highlight greater transparency by providing details of its bank deposits to its directors. There is a growing apprehension that the spotless reputation of such corporates will be affected by the Satyam scam. Their fears are to some extent justified as both domestic and foreign customers are bound to view the Indian IT sector with some suspicion after the Satyam scandal.

A tremendous initiative to highlight the high standards of corporate governance in this sector will be needed. Indian industry as a whole now needs to introspect and ensure that the levels of corporate governance are raised dramatically so that more such scandals do not smear its name in future. In addition, regulators like SEBI and the Registrar of Companies are not blameless and need to act more aggressively against all kinds of manipulation that is even now continuing in many segments of the corporate world in this country.

(29.1.2009-Sushma Ramachandran is an economic and corporate analyst. She can be reached at sushma.ramachandran@gmail.com)