India's own Enron-plus
THE Satyam scandal has been wrongly called "India's Enron," after the gigantic 2001 fraud in the US company. In fact, the Satyam scam is much bigger in magnitude and impact. The amount stolen from Enron was Rs. 2,866 crores at current exchange rates. In Satyam, according to promoter B. Ramalingam Raju, Rs. 7,136 crores were involved.
The scandal's impact won't be confined to its 53,000 employees. India's entire Information Technology industry will be singed.
Satyam has cast a shadow over its remarkable 30% annual growth, generally attributed to virtuousness, brainpower and hard work. It has lowered Andhra Pradesh's image as a land of gutsy businessmenparaded as "Andhra-preneurs."
The scam has exposed huge cracks in India's corporate governance structures and system of regulation through the Securities and Exchange Board of India (SEBI), Ministry of Corporate Affairs and the Serious Fraud Investigation Office. Unless the system is overhauled, corporations will continue to rob wealth from the public exchequer and shareholders.
The Andhra government failed to arrest Mr. Raju for 3 days after he confessed, allowing him time to destroy incriminating evidence. SEBI was effectively barred from questioning him, and the centre too wants to sink money into Satyam.
This suggests he has cut a deal under which his family would be protected.
Contrary to Mr. Raju's earlier claim that he or his family didn't take "even one rupee/dollar from the company …" he now admits he has been cooking Satyam's books for 7 years. He is estimated to have made Rs. 2,065 crores.
Two things are clear. First, Mr. Raju siphoned off thousands of crores. He claims that Satyam's operating margin was a lowly 3%, compared to the 25% plus for IT companies. If Satyam's margin was indeed higher, then huge sums were spirited out of it.
This trail must be traced. It's likely to lead to real-estate scams and corrupt politicians. Former Union revenue secretary, E.A.S. Sarma, has investigated some tracks through the Right to Information Act.
He found that 18% of a company which is building Gangavaram Port in Andhra is held by Mauritius-based Lakeside Investments. Mr. Raju reportedly owns a company, Lakeview Investments, at the same address.
Mr. Sarma has raised questions about the way the state handed over 17,000 acres to Maytas Properties and Maytas Infrastructure without competitive bidding. Maytas Infra alone has projects worth Rs 30,000 crores in Andhra. All this warrants an in-depth investigation.
Secondly, surrendering to the Indian police was Mr. Raju's guarantee against extradition for trial to the US.
Enron's Kenneth Lay was to be sentenced to 45 years' imprisonment when he died. If Mr. Raju is tried in India, he could get away with just 3 years. The Satyam swindle happened because all supervisory mechanisms failed, including statutory auditor Price Waterhouse Coopers (PwC), independent directors, and SEBI.
PwC didn't check the account-books thoroughly. Irregularities were noted in its handling of Satyam in 2001. Mysteriously, there was no probe. An MP filed a complaint with SEBI in 2003, but did not pursue it because of political pressure.
PwC should have faced punitive action from the Institute of Chartered Accounts of India for its grave misconduct. Ironically, PwC has two members in the ICAI disciplinary council. The council failed to act.
Satyam's directors were no better When the board met last month to approve a scandalous proposal to invest $1.6 billion in Maytas, it didn't even notice the conflict-of-interest in buying a promoter-floated company in an unrelated business.
These directors collect annual fees ranging from Rs 13 to 92 lakhs for attending a few meetings. They lack independence, if not integrity too.
Even worse was SEBI's approval of the Maytas deal, which was aborted by investor protests. Other authorities also turned a blind eye to complaints about illegal land allocation to Satyam group companies in different cities.
India lacks good corporate regulation, and enforcement is pathetic. Indian corporate nabobs milk their companies by appointing procurement and distribution agents, underand overinvoicing imports/exports, evading taxes, indulging in insider trading, and dressing up balance-sheets. Satyam fits this pattern.
We need a Board of audit, which can conduct surprise audit on its own or on whistle-blower complaints. Besides, no auditor should be allowed to continue beyond 3 years.
The government should create a pool of independent directors of high integrity. Impartial authorities, not company managements, should appoint them. Cross-directorships must be banned. All agent appointments must be scrutinised. The conviction rate in corporate frauds must be improved, with stiff penalties.
If an auditor fails in his duty, he faces a ridiculous penalty of Rs. 10,000 and 2 years' imprisonment in India. The US Sarbanes-Oxley Act awards imprisonment for 20 years. The US has greatly improved fraud detection by reforming audit and offering incentives to whistle-blowers.
We must acknowledge that deregulation promoted in the name of creating a "favourable investment climate" is dangerous.
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