Thursday, August 30, 2012

Are there more Satyams around?

Although extensive reforms have been set in motion by corporate watchdogs like Securities and Exchange Board of India, Company Law Board, et al, in the last few years, there remain significant lapses in its implementation and enforcement. by Manish K. Pandey

It was January 2009 when the Satyam fiasco revealed the dark underbelly of Indian capitalism. It not only questioned the integrity of promoters but also the levels of corporate governance in India. Though it was not for the first time that such a thing had happened (like Satyam, Sterlite too was alleged to adopt fraudulent practices to bag a tender floated by GAIL in 2008. Bearings, promoter of BFL, too, a few years back, was abstained from voting when its business was getting acquired by MphasiS. And how can we forget the Global Trust Bank!), Satyam scandal made sure that Indian policymakers sit up and rethink corporate governance norms prevailing in the country. But do they really have?

It has been over one and a half years and the country’s biggest corporate fiasco (the Rs.70 billion plus Satyam scandal) hasn’t even reached the trial stage. And this, when the main accused, B. Ramalinga Raju, the former chairman of Satyam, initiated it all with what he called “relieving the burden on his conscience”, or if we put it simply – a confession. In fact, if industry rumours are to be believed, the scandal is probably on its way to the burial ground. All the accused, except Raju, are already out on bail. Even Raju’s attorneys are now believed to be making way for his quick release. Buzz is high that he might also not stand to his initial statement made on January 7, 2009. So, does that mean Satyam fiasco has failed to wake up the corporate watchdogs? Do they need a bigger bang than Satyam? What’s more? The recent KPMG India Fraud Survey Report 2010 too reveals that there is a rise in the incidence of fraud in India Inc. with ineffective control systems and diminishing ethical values being the key contributors to this trend, particularly over the last two years (see charts).

No doubt, over the last decade, change has come to corporate India – from family-owned businesses that were involved in issues such as nepotism, mismanagement, lack of transparency, et al, to a scenario where companies are professionally managed – but the pace of it has been really slow. Even today still more than half of the companies on the benchmark indices Sensex and Nifty are family-controlled which hampers the evolution of corporate governance in India. “Indian corporate culture is still in a nascent stage as opposed to their US and European counterparts. Moreover, a deep integration with global environment has quickly come to them. But, Satyam fiasco made sure that corporate governance matures in India,” Naresh Gupta, MD, Adobe India tells B&E.

In fact, an assessment of India’s corporate governance reforms shows that although extensive reforms have been set in motion by corporate watchdogs like Securities and Exchange Board of India (SEBI), Company Law Board (CLB), et al, in the last few years, there remain significant lapses in its implementation and enforcement. Moreover, most of the reforms that have been adopted fail to address fundamental areas of concern such as the relationship between controlling and minority shareholders, the role of promoters, and issues with director independence (The Promise and Challenges of India’s Corporate Governance Reforms by Afra Afsharipour, Associate Professor of Law, University of California).

However, there are still many who believe that though the Satyam debacle raised some serious issues, the standard of corporate governance is still intact in India. “As far as corporate governance is concerned, we are still better off than the West. After Enron, US Securities and Exchange Commission (SEC) had put a lot of pressure on American companies. In spite of that subprime crisis happened. Compare that to India. We are still vibrant when worse could have happened,” B. Sai Chandravadhan, VP, Chess Management Services, a legal audit and compliance services consultancy, tells B&E.

But that does that not mean regulators, auditors or independent directors, shouldn’t be held responsible for any corporate mishap? No doubt in the case of Satyam and Sterlite they responded to what shareholders demanded, but what about smaller companies? Since 2006 more than 20 companies have been blacklisted by SEBI for violating corporate governance norms. Leave aside convictions, no one knows about the progress of these cases as of now. In fact, India has one of the poorest conviction rate when it comes to corporate frauds (just 5%). More than 50,000 cases related to corporate frauds are still pending in courts. In comparison, a corporate fraud task force set up in US in 2002 (post Enron fiasco), secured 1,236 convictions in the next five years. “US has strict regulations. If a company commits fraud it’s punished in no time. India too needs such stringent rules,” agrees Gupta of Adobe.


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