MUMBAI, India (AP) — One year after the founder of Satyam Computer Services made an astonishing confession to the largest fraud in Indian corporate history, many say that what really sets R. Ramalinga Raju apart is not his malfeasance, but the fact that he got caught.
“To think there aren’t other companies that dabble in less than forthright practices, to believe that other companies are not doing this kind of thing is naive,” said Sharmila Gopinath, research manager at Hong Kong’s Asian Corporate Governance Association.
The group released a 55-page white paper on Indian corporate governance Tuesday, which suggests that many of the conditions that helped facilitate Raju’s $2.5 billion fraud still exist, despite efforts to reform.
The Satyam scandal stunned India and raised questions abroad about the risks of investing in a country where improvements in regulations and corporate governance haven’t kept pace with its rapid rise in economic and financial clout. With creaking infrastructure and a fast-growing population, India more than ever needs reputable markets to attract and channel private investment capital.
The report draws on the views of more than a dozen foreign institutional investors, like the California Public Employees’ Retirement System, auditors, like KPMG, and law firms, like White & Case.
Their chief complaint? Controlling shareholders have too much power, a situation with roots in Indian culture and the nation’s corporate regulations.
“The balance of power between the promoters and other shareholders is out of kilter,” said Jamie Allen, the group’s secretary general.
If that relationship isn’t better calibrated, he said, foreign institutional investors — who poured $17.5 billion into Indian equities last year — could lose confidence in India’s nascent capital markets. Some, he said, already have.
Many Indian businesses are rooted in old family empires run by men who are happy to take money from public shareholders but loathe to cede control. As a result, minority shareholders and independent directors often have little real power. That, plus inadequate regulation and lax oversight, means controlling shareholders can often manipulate a public company for their personal profit, critics say.
“India is undergoing a generational transformation,” said Nishith Desai, one of Mumbai’s best-known corporate lawyers. “Twenty or 30 years ago, India was very feudalistic, full of black money, bad practices, and no accountability.”
Punitive tax rates of up to 97.5 percent in the late 1970s encouraged corporate sleight of hand. “Everybody did business in the black. You were not accountable to anybody. You showed poor results and false losses. You cheated the government, employees and shareholders,” he said.
Economic liberalization in the early ’90s — and corporate tax rates that plummeted to 34 percent — began to change that culture, but, he added: “Some of the old habits and legacy continue.”
“The founders of a company forever thought they are the proprietors,” Desai said. “They don’t want to be answerable to outsiders. They’ve yet to understand the value good governance brings to a company.”
ACGA argues that the best way to fix the problem is to empower institutional investors. It was, after all, a rare revolt by minority shareholders — who objected to Raju’s plan to drain Satyam’s cash reserves to buy two property companies run by his sons — that brought Satyam down.
Today, Raju and nine others, including two auditors from Price Waterhouse, face charges including criminal conspiracy, cheating and forgery at a court in southern India.
Weak voting rights and poor disclosure rules hinder the ability of institutional investors to play watchdog, ACGA says.
Voting by show of hands, the norm in India, gives every investor one vote, irrespective of the number of shares he or she owns. Proxies for foreign investors aren’t allowed to vote by hand count or speak at shareholder meetings under Indian law.
Poor disclosure rules mean investors don’t necessarily know what a company’s holdings are and give controlling shareholders scope to abuse corporate linkages by, for example, overpaying for the assets of a private company they also own.
Satyam is a case in point.
Government investigators say Satyam executives started over 300 companies to invest in real estate and agriculture, buying over 1,000 properties with fraudulently acquired funds.
Those activities dragged the company far from its core software services business. But because Indian companies aren’t required to disclose such corporate linkages, shareholders didn’t find out how far Satyam had strayed — and how close they were to owning a property company rather than an IT company — until long after the fraud came to light.
Weak audits also don’t help, ACGA says. They argue that India’s auditing industry is too fragmented and needs an independent regulator.
Auditors also complain of getting such a run-around from Indian banks that they can’t independently validate bank statements and invoices in time to meet audit deadlines, Gopinath said.
“Accounting firms started sending people to banks and having them sit there and hound people until they get what they want,” she said. “If you don’t validate things yourself, the likelihood of getting conned is quite high.”
To be sure, not all companies are bad. Infosys, notably, has a stellar reputation, and ACGA says the top 50 to 100 Indian companies — of which Satyam was one — have generally good governance.
Indian regulators did implement some reforms in the wake of the Satyam scandal.
The Securities and Exchange Board of India in February 2009 mandated greater disclosure of the holdings of controlling shareholders and any pledging of those shares.
The regulator may also mandate the publication of balance sheets twice a year instead of once a year, which could help fill in holes and inconsistencies found in the unaudited quarterly reports of many Indian companies.
In December, the Ministry of Corporate Affairs published a new set of voluntary corporate governance guidelines, designed to improve board oversight and auditor independence and create a whistleblowing mechanism.
But ACGA says those measures aren’t enough, and some worry that perversely, Raju’s stunning fall may make it harder to root out fraudsters, who will now likely work harder to evade detection.
Raju, Gopinath said, was a victim mostly of bad timing. “If he’d waited, nobody would have known,” she said. “Nobody would have been the wiser.”