India's Enron - Satyam Computers

ECONOMIST: SATYAM means “truth” in Sanskrit, an ancient Indian language. On January 7th Satyam Computer Services, one of the country’s biggest software and services companies, revealed some alarming truths about Indian capitalism, even in its spiffiest industry. The company’s founder and chairman, B. Ramalinga Raju, confessed to a $1.47 billion fraud on its balance sheet, which he and his brother, Satyam’s managing director, had disguised from the company’s board, senior managers and auditors for several years. “It was like riding a tiger, not knowing how to get off without being eaten,” Mr Raju wrote.

The tiger carried Mr Raju deep into the woods. Quarter after quarter, he inflated Satyam’s profits, even as operations expanded and costs grew. The company, which is listed on both the New York Stock Exchange (NYSE) and the Bombay Stock Exchange, now claims to have 53,000 employees, and customers in 66 countries, including 185 companies in the Fortune 500. In its books for the third quarter it reported 50.4 billion rupees ($1.03 billion) of cash and 3.76 billion of earned interest that do not in fact exist. It also understated its liabilities by 12.3 billion rupees and overstated the money it is owed by 4.9 billion.

The ride took a final turn on December 16th, when Mr Raju tried to buy two firms owned by his family, Maytas Properties and Maytas Infra, for $1.6 billion. Satyam’s supine board approved the proposal but shareholders revolted. They thought it was a brazen attempt to siphon cash out of Satyam, in which the Raju family held a small stake, into firms the family held more tightly. In fact, it turns out, it was Mr Raju’s last desperate attempt to plug the hole in Satyam’s balance sheet with Maytas’s assets.

The deal was swiftly aborted. In the aftermath, four non-executive directors quit, hoping to salvage their own credibility, and Mr Raju’s creditors came knocking. They dumped most of the Satyam shares he had pledged as collateral for the 12.3 billion rupees in loans. The ride was over. The daunting task of rescuing Satyam falls to Ram Mynampati, its chief operating officer, who is now interim chief executive.

The task of rehabilitating corporate India is equally daunting. It has long basked in the reflected glory of its information-technology firms. Run by cerebral, clean-living professionals, they employ India’s brightest youngsters and serve the bluest of blue-chip companies. These digital ambassadors have lent corporate India a certain “mystique”, says Sharmila Gopinath of the Asian Corporate Governance Association (ACGA), based in Hong Kong. But that reputation rests largely on the efforts of one or two companies, such as Infosys, which are impeccably run. Investors delude themselves if they think standards in most Indian technology firms, let alone the rest of its 9,000 listed companies, are close to those set by Infosys.

The illusion persists because it is not easy to gauge corporate governance objectively. ACGA’s own 2007 ranking of corporate governance placed India third out of 11 Asian countries, behind Hong Kong and Singapore, but far ahead of China, in ninth place. India’s financial-reporting standards are high, its principal regulator, the Securities and Exchange Board of India, is independent of the government, and its business press is enthusiastic. But enforcement is weak, loopholes large, and shareholder activism is lacklustre. “There is virtually no voting by poll at AGMs”, ACGA notes, “and meetings are often held in remote locations.”

The government has introduced a new companies bill, which would allow shareholders to pursue class-action lawsuits, but it will probably lapse when elections are called some time before May. Even if a new government passes the legislation, India’s cumbersome courts tend to delay justice to the point of denying it.

New laws may matter less than the spirit that animates them. Satyam’s independent directors, for example, met the standards set by the NYSE. But they did not ask hard questions. Directors in India may sit on as many as 15 boards, which leaves them little time to do their job properly.

But even an assertive board and reputed auditors will struggle to stop managers who are determined to hide their dirty laundry from view. About half of the 30 companies in the Sensex, India’s benchmark stockmarket index, are run by business families, most of who trace their roots back to the closed economy of India’s past. “They don’t always understand the new rules,” says Ms Gopinath. “Until investors stand up and say these practices are unacceptable, what reason do companies have to change?”