Our guest blogger Lune (who in one of his past lives worked on the Hill) was just in India and gives us his take on the Satyam Computers case, which has gotten scant coverage in the US. The Indian government’s reaction to its biggest corporate scandal ever makes for a useful object lesson.
We Americans have typically prided ourselves on having the most reliable, transparent, and well regulated financial markets in the world. That reputation has taken quite a beating in the past couple of years, arguably starting with Enron and accelerating in the past year; so much so that we have begun looking at such countries as Sweden, Japan, and the UK for possible examples of how to deal with our current financial troubles. Perhaps another good example might be India.
While much of the world’s attention has been consumed by the drama in the US and Europe, India has been rocked with what is being called the biggest corporate fraud in its history, something akin to America’s Enron and Lehman.
Satyam Computers, one of the largest IT firms in India, has been embroiled in an accounting scandal. To summarize briefly, this autumn, Satyam’s founder and (now former) chairman, B. Ramalinga Raju, proposed to Satyam’s board that the company buy two unrelated firms substantially owned and run by his family members.
In December, the board agreed and announced its decision, only to be greeted by a massive investor revolt over this non-arms-length deal. Within a few days, the deal was scuttled. Soon afterward, several board members resigned, and the company became the focus of closer scrutiny by investors and the press. On Jan. 7th, Ramalinga Raju resigned as chairman of Satyam and admitted that the company inflated its earnings for the past several years and engaged in accounting fraud to the tune of ~Rs. 7,000 crore (Rs. 70 bil or $1.4 bil). A more detailed account and timeline can be found here.
While the details of exactly what happened will take some time to figure out, the government’s response has been swift:
From the WSJ: Within a week of Ramalinga’s resignation, he, his brother, and Satyam’s CFO have been arrested and are currently in jail awaiting trial on criminal charges of conspiracy, cheating and falsification of records.
The entire board of the company has been dismissed by the government, and a new board has been constituted with members nominated by the central government including one former member of SEBI, the Securities and Exchange Board of India (India’s version of the SEC). This new board will hire a new CEO, and other key executives, with the stated goals being “to restore the company’s credibility, customer confidence and employees’ morale and to safeguard the interest of investors and other stakeholders.”
From the Business Standard and The Hindu: SEBI has announced that it will conduct a “peer review” of the financial statements of every company in the Nifty and Sensex indices (indices consisting of the 80 largest and most actively traded Indian companies, akin to the US DJIA or S&P 500) for both the 3rd quarter and for the past year. A peer review is to consist of an analysis of the statements along with the working papers used by the company’s auditor to certify the statements. This peer review will be done by an auditor unrelated to the company’s current accounting firm, selected from a panel of independent auditors to be named by the government.
From The Economic Times: In addition, SEBI is developing criteria for additional companies to be peer reviewed, targeting companies with the highest likelihood of having engaged in similar fraudulent practices. For example, it is looking at including companies with multiple subsidiaries or companies whose shares have risen abnormally just before the announcement of results.
Certainly, we will need to see whether all these initial efforts are followed through, and India’s extensive government corruption is well documented, so this may all still come to nothing.
That said, the Indian government’s rapid and comprehensive response, including the arrest and criminal charges for the perpetrators of the fraud, the sacking and reconstitution of the company’s board with truly independent and activist members (despite Satyam being a fully private company), and the investigation of the largest companies and those that might be most suspicious in the eyes of investors will do a great deal to restore the Indian people’s confidence in their private markets. Furthermore, it stands in stark contrast to the kid gloves with which we have treated our own fraudsters
Why is Dick Fuld still roaming the streets after making false statements about Lehman’s health right up until its implosion? How about Angelo Mozilo? And why haven’t the incompetent boards of such companies as Citi been dismissed? And would things have been better if after the implosion of Bear Sterns, the SEC ordered a “peer review” of all major investment and commercial banks so that it could deal with problems before they blew up into Lehman and Citi sized disasters?
While skeptics often dismiss “socialist” countries like India for confiscatory taxation and state-sponsored market manipulation, it is ironic to note that India at least, appears to be taking comprehensive steps to ensure the integrity of its free markets while not (yet) spending a dime of public money bailing out its bad apples. The U.S., in contrast appears to be doing the exact opposite…