Arun Goyal and Srilata Swaminathan
On January 7 2009, R. Ramalinga Raju, the CEO of Satyam Computer Services (the fourth largest company in the Indian IT industry) sent shockwaves throughout the financial world, already reeling under the global financial meltdown, by announcing his resignation and a fraud of over Rs. 7000 crores over several years.
Satyam has reported an operating margin of 24%, hiding the actual figure of just 3%. This low figure (3%) for the company’s operating margin has baffled experts, since most IT giants report corresponding figures above 20%. While the actual picture is as yet extremely hazy, with people still trying to make some sense of the concocted figures doing the rounds, what is clear is that funds worth several crores have been siphoned off without a trace.
“Call of Conscience” or Call for Protection?
It is apparent that Raju’s public “confession” was driven less by a “call of conscience”, than by the impending dragnet of trial and punishment in the US for innumerable frauds. He clearly chose to get tried in India, where his tremendous clout and political connections could help him escape a rigorous punishment. He has placed his trust in the Indian political and legal system to let him off the hook easily, and the developments till date seem to prove how well-placed his decision was. Raju and his family are being shielded not just by the Hyderabad police but by the Central government too. Apart from the delay in his arrest (which gave him enough time to do a good whitewash job), the Central government has shown shameless willingness to rescue Satyam through a massive bailout!
This upcoming bailout, which is being justified in the name of Satyam’s 53,000 employees, exposes the attitude and priorities of the UPA government. The same government which is now perfectly willing to spend crores of public money to save a corporate house, rather than snatch the assets of a corporate swindler, sat back and watched while hundreds of farmers in Vidarbha and Andhra Pradesh committed suicide in desperation. The same government, which is now supposedly showing concern for the employees of Satyam shows undue enthusiasm in promoting massive retrenchments and large-scale subcontracting in thriving public sector companies.
Whys and Hows of the Satyam Fraud?
Why did Satyam have to indulge in such large-scale fudging of figures? So how did the Rajus land up with a severe liquidity crunch? One of the theories doing the rounds suggests they were trapped by a murky cocktail of political developments and a real estate crash. Speculations are rife: analysts and commentators have suggested that Raju was trying to keep Satyam’s stock value high, and use the company’s “financial giant” status to increase assets elsewhere and corner large contracts for several mega public projects.
Raju’s mea culpa came after he failed to persuade shareholders to allow Satyam to buy up Maytas Properties Ltd. and Maytas Infra Ltd. which are all owned and run by himself, his brother and his sons. They also had tremendous clout and contacts in Andhra and national political circles. With the global financial meltdown and the fall in real estate projects, these two companies were in deep trouble. Many feel that Satyam's wealth had been steadily siphoned off to these companies over the past few years during the SEZ /real estate boom.
According to the Economic Times the Raju family might figure among India's top 10 landlords as it had embarked on a massive land-buying strategy to cash in on the real estate boom in recent years. While the family holds over 6,500 acres through Maytas Properties, the individual members in their personal capacity have significant holdings of agricultural land across south and western India, industry officials said.
Some examples of the Raju family’s recent acquisitions are contracts for the Hyderabad Metro Rail project, the Machilipatnam port project and airport projects in Andhra Pradesh and Karnataka. Satyam’s fraud and grab story does not end here. In return for these prized contracts, prime land near some of these projects had to be “offered” to the supportive establishment. Several real estate sources claimed there were some instances of Maytas being awarded road projects even without proper bidding. We can now understand the full import of the Delhi Metro managing director E Sreedharan’s cryptic warning that the Hyderabad Metro Rail project was a "future political scam". He had objected to the way the government allowed a private consortium to develop land commercially.
Some other conjectures floating in Hyderabad claim Satyam's promoters raised huge funds from tobacco traders in Rayalseema district by pledging Satyam shares. The promoters may have assumed that they would be able to raise funds to recover the pledged shares through an IPO of Maytas Properties. But the downturn in the real estate market derailed Maytas's IPO plans leading to the promoters being unable to meet margin calls on Satyam shares.
Another interesting twist to the story is that Satyam senior executives obviously realized much earlier that something was seriously wrong in their company as they were busy selling their shares in the company! Over $2 million in shares were sold in the 6 months before the scandal broke according to filings to the Mumbai Stock Exchange and the volume of sales by the Satyam managers exceeded the combined total recorded for the other 29 companies in India’s benchmark Sensex index, according to Bloomberg, the provider of financial data.
Whither “Corporate Accountability” and “Regulation”?
The Satyam scandal raises serious questions about the much touted “corporate accountability” as well as the efficacy of the array of the regulatory bodies. When a blue-chip company is caught indulging in such large-scale fraud, it speaks volumes for the hollowness of any neo-liberal claims of professionalism, self-regulation, and accountability by the corporate sector.
The extent of the fraud and the time span over which it was practiced makes it clear that this is not simply a case of a single errant individual swindling. An entire array of actors in and around Satyam, “certifying” and “awarding” the company, is also deeply implicated. “Independent” directors in the Satyam board were supposed to oversee the records to detect any malpractice. SEBI’s job is to detect precisely the kind of wrongdoing that Satyam has indulged in. Satyam’s auditors, the international consulting giant Price Waterhouse Coopers (PwC) should have demanded proof for all the investments Satyam had allegedly made. Angry shareholders want to know why it did not seek certificates from banks attesting to the existence of money in Satyam's accounts. Investment analysts for FIIs, and the business press continued to promote Satyam as one of the poster boys of the “glowing” Indian economy. Over the years, Satyam has received several awards for corporate governance. How come none of these agencies detected what was happening over the span of several years?
It is high time we demand greater accountability from all these agencies. For PwC for instance, this is not the first case of oversight. After all, it was PwC that shielded the Global Trust Bank till it finally collapsed. Shouldn’t we be demanding an immediate blacklisting of such fraudulent auditors? Why isn’t the Institute of Chartered Accounts of India, ICAI, taking any action against them?
Why shouldn’t action be taken against Satyam's independent directors who remained silent? And also against Investor Relations Global Rankings (IRGR) who rated Satyam as the company with “Best Corporate Governance Practices” for 2006 and 2007? Aren’t the forty eminent independent judges for the Golden Peacock Awards (ostensibly based on a “rigorous” and “detailed” two-tiered assessment process) for corporate governance guilty of negligence and oversight?
Pandora’s Box Opened
We also have to ask: is Satyam just a rare rotten egg in the basket? If there are systematic probes into the various arms of the regulatory bodies, many more skeletons will tumble out of the corporate cupboard. Satyam's collapse is now revealing other interesting stories of fraud and corruption. One is the blacklisting of Indian IT companies by the World Bank for “providing improper benefits” to Bank staff. In other words, the WB staff are bribed with shares, kickbacks etc so that various projects and contracts can go to the IT company. Satyam was barred for eight years from 2008 for giving such 'improper benefits' and for failing to maintain documentation to support fees charged for its subcontractors. Wipro was barred for four years from June 2007 for 'providing improper benefits to Bank staff.' A third Indian IT firm, Megasoft Consultants Ltd, was also barred for four years from December 2007, for 'participating in a joint venture with Bank staff while also conducting business with the Bank.'
The exposure of this large scale, multi-layered fraud must also lead us to question the policy of treating the IT sector as the engine of present growth – and the public subsidy the IT corporate houses corner on this count in terms of real estate and tax benefits.
For Indian corporate honchos and their ideological mentors in business schools and academia, who have been patting themselves on their backs for being “global leaders”, the Satyam scandal has embarrassingly proved that at least in fraud, they are capable of beating even the Enrons of the world! The money involved in the Satyam scam is almost 3 times that of the Enron swindle which was exposed in the US. The real parallel however lies, not in the extent of the scam, but definitely in the continuity and extent of the patronage received patronage from the most powerful political circles in the country to both these swindlers. If the Congress and the BJP governments in the 1990s, both in Maharashtra as well in the Centre went out of their way to first bring in and then protect the corrupt US multinational Enron, the TDP and the Congress have been vying with each other in Andhra Pradesh to promote and protect Satyam.
Interestingly, corporate fraud is not just increasing, but also being acknowledged more openly: “Globally, the trend is toward an increase in economic crime, not a decrease," mourns the Global Economic Crime Study. The report found that, since 2003, the number of companies reporting cases of corruption and bribery rose 71 percent; those reporting cases of money laundering were up 133 percent and reports of financial misrepresentation were up 140 percent. (John W. Schoen, msnbc.com).
Corporate fraud is alive and well in the US. Despite Enron verdict, accounting reforms, aggressive prosecutions and tough new laws designed to prevent a repeat of the deception that cost shareholders, investors and employees billions of dollars, fraud in the workplace is alive and well in the post-Enron era. The world is gradually awakening to the fact that the “free-market” and neo-liberalism cannot possibly function without the attendant swindle and thievery that is fundamental and intrinsic to it.After all, the principles of free trade have always been synonymous with the principles of free-for-all. The pirates, buccaneers and freebooters of yesteryear were the founders of British, European and American capitalism whether they were slave-traders, opium-runners or just plunderers and looters of the worst sort. Nothing has really changed. Our present-day Enrons, WorldComs, Madoffs, Wall Street corporations and Satyams are merely continuing the well-trod traditions of capitalism!