Rate Cuts, Trusts, Banks and the Summer of 2001

Saumitra Chaudhuri &= nbsp; &nbs= p; &= nbsp; &nbs= p; &= nbsp; &nbs= p; &= nbsp; &nbs= p; &= nbsp;

Economic Advisor

ICRA Limited = &nb= sp; = &nb= sp; = &nb= sp; = &nb= sp; = &nb= sp; = &nb= sp; = &nb= sp; January 15, 2009

26 K G Marg, New Delhi 110 001

Wannabe Nizam Raju Beggars India = Inc.

B. Ramalinga Raju showed enterprise and ability in building Satyam Computers up from scratch over the past two decades. He has= now brought it all crashing down in a matter of months. That in itself is perha= ps just desserts, were it not for the serious ramifications that Raju’s shenanigans have for India’s corporate enterprises. Over the past decade, India – both the regula= tors and the industry – had worked at bringing corporate financial and reporting practices up to par. So much so, that for India the reliability of corp= orate financial statements and general reasonably good governance practice had be= come an important element in her competitive advantage. Continuity, dependability and the underlying glue of all of this, an old-fashioned but eternal term, = viz. trust, has, is and will remain the cornerstone for business.

You don’t hand your money over to someone you cannot trust. Nor do you give him a contract to build your house. For that matter you do not buy a car from a company that may fold up. To be able to conduct business, everyone has to build up a track record so that buyers, counterparties, lenders and investors can trust them. Not blind trust, but = as in “trust but verify” kind and verification is possible only on= the presumption of an element of reliability that can be reposed in the documen= ts and other evidence. Over the years, Indian companies have worked hard to ea= rn that trust. Has Raju completely destroyed this capital? No, but he has caus= ed it considerable damage. It will take a lot of effort to try and repair that breach.

At one level, the Raju episode, shall we call it, = for it is painful to use the term Satyam (his family got it right when they cal= led their companies Maytas, spelling Satyam backwards) is amusing for it shines= a bright light on sundry puffed-up “experts” who promenade in the public space. Did you know that Raju got an award for corporate governance? None less than the “coveted (sic) Golden Peacock Global Award for Excellence in Corporate Governance for 2008” given by the “World Council for Corporate Governance (WCFCG), with Dr. Ola Ullsten, the former Prime Minister of Sweden, serving as lead judge” (excerpt from a media story). History has never heard of an award, “coveted” or other= wise, for truthfulness, decency or honesty: Which should tell us something about = this corporate governance business. About Mr. Ullsten who was Prime Minister for= a year in 1978-79, it tells us nothing, except the hazards that ageing, retir= ed politicians and other dignitaries expose themselves to when they get involv= ed in things they know nothing of. As for what it tells us about WCFCG, I leave t= hat to you. Raju also got very high marks, several years running, in the IR Glo= bal Rankings, specifically in financial reporting and corporate governance and = other awards from other outfits. All these sadly seem to be little more than R= 20;for-hire” fronts for public relationship and image management.

Then there are his Independent Directors. Raju was partial to academia, packing his board with as many as four long-time acade= mics, a former Cabinet Secretary, a US-based techie and till his demise, a retired Chief Secretary of Andhra. Three of these distinguished academics teach business administration and/or policy and are, as we desis say, “very much re-knowned” authorities on th= at apparently hard-to-understand subject, i.e. corporate governance. In a 2006 event sponsored by the Universi= ty of Southern California and AAAS, one of the profiled speakers was “Mangalam Srinivasan, a fo= rmer adviser to Indian Prime Minister Indira Gandhi and now a director at Satyam Computers, one of the world's largest global IT services/software corporati= ons”. Dr. Srinivasan is a public policy expert with a long association with the Kennedy School of Government at Harvard.

Then there is Krishna Palepu, professor at Harvard Business School (HBS). His bio at HBS says that “In the area of corpo= rate governance, Professor Palepu's work focuses on how to make corporate boards more effective, and on improving corporate disclosure. [He] teaches these topics in several HBS executive education programs aimed at members of corporate boards: ‘Making Corporate Boards More Effective’, = 216;Audit Committees in a New Era of Governance’, and ‘Compensation Committees: New Challenges, New Solutions’. He also co-led Harvard Business School's Corporate Governance, Leadership, and Values initiative, launched in respon= se to the recent wave of corporate scandals and governance failures.”

What incredible irony! But that is not all. This high-priest of corporate governance and co-leader of HBS’s initiative= to save the corporate world did not walk off only with the remuneration that o= ther non-executive directors did (about Rs 12 lakhs a year). He pocketed in addi= tion Rs. 99.3 lakhs, Rs. 87.2 lakhs and Rs. 79.5 lakhs in 2005/06, 2006/07 and 2007/08 as professional fees. It is very unusual for business to be given t= o a non-executive director, but for such torchbearers of global corporate salvation, exceptions appears to have been deemed fit. The noted Prof. Palepu was also on = the Board of the now defunct Global Trust Bank (GTB), which generated so many b= ad loans, so well-disguised, that the public sector Oriental Bank of Commerce, which took over GTB, is still recovering from the food poisoning.

There was always a bad whiff about Raju’s reputation. That is why Raju perhaps went to such lengths to find dupes from the rarefied world of academia and amongst retired civil servants who had n= o previous experience in examining financial statements and processes. I assume that it was a case of being duped and not complicity, even if one of the dupes did help himself generou= sly to the moolah.

The company reported Rs. 2,223 crore as receivable= s in March 2008. Raju now claims this is fiction as are the accounts. Maybe; per= haps these dues have been realised and previously siphoned off. Then there are t= he cash balances. The audited annual statements says the company had bank fixed deposits of Rs. 1,907 crore on 31 Mar 2006, Rs. 3,366 crore on 31 Mar 2007 and Rs. 3,318 crore on 31 = March 2008, besides Rs. 956 crore in current accounts. News reports have the audi= tors saying that they physically verified the fixed deposits. Raju now claims th= at the bank deposits were fiction. In which case so must have been the interest received from banks and the TDS deducted against them: Rs 270 crore and Rs = 61 crore respectively in 2007/08. It is too much to swallow.

A more plausible story is that the fixed deposits = were en-cashed and the money siphoned off after the last annual audited accounts= , i.e., over the last eight months. To add to the possible pile previously siphoned off. That these moneys were used by the Raju family money in a mad frenzy of land acquisition in Andhra, mostly in and around Hyderabad: Verily a latter day Nizam wa= s in the making. Maybe they had hoped to raise funds from financial markets, but= with that avenue closed because of the global crisis, they turned to the fixed deposits of Satyam. Who knows where else the missing crores went to? <= /o:p>

Which is perhaps why Raju made his confession the = way he did: “There is no money trail to follow” was really his plai= nt. When some months back Delhi Metro’s widely respected Mr. E. Sreedharan wro= te a letter to Government, warning of the “makings of a scandal” in = the award of the Hyderabad metro project to Raju, not only did he turn out to be pres= cient but also not overawed by the Raju clout. The Planning Commission took umbra= ge at Sreedharan and the Andhra Pradesh government decided to sue him.

Now India Inc. has an uphill struggle to reclaim i= ts reputation. Even more so the IT industry which has had also to deal with serendipitous = love letters from the World Bank. Thorough investigation, prosecution and convic= tion of all the guilty, is the only way that this objective can be achieved. If government succeeds to salvage the company’s operational component, i= t would be laudatory. But in the final and only reckoning, it is the ends of justic= e that will have to be perceived as having been properly served.=

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