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From Our Archive | Lessons from Satyam fraud

From Our Archive | Lessons from Satyam fraud
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First Published: Wed, Jan 07 2009. 12 24 PM IST

Updated: Fri, Nov 04 2011. 05 24 PM IST
Is this India’s Enron moment?
Former Satyam Computer Services chairman B. Ramalinga Raju’s astonishing letter admitting that he had cooked the books is unprecedented in the annals of Indian business history.
His mea culpa has already generated a firestorm of angry reactions, understandably so. This newspaper made no bones of the fact that Raju should have been removed as head of Satyam immediately after the scandalous attempt to use shareholder money to bail out two infrastructure companies owned by his family, as we wrote in a front-page Quick Edit last month, though the Wednesday revelations raise new questions about who was bailing out whom.
It is not quite clear why Raju decided to come clean eventually, but let’s for now accept it was a brave decision.
Investors have hammered the Satyam stock. There has also been collateral damage to other software companies. The natural question that will prey on investors’ minds—and perhaps clients’ as well—is whether what has happened at Satyam is an exception or closer to the rule.
The longer-term issues will be even more complicated. Our fear is that politicians will start feeding on the carcass of Satyam’s corporate reputation—and then move towards more healthy animals as well. There is no reason to believe that all Indian companies are paragons of corporate virtue. It is an open secret that too many of them massage their financials, pack the board with cronies and have sweet deals with private companies owned by family and friends. But an indiscriminate witch-hunt in an election year is a clear and present danger. The US went in for drastic reforms after the collapse of Enron Corp., an energy company that was once widely admired for its dynamism and innovation. Enron used accounting fraud, offshore secret accounts and tax avoidance to inflate its profits. The aftermath of its collapse saw tough legislation in the form of the Sarbanes-Oxley Act of 2002, to restore investor confidence in public companies and equity markets in the US.
Several initiatives to improve corporate governance in India are modelled on Sarbanes-Oxley. But new statutes are not necessarily the solution. Business lobbies such as the Confederation of Indian Industry should now start discussions with the government to ensure there are fewer episodes of fraud in the future. It is in their interest to do so, to win back investor confidence.
How do we prevent more Satyams? Write to us at views@livemint.com
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First Published: Wed, Jan 07 2009. 12 24 PM IST