Mumbai: The chairman of Housing Development Finance Corp. Ltd (HDFC),Deepak Parekh, has played the role of the government’s unofficial crisis consultant for years. He drafted the rescue plan for India’s oldest asset management firm, Unit Trust of India, during its first crisis in the late 1990s. He has been in almost all the key panels for financial sector reforms, including the Malhotra committee on insurance and the Narasimham committee on banking. He was also actively involved in drafting critical government policies on telecom licensing, a housing finance regulator and infrastructure.
Warning signals: Deepak Parekh says the regulatory bodies should be more vigilant against frauds, and employees of a company too should complain to the regulators if they suspect any wrongdoing. Abhijit Bhatlekar / Mint
When the Rs7,000 crore fraud at Satyam Computer Services Ltd came to light a year ago, Parekh was one of six people chosen by the government to save the company and India’s reputation as an information technology (IT) hub.
Parekh narrates the rescue act in an interview. Edited excerpts:
This is possibly the only instance across the world where after such a big fraud, a company was brought back on the rails without any financial support from the government. How did you manage that?
Well, I can say that it’s a joint effort of all the six of us. Initially, the government had appointed three directors— Kiran Karnik, (C.) Achuthan and myself—and after a few weeks, Tarun Das, (T.N.) Manoharan and (Suryakant Balakrishna) Mainak were appointed.
Our main objective was to protect India’s image as the IT capital of the world. And that is the reason why the Prime Minister and his colleagues in the cabinet took a decision that the board had to be superseded and a government-nominated board would be set up. Had it happened to a consumer finance company or a small, or even big, manufacturing company, the government would not have come out and superseded the board. The normal procedures for bankruptcy and liquidation would have taken place.
So preservation of India’s image was the main job?
Absolutely. Two days after the fraud was admitted—mind you, it was not discovered, it was admitted—the government in its wisdom felt that it was absolutely necessary to protect India’s image because it would impact outsourcing, the IT sector and India’s development.
Our objective was to preserve India’s image. We took a view internally that we need to find a new home for Satyam immediately and to take whatever steps needed to be taken to achieve that without profitability, balance sheet numbers and all pending legal cases, on an “as is where is” basis.
Our main concern was how do we sustain the operations and how do we openly, transparently find a new buyer—a new home for Satyam. And we needed to take steps to protect the employees and the customers, who needed to be reassured that their work will be done.
The positive thing was that all the customers we spoke to were all very appreciative of the quality of the service they were receiving. Satyam gave good quality of work. And we had to plead with them saying we are government-backed nominees and we are trying to find a solution, so have faith in us, your work will not suffer.
You have been the government’s unofficial crisis consultant for many years now. Was there any moment when you thought the Satyam job would be very difficult?
Oh, every minute we thought it would be a difficult job. There was a lot of support from the government and the regulatory authorities but there was also exodus of senior people. We didn’t know whom to trust.
I heard your secretary at HDFC used to fly down to Hyderabad to take down notes for all Satyam board meetings.
Yes. We had to appoint new people straight away. We had to get external agents to do the audit and we had to get forensic accountants for restating the balance sheet because we had to reconfirm the numbers.
What was the most difficult task?
Every task was difficult—giving confidence to the employees, getting funds from banks to pay salaries, giving confidence and assurance to customers to stay on and not leave the battleship and go to our competitor.
What is your take on the auditor’s role in the scam?
I’m an accountant myself and I’m amazed at the carelessness or negligence of the auditors in accepting all the bank statements, because if you saw the bank statements, which we have seen, from HDFC Bank, HSBC, it was reasonably visible that there was something wrong in those statements.
Would you attribute mala fide intent?
Well, it could be mala fide, it could be negligence. We can’t come to any conclusion. It was such a large company, a “triple-A” company and reputed. So the senior partners (at the auditor firm) may have said that “who is going to do anything with the bank statements” and may have accepted them in totality.
Had there been a whistle-blower, perhaps the fraud could have been unearthed early.
You can’t perpetrate such a large fraud single-handedly. So there must be more people involved in the company, whether in the accounts department or in the finance department who were involved with it. Otherwise, such a large fraud over such a long period of time cannot be done.
Do you think there could be many more Satyams waiting to happen?
I don’t think so. I think that one Satyam wakes everyone up.
A Satyam case now would’ve woken every auditor in the country. They will take much more care when they audit. So there are positive outcomes of Satyam. Seeing the fate of the partners of Satyam’s auditors who’ve been arrested, no independent auditor would want to take the risk. They will be much more diligent in signing balance sheets, in giving certificates.
Is Satyam in any way a reflection of overall corporate governance in India?
No, I think it’s an aberration. One case cannot be representative of the Indian corporate sector.
In accounting, there are different views and those differences of opinion may continue to be there, but Satyam was a downright fraud, downright cheating, where you inflate sales.
In the early days, they were inflating sales and later days they were diverting money to personal accounts.
What are the lessons from Satyam?
There are a number of learnings. For example, when a promoter has a very low holding in a company and it keeps going down over a period of time, there is concern as to why is it happening. Here (in Satyam), Raju’s family holding in the company was very low and his sons were not on the board of the company. It’s a prestigious, family-run company but why were the boys not on the board?
Every quarter, the accounts of Satyam were announced after the three companies, TCS (Tata Consultancy Services Ltd), Infosys (Technologies Ltd) and Wipro. Satyam was always the last of the (top) four to announce quarterly results, so the growth rates and numbers were all manipulated, to say that we are like them.
When the stock market collapsed in the financial sub-prime crisis, they borrowed money against their own holding. This borrowed money had been used to start Maytas real estate and infrastructure (businesses) and the boys were running it.
So as stock prices collapsed, after the financial crisis, banks wanted more shares and that time they didn’t have the shares, they had pledged all their holding and some banks sold (the pledged shares) and that’s the time when they decided to acquire Maytas Infra (Ltd) and Maytas Properties (Ltd).
How do we prevent recurrence of another Satyam?
You have to run your business honestly and there has to be a conscience. You can’t cheat people. But if your attitude is that I want to make money illegally and that I want to cheat people, then it’s going to continue.
It’s not the first time and it’s not the last time it has happened—either in India or abroad. You could’ve learnt lessons from Enron, but how many people take that seriously?
The regulatory bodies, the outside agencies, be it the internal auditors or the external auditors, should be more vigilant and even the employees of the company must come out and complain to the regulators when they suspect something. They could’ve gone to the independent directors. Satyam had very reputed independent directors on its board. Normally, such a thing (fraud) would not happen because someone would squeal.