The saga at Satyam Computer Services Ltd has given global publications the opportunity to scream about weak corporate governance norms in India. Though it has certainly been a shameful string of events at Satyam, this has been what we’ll label as the slumdog phenomenon.
Just as the Western world has showered accolades on the movie Slumdog Millionaire for apparently revelling in India’s poverty, Satyam’s example is now being touted as representative of overall poor corporate governance standards in India.
Of course, the woeful state of affairs in other Asian countries, especially in South Korea and Indonesia, as well as the terrible record that the US has, is forgotten. On a less pontificative note, we explore what the Satyam fraud might mean for overseas capital flows.
We are not being naïve and giving India a clean chit on corporate accounting. We recognize there are some trustworthy names among Indian companies, and some not so trustworthy. We wouldn’t go so far as The Wall Street Journal, which suggested that Indian companies with Western sounding names are associated with superior corporate governance.
However, we have a firm belief that the economic boom of the last four years has, to an extent, convinced promoters that being trusted by the marketplace and hence being valued at a higher multiple is the best way to become wealthy, or in most cases wealthier.
The chink in the argument arises when the promoters do not own a significant stake in their company, as in Satyam’s case. Aside from capital market scams, India has really not seen respected companies crumbling to outright frauds as the rest of Asia, or even the US, has.
South Korea, recognized by some as perhaps the safest place to invest in Asia as far as corporate governance goes, is really one of most hallowed in terms of corporate wrongdoing.
The Daewoo Group, the poster child for Korean export-led growth in the 1980s and 1990s, collapsed in 1998 as a result of ridiculous debt levels. With the collapse was unearthed an immense $20 billion (Rs98,200 crore) accounting fraud by founder Kim Woo Choong.
If B. Ramalinga Raju was a respected business leader in India, Kim was a legend in his country—virtually the pioneer of Korea’s vision of developing into an export power house.
More recently, the chairman of Hyundai Motor Co., Chung Mong-Koo, was found guilty of embezzling company money. His punishment? Chung was asked to apologize, donate $1 billion of his personal wealth and asked to devote time to community service. Incidentally, Chung’s son heads Kia Motors Corp.
Along with Chung, 73 other white-collar criminals, some of them very high profile, were pardoned by the President just a few months ago. Their amnesty is supposed to increase investment from the respective companies and create jobs.
Murky dealings, misrepresentation and poor corporate control have been Indonesia’s legacy and continues being so. Investors virtually take this as a given while deploying money in Indonesia. What’s even more disturbing in countries such as Korea or Indonesia is the unabashed manner in which the government is willing to get into bed with the powerful business families.
True, there were some reports of the Andhra Pradesh government being reluctant to arrest Raju, but the inevitable pressure from the Union government did come. Of course, we are hopeful that the Indian justice system, albeit slow, but largely uncorrupt, will see the Raju saga to its logical conclusion unlike other Asian corporate leaders, who invariably find the right levers to pull and avoid jail time.
Other Asian countries such as the Philippines, Malaysia and Thailand, too, have seen their share of corporate malfeasance and inexplicable entanglements with their respective governments. We won’t even waste words going over the slew of Enrons, WorldComs and Adelphia in the US.
The day the Satyam saga erupted we saw FII (foreign institutional investor) fund outflows of just more than $200 million. In the last six months, we have seen several days with greater FII outflows. The next day’s net FII selling in cash equities wasn’t even $40 million.
Having said that, over the short term India will surely lose some foreign investors. We’d attribute that more to foreigners looking for a reason to sell as risk aversion sets in again and the global economic picture remains murky.
Over the long run, foreign flows always chase growth; corporate misdoings are rarely remembered. If a commodities boom and high yields could attract money into Indonesia and the promise of a cyclical upturn could lure money into Korea, India is not going to be pointing fingers at Raju in 2010 when growth picks up again.
Rajeshree Varangaonkar and Bharat Indurkar have day jobs with US-based hedge funds. They write every other Thursday. Send your comments to firstname.lastname@example.org