BackGautam Banerjee | Bringing PwC back on track in India
After having worked for 31 years at PwC, Gautam Banerjee says his 18 months in India turned out to be the most challenging
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Singapore: When the Satyam Computer Services Ltd scandal—India’s biggest accounting swindle—broke in early 2009, the firm’s statutory auditor, the local affiliate of PricewaterhouseCoopers (PwC), came close to losing its permit. The global audit firm sent Gautam Banerjee, its executive chairman in Singapore, to clean up the mess and stabilize the Indian arm.
“We were really concerned that Sebi (Securities and Exchange Board of India, the capital market regulator) may issue a direction (to Indian companies) saying don’t use PwC as your auditors. That one notice would have meant that the firm would have to close down," Banerjee said in an interview. “This is what had happened to Arthur Andersen Llp (Enron Corp.’s auditor when the accounting fraud at the US energy firm broke out)."
After having worked for 31 years at PwC, the 18 months in India leading to his retirement turned out to be the toughest and most challenging phase of his career, says Banerjee, who was made the India chairman for the clean-up.
The Indian affiliate had failed to do a good audit of Satyam’s accounts, and that, he said, was unacceptable to PwC, even if the Indian unit was “not in cahoots with Satyam management". Banerjee started significant organizational changes to restore trust in PwC’s Indian operations. PwC spent more than $100 million in employee costs alone in India and brought quality control specialists from across the globe to concurrently check the audits.
“We asked our chairman Ramesh Rajan to step down. We replaced our head of audit, we replaced engagement partners who had any issues in the past in terms of quality," Banerjee said. “The reason why audits are often not of good quality is people don’t stand up to the client. We set up an advisory board with former diplomat Naresh Chandra as chairman." His actions, especially asking the partners to leave, “shook up the 130-year old firm".
Banerjee had stepped into the mess, generated a debate, brought in a touch of strategic assertiveness and high moral integrity to deliver results, a style that has served him throughout his career.
PwC affiliates ended up paying $25.5 million to Satyam investors to settle a US litigation in addition to shelling out fines to the tune of $7.5 million to the US Securities and Exchange Commission and the Public Company Accounting Oversight Board for failing to comply with generally accepted auditing standards and violations of federal securities laws. Banerjee moved back to Singapore with PwC in 2011. He had emigrated to Singapore from Mumbai when he was 16, and through the course of his career has worn a number of hats. Banerjee, having retired from PwC, is now vice-chairman of the Singapore Business Federation and sits on the boards of Singapore Airlines Ltd and Straits Trading Co. Ltd. He also holds public sector board appointments that include GIC Pte Ltd and the Economic Development Board. Banerjee also sits on the governing board of Singapore’s latest educational venture—Yale-NUS College, a liberal arts institute he says will foster a more creative society asking critical questions. He was also a nominated member of the Singaporean parliament between 2007 and 2009.
But these days it is his role as chairman of Blackstone Singapore, the US-headquartered alternative asset investment firm that manages about $240 billion globally, that keeps him busy. While only a small fraction of the firm’s investments are in Asia, Blackstone Group is currently raising a $4 billion real estate fund, the largest Asia property fund.
Although he left India at 16, Banerjee says he’s been lucky to remain constantly connected, and after his short tenure as chairman of PwC India, he sees the country as a market one “can’t not be involved in." At the same time, he also shares the view that Indian companies would do better if they increased their focus on the East. “There is a fear of doing business in the East, be it Indonesia and China... I’ve been telling Indian companies, ‘send your best and brightest to work here (in Singapore)—set up a global office, let them get exposure to the global world’. Then they can go back and be much better managers in India because they would have seen they have to compete globally here and learn about best practices," he said.
Banerjee lists two former chairmen of PwC in Singapore as his mentors—Michael Lim, who retired as executive chairman of the accounting firm in 2003 after more than 30 years with it, and the late Thai Chee Ken, who headed its operations in the city-state in the late 1980s and early 1990s. “He (Ken) taught me to keep 30% of your time for non-business work. My work with the National Heritage Board, Yale-NUS College, Monetary Authority of Singapore and being steering committee for reviewing the Companies Act (2007-09) were all due to this. It has helped me and had also helped PwC, too, as it showed that it was a place where people dedicated time for other activities," he said.
Edited excerpts from an interview:
Now you are with Blackstone—tell us your views on the private equity (PE) situation in India at present, and how Blackstone is handling investments in the country. Do you think that PE firms in India are finding it tough to exit?
A lot of private equity flowed into India around the 2004-2005 period. If you look at Blackstone, I mean we are primarily a US, and to some extent a European firm, we have invested in Asia, but of the $240 billion that we manage, a very small percentage is in Asia. The bulk of it would be in the US, with Europe being the second biggest location. We have about close to $3 billion in India, but $3 billion out of $240 billion. We’ve got 17 or 18 separate private equity investments in India, and three large real estate investments. I think it’s quite a lot of money that we’ve put in—this is our own, money from our own funds. Of course, there’s leverage on top.
The problem that the private equity firms in general, and not just Blackstone, have faced in India is the devaluation of the rupee, which has gone down by 50%. Most of our investments were made around the 2006-2008 period, so we have got this rupee devaluation issue—but we still have some time. We don’t have to immediately exit out, but exit is an issue and we are looking at options. Among those 17 or 18 investments, some have been very good investments.
I think the issue with India is that it is a long-term play. We have both private equity and real estate—our three real estate investments are doing very well. These are located in business parks and our tenants are US companies who export out of India, so the rents are probably going up faster than the rupee is coming down, so at least there we seem to be doing well. We see a window for our real estate—we can do REITs (real estate investment trusts) and list them in Singapore. In fact, that’s certainly an area which we will look at as an exit opportunity.
The challenge that private equity has in some markets is that there’s a lot of money. For example, in Singapore, there’s no shortage of money available but in India there is a credit crunch. I think for us we will see opportunities, but you have to just get smart in terms of picking the right type of companies and the right type of structures which will enable you to exit.
India is a market that you can’t afford not to be. So when you have invested $3 billion out of $240 billion, there will be learning and there will be ways of developing strategies for India—and overall hopefully we can get better at it.
What about Blackstone’s Asia investment strategy? Do you see more opportunities in Asia now that real estate prices have started dropping?
Our play on Asia is that we’ve got a rising middle class. Whether it is China or India or Indonesia, there’s urbanization. If you ask me the growth come from, I’ll probably think it’ll be real estate. In China, we’ve not done that many private equity deals but we just announced a big investment on a mall because we feel that malls, good office buildings, warehousing (because one of the important legs of the e-business is that you need to fulfil e-commerce orders—you need to have good distribution, good logistics), so logistics parks, warehouses, all of these we think over time would be very good investments.
We never buy into a rising market you know. In fact, if you look at our strategy— actually on real estate—is that we usually buy something which has got a little bit of distress, whether the property itself has got something which needs to be fixed or the financing has got some issue which needs to be fixed or the seller has got some distress. We don’t as a rule take the development risk.
Do you feel that Asia has room for more globally positioned financial hubs?
Singapore is well positioned to take advantage of it, but I think over time there will be more than just Hong Kong and Singapore. With the free trade zone that Shanghai has created, definitely Shanghai will be a major centre. I think over time hopefully Mumbai will also emerge as a centre. There are eight Indian companies today in the Fortune 500, it’ll be 50 in 10 years time. That in itself creates wealth—with the size of the markets in India, anyone doing a very good business can become very wealthy. And a lot of that wealth is flowing out of India at present.
Tell us about difference you see between auditing in India and elsewhere?
In India, the auditing field is dominated by smaller firms with not very high standards. Also, there seems to be an animosity towards the big firms coming in and developing and practising.
Further, due to the fact that the accountancy profession has not maintained rigorous standards and kept up with the complexity of businesses today the status of a CA (chartered accountant) is not what it should be. The audit process is not an exact science; people need to be rigorously trained for it and remunerated accordingly.
In India, the rate per hour we were getting from our clients was $10-12—that is the market and at this rate you put a lot of junior guys on the audit. In Singapore, the realized rate is about $70-80/hour and adjusting for purchasing power parity, it is still way below. For audits to have the right mix, India has to have around $25-30/hour because you need to have auditors with overseas training as you go into complex businesses.
A good auditor must be vocal, has to exercise professional scepticism and dig deeper where necessary. This is sometimes not the case in India.
In Singapore, for example, I was the audit partner on Singapore Telecom for a number of years—I would have access to the CEO and the CFO four times a year. I would sit down with them and go through key issues. That gives you a certain level of understanding of what’s going on and your ability to assess them. If you’re trying to do an audit by just looking at documents, and those documents are fictitious, how are you going to pick that up? You have to do forensics work. In fact, what we have started doing in India is, as we do work, we do forensics work as a routine just to see whether we’re not missing things.
When I decided to come back to Singapore in 1982, in fact I looked everywhere including India, and sad to say that my profession in India is still kind of finding its way.
In contrast, China had no accountants prior to its economy opening up, but they decided not to reinvent the wheel. Governance and accounting standards in China are no means perfect—Chinese numbers though are more reliable than Indian numbers. China relied on the Hong Kong expertise and are actually in the process of creating their audit firms—they know it is a long journey and in the meanwhile they are working with the big four (PwC, Deloitte, KPMG and EY, earlier known as Ernst and Young).
How can India and Singapore benefit from a deeper relationship?
India should not see Singapore as a threat. In fact, both countries stand to benefit from each other. One thing about Indian companies that strikes me is a lack of diversity. You go to CEO meetings and there are hardly any foreigners. Foreign companies are mostly always run by Indians in India. Coming to a place like Singapore, you really learn the benefits of diversity, you really learn to grow, be adaptable. Singapore would also benefit from going deeper into India because we constantly need to expand into other places, our companies need to grow and can’t just grow from operating in Singapore.
Why has Singapore been such a success story?
One of the key reasons why Singapore has been so successful is that the government has very open links with businesses and the unions. Businesses have a constant and open channel with the government and there is a high degree of trust between both which is unique.
For example, every eight years or so the government forms an economic strategies committee which is made up of senior members from the government, business and academia, and they work together for a period of about a year to look critically at what direction Singapore should take; how should Singapore reinvent itself for the coming decade keeping in mind local, regional, and global trends and there is a vibrant and vigorous discussion out of which a coherent plan is formed and implemented. I co-chaired a sub-committee on how to make Singapore a global city. We asked critical questions like what does a global city actually mean in this day and age and how can we preserve the Singapore identity while bringing in foreign talent; critical questions for growth as well as social cohesion.
We also have institutions of excellence like Economic Development Board (EDB). For example, one of the things that it has done is to proactively go out to look at the type of businesses we want to attract. Procter and Gamble and Unilever 10 years ago hardly had presence in Singapore. Today, they are both here with a huge presence; I think this a coup for Singapore. EDB persuaded them that they needed to be closer to their markets so as to have better Asian consumer insights.
India, too, should establish an agency like the EDB in my view to woo big businesses to set up operations in India and especially in manufacturing that will create a solid and sustained growth for the country that will also feed growth in the services industry.
Singapore is also a country which wants to keep its reputation as a financial centre with high standards. We are not a tax haven by any means. If you’re a family office, say a European family office, there’s good substantive reason for you to be here because there are so many investment opportunities in this part of the world, so tax could be one of the reasons but I don’t think it should be the only reason. That’s why we as a country have also upgraded our anti-money laundering rules, making sure that you know it’s not hot money that’s coming here, it is money with substance because we’ve got a reputation to protect.
In Singapore, although we have stringent laws, we make it easy to comply with the law, whereas I feel that sometimes in India businesses are over burdened and get buried in complying with too many laws instead of focusing on growing their business.
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