One year after the founder of Satyam Computer Services confessed to the largest fraud in Indian corporate history, many say that what really sets R. Ramalinga Raju apart is not his malfeasance, but the fact he got caught.
"To think there aren't other companies that dabble in less than forthright practices, to believe that other companies are not doing this kind of thing is naive," said Sharmila Gopinath, research manager at Hong Kong's Asian Corporate Governance Association.
The group released a 55-page white paper on Indian corporate governance Tuesday, which suggests that many of the conditions that helped facilitate Raju's $2.5 billion fraud still exist, despite efforts to reform.
The Satyam scandal stunned India and raised questions abroad about the risks of investing in a country where improvements in regulations and corporate governance haven't kept pace with its rapid rise in economic and financial clout. With creaking infrastructure and a fast-growing population, India more than ever needs reputable markets to attract and channel private investment capital.
The report draws on the views of more than a dozen foreign institutional investors, like the California Public Employees' Retirement System, auditors, like KPMG, and law firms, like White & Case.
Their chief complaint? Controlling shareholders have too much power, a situation with roots in Indian culture and the nation's corporate regulations.
"The balance of power between the promoters and other shareholders is out of kilter," said Jamie Allen, the group's secretary general.
If that relationship isn't better calibrated, he said, foreign institutional investors — who poured $17.5 billion into Indian equities last year — could lose confidence in India's nascent capital markets. Some, he said, already have.
Many Indian businesses are rooted in old family empires run by men who are happy to take money from public shareholders but loathe to cede control. As a result, minority shareholders and independent directors often have little real power. That, plus inadequate regulation and lax oversight, means controlling shareholders can often manipulate a public company for their personal profit, critics say.
"India is undergoing a generational transformation," said Nishith Desai, one of Mumbai's best-known corporate lawyers. "Twenty or 30 years ago, India was very feudalistic, full of black money, bad practices, and no accountability."
Punitive tax rates of up to 97.5 percent in the late 1970s encouraged corporate sleight of hand. "Everybody did business in the black. You were not accountable to anybody. You showed poor results and false losses. You cheated the government, employees and shareholders," he said.
Economic liberalization in the early '90s — and corporate tax rates that plummeted to 34 percent — began to change that culture, but, he added: "Some of the old habits and legacy continue."
"The founders of a company forever thought they are the proprietors," Desai said. "They don't want to be answerable to outsiders. They've yet to understand the value good governance brings to a company."
ACGA argues that one good way to fix the problem is to empower institutional investors. It was, after all, a rare revolt by minority shareholders — who objected to Raju's plan to drain Satyam's cash reserves to buy two property companies run by his sons — that brought Satyam down.
Satyam — which means "truth" in Sanskrit — was once India's fourth-largest software services firm, counting a third of Fortune 500 companies and the U.S. government among its clients.
Today, founder Raju and nine others, including two auditors from Price Waterhouse, face charges including criminal conspiracy, cheating and forgery at a court in southern India.
Weak voting rights and poor disclosure rules hinder the ability of institutional investors to play watchdog, ACGA says.
Voting by show of hands, the norm in India, gives every investor one vote, irrespective of the number of shares he or she owns. Proxies for foreign investors aren't allowed to vote by hand count or speak at shareholder meetings under Indian law.
Poor disclosure rules mean investors don't necessarily know what a company's holdings are and give controlling shareholders scope to abuse corporate linkages by, for example, overpaying for the assets of a private company they also own.
Satyam is a case in point.
Government investigators say Satyam executives started over 300 companies to invest in real estate and agriculture, buying over 1,000 properties with fraudulently acquired funds. But shareholders didn't find out how far Satyam had strayed from its core software services business — and how close they were to owning a property company — until long after the fraud came to light.
Many here also complain that controlling shareholders can essentially issue themselves preferential securities at will, diluting the holdings of other shareholders and flouting global insider trading norms.
"There are cases where a promoter has moved from nothing to one of the top richest people in the country, whereas shareholders haven't benefited at all," said Nilesh Shah, who helps oversee $28 billion in India investments for ICICI Prudential Asset Management Company Ltd.
Selective disclosure of information by management, poor quality financial reporting and the absence of meaningful punishment for flouting the law remain serious problems, he said.
To be sure, not all companies are bad. Infosys, notably, has a stellar reputation, and ACGA says the top 50 to 100 Indian companies — of which Satyam was one — have generally good governance.
Shah and others say Satyam was a wake-up call. "A lot of companies are focusing on issues of corporate governance and taking investor feedback quite seriously," he said.
Audits are also getting closer scrutiny by both accountants and company management, said Sammy Medora, executive director of KPMG's India partnership.
And Indian regulators have implemented some reforms, like requiring greater disclosure of the holdings of controlling shareholders and any pledging of those shares.
But there has been no searching structural reform. Some even worry that, perversely, Raju's stunning fall may make it harder to root out fraudsters, who will now likely work harder to evade detection.
Raju, Gopinath said, was a victim mostly of bad timing. "If he'd waited, nobody would have known," she said. "Nobody would have been the wiser."
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