Country Focus - Corporate confidence in India shaken by Satyam Scandal - Neil Baker

The fraud at Satyam has highlighted flaws in India’s corporate governance practices.

Satyam means ‘truth’ in Sanskrit, yet the leading Indian company of that name has been anything but truthful. The fourth largest company in India’s booming information technology sector – a company that named the World Bank and a series of international blue chip businesses among its clients – was actually a massive fraud. Its chairman and founder, Ramalinga Raju, resigned in January after sending a letter of confession to his board. Some US$1.5 billion of the company’s funds were ‘non-existent’, Raju said, as was 95 per cent of the revenue it reported in its last financial statements.

‘Horrifying magnitude’

The announcement shocked corporate India. The chairman of the country’s financial regulator, the Securities and Exchange Board of India (SEBI), described it as an event of ‘horrifying magnitude’. Other observers said that if the November terrorist attacks in Mumbai gave this emerging world power its 9/11, Satyam was its very own Enron – a reference to the fraud-ridden US energy company that collapsed in 2002.

The fear now among India’s business and political elite is that the Satyam scandal could scare off foreign investors. The company was a leading player in India’s massive outsourcing sector, which depends heavily on the trust of foreign companies.

Satyam looked like a safe pair of hands. It is listed on the New York Stock Exchange, has business operations in 66 countries and counts 185 companies in the Fortune 500 among its clients. It won awards for its standards of corporate governance. Yet perhaps the most alarming aspect of the fraud is that it seems to have been going on for a long time. Raju confessed that he had been fiddling the company’s financial records for the ‘last several years’. In his contrite letter he argued that he had not benefited financially from the fraud, and was simply trying to keep the business going. Once he had started to cook the books, ‘It was like riding a tiger, not knowing how to get off without being eaten’.

That tiger started to bite Raju’s ankles in December, when Satyam launched a US$1.6 billion offer to buy two property companies largely owned by Raju and his family. As soon as the deal was announced, analysts said the bids massively overvalued the target businesses and would have used up all of Satyam’s cash reserves. Its shares started to fall, and within hours the company said it had scrapped the idea.

Institutional investors were angry that Satyam’s nine-member board had approved the deal in the first place. It just didn’t seem to make sense: why would a leading IT company want to start investing in property? Raju’s resignation letter revealed the true logic behind the aborted deal. It was a final, desperate effort to cover up the accounting fraud by bringing some real assets into the business, he said. When it failed, Satyam started to unravel. Within days, the World Bank said it had barred Satyam from offering it computer services for eight years, citing concerns about corruption, data theft and bribery. Other customers started to voice their concerns about fraud and accounting irregularities. Satyam directors started to resign. And then Raju confessed.

In his letter, Raju tried to take full responsibility for the fraud. Investigators will test the credibility of that claim. The government has already replaced all of Satyam’s board directors and, at the time of writing, Raju was pondering the consequences of his actions from the comfort of a Hyderabad jail cell.

‘The Satyam crisis is not only a wake-up call that has shocked us all, but it is also a great opportunity for everybody to look at the quality of corporate governance more seriously’
Richard Rekhy


Of greater importance, however, are the consequences for corporate India. ‘If there were one or two more such accounting scandals in the next six months, it would make international investors more wary’, commented Michael Useem, professor of management at Wharton, the business school. ‘One example would put people on guard; several examples would be enough to tell big investment money managers that they have to be especially careful working in that environment.’

India has tried to contain the damage so far. Rajeev Chandrasekhar, president of the Federation of Indian Chambers of Commerce and Industry, has called on regulators ‘to move quickly to demonstrate that this is an exceptional case among corporations, and that investors need not worry about Indian corporate governance and accounting standards’. The Confederation of Indian Industry (CII) has launched a corporate governance task force to report on the implications of the Satyam scandal. The initiative is chaired by Naresh Chandra, India’s former Ambassador to the United States. The Institute of Chartered Accountants in India has also launched an inquiry.

The Satyam affair is ‘a major eye opener and will bring into renewed and critical focus the role of independent directors, auditors, company management, [the] CFO and other key persons involved’, said Suresh Surana of Astute Consulting. Richard Rekhy, chief operating officer of the global consultancy firm KPMG in New Delhi, has espoused similar views. ‘The Satyam crisis is not only a wake-up call that has shocked us all, but it is also a great opportunity for everybody to look at the quality of corporate governance more seriously’, he says. For a long time, ‘many found the subject boring, but that has changed now. We were busy pursuing a high-growth economy and neglected important things like instituting an ethical corporate governance mechanism’. Rekhy said that as yet unpublished KPMG research shows that ‘integrity and ethical values are not given enough attention’ in Indian companies.

‘Satyam was its very own Enron’

Widespread weaknesses

Saroj Jha, partner in Indian law firm Fox Mandal Little, is an IBA member and regularly speaks on the country’s system of corporate law at IBA conferences. The fraud at Satya  is an isolated incident, he says, but the corporate governance weaknesses that it exposed are more widespread.

One of the big problems with Indian corporate governance, says Jha, is that too many listed companies and directors follow the letter of the law, rather than the spirit. Clause 49 of the country’s listing rules sets out a series of corporate governance regulations. For example, a listed company must have a non-executive and one-third of its board should be non-executive directors. The nonexecutives should be on the board to challenge management, says Jha, but in reality they tend not to. ‘Good people are very few’, h  says, partly because there is a legal limit on the amount companies can pay non-executives. They are not allowed to receive a salary and can only be paid for attendance at board meetings, and then only up to a limit of roughly US$600 per meeting. That gives the non-executives little incentive to fulfil their obligations properly, Jha argues.

Directors’ remuneration needs a rethink, he says, as does the process of appointing directors. Currently, non-executives are generally selected by the board, with little input from shareholders – they should become more active, says Jha. He also wants an independent agency to rate the standards of corporate governance at listed companies.

Not all bad

Jha says the Satyam scandal has dented the image of corporate India, but predicts that ‘things will normalise’ over time. And while Indian governance has been criticised, it is not all bad. The Asian Corporate Governance Association’s 2007 ranking of corporate governance placed India third out of 11 Asian countries, behind Hong Kong and Singapore, but far ahead of China, which was in ninth place. India’s financial-reporting standards are high and the SEBI is independent of the government.

The government has introduced a new Companies Bill, which contains measures to make shareholders more active – for example, they would be able to pursue class-action lawsuits. But the Bill isn’t certain to make it onto the statute book – there will be an election this year – and a 2005 Companies Act still hasn’t been fully implemented, Jha says.

Beyond any legal or regulatory issues, there is a further cultural factor that compounds India’s governance problems: the corporate landscape remains dominated by family-owned businesses. According to a survey by Moody’s Investors Service, there are benefits to being family controlled: a lack of outside influence makes it easier to take a long-term view and to act quickly. That is one reason why Indian companies have been able to take advantage of the opportunities created by a fast- growing and rapidly liberalising economy.

But family control also brings governance problems – not least of which are a lack of checks and balances over executive decisionmaking and behaviour, and a lack of transparent reporting to the outside world. ‘Although Indian corporate governance practices are improving, this largely reflects regulation of listed companies, particularly regarding “checks and balances” such as composition of the board of directors and the operations of audit committees’, said Chetan Modi, author of the Moody’s report. As family companies grow, it is hard for the founders to let go, or allow ‘outsiders’ to have an influence.

It’s hard to know what goes on inside a boardroom once the doors are closed. However, it’s often the case in India that the independent directors who are supposed to provide an objective voice are linked to the executives or their family. There is also an attitude in some Indian companies that the board members – executive and independent – work for the people who have brought them onto the board, and not for the interests of shareholders. This is wrong, but hard to fix in the short term.


Neil Baker is a freelance journalist. He can be contacted by e-mail at

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