Weak corporate governance is hobbling India's economic growth. Share prices would rise if companies were more transparent...
India Inc.'s Murky Accounting
A lack of corporate governance at Satyam, among many others, is hampering the nation's economic growth
January 15, 2009, 5:00PM EST
By Manjeet Kripalani
Mumbai - On Jan. 6, Nashville hedge fund Courage Capital Management was mulling a purchase of shares in Satyam Computer Services (SAY). The Indian outsourcing shop's stock price had dropped sharply and seemed attractive. But Jayant Sinha, a managing director at Courage Capital, decided the outsourcer's balance sheet lacked the kinds of disclosures he needed to make an investment. "These were red flags, and I wanted to probe them further," Sinha says. A day later, those flags came into full view as Satyam Chairman B. Ramalinga Raju confessed to fraud that led to a loss of $1.5 billion for his company.
The saga of Satyam is, among other things, a tale of the failure of corporate governance in India. Raju stole profits and attempted to saddle Satyam with debt-ridden companies owned by his sons, persuading his board to approve the deal. His auditors, PricewaterhouseCoopers, endorsed Satyam's accounts even as hundreds of millions of dollars had gone missing. Satyam "should give us all a signal that we can't take anything for granted, that overdisclosure is the best policy," says Surjeet Singh, chief financial officer at Patni Computer Systems (PTI), an outsourcing shop that on Jan. 12 ordered a "reverification" of its cash balance and investments by third-party auditors.
Corporate India has been seized by panic over governance—or rather, the dismal lack of it. A majority of India's companies are family-owned. Their founders, while keen to get funding from global markets, are reluctant to relinquish control, or the cash flow that comes with it. So financial reports are misstated, companies create complex cross-holdings wherein subsidiaries engage in shadowy business with each other, and outside directors appointed by managers don't do much to protect minority shareholders. Company- appointed auditors, with little incentive to be independent, become "experts at cosmetic surgery," says Nirmal Momaya, a Mumbai financial adviser.
Weak corporate governance is hobbling India's economic growth. Share prices would rise if companies were more transparent, says Sanjeev Prasad, an analyst at Mumbai investment house Kotak Mahindra. In a Jan. 7 report, Prasad analyzed governance standards at 68 Indian companies and found just four with "highly desirable" disclosure standards—outsourcers Wipro Technologies (WIT), Tata Consultancy Services, and Infosys (INFY), along with textiles conglomerate Grasim Industries. More than half the companies on the list, including automakers Maruti Suzuki and Tata Motors (TTM), petrochemicals producer Reliance Industries, and developer DLF, were deemed to have subpar disclosure. "More transparency will reduce the chances of a Satyam scenario recurring," Prasad says. The companies all say their disclosure meets regulatory requirements.
Worries about governance can damage even blue chips. Wipro, for instance, saw its Mumbai shares drop by 10% on Jan. 12 when it revealed that it had been barred from working for the World Bank. Wipro had allocated shares in its 2000 initial public offering to World Bank managers. Wipro says the transaction was legal, but the bank later decided the share allocations violated its rules. "If not for Satyam, the reaction to the announcement would have been neutral," says Suresh Senapaty, Wipro's chief financial officer. "But our stock has taken a beating... It takes time for people to come to terms with this." By Jan. 14, Wipro shares had regained much of the lost ground.
Poor governance, of course, can lead to disaster, and India has seen plenty of that in recent years. Before Satyam, Mumbai brokerage First Global estimates, shareholders had lost some $2 billion from scandals and bad governance since 2003. "There's a lot of noncompliance out there," says M. Damodaran, a former chairman of the Securities & Exchange Board of India, the regulator. "We need to pick 5 or 10 large violators and show exemplary punishment meted out to them."
The technology-services sector was supposed to be different. Unlike much of Corporate India's old guard, IT companies grew from brainpower rather than connections. They're modern, global, and certified by Western auditors, and seemed to provide a safe haven in a wild market. But after Satyam, the sector faces the same governance questions as the rest of India Inc. "Now I will do my own due diligence," says Chetan Parekh, an independent investor from Mumbai. "Stocks have to pass the old-fashioned smell test."
With Steve Hamm in New York
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