Truth about India's Corporate Success

By Subramanian Swamy 
13 Jan 2009 12:32:00 AM IST  (New Indian Express)

The truth about the Satyam accounting fraud will spill out in instalments. Besides the accounting fraud, we are confronted with an accountability crisis: who were responsible and why it took so long to find out.

In 2001 I was invited to a lunch meeting with the Board of the New York Stock Exchange (NYSE) to speak about the Indian economy. I spoke about the disclosure standards in India for business corporates, and pointed that most Indian companies would fail to be listed in the NYSE if the US Securities and Exchange Commission's norms on disclosure were applied. All one has to do is to see the Crisil compilation on company accounts to infer the array of corporates committing daylight accounting fraud.

I cited the example of one of India's multi-product corporate giants that would not be able even to disclose who owned how much of its shares in their companies.

I pointed its sharp business practices to jack up its stock price by first collecting money from the BSE by new IPOs, then lending that money at zero interest rate as inter-corporate loans to shell companies which were all completely owned by the promoter. In turn these companies went back to the BSE with the loaned funds to buy the stocks of the lending company thereby driving up its share price, which shares in turn were mortgaged by the giant corporate for more loans! I had approached the Delhi High Court, which sent my complaint to the ministry of company affairs for action (which is still awaited). There was considerable mirth on hearing this. Board members asked me for a copy of my court petition, which I sent to them. Only later I understood why they were amused and so curious to know about the corporate giant.

Two months later this giant corporate failed to get listed in the NYSE, and had to withdraw its application to be listed, and not since has its application to be listed ever entertained again, while twelve other Indian companies including Satyam have got listed. At that stage I had not studied Satyam's affairs, but the then secretary for economic affairs, E A S Sarma, had written to the ministry of company affairs and the SEBI in 2001 about Satyam's fraud, and the inquiry ordered into his complaint is still in progress.

The only official action taken on it, however, was to ease Sarma out of the ministry. He chose premature retirement to a transfer to the ministry of coal.

The moral of this narration is that Satyam is neither the first nor the last ripoff of the Indian public. It represents not only the ruination of the retail share buying middle class (2.07 lakh investors holding 5.27 crore Satyam shares in just two trading sessions saw the price per share fall from Rs 179.10 to Rs 23.85) but also of the poorer classes who faithfully deposit their savings in public sector banks and who in turn lend to Satyam (the company market cap fell from Rs 15,262 crore to just Rs 1,607 crore). No doubt these banks are re-capitalised by the government but that is by a higher fiscal deficit and hence inflation. The question is why such sophisticated plunder of the nation takes place with very little punishment.

Part of the answer to how such frauds happen lies in Ramalinga Raju's letter of January 7, 2009, to the Satyam board of directors. This letter was triggered by the indictment by the World Bank. It was thus only a matter of time before Satyam's accounting can of worms would spill out. So Raju decided to cut his losses and confess. He states that during the last two years, Rs 1,230 crore "was arranged (not reflected in the books of Satyam) to keep the operations going… by giving all kinds of assurances." How arranged, on what assurances, and to whom? Only the board may know at present.

The true answer to these questions will unearth what is going on in corporates that, with a few exceptions, are growing by leaps and bounds in profits.

The truth is that India's corporate world's success stories are founded on undisclosed funding through black money held by corrupt politicians and notorious criminals. In 1991, the respected Swiss magazine Schweitzer Illustrate published the by-product revelations of the Marcos investigation in which Rajiv Gandhi was disclosed to have thousands of crores of money in illegal Swiss bank deposits. He is no more, but in February 1991 in a candid conversation he confided with genuine regret why and how this came about, and what he would do once he became PM again. But he was assassinated and that booty has gone to his named beneficiary.

Indians have about $ 1.5 trillion in banks in Switzerland, Liechtenstein, the Isle of Man, the Cayman Islands, Macao, etc. All this money can be brought back legally within two months, but who will cast the first stone? Earlier this money used to lie in bank vaults, but now thanks to Participatory Notes (PNs) and the Mauritius route, this money is returning to India and in the BSE to earn windfall profits. This money enables politicians and businesspersons to carry cash around the world for pleasure, and sometimes caught with it. For example, on September 27, 2001, Rahul Gandhi and his girlfriend were arrested by the FBI at Boston's Logan Airport with $ 1,60,000 in cash, without declaring it to the US Customs. US law requires cash at hand of more than $10,000 to be declared.

But he was let off after nine hours in FBI custody at the intervention of the then BJP-led government, which played guardian to Sonia Gandhi and her family throughout its tenure.
With a thousand crore rupees as legal tender, much as Rs 10 is for the middle class, politicians and criminals have entered to finance the Indian corporate world. Any enemy of India can ruin the nation by leveraging the financial web that fuels our greed for more profits and search for shortcuts to satisfy that greed.

Satyam's real truth is just that, and not the criminality and betrayal of trust.

Such a depressing event can happen again if there is compliance, capitulation and conspiracy of silence to fraud.

How was it possible for accountants to not know what was going on? What about the business magazines and financial newspapers which kept quiet on Sarma's complaint and Metro Rail chief E Sreedharan's outrage at the Maytas fraud? They all chose to look the other way. Who did the 185 Fortune-500 companies, which were Satyam's clients, rely on for clearance? Why did the 24/7 TV news channels refuse to see this nexus? Was it their greed or cowardice, since corporates are not soft targets?

(The author is a former union law minister)

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