Not good for business

The story of Satyam Computer Services is hardly mentioned in much of Western publication other than in Bloomberg. This story is covered by a columnist on India affairs in the Malaysian paper, The Star. If such a scandal was to happen in China, the Western mainstream news media would have a field day. Somehow, India is just not newsworthy when it comes to scandals or telling the Western audience how poor the current system is in India.

Reading such news on India, confirm my suspicion that merely having democratic government is not the cure for the ills of a country. If a system is rotten, nothing can cure it other than a long process of genuine political reform or in some instances, revolution. Merely changing government or leadership at regular interval will do nothing to rectify the inherent defects of a system.

India inherits its system from the British. In China the political system is still evolving, and it is conscious of the fact that it’s system need to be improved continually. The Indian elites on the other hand, just loved what their British former master have left behind for them, and boost of being the largest democracy (democrazy) in the world.


Monday December 29, 2008

India Diary

That the Raju family, owning only 9% of Satyam Computer Services, is able to control it fully, underlines the malaise in the Indian private sector.

THE blow to Corporate India could not have come at a worse time. Still reeling from the impact of the growing global financial meltdown, the greed of the managers of Satyam Computer Services, the country’s fourth largest information technology company, has yet again brought into sharp focus issues of corporate ethics and governance.

In a move reminiscent of the pre-economic liberalisation years, Satyam managers sought to palm off two troubled family-owned real-estate firms to the cash-rich IT giant, plunging Satyam’s share price to a five-year low.

The idea of a leading IT company, which generates more than 60% of its income from the US alone, paying nearly Rs8bil (RM570mil) to acquire two companies owned by the sons of Satyam founder-chairman B. Ramalinga Raju, didn’t sit well with its foreign investors, causing panic at the bourses.

Satyam ADRs (American Depository Receipts) plunged 55% on hearing that the company was shelling out US$1.6bil (RM5.5bil) to acquire a controlling stake in the Rajus family-owned real estate companies. The Indian share markets too gave a huge thumbs-down to the decision, with the Satyam stock plunging by over 50% in the days following the controversy.

Jolted by the adverse market reaction and criticism, Satyam’s management aborted the plan to enrich itself at the cost of the shareholders. That it held only a 9% stake in Satyam and yet controlled it fully, underlined the old malaise in the Indian private sector – managers putting in a fraction of their own money but controlling asset-rich companies.

In the socialist era, it was common for unscrupulous promoters to bleed a company dry, strip down its assets and then walk away, leaving the labour-intensive unit at the mercy of the government.

Scores of textile and sugar mills were rendered sick by greedy managers. They ran huge liabilities, diverted funds to other privately-held enterprises and then looked to the government to bail them out with taxpayers’ cash.

Loans from public sector banks invariably found their way into the pockets of such managers. Laws were so weak that the banks failed to recover these loans.

The opening up of the economy is said to have put an end to the excessive profiteering and greed of owners. Liberalisation supposedly ushered in an era of shareholder democracy, professionalisation of management and transparency of corporate practices.

The rise of the professional-entrepreneurs, especially in the IT sector, was almost in tandem with the opening up of the Indian economy. Tata Computer Services, Infosys and Wipro became household names.

Satyam Computer Services was founded in 1992 by Ramalinga Raju, son of an agriculturalist with little personal knowledge of information technology. But, it was the time of the IT boom and Satyam grew from an initial 20 employees to a workforce of 50,000 spread over offices in the United States, Japan, Canada and Sweden.

Like the other IT biggies it, too, earned nearly two-thirds of its revenue from foreign clients.

In the last quarter ending September, the results of which were declared a few weeks ago, the company earned a revenue of Rs28.2bil, which was 38% more than the corresponding quarter last year. Its net profit in the last financial year was Rs5.8bil. Satyam has cash reserves of over Rs60bil.

But success bred irresponsibility. The Rajus soon branched into the far more lucrative if disorganised and corrupt real estate sector, setting up two companies, Maytas Infra and Maytas Properties.

Headed by sons Teja Raju and Rama Raju, the two companies went about aggressively acquiring land and other assets in Andhra Pradesh, where Satyam is headquartered, and elsewhere in India.

The Maytas, like other companies in the real estate sector, were severely hit by the recent global financial crisis.

Though both companies claimed that they had land and other assets worth tens of thousands of millions, no independent examination of its claims was done when the chairman of Satyam proposed that the controlling share in them be acquired by the IT giant for US$1.6bil. Universally hostile reaction forced the deal to be aborted. But the damage was done.

On Dec 24, news that the World Bank had barred Satyam for eight years from any contract caused panic selling of the scrip. At one stage, Satyam stock plunged to Rs114 before closing the day at Rs134, almost half its initial value.

The Satyam fiasco also focused on the role of the independent directors. The Satyam board, which gave the nod for the acquisition of the Rajus family-owned real estate companies, boasts of some very respectable names.

If they, too, went along with the plan to bail out family firms, criticism that independent directors are very often co-opted by management through the grant of financial and other favours cannot be easily brushed under the carpet.


About kchew

an occasional culturalist
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