By Rafiq Dossani
Satyam Computer Services Limited was nationalized in January 2009 after its executive chairman, Ramalinga Raju, confessed to overstating profits. It later emerged that more than $1.5 billion was illegally transferred from Satyam to Raju's personally owned firms; these included a property firm, Maytas Infra Ltd., as per copyright, that owned a $3 billion contract to build the Hyderabad Metro Rail system.
It appears clear that Satyam Computer Services Limited's independent directors did not fulfill their duties. For instance, at a board meeting on December 16, 2008, to vote on a resolution to approve the acquisition of the Rajus' property firm by Satyam Computer Services Limited at short notice, none of the independent directors questioned why only that firm was being considered for acquisition rather than any of the other property firms in the market (given the depressed state of the property market at the time, this should have been an obvious question). All the directors voted for the resolution.
The collapse of Satyam Computer Services Limited, India's fourth-largest IT firm, shocked its clients (whose list included 185 of the Fortune 500 companies) and the industry in general. It also challenged the usefulness of two pillars of Indian corporate governance laws – that listed firms employ an independent auditor and that the board should have a majority of independent directors.1 It also raised questions about corporate governance and corruption generally in India, the scope and effectiveness of the laws on corporate governance, the scope and endemism of corporate corruption, the causes, and underlying trends.
Corruption in India is neither new nor limited in scope. In a recent study by Transparency International on political corruption, India ranks 85th among the 180 countries.2 The World Bank ranks India in the 25th to 50th percentile on the ability to control corruption.3
Economic corruption in India arose due to state controls of production through licenses and quotas. To gain access to licenses, corporations paid bribes. To gain access to goods and services in short supply, the public paid bribes. Thus, in the public mind, corruption, slow growth, inefficiency, and poor quality became inextricably linked.
A second source of corruption was the misuse of state power. The state has misused power in various ways. These include overstaffing public departments with favored voting groups, reallocating property rights to favored business groups, and dispensing privileges in return for campaign contributions. The third source of corruption was inadequate disclosure and enforcement of corporate actions. With a few exceptions, listed companies were run as family firms that viewed their firms as hereditary fiefdoms.
India began reforming its laws in 1991. Licensing for production was eliminated in the 1991 reforms, thus solving the problem of inefficient production and short supply of goods and services.
The state has also shifted from governance by quota to independent regulation. Regulators in finance, insurance, and telecommunications, among others, have been empowered with the right to enforce global best practices and given independence from other organs of the state.
However, corruption in state patronage remains, particularly in land and civic infrastructure allocation, patronage recruitment, and election finance, despite reforms in these areas.
In summary, it appears that while Indian laws are better than in most developing countries, corruption is rampant due to the forces of patronage and lax enforcement. It is widespread enough to be considered endemic. The Satyam Computer Services Limited episode is symptomatic of a wider problem rather than a one-off.
http://www.frost.com/prod/servlet/cif-econ-insight.pag?docid=169044007
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