India needs stronger will to fix corruption

India needs stronger will to fix corruption

Summary: Country's new Companies Bill aims to address issues that enabled the infamous Satyam scandal to take place, but Indian government has yet to exhibit a willingness to enforce the law.

SHARE:

India's inability to enforce the law and hold corporate wrongdoers, such as Satyam's founder B. Rama Raju, accountable leaves room for more deceit and corruption to surface.

Three years after he confessed to a billion-dollar corporate fraud, Raju remains untried, highlighting the failure of the Indian legal system to prosecute criminals.

The former chairman resigned in January 2009 after admitting he had inflated the company's profits by US$1 billion.

Its staff and customers faced a grim prospect and Satyam's stock price nosedived. Rival Tech Mahindra salvaged the wreckage by acquiring the beleaguered company in a fire sale and transformed its fortunes. The reborn Mahindra Satyam posted a 56 percent profit growth in first-quarter 2012.

The fact remains Raja has not been punished, noted managing director of Prime Database, Prithvi Haldea.

"The scandal happened three to four years ago but you do not see any visible results in terms of final indictment. [Raju] gets out on bail and the case keeps going on," Haldea said

The Indian government's new Companies Bill will address some of the issues which allowed Raju to deceive Satyam's investors and customers, but it does not provide the needed muscle to bring offenders to justice.

The government and the courts selectively enforce the law, Haldea said. "You can keep improving laws but people will find new loopholes. There has to be a willingness to enforce those laws and take them to their natural conclusion," he stressed.

Outside of Satyam, the scandal has claimed some big scalps. Its auditor PwC India was ordered to pay over US$30 million in fines for offences related to the fraud, including non-compliance with Generally Accepted Auditing Standards and violations of federal securities laws.

Earlier this year, Institute of Chartered Accountants of India (ICAI) also imposed a life ban and maximum penalty on PwC India's audit partner, Srinivas Talluri. It previously banned two PwC India audit managers.

Auditor rotation part of new bill
According to founder and managing director of Institutional Investor Advisory Services, Amit Tandon, the Satyam scandal triggered some soul-searching from the Indian government.

The ongoing revision of the Companies Bill presented an opportunity to more strictly govern the behaviour and actions of corporations. Originally to be introduced in 2008, the new legislation will be enacted later this year.

A key change is the requirement to rotate corporate auditors every 10 years, Tandon noted, which he said is currently an unenforceable guideline.

"The term is five years and after that you can be the auditor for another five years. After that, there's a mandatory five years cooling off before you can come back and audit the company's books [again]," he explained.

The rotation rule means a fresh set of eyes will scrutinize the books, compared to the current cosy arrangement in which most companies retain auditors for decades.

Tandon said: "Our belief is in an environment where you have companies which are having double-digit growth, it's certainly worthwhile to change auditors with some degree of periodicity. Unfortunately we don't see enough investors raising a noise about auditors."

Olswang Asia's managing partner Rob Bratby said changes in the new Companies Bill will enable India to be aligned with standards in developed worlds.

However, its unreliable record in enforcing legal breaches distinguishes it from other jurisdictions, he said, adding that the new legislation does not solve the problem of the country's slow judicial process.

A verdict on the Satyam fraud reportedly will be delivered in December, almost four years after it was uncovered.

Look after your own money
Ultimately, though, consumers and investors must be responsible for their finances, Bratby said.

"It's always open to customers and suppliers to think about how they can protect themselves [through] enhanced diligence," he said. "Look at the affairs of the people you're doing business with. If you're entering a large arrangement with an Indian outsourcer, don't just rely on the auditor to count but get somebody else to look at the financial performance and probity of that company."

"Speak to other customers. Do your own homework," he urged.

According to Haldea, Satyam is just the tip of an iceberg submerged in a sea of corruption. While the new Companies Bill is a significant improvement, he said it still leaves "a lot of room for manipulation and deceit".

"What comes to light becomes a scam, what does not come to light remains hidden," he said.

There is hope recent anti-corruption protests by Indian activist Anna Hazare which attracted global attention will drive change, but systemic change takes time.

Hazare said: "The bottom of the pyramid actually puts pressure on the people at the top to work and act differently. There's no magic wand [where] you do this and things will improve overnight.

"The problem now is there's a huge nexus of industries, politics and bureaucracy so each one is saving the other person's neck. This nexus has to break."

Mahesh Sharma is a freelance IT writer based in Australia.

Topics: Outsourcing, Government Asia, India, Tech Industry

Kick off your day with ZDNet's daily email newsletter. It's the freshest tech news and opinion, served hot. Get it.

Talkback

0 comments
Log in or register to start the discussion