Saturday, January 10, 2009

Time to rethink governance - By TT Ram the IIM Professor in ET

I dont really know why they named their comp. as SATYAM. Contray to their real stature.

Why on earth would they want to do that? Over the past month, bewildered investors

and media analysts have been asking the question of
Satyam’s aborted attempt to use
about Rs 7,000 crore in cash to acquire equity in two property companies.

The lack of synergy between the companies, the conflicts of interest, the issue of valuation — all these were so glaring that it was a mystery why a businessman of the stature of B Ramalinga Raju would have attempted such a move.
Well, it’s all falling into place now.

There was no cash pile waiting to be transferred out. It was a fiction created through some incredibly creative accounting. Revenues, profits, reserves, cash were all cooked up over the years leading to an inflation of the balance sheet by around Rs 7,000 crore.

It was becoming difficult to keep up the fiction. That’s where the proposed investment in the two property companies belonging to Raju’s family came in handy. If Rs 7,000 crore could be shown as having been used to finance the acquisition, the gap at Satyam would cease to exist. Of course, Raju’s sons, who ran the property companies, would have received from Satyam a cheque that was worthless. But that’s all in the family, you know.

This is the merest sketch of a story that has the hallmarks of a thriller. It will take a while for investigators to fill out the details. A whole slew of questions will need to be answered. How did the auditors fail to discern any sign of wrongdoing? How did all of it escape the audit committee? If cash of around Rs 7,000 crore was not there, how was it corroborated by bank statements? And so on.

Investor fury over Satyam’s failed attempt at diversification is now giving way to more universal shock and horror over a scandal that could turn out to be India’s own Enron. Following the terrorist attack in Mumbai last month, the incompetence of politicians was contrasted with the supposedly high standards of performance in corporate India. The Satyam affair has now dealt a severe blow to the pristine image of business in post-reform India. As the economic environment worsens, expect more skeletons to come tumbling out.

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