The confession, a couple of days ago, by the Chairman of one of India’s leading software companies, to commission of financial irregularities of unimaginable magnitude is shocking. In his statement, sent to the Satyam board of directors, its Chairman Ramalinga Raju narrates several instances of misrepresentation of financial statements over the last few years. What is baffling is that the company was not only listed on India’s leading stock exchanges, but even had its American depository receipts (ADRs) listed on the New York Stock Exchange (NYSE); for this reason it had seemingly complied with all the onerous requirements of corporate governance imposed by the Indian regulations (clause 49 of the listing agreement) as well as the oft-feared Sarbanes-Oxley Act of 2002. Clearly, this has been a case of compliance of corporate governance norms in form, but utter breach in spirit.
At this stage, it would be premature – events are still unfolding as you read this – to attempt a detailed analysis of what went wrong. That will have to await the availability of relevant facts. However, this does give rise to several issues for consideration, especially on the questions of whether there has been a failure of the existing regulations on corporate governance (that enabled the insiders within Satyam to suppress information of this magnitude and hoodwink investors, regulators and the public for a sustained period of time), whether there was a lapse on the part of regulators such as the Registrar of Companies, the stock exchanges and SEBI in probing further for any red flags, and more importantly, whether the ‘gatekeepers’ such as the independent directors and auditors were truly oblivious of the wrongdoings by the top management (or whether they bore a duty to investigate and seek further information). All these questions will hopefully find some answers in the near future. But, for the present purposes, it would be useful to refer to the array of issues raised by my co-contributor Mr. Jayant Thakur on the Indian Corporate Law Blog.
This episode has invoked strong reactions from the industry, media and the regulators. On the regulatory front, several regulators have already registered their objections or initiated investigations. The Registrar of Companies and SEBI have already initiated investigations, while the Institute of Chartered Accountants of India has announced that it would examine the role of the auditor, Price Waterhouse Coopers, as regards the misstatements in Satyam’s accounts. We can perhaps even expect special commissions or committees to be appointed by the Government to look into the case. The findings, of course, are unlikely to be forthcoming in the near future, especially in a complex case such as this.
At a more general level, this episode is likely to tangentially result in wide-ranging changes to Indian corporate governance norms. After all, such instances shatter investor trust in Indian companies, and more so in the software sector, which is a flag-bearer of Indian industry. The media has termed this India’s Enron, and we all know only too well that the regulatory outcome from the Enron crisis was the enactment of the Sarbanes-Oxley Act in the US. In India, the Minister for Company Affairs has already announced that the Companies Bill, 2008 (which is pending in Parliament) will be reviewed to strengthen the corporate governance regime in the light of recent developments. While Satyam’s case is unfortunate as it severely hurts the interests of all its stakeholders (investors, creditors, employees), it serves as a wake-up call to the Indian industry in general that imbibing corporate governance principles in “spirit” is of utmost importance.