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The Rediff Interview/Rafiq Dossani, senior research scholar at Stanford

'Laws are here but implementation is weak'

January 19, 2009

Rafiq Dossani, senior research scholar at Shorenstein APARC at Stanford University

The 'shining' image of India's IT industry took a beating when B Ramalinga Raju, (former) chairman and founder of Satyam Computer Services [Get Quote], confessed to a Rs 7,800 crore (Rs 78 billion) scam in a letter emailed to the employees on January 7.

Satyam turned out to be the biggest fraud in India's corporate history.

What impact will this event have on India's IT industry? How has the western world reacted to the fraud?

In an e-mail interview to Assistant managing Editor Indrani Roy Mitra, Stanford don and author Rafiq Dossani discussed these vexing issues.

Dossani is a senior research scholar at Shorenstein APARC, responsible for developing and directing the South Asia Initiative. His research interests include South Asian security, and financial, technology, and energy-sector reform in India.

His most recent books are India Arriving, published in 2007, Prospects for Peace in South Asia (co-edited with Henry Rowen), published in 2005, and Telecommunications Reform in India, published in 2002.

Dossani earlier worked for the Robert Fleming Investment Banking group, first as CEO of its India operations and later as head of its San Francisco operations. He has also been the chairman and CEO of a stockbroking firm on the OTCEI exchange in India, the deputy editor of Business India weekly, and a professor of finance at Pennsylvania State University.

He holds a BA in economics from St. Stephen's College, New Delhi, India; an MBA from the Indian Institute of Management, Calcutta, India; and a PhD in finance from Northwestern University. Excerpts:

How will the Satyam fiasco affect the Indian IT industry? Will clients, investors shy away from Indian IT firms?

The main effect is to question the quality of governance in Indian firms that are controlled by a single, identifiable person/family/group who control all aspects of governance.

Several such firms exist, both old and new, in many industries.

Investors and clients have always questioned the trustworthiness of such 'family' firms and have generally tended to be reluctant to deal with such firms.

However, somehow, IT escaped that stigma because it was thought that the industry had other balances, such as global-quality clients, directors and auditors.

It now turns out that the family firm is a more powerful force than all these. So, the Satyam fiasco will definitely affect perceptions of the IT industry.

Will there be a fall in FDI?

Yes, for the same reasons as above.

World Bank bars Wipro [Get Quote] and four others from doing business with it. Does it mean that the global institutions are losing faith in Indian IT? After the Satyam debacle, will this ban from World Bank tarnish the image of the Indian IT further?

I think one needs to go beyond the 'certification' of the World Bank to look at individual firms and causes. Wipro has already explained its actions, quite satisfactorily.

I've not read about the others. If they do not, it will tarnish the image further.

How does this incident affect corporate India?

Yes it does have an effect. It is not a matter of better rules, we have those already. The issue is that of implementation.

For instance, the role of independent directors is already well specified, but they should be held accountable.

In Satyam's case, we read that one of the directors, Professor Krishna Palepu, not only took home director's fees of $25K last year, but also charged over $150K for training.

If this is true, how can an independent director be allowed to train staff for a profit -- it is a clear conflict of interest.

Ironically, Palepu's HBS website states, "In the area of corporate governance, Professor Palepu's work focuses on how to make corporate boards more effective, and on improving corporate disclosure."

How has the Western world taken this fraud?

It made headlines in the US. It was unexpected and makes investment banks and clients here look bad. For the moment, the main focus is on what the Government of India is going to do about the issue.

Is there a need to have tougher corporate governance norms?

I think the norms are fine, the question is whether they will be implemented.

What role, according to you, did the promoters play in this fraud?

Based on news reports of Raju's resignation, the promoters admitted to the fraud because margins were too low and they feared a hostile takeover.

However, there is something behind the low margins that needs to be probed. Were funds siphoned off for other purposes or headcount was being built up too rapidly?

Other than Raju's letter, which itself may be full of lies, we don't know nothing much.

Can a scam of this magnitude be perpetrated without the aid of the auditors?

The auditors, at some level, must be involved, either as a group or individuals. I suspect the latter.

How could PricewaterhouseCoopers be conned for so long without becoming aware of the wrongdoings?

Auditors face a conflict of interest. Satyam was probably their largest client in Hyderabad and one of the largest in the country. They paid huge fees. That probably tipped the balance.

Greed or fear will warp the brightest mind in the absence of personal ethical standards.

What do you feel needs to be done to stop recurrence of such frauds?

As noted above, the problem is in implementation. Corruption is an endemic part of the system, so why should Satyam be subject to higher ethical standards by auditors, bankers, etc. than some other company?

The difference is in the company, not the outside world.

Where did the lapse lie as far as the regulators are concerned?

There must have been several lapses reported over the years to the Company Law Board, Securities and Exchange Board of India, and Reserve bank of India, not just for Satyam but for dozens of firms. The capability to respond is a problem.

Will the world accept that this is just an isolated case in India?

It depends on whether anything else comes out, till then, there will be a wait and watch attitude.

Is there something that the Nasscom and the IT industry can do to minimise the damage and to see to it that the Indian industry continues to flourish?

Nasscom promotes the industry's interests, including looking at industry standards of practice. But lapses in ethical standards are very hard to monitor by an association.

That's what regulatory bodies are for.

How can India now soothe the frayed nerves of investors and clients?

The Indian government has doing well so far, by replacing the board, appointing trusted people in their place, etc. The IT industry has condemned Satyam's practices. There is not much more that can be done.

What lessons need to be learnt from this fiasco?

We must ask ourselves -- will this incident lead to better disclosure, more responsible behaviour, etc? Not while 'looking the other way' is endemic to the system. The big firms that are proven to be ethical, i.e., Tata Consultancy Services [Get Quote], Infosys [Get Quote] and (hopefully) Wipro will get more business.

Do you feel that we need different set of values to judge corporate leaders rather than just the amount of money they have?

There is no point in putting them on an ethical pedestal either. They should be subject to the same standards we expect of normal people.

Do you think Satyam is a good acquisition possibility? Would any IT company be interested in buying out Satyam, especially to help save the 53,000 employees from joblessness?

Satyam would be a very attractive acquisition for its relationships, not to save employees.

With Kiran Karnik, Deepak Parekh and C Achuthan as the new board members, do you think Satyam is in capable hands? Will the new board be able to steer it out of the crisis?

This is just an interim board, able to meet clients and reassure them. Very soon, a technically competent board should be appointed by the investors.

What could be done to comfort Satyam's 53,000-odd employees?

The nerves are frayed by the downturn as also by the reputational impact, which hurts the employees as well. So, comforting them will take time.

After a year or so, a Satyam employee can state that he stuck by the company and, therefore, should be taken seriously.

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