The unfolding Satyam saga, India’s Enron, has been a watershed event in Indian corporate history. According to the now-under-arrest founder’s own public confession, Satyam (India’s fourth largest IT services company) had inflated its reported revenues by 25 percent, its operating margins by over 10 times, and its cash and bank balance by over one billion dollars. The magnitude of this fraud makes it by far the biggest accounting scandal in India’s history and one of the more prominent ones worldwide in recent years.
Just like product safety crises in 2008 involving toys, toothpaste, and tires from China, the Satyam scam has been a big black eye for corporate India. However, if we look ahead, I believe that this scandal will prove to be a blessing in disguise. The ownership structure of India’s corporate sector is rife with the potential for governance abuse. More than half of the 30 companies in the BSE Sensex – India’s equivalent of Dow Jones – are family controlled. Similarly, over 40 percent of the companies listed on the Bombay Stock Exchange have family shareholdings exceeding 50 percent. Dominant control by a family block is not necessarily detrimental as it can enable rapid decision-making on important strategic matters. It can also reduce the risk of divergence between the interests of owners and managers. However, such an ownership structure does demand that the interests of non-family shareholders be zealously protected. This is often not the case today in India.
While the scale of the scam at Satyam is breath-taking, there is no reason to believe that many of the other family controlled companies in India are squeaky clean. Thus, a blow-up was bound to happen at some point in time. Regulatory systems – not just in India but virtually everywhere – are always reactive. Thus, the sooner the regulators get a kick in their pants, the better. Even the mega-scale of the Satyam scandal is a blessing in disguise. It simply cannot be swept under the rug or responded to with half-hearted measures. It has already resulted in a toughening of the disclosure requirements. Other moves are being considered. It also is very likely that the perpetrators of the fraud at Satyam will see themselves behind bars for a considerably long time. Further, Satyam’s auditors, PricewaterhouseCoopers, have already suffered a massive damage to their reputation and are unlikely to come out of this scandal unscathed.