Comment

Corporate frauds are not easy to understand and that seems to make the job of the perpetrators easy. The Satyam Computers scam is a case in point. People at large, the investors and tax payers, have not been able to grasp the complex modus operandi in the Satyam case.

All the same, people are not ready to accept the confessional statement of Raju to be the whole truth. Their hunch, and not disputable at that, is that the depth of the fraud is much steeper than the Rs 7,000 crore or so being projected by vested interests.

Another strong feeling is that since the Satyam case surfaced because of a voluntary disclosure by the fraudster himself, there may be more such big, or bigger, scams still under the wraps.

The concerns of the vested interests, ever so keen to turn a threat into opportunity, are different. They are extending varied explanations to suit their interests. The intention seems to be to divert people’s attention from the real issue and ease the pressure on the government to go to the bottom of the Satyam issue, perhaps to preclude the possibility of similar frauds elsewhere being unearthed.

While the forces outside India point to this scam as a proof that there is ample scope for such frauds, bribery and weak corporate governance, some in the country feel it is patriotic to play down the scam and say that the scale of the fraud is much smaller than elsewhere. The reformists blame the slow pace of reforms as a plausible cause, while their opponents heap blame on liberal economic policies.

The truth is that scams are ubiquitous — they occur in every country — and their magnitude is commensurate with the size of the respective economy.

Take the Indian experience.

Before ‘license-controls raj’ was put in motion, Ramkrishna Dalmia’s embezzlement of about Rs 2 crore from Bharat Insurance Company in 1956 led to the nationalisation of the insurance sector.

Another big fraud relating to the investment of LIC’s funds of over Rs 1 crore in companies owned by Haridas Mundhra was unearthed in 1958.

But those days were different: the fraud was exposed by none other than a Congressman, Feroze Gandhi, and T T Krishnamachary, the then finance minister, resigned. This and one or two other scams led to the imposition of regulations and tightening of licenses in a bid to guard against the recurrence of frauds.

But that arrangement led to a different kind of opportunity, to unscrupulous elements, to profiteers. As found by the industrial licensing policy enquiry committee (known as the Dutt Committee) in 1969, the wealth was concentrated in a very few hands. This phenomenon and several frauds during the period had led to further controls and legislative measures like the Monopolies and Restrictive Trade Practices Act.

During the subsequent period, there was widespread clamour from business and reforms protagonists to remove the restrictions on the plea that the ‘license-controls Raj’ was the root cause of corruption in India. These lobbyists have succeeded to a great extent in getting the controls eased, but, the frauds have not disappeared. Rather, very big frauds such as those committed by the Harshad Mehtas and Ketan Parekhs came to light during the very early period of reforms. And now the Ramalinga Raju mayhem.

True, many scams, much bigger than India’s, have taken place across the globe, involving very big companies such as Enron, WorldCom, Xerox and AOL, etc.
There is a foolproof arrangement for the fraudsters in the West to save and reuse their ill-gotten wealth. Liechtenstein, a small European country with a population of barely 36,000, has 73,700 companies registered — twice the number of people living in it. This country is a tax haven. Sometime back, an employee of LGT Bank sold the information of some 2,000 German customers involving around 4 billion euros to that country’s foreign intelligence agency. The size of tax evaded money in that country is understandable when a single person in one bank revealed so much information.

This need not make Indians feel complacent. As per one estimate, the Indians’ deposits in the secret accounts of Swiss banks amount to around Rs 70 lakh crore, over one and a half times the country’s GDP. And all the black money arguably is not in the Swiss banks alone. This suggests the possibility the existence of many more hidden frauds in the corporate world, too.

Satyam’s fraud brought to light the possibility of promoters drawing wool over the eyes of independent directors, auditors, senior management functionaries and experts, perhaps with some being hand in glove. It is difficult to believe the senior functionaries privy to the transactions could not know the mischief played by Raju and his associates till he revealed it.

Agencies like the Securities and Exchange Board of India, which could not unearth the scam on its own, now say they will put in place measures to avoid a recurrence of similar frauds. That is heartening to hear. Let them start by bringing to light frauds in other corporate houses which have not been reported yet. The longer the rot is kept concealed, the larger would be the damage.

The existing system of investigation and punishment doesn’t seem to be effective in addressing this task. Sebi had to approach the Supreme Court to interrogate Ramalinga Raju. The Serious Frauds Investigation Office (SFIO), supposedly a multi-disciplinary agency, is seriously handicapped in disposing these cases, too. As its website shows, the SFIO has filed 756 cases since its inception in October 2003, but has been unable to secure a verdict even in a single case.

Let alone the Sebi and SFIO, there are over 50,000 cases related to violation of the Companies Act pending in courts. The conviction rate in corporate frauds is said to be not more than 5%, so fraudsters go about their job with great impunity.

The Satyam fraud, which is only the tip of an iceberg, has undoubtedly brought all these crucial issues to focus. It is doubtful if the whole body of the iceberg will come into public view, for the simple reason that the stakes involved are very high — the money power indicated by such large underground deposits in the Swiss banks cannot be taken lightly. It is too much to expect an overnight cleansing of the system. At best, a few more eyewash control measures would follow this episode.
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