Lessons from Satyam

20 January 2009

Mr. Ramalinga Raju's letter to the board of Satyam contained not one but two disclosures. The first, which has drawn universal attention, is the amount by which, over the years, he had succeeded in padding the balance sheets of the company, and duping its shareholders about the real worth of their shares. The second is his reasons for doing so. The first has attracted universal condemnation, and not a little anger. The second has drawn a collective blind eye. Yet if we seriously wish to safeguard the legitimacy Indian capitalism, in the eyes of the Indian people it is the latter that we should be trying to understand.

Satyam has been dubbed as India's Enron. The similarities are indeed uncanny. Enron too fudged its accounts in order to show high profits and a healthy bank balance. It did so by creating subsidiaries and palming off its losses onto them and a variety of other questionable accounting sleights-of-hand. Satyam tried to do something similar by creating Maytas (Satyam spelt backwards) and then acquiring it.

There is , however, one striking difference. Enron's CEO, CFO, and just about every director and employee in the know, were selling their shares for months before the crash, and made millions, indeed hundreds of millions out of their inside knowledge. Enron's CEOs continued to pay themselves multi-million dollar bonuses even while their company continued to sink, and they  were quietly encashing their stock options. 

If  Raju stated  the truth in his letter to the board (and I am inclined to believe that he mostly did), then neither he, nor any member of his family, sold a single share  to profit from the company's artificially inflated books. On the contrary, they pledged their entire family shares to meet  Satyam's expenses. Add to this the fact that that the family  has set a new world standard for corporate responsibility through the Byrraju foundation's work on  village uplift and  provision of  emergency medical services,  and the differences between Enron and Satyam  become almost more striking than their similarities.

Why did a family with such an exemplary sense of social duty do such a thing? The answer is the same as it was for Enron, but here the absence of personal fraud makes it stand out in bold relief.  It is the change that has taken place in the nature of capitalism as it has broken the bounds of the nation state and gone global. The last 20 years have  seen the rebirth of robber baron capitalism, of a kind that England knew in the late 18th and early 19th centuries, and America a century later. Globalisation has made robber baron capitalism go global. 

 This has destroyed, and continues to destroy,  the institutions that nation-states had built over more than a century to limit social conflict and curb unbridled capitalist greed. In just the past 15 years  we have seen the 'de-regulation, of the banking system, the removal of the steel wall between commercial and investment banking,  the mushrooming of derivative bonds (that club together good and bad investments) on the one hand and the rise of hedge funds, (that are little more than bankers' private gambling clubs) financed by their depositors' money, on the other.
With no regulatory system that could signal excess this so called ''free'' system inevitably became its own nemesis.