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Ken and Raju

How politicians,who value capitalism more now,must respond to Satyam

Written by Saubhik Chakrabarti |
January 8, 2009 12:06:47 am

Satyam’s meltdown makes Enron comparisons inevitable. But Enron was a more creative fraud. It was trading in something called weather derivatives when it went bust and its special purpose vehicles (where losses were hidden) are to Satyam’s cooked books as Hyderabadi biryani is to curd rice. Plus,politics was mixed up in the Enron story in a way it isn’t in the Satyam story. This has an obviously good implication. But politics needs to get mixed up in scandals like Satyam. The implications will be even better.

It is obviously good that there is,as yet,no evidence of Enron-like political shadiness in the Satyam affair. Remember that the late and unlamented Kenneth Lay,who was Enron’s chief when the company went bust,was a chum of George W. Bush and a bigger chum of Dick Cheney. Wendy Gramm,wife of Republican Senator Phil Gramm,had chaired a committee on energy regulation in 1993 that had exempted energy trading instruments from regulation. Mrs Gramm then joined the Enron board and Enron proceeded to lose over the years tonnes of cash in energy trading. Before Enron went bust it made several calls to the White House and the Capitol. True,Republican politicians didn’t rescue Enron. But that’s a tribute to the American system’s taste and capacity for retribution when big bad things are revealed.

The last point is important as we feel relieved that at least no political hotshots are caught up in the B. Raju controversy. The American political and politics-determined regulatory systems were caught napping in the 2002 Enron scandal — as they were by last year’s financial crisis and the Madoff Ponzi scheme. There’s plenty to criticise and to laugh about. But there’s also something to be impressed about: the American political system’s zest for improving capitalism. The Satyam meltdown should produce similar impulses in India’s political establishment. And most likely,the time is right in India.

American politics of course has the advantage over its Indian counterpart in that it has legitimised,loved,regulated and reined in capitalism for more than two centuries. Capitalism has acquired real legitimacy across most of the political class in India only over the last 15 years or so. Most politicians won’t declare their love openly. But a larger number of politicians than is usually suspected harbour strong private attraction. These politicians’ actions speak for them. And there’s now a rough political consensus about the potential of Indian capitalism and how it can transform the country.

It would be most surprising therefore if most politicians today don’t see the Satyam story as something that must be exorcised fast from the India story. The stakes are plainly high — quickly re-establishing in the eyes of global capital that Corporate India is more or less well-regulated. Such an assurance is part of the process that gives India and its political class some clout globally. It is not fanciful to assume that the political class now is sufficiently attracted by the returns to know that a rotten apple like Satyam should produce the seeds of intelligent political action.

This kind of action will obviously have to be different from the JPC-type responses seen after business/finance scandals earlier. What distinguished those responses was the lack of intellectual heft. You can criticise America’s post-Enron Sarbanes-Oxley Act that codified corporate governance. But you can’t deny the extraordinary analytical effort behind it. The same thing can be safely predicted about whatever US politicians come up with this year in response to the financial crisis.

The notion that Indian politicians aren’t smart is rubbish. Most of them are smart,as they have to be while plying their trade in what is arguably the world’s most complicated electoral democracy. What was lacking was the proper political context for addressing big complicated questions thrown up by capitalism.

Among such questions thrown up by the Satyam scandal is the role of auditors. Let’s recall a political discussion about auditors some years back to see how politics has to respond better now.

In mid-2003,S. Gurumurthy had argued and Murli Manohar Joshi,then Union HRD minister,had loudly agreed that foreign audit and accountancy firms should not be allowed to offer their core services directly in India. RBI had allowed them to come in as consultants. So they must remain,was the argument then. And so they do.

Pricewaterhouse (Pw),an Indian firm,audited Satyam’s accounts. The global firm PricewaterhouseCoopers (PwC),which has a relationship with Pw,can’t directly audit company books in India. Neither can global big name audit firms KPMG,Ernst & Young and Deloitte Touche.

Post-Satyam,it might look that if Pw is dodgy,then why let PwC do auditing? But Indian auditors aren’t shining examples of rectitude either. Who audited the plantation companies or C.R. Bhansali’s firm,to name two scams prominent when Gurumurthy was making his pitch? Plus,in India,these days,having a big name foreign auditor is necessary for listing in overseas markets as well as for making overseas deals. So the big complicated question before India’s political class post-Satyam is not whether foreign or Indian auditors are better but whether auditing needs regulation and,if so,in what form?

Indian auditors have more or less been self-regulated. The post-Satyam politically correct noises made by the auditors’ body are not sufficient. Politicians will have to decide on the form of regulation. Investors everywhere will take note if India’s political class delivers big reform on how company accounts are checked and passed.

Satyam is a New York market-listed company and part of the globally feted Indian information technology sector. Today’s politicians in India would know what that means. As they hopefully decide how to respond to Satyam and its auditors,they should recall America’s politicians sent Enron’s Ken Lay to jail and helped blow up Enron’s auditors,Arthur Andersen.

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