Notes on a scandal

Its real success,and this is what will determine its fate in the long run,is the creation of a high quality product which consumers in India and elsewhere are embracing. Before 1991,entrepreneurs had little incentive to create quality products. Now they do. The IPL may offend the traditionalists who believe that it’s simply not cricket. And they may be right. But successful entrepreneurship doesn’t seek to conform,but to break the traditional mould.

And so,the IPL is a curious creature that combines the best and worst of Indian capitalism — fabulous enterprise and outcomes on the one side,riddled with cronyism,patronage and power politics on the other. In many ways the IPL is a confirmation of what India really is: an emerging economy. Liberalisation created the conditions for India to move from being an under-developed or developing country to a powerful emerging economy,a country which along with a few others like China and Brazil had left other developing countries behind. But the unleashing of entrepreneurship was not accompanied immediately by the strong institutions and norms of propriety that usually characterise more advanced economies. These take longer to evolve and,interestingly,it often needs a big scandal or two for things to correct.

For Indian cricket,this may be the scandal that begins to set right the opaque governance structures of the BCCI and IPL. The BCCI and IPL have without doubt transformed India to a cricketing superpower. But scandal of the kind that has now broken out threatens to dent not just the IPL brand but the larger edifice of Indian cricket.

Of course,the business of cricket is not the only example of the disconnect between clever entrepreneurship and the underlying institutions and propriety.

Think back to the late ’80s and early ’90s when the stock market first came to prominence as both an avenue for investment and an important source of corporate finance. Among the emerging economies,India was perhaps the first to realise the importance of stock markets as a means to efficiently channel savings and investment. And we are bearing the fruits of that even two decades on. But the evolution of stock markets was not smooth. Some entrepreneurs chose to manipulate the markets. It took two major scandals — Harshad Mehta in the early ’90s and Ketan Parekh in the late ’90s — to put in place the necessary structures of regulation to prevent manipulation of the markets. Since then it’s undoubtedly been much cleaner.

Another good example is films. The industry transformed its quality and scope in the post-liberalisation years,largely because consumers,particularly those in urban areas exposed to productions from Hollywood on cable television,began to demand better quality. In fact,and this is unlike many other regional film industries,the Indian film industry not only transformed its product but successfully held back competition from Hollywood. But even as this transformation of product was taking place,there was little change in the business side. There were numerous allegations,and the occasional evidence,of the involvement of the underworld.

Things finally broke out into the open with the arrest of film financier Bharat Shah and the scandal around the underworld financing of Chori Chori Chupke Chupke in 2000. The film industry has undergone significant changes since then. Many of the old producer families have tried to corporatise. Financial institutional funding has been liberalised. And there is little doubt that the business is cleaner now than it was in 2000.

Of course,it is perfectly reasonable to argue that films,stock markets,cricket and even other regular business enterprises will never be entirely clean and transparent. Because the fact is that there will always be bad eggs who will try to manipulate free markets. But it’s still worth making every effort to increase transparency in the way business,in whatever sphere,is run. A scandal provides an opportunity to reform,and it should not be missed.

What is also important in an evolved capitalist system,in addition to structural reform,is the ability of the system to punish the bad eggs. In the US,perhaps the most evolved capitalist system,those who play crooked,usually end up in prison — think Enron,Arthur Anderson,Bernie Madoff and S. Rajaratnam.

In India,the record for punishment is not great. Harshad Mehta,for example,was rounded up but died in prison before most of the cases against him could be concluded. On Satyam,a scandal which came out of the blue in what was considered to be India’s best run industry,however,the record is more encouraging. The government of India moved deftly to rescue the Satyam brand,its employees and clients after its promoter Ramalinga Raju confessed to fraud. That proved that it is possible for brands tainted by scandal to recover. The government also initiated key reforms to corporate governance norms in the aftermath of Satyam. However,proper punishment still needs to be handed out to the guilty. And for this,the government still needs to successfully prosecute all those involved in the fraud.

In the end,the success of Indian capitalism,and the microcosm of the IPL,will crucially depend on getting both regulation and punishment right.

The writer is a senior editor,‘The Financial Express’

dhiraj.nayyar@expressindia.com