The Hindu : Corporate fraud

Online edition of India's National Newspaper
Monday, Aug 26, 2002

Opinion

Opinion - Leader Page Articles

Corporate fraud

By Sushma Ramachandran

Good corporate governance is closely linked to the Government's own performance.

THE MUDDY waters of global corporate fraud are lapping at our shores with the formerly inviolate Tatas embroiled in a financial controversy and Xerox's Indian subsidiary involved in bribing Government officials. This is not to say that our very own domestic corporates have remained untainted by scandals till now. The country has faced a spate of such scams in recent years but little has been done to stem the rot in the system. At least in the case of multinationals mired in financial fraud, action has been taken by the market regulators, the courts and the U.S. Government. Enron, Worldcom and Andersen have not been able to wriggle out of their quagmires and entire global conglomerates are being wound up.

In sharp contrast, scams in this country have left the perpetrators virtually untouched and small investors especially remain highly vulnerable with the market regulator remaining toothless in many cases. It has to be seen whether the latest initiative to bring the dormant Department of Company Affairs under the Finance Ministry rather than under the purview of the Law and Justice Department will make it a more pro-active agency. In addition, the Finance Minister, Jaswant Singh, has set up a Serious Frauds Office, to signal that the Government is determined to bring corporate criminals to book.

Till now, however, it seems that the little man has been the hardest hit by the corporate frauds. The problems began for small investors when the stock market became an attractive investment prospect for the middle class after Dhirubhai Ambani launched Reliance Industries' first public issue in the early 1970s. This coincided with foreign companies taking the public issue route to dilute their equity, in line with the norms laid down by the then stringent Foreign Exchange Regulation Act (FERA), to below 50 per cent. Many small investors applied for these blue chip companies ranging from Hindustan Lever and Cadbury's to a whole host of pharmaceutical companies. With the share market appearing to have become a relatively secure investment, unwary investors applied in virtually each and every company launched in the then stock market bubble. Several companies simply disappeared when the bubble burst and were no longer listed by the stock markets while the addresses turned out to be non-existent. Others were genuine companies where the share values crashed, making the share certificates worthless.

It was at this time that the role of the market regulator began to emerge with the Securities and Exchange Board of India (SEBI) seeking to protect investors' interests. The fact is, however, that there have been too many scams in the Indian financial markets and too little effort to ensure that anyone is actually punished for wrongdoing. The most widely publicised scandal was the securities scam involving the Reserve Bank of India, high-profile stock market brokers such as the Big Bull, Harshad Mehta, and several banks. Despite the unending parade of testimony before a joint parliamentary committee, it took years for a single conviction to actually take place. The banking system also went through turmoil during this period as several reputed banks were involved in routing the funds through their systems. Some small banks collapsed in the process and middle class depositors saw their life's savings wiped out.

It is not quite clear whether the newly created Serious Frauds Office will focus merely on corporates or whether the banking system will also come under the glare of its scrutiny. In any case, merely setting up a special division to deal with scams is not enough.

As the Xerox case shows, fraud is not limited to the corporate sector alone. With what are described as "improper payments" having been made to Government officials on purchases of copiers and other such equipment, the spotlight must also move to improving governance within the Government itself. The most effective way of curbing corruption in the Government is to reduce regulatory powers as has been done in a phased manner through economic reforms. One of the success stories of the reforms has been that the corridors of Udyog Bhawan are no longer crowded with wheeler-dealers trying to utilise the licence raj to their advantage by interacting with key Government officials. Power brokers almost disappeared from the scene after the Industry Ministry was stripped of licensing powers. Similarly, the chief controller of imports and exports has had its controlling power withdrawn and the agency has been converted to a trade promotion organisation, the Directorate-General of Foreign Trade. But there are still large segments of the Government with enough powers to harass both corporates and individuals, notably on the revenue side such as income tax, customs and excise.

As a result, "improper payments" remain the norm rather than the exception in dealings with Government agencies which continue to have regulatory powers.

In fact, bribery involving Government officials is not quite so improper in this country. Indeed, it is the very essence of the system of Government functioning. Every company knows that files do not move without bribes, projects are not cleared without bribes and inspections are not completed without bribes.

No wonder the outcry over "improper payments" by Xerox Modicorp has left most people cold given the fact that little progress can be made in the corridors of power without these essential lubricants for the system.

It is thus essential for the Government to look at corporate fraud from both sides of the lens. Not just from the perspective of good corporate governance, which is undoubtedly essential, but also from the viewpoint of good governance within the Government. In this context, it must be pointed out that leading software companies such as Infosys are noted for good corporate governance but these are also the ones with the least interface with the Government. Even Pramod Mahajan has conceded that the success of the Indian information technology sector may have been due to the lack of governmental interference.

In fact, the creation of the Information Technology Ministry had raised concerns that it would introduce regulations and controls and thereby put roadblocks in the growth of this thriving sector of the economy. Fortunately, it has not done so and the problems of the IT sector are linked to the worldwide recession and slump in demand rather than any hurdles placed in its way by governmental interference.

Good corporate governance is closely linked to the Government's own performance. Pious pronouncements about the need for ethics in the corporate world carry little weight when they come from a Government facing flak for favouritism and nepotism in allotment of petrol pumps and land.

At the same time, steps to curb corporate fraud in any manner such as setting up a special cell or strengthening the SEBI are to be welcomed as the small investor needs to be protected at all costs. The only rider is that all these measures would carry greater conviction from a Government whose own track record on ethics can at least be described as commendable, if not of the highest standards.

The ruling party which sought to be different still has to prove itself to be on a higher moral ground than past regimes on the score of good governance.

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