Impact of the Satyam scandal on India's image

Here is a verbatim transcript of the panel discussion on CNBC-TV18's show War of Words anchored by Karan Thapar. Also see the accompanying video.

Q: Let us start with the impact of the Satyam scandal. India's fourth largest IT company with alleged reserves of USD 2 billion and 53,000 employees is defrauded by its own chairman over a period of seven years amounting to perhaps a total of over Rs 7,000 crore and absolutely no one knows until he owns up what sort of world does this speak of?

Goswami: It is a world no very different in scale from the world of Enron where Kenneth Lay went around saying how wonderful Enron was when in fact all sorts of money was being siphoned off. It is a serious issue, we still don't know whether Raju's confession is the truth, it maybe just the tip of the iceberg, it could be much worse - we don't know at this point in time.

The implication of this - we have taken a knock but just as one Enron did not make the US corporate sector or one Maxwell the UK corporate sector, we will get over this but having said that it has been a nasty knock, let us accept it.

Q: The Financial Times says, "India's cozy corporate culture, a world in which large families control the biggest companies and hob-knob with politicians whilst regulators keep themselves busy elsewhere was suddenly laid bare," has the vulnerability of India's private sector been exposed?

Mitra: The concern is; if there is one Satyam, could there be more? No doubt. But let me say that particular quote is a bit of an exaggeration. There are three shields that any company faces, internal audit, external audit and auditor from the board from an independent director as a chair.

Q: All three failed. Let me point out that the quote from the Financial Times is not unique, The Economist in the same week says that, "the task of rehabilitating corporate India is daunting," so the world seems to be of a similar opinion.

Mitra: I would agree with the fact that there is deep concern as a rethinking but I would also submit that let us not paint in a jiffy with the same brush. A huge corporate sector that produces 70% of India's gross domestic product (GDP) - there are bad apples but my sense is that I would say 80-90% of people are following corporate governance.

Q: Are you suggesting that 10% are bad apples?

Mitra: I would say the small kind of changes that you see could be 10% but big frauds - I must confess that this will be a very rare case if at all. But we must bring confidence back.

Q: Before we come to the 10%, let us paint a slightly broader brush,. What does this tell us of the way external auditors function in India? PwC were the auditors for Satyam for over eight years and yet today they are forced to admit that their own audit statements cannot be relied upon, are they negligent, were they complicit or were they just incompetent?

Singh: There are a couple of things. The disclosure that PwC made the other day about their statements cannot be relied upon is a part of the process. Whenever an accountancy firm comes into such a question, it is obliged to declare that its financial statements cannot be relied upon till the investigation is completed.

It is hugely embarrassing and therefore in that sense if we go back to ICAI, the fact is that there has been a vested interest of India's professional accountants. Of the 750 complaints that have been made to ICAI over the last few years, only seven accountants have lost their licenses but I think that the tenure of this discussion has to go beyond Satyam and beyond the IT industry.

Q: For a moment let us stick to PwC - this is not the first time PwC have been accountants to a company that has gone belly up, they were also the accountants to Global Trust Bank and EAS Sharma, the former Economic Secretary says that he believes that the people from PwC who worked on Satyam were also the same people who worked for Global Trust Bank?

Singh: Yes now first of all PwC has arrangements with Indian accounting firms because they are not allowed to practice self-owned and in that sense they rely upon Indian auditors or Indian smaller auditors.

Goswami: The accountants were from PwC whose partners are registered in India. PwC is the international firm and let us forget about names - the firm which is affiliated to PwC audited Satyam's Indian GAPP accounts, PwC audited the US GAPP accounts and let us call a spade a spade, there has been huge errors and omissions of the statutory auditors road and let us not beat around the bush.

Q: What about the banks and bear in mind that the banks include Citi as well as HSBC and several Indian ones as well? Did Rajus forged all the bank accounts or do you believe that at some level, even if we don't know the degree the banks would have had to be complicit in a fraud that goes on for seven years and amounts to over Rs 7,000 crore?

Lamont: The truth is that we don't know yet. It's been 10 days and we don't know very much about the implications and the details of this fraud. The Sebi still hasn't been able to question Mr. Raju because he is protected in Andhra Pradesh by judicial process. So the details are still very fuzzy. But I think that as we have discussed questions about the audit will have to arise. PwC has made this statement saying that their audit can't be relied upon, equally the quality of information that PwC was dealing with is possibly suspect and that comes to the banks. The statements that were issued about how much cash Satyam have could very well have been entirely false.

Q: So there are major question marks about the banks?

Lamont: I think so.

Q: What Satyam seems to show is that at almost every level Indian governance, as well as Indian regulations failed, management failed, auditors failed, banks have question marks, there are very possibly question marks about the oversight of Sebi and perhaps even question marks about the government itself, won't this collection of failure put people off India?

Kumar: Let me put the record straight for you. I agree that the layers of auditing internal and external and the independent auditors have a lot of explaining to do. I agree that at certain levels the accounts in the banks appeared to have been fudged or forged. But as far as the regulatory and government response is concerned, to be fair to both within 48 hours of the confessional statement of Raju which triggered this investigation the Department of Company Affairs was in action, Sebi was in action, the state CID was in action, a board has been put in place within less than 72 hours, the first three members were appointed within less than three days and I do not think therefore that the capital markets regulator namely the Sebi or the department of corporate affairs were less intelligent.

Q: Can I quote to you the Financial Times from January 8, which says that this episode will raise disturbing question of about risk of doing business in India and even the sustainability of the country is much wanted growth miracle. How do you respond to that?

Kumar: I will not say that there would be no negative fallout of this Satyam saga - it is a case of colossal mal-governance and at certain levels it would hit our image. But I do want to state that once swallowed does not make a summer and I have a reason to believe that India's excellent track record cannot be sullied by one aberration and I would call Satyam an aberration.

Q: Let's have a look at the impact Satyam will have on India's IT industry as a whole, someone who has close associations and understanding of India's IT industry you know that IT is based on trust and credibility, has Satyam put that at risk?

Goswami: I don't think so at all, in the short run some questions are being asked, clients are asking questions about processes to the IT companies but I know for sure that there is absolutely no negative.

Q: What about the fact of the World Bank that now has been revealed has suspended or banned not just Satyam but Wipro or Megasoft as well?

Goswami: Let me just explain this - this requires  explanation I don't the Satyam reasons for banning it is not yet been fully stated by the World Bank but I do know the Wipro one. When you do ADRs -when you do American issue you are allowed to have a part of the ADR can be issued at the IPO price to keep people vendors, Directors and others. Wipro did that and gave on of the guys in the World Bank that guy did not take a no objection certificate - that is what the story is - that guy did not take a no objection certificate from the bank. So, what Wipro did was absolutely above the board and this guy did not follow process.

Q: Lets go beyond IT, let me ask you what impact Satyam will have on Investment in India, Satyam happened immediately after the Mumbai Terror Strikes, in the wake of the global liquidity, wont there now be greater fears of investing in India?

Mitra: I would just like to supplement just like what Mr Goswami said, the total amount allocated to the World Bank by Wipro was USD 1 million.

Q: Come back to investment in India, will Satyam happening when it did create greater fears and concerns?

MItra: the whole point would be how we deal with Satyam, the speed with which we deal with Satyam, what the small investors in India are looking at is are we going to tackle Satyam effectively as Enron was done in US and everybody forgot about it, so that's the key.

Q: If you don't deal with it effectively then you will have an impact on investments?

Mitra: Yes that's certain and the impression or presumption is there will be more and we may not be able to handle it.

Q: Rajiv Chandrasekhar of FICCI says the most disconcerting aspect of Satyam fraud is the growing worry amongst investors to regulators that this maybe the tip of the iceberg, has the bad news only just begun?

Singh: I think this discussion has to go beyond Satyam and IT because per say I don't think that IT business will suffer to any large measure but for any large foreign investor or medium sized foreign investor who is a fence sitter, who are already active in India or those who already have well oiled arrangements with Indian companies whether its BPO, KPO, manufacturing, I don't think all that is going to be affected but for those companies who are sitting on the fence looking and assessing India from a point of view of investment, that is definitely going to suffer because there is not only going to be a question of the financial fiasco that has happened in Satyam's case but people are going to question the fundamental credibility of the way we think, the lack of collective thinking, social implications and so on.

Q: Won't those questions which the fence sitters will ask, will be asked even more loudly and more disconcertingly if you discover that Satyam isn't an isolated example that 4-5 more companies in this economic crisis certainly reveal themselves, they will be bankrupt?

Singh: So the basic point that I am making is we shouldn't be naïve or very simplistic and this is going to affect business and the credibility of the country particularly on the part of fence sitters and those fence sitters in today's environment are very important because that is where new FDI investment is going to come from.

Q: Satyam has happened, at a time when not just Mumbai but Christian killings in Orissa attracted surplus attention, economic growth itself is sliding  and attracting adverse attention and then there was the Tata fiasco at Singur, what damage has this done to the image of India in a  broader sense?

Lamont: India is under a lot of pressure at the moment; whatever you outlined gives one level a very bad picture but another level India still looks very attractive to the rest of the world, there is a real gloom in London and New York, you only have to read about what's happening at Citigroup at the moment to see that there are major problems in the American financial services sector and India with its growth rate and with its Democracy and with its future potential as the domestic market still looks incredibly attractive to lots of investment bankers all over the world but I would say and its been also said by my panelists here is what is as important as this fraud is the response to the fraud and very quickly we have to find out what's happened because that's what investors both India and elsewhere want to know.

Q:  The problem is that in 3 months time, the Government faces the elections and there is no sense of clarity about what's going to happen there after but most people believe that a clear winner wont emerge, is that therefore a danger, so that's where the country needs a strong government, it could end up with a weak and flounder administration and that could be the last nail in the coffin?

Goswami: I don't think that is an accurate assessment and there would be a strong and stable government at the center after the elections and all pointers are there in that direction.

Q: Are you talking about Mr. Adwani by any chance?

Goswami: No; the UPA government will be in power again but let me quickly respond to what has been stated, it can be no ones case that the Satyam saga has lifted India in the eyes of the international community, it hasn't but its equally true that investors go where they see a potential of a good return and India as Lamont said has all the credentials for a country still continuing to grow and capital is going to flow and so would corporates wish to invest in India, yet it is true that we need very effectively to respond to the aberrations that Satyam has brought up and we need to find out is this a case of systemic failure, is it a case of a solitary fraud or is it a case where the due diligence at all levels needs to be tightened, and the government will respond to these questions as effectively and with the utmost expedition as possible.