Closing l'affaire Satyam in India

Closing l'affaire Satyam in India

The Satyam scandal continues to make news in corporate circles, capital markets and the audit profession. The Supreme Court recently announced the revocation of bail granted to the external and internal auditors.

While the painstaking search of the money trail by several investigating agencies continues, the trial in the case is yet to begin. The weakness in the Indian legal system exposes the difficulty in prosecuting the culprits despite a confession by the perpetuator in orchestrating the biggest white collar crime in India.

Meanwhile in the United States, both the new company management and the auditor have gone on a settlement spree to bring closure to this sordid affair. The management of Mahindra Satyam and the auditor — PricewaterhouseCoopers — have paid fines to settle damages claimed by shareholders and regulators.

Mahindra Satyam agreed to pay $125 million to settle plaintiff’s claim in the class action law suit and $10 million to the watchdog Securities and Exchange Commission. PricewaterhouseCoopers has agreed to pay a total of $32 million in fines to shareholders and regulators for failing to comply with rudimentary auditing standards and procedures.

Such recompense is not in sight for Indian investors. Shareholders in India have been unable to take any legal recourse for abdication of fiduciary duty by the Board of Directors of Satyam and the auditor. The Supreme Court dismissed a class action law suit filed by a group of individual investors for want of definition of a class in securities law.

The market regulator SEBI while professing to protect the interest of individual investors has been of little help in cases of corporate fraud. Many experts have suggested various other remedies like amending the securities law and giving teeth to the Companies Act to safeguard shareholder interests.

A pioneering effort to protect individual and retail investor interests in Indian capital markets can be accomplished by self-regulation. The Satyam fraud has been hard on individual investors who are most gullible and have no protection or remedy in the legal system. The current management should announce a voluntary compensation settlement for individual shareholders. It would also avoid aping the developed country securities law model which is more rewarding to lawyers than investors.

One simple way to arrive at compensation to individual investors is by calculating the loss in market capitalisation of the company. In case of Satyam, the market cap loss was Rs 8,000 crore and according to various reports, individual investors had a 15 per cent stake in the company at the time of the fraud. Hence, 15 per cent of market cap loss would be around Rs 1,200 crore and if the investor has to bear say one third of the risk, there will be a further haircut of Rs 400 crore.

The amount will be smaller if the group of investors who held on to the stock till the government announced measures to save Satyam are excluded from such compensation. Large financial institutions should not be included for obvious reasons. An effort to compensate individual investors by the entities involved in the Satyam case will reaffirm the fundamental tenet of corporate governance ie accountability to shareholders. The entities can also seek closure of open cases by investigating agencies and the government can focus on prosecuting the main culprits.

Voluntary settlement

A voluntary settlement has a great potential to increase confidence in our capital markets. This will lead to an enormous increase in capital flows from both foreign and domestic investors. It will make it easier for insurance companies to introduce and market Directors and Officers liability insurance, currently part of market regulator’s agenda. Such a measure will certainly enhance Indian Company’s ability to recruit the best possible independent directors who currently shy away due to pernicious legal clauses.

More importantly, to keep the India growth story going, start-ups and companies need capital at a reasonable cost to spread risk and execute large infrastructure projects.  The managements of Mahindra Satyam and PricewaterhouseCoopers should not cringe from doing the right thing that would benefit them as well as the country’s capital markets, corporations and investors in the long run. Such an act followed by a successful prosecution of the culprits in the Nampally criminal court on a day-to-day trial can bring closure to l’affaire Satyam even in India.

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