The Hindu Business Line : Moral hazard in Satyam resurrection

Unique by global standards, the Satyam takeover poses dangers of moral hazard unless accompanied by swift action against the swindlers, says ASHOAK UPADHYAY.

Satyam’s journey from orphaned firm to adoption by a foster parent has been relatively short.

In 1983, the Government of India passed legislation taking over sick textile mills in the then Bombay a year after the workers had begun what was to become the world’s longest strike. In its preamble, the Textiles Undertakings (Taking Over of Management) Act provided an explanation for the nationalisation of the city’s iconic mills located in the heart of the metropolis.

“Whereas by the reasons of mismanagement of the affairs of the textiles undertakings…their financial condition became wholly unsatisfactory even before the commencement in January 1982 of the textile strike in Bombay…” The Government was assuming charge to ensure investments necessary “to protect the interests or the workingmen.”

That assumption of management by the Central Government to prevent further mismanagement and protect jobs in the interests of the country at large reflected both the times and the state of capitalism in the country; nationalisation was the only solution to corporate fraud or mis-governance.

In fact, the decade preceding the Act and the one that was to follow, right to 1995, public ownership and, most critically, public money seemed the only way to prevent mills from being completely stripped by their owners.

Within a few years, the Government’s own inability to raise enough capital, poor knowledge of global market changes in the demand for cotton and jute, not to mention the management of the state-owned mills sired in the laidback ways of the ‘license Raj’, ensured most mills remained sick. From the mid-1990s on all that could be done to the mills of Mumbai was to sell them off as real estate.

Resurrecting discards

Nearly four decades after the Government justified nationalisation as public-interest policy, western governments are discovering the virtues of public-ownership for precisely the same reason.

Governments in Britain, Scandinavian countries, and indirectly, the US, have assumed control of their troubled banks, with the intent to nurse them back to health and sell them off. At precisely the same time that the nationalisation premise was being dusted off the shelves in London, Washington (very reluctantly and with different names) and Brussels, New Delhi was saddled with what remains the biggest corporate swindle.

But Satyam Computer was not nationalised; in a remarkable hands-off strategy, the troubled company was headed by professional managers and has now found a new owner; pending the Company Law Board’s approval Satyam will have management not from the civil services but from one of the largest private sector companies.

Such a long journey

Satyam’s journey from an orphaned firm to adoption by an able foster parent has been relatively short and all through that time the Government has stayed off, at least in public perception. Short as that journey was it measured just how far the Government had travelled in its sense of where good governance can come from. By that same token the journey also showed us how far capitalism had moved from forty years ago; not so much as dilution of its innate potential for unlimited greed as in its self-confidence to measure up to public, even global, expectations of professional governance.

In that sense, the successful outcome of the bidding process at Satyam deserves all the praise it has earned for the team that guided the firm to this day, for the Government that stayed off a revival process that most governments in similar predicaments have been unable to execute.

In that sense India has discovered capitalism; of the kind that works with oversight and regulation. For its part, the West is discovering socialism grudgingly but necessarily as the only answer to the ravages caused by unfettered greed. But both discoveries contain their moral hazard.

The moral hazard

In the West, fierce debates have raged on just how camarilla bankers and industry types should be made to pay for taking the world down with them. But there is no debate on just how fraudsters and swindlers must be dealt with and if the biggest one in recent times gets his desserts, at least the victims would have bowed to the system’s capacity to deal with white-collar crime.

That is still a very nebulous area in India and has been so ever since the Government took over troubled mills on the verge of closure or bankruptcy. Both nationalisation and the Board for Industrial and Financial Reconstruction (BIFR) carried deadly moral hazard; they allowed errant industrialists to win whichever way the flipping coin landed; both if the public money invested in sick firms worked or not. That set a dangerous precedent as the 1990s showed with a string of white-collar crimes. Not one of those stockbrokers or NBFC owners were punished for cheating a gullible public; in fact, some even became public heroes, the Indian middle-class’ splintered version of the rags-to-riches narrative.

The unwillingness of the political class to punish the white-collar criminal or even the family owner that runs his firm into the ground or tries to, has given India (no less the organised economy) much of its image as a corrupt society. That almost every transaction between asymmetrically informed agents is tainted by unequal power or that lax laws are bent or books fudged has not earned India that sobriquet so much as the notion that the guilty get away sometimes to tacit public acclaim.

All these elements of corruption and the complex public response to it were evident in the aftermath of Ramalinga Raju’s confession of his swindle. But the public outrage was more widespread than was the support for a man who rose to dizzy heights of fortune on his own ambitions and drive.

Criminal investigations

So Satyam contains an even greater moral hazard than those old nationalising policies because of the huge stakes involved in the fortunes of a global-sized company. The bright lights of its possible resurrection could just dazzle the government and stakeholders into forgetting if not forgiving the immense fraud that led to the takeover.

The possibility that the Government may not take its criminal investigations to its logical end and quickly take action against the Rajus could haunt the corporate sector and India for years to come.

Just as the takeover process, unique by any global standard, presents immense scope to neutralise the worst fallout of future lapses in corporate governance so does it also present great dangers for the country as a whole if the swindlers are allowed to fade away from the broken lights of the law.

( blfeedback@thehindu.co.in)