The Hindu Business Line : India’s move towards higher standards will attract large capital, says Oxley

Mumbai, March 15 Mr Michael G. Oxley, co-author of the Sarbanes-Oxley Act and Vice-Chairman of Nasdaq, spoke with Business Line on the sub-prime crisis plaguing the world, on the US recession, and a host of other issues.

The sub-prime crisis has rattled the world. Where do we stand now?

If a capital system invites excess money, there is excess greed and an excess of stupidity or both. In the case of sub-prime it was lot of free money, where you can get a loan or a mortgage for nothing down?

You don’t even have to prove you can pay back, who would not go for that? Once the bubble burst all hell broke loose and so now we are in the middle of that.

The investment banks couldn’t quantify the losses for a long time, and even when they did it was mark-to-market. That’s what happens in a free and vibrant economy. It’s a full lack of transparency in the secondary market. We need to make the secondary markets more transparent so that we do not get into that problem again. But with a large secondary market and such a divorce between two mortgage companies — where you take a mortgage and, five minutes later, it is sold in the secondary market — there is no connection between the lender and a borrower, then begins the problem. Then you add to it the free money aspect; you’ll know where we stand.

India seems to be not quite isolated from the sub-prime crisis.

When the US catches a cold the rest of the world sneezes. It is so ideal (to think) you can somehow de-link (yourself) from the US economy but it’s really nonsense to argue that we are not in a globally inter-dependent world any more.

What is your opinion on regulating hedge funds?

In the past there were discussions on the need to regulate hedge funds, but they have not gone anywhere. I think it needs a breakdown or a scandal to bring it about. I don’t think a systemic failure of more than one hedge fund is probably the right way to have the momentum to do anything in that area. The SEC should make it compulsory for hedge funds to register with them… you are not going to see the Congress or SEC deal with hedge funds in a meaningful way unless a catastrophe erupts.

IT spending in the US has slowed down. How would this affect India?

IT spending in the US has slowed down because of the slowdown in the economy. What kind of impact you see on the IT companies it’s difficult to tell at this point of time. You have factors that have gone somewhat out of control in terms of energy cost, the high price of oil and other commodities, and the potential inflation factor. Really, the Fed is in a very difficult position, trying to maintain price stability and at the same time get growth started.

The encouraging part is that the Fed has been very responsive. Congress passed an economic stimulus package by a large margin, which should have a major impact in the second part of the year. It’s a difficult balancing act for any Central Bank. In the past we have been pretty fortunate, we had that kind of leadership but I think the jury is still out as to whether those actions by Fed or by the Congress will be successful. We haven’t been recession proof, but recessions have been relatively short and shallow.

India is in the midst of capital market reforms. What is your advice in this matter?

You (India) are obviously moving towards raising standards, which is going to attract large capital. Investors today expect more transparency, more accountability and higher standards. Nasdaq led the way with higher standards after the Enron and Worldcom debacles. Given the fact that India is a democracy, (this is) slated as critically important for the investors. Also there is the rule of law in many ways, passed down from the British as is ours. A lot of countries do not have that tradition and is much more difficult for them to attract capital.

If norms like Sarbanes Oxley Act were to be framed for India, what do you think should be the focus?

There are differences and different approaches to it. Japan passed the JSOX, The European Union passed the ESOX. The key element is that it has been adapted to that particular country’s culture and tradition instead of having it forced on them. But I think if you stick with the general principles of accountability and transparency, the whole world of good governance will follow. The important thing about India is that you have the structure ready and running for 100 years. That’s a huge advantage over other countries (who) like former Soviet Union simply don’t have, China doesn’t have. So it seems to me you’ve got a head start.

Are the high costs of SOX compliance keeping companies away from the US bourses?

The original accounting standards prescribed were obviously more expensive than anybody anticipated. The changes made by SEC last year to make it more investor friendly were the most under-reported story in the American press. There is more emphasis on internal audit. SEC officials are open about listening to companies, listening to their complaints and have really been flexible enough to deal with it and still maintain the integrity of what we tried to do.

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India’s move towards higher standards will attract large capital, says Oxley