Opinion

GAAPs in Indian regulation

K V Kurmanath | Updated on August 18, 2011 Published on August 17, 2011

Investors have not received a single rupee as compensation after Satyam Computer Services succumbed to financial fraud.

Satyam failed to measure up to the accounting standards of the US regulator, even as its numbers were compliant with Indian norms.

American Depository Shares (ADS) of Satyam Computer Services are going to make an exit from the New York Stock Exchange (NYSE) in the next seven months. In fact, the present management, Mahindras, announced their plan last week to withdraw ADS in a phased manner.

It is not an option for Mahindra Satyam. Faced with the danger of having its registration with the US markets regulator Securities and Exchange Commission (SEC) cancelled, the company decided to ‘wind down' the ADS.

These shares, which account for about 9 per cent, or 10.42 crore shares, of the outstanding equity shares of Satyam, were already delisted after the massive financial fraud hit the company. They are being traded over the counter (OTC) ever since. OTC trade will not be allowed after the registration is cancelled. What had triggered the decision? The new management failed to become ‘current' as per US GAAP (Generally Accepted Accounting Principles), although it became current as per Indian accounting norms. It failed to meet the stringent compliance norms of SEC.

SEC'S ZERO TOLERANCE

Although it always ‘intended' to become current with US accounting norms, Mr Vineet Nayyar, the Chairman, admitted that the writing on the wall was clear after last of series of meetings with SEC officials — that the US regulator was not inclined to give any concessions like its Indian counterpart, Securities and Exchange Board of India (SEBI) did with regard to the accounts of the fraud years.

“The company has now determined that it will not be able to become current in its SEC filing obligations,” he said, while announcing ‘winding down' of ADS last week.

No doubt it was quite a daunting task for the new management to fathom, understand and explain the inexplicable entries made by the erstwhile management.

Issues were complex, spread over a decade and stored in multiple accounting software. Financial statements prior to 2001 were reportedly in Tally, traces of which were not available now. The company reportedly opened with an opening balance of a loss of Rs 2,200 crore in 2002 for which the new management had no clues to reconstruct the picture!

Considering the fact that the competition is on the rise in the outsourcing business, with Western economies facing challenges, we cannot expect the present management to engage itself with the mess forever.

But what attracts one's attention is not this. It is SEC's insistence on details and the zero tolerance for accounting violations.

One might argue that Rajus managed to hoodwink the same SEC for eight years. But how the regulator has responded to the issue after the fraud surfaced is more important. We need to learn a lesson or two from this.

The SEC has not spared the company even after it agreed to pay $10 million to stay clear of the fraud charge. Mahindra Satyam had settled it without admitting or denying allegations of any wrongdoing in the accountancy fraud perpetrated through 2002-08.

The SEC has not taken any lenient view of the fraud even after the company agreed to pay $125 million to settle class action suits (paying compensation to the American investors for the losses they suffered on the stock market due to the fraud). Even after doing all this, the company was told to explain all entries in the books. No concessions were made.

INDIA'S LAX STANDARDS

But the company became current under Indian GAAP last year! The Indian regulator, SEBI, has received no fine. Investors (who according to CBI must have lost about Rs 14,000 crore after the crisis broke out) have not received a single rupee as compensation!

All the financial entries, to which SEC objected, were accepted and the company has got the Indian GAAP-compliant tag!

Both the company and the regulator must have followed the rule book to seek and give the clearances. This only points to the yawning gaps in the regulatory mechanism, thereby exposing investors to the wrongdoings of fraudsters. Investors have no recourse, as the regulator allows the questionable entries to hang on, unanswered and unexplained.

The survival of Satyam Computer Services and its rebirth in the form of Mahindra Satyam is a unique experiment on how life can be resuscitated into companies that have all but slipped into a coma. But that is not enough. The Government should also use this context to create a strong mechanism to protect investors.

>blfeedback@thehindu.co.in

Published on August 17, 2011
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