Economy

A Healthy Economy Cannot Be Built on Dodgy Balance Sheets

BySeetha

Even six years after the Satyam scam broke out corporate governance in India still needs much to be desired. 

Even before the cheering of the conviction of Satyam’s B. Ramalinga Raju for corporate fraud could die down there came indications that the problem of cooked books may not be an isolated case. The Indian Express today front paged a story about a forensic report by India Ratings for the Serious Fraud Investigation Office (SFIO) that showed there could be many more Satyams dotting the corporate landscape.

India Ratings studied the financials of the top 500 firms and found, according to the Indian Express report:

– More than one-third of these are `managing’ their accounts.

– Many of the top 100 companies were doing this.

– Companies in which promoters had more than 50 per cent stake were more prone to this.

– Subsidiaries of multinationals listed in India were also guilty.

– Smaller firms had a better record on this score than the larger firms.

– In many cases, the board of directors knew about and approved such sleight of hand.

This isn’t really surprising. Indian companies do not have a very good reputation on the corporate governance front. Some years back, a consultant who was invited to a weekly interaction with the staff of a business magazine was taken aback when everyone started laughing when she said that one of India’s top five companies had high corporate governance standards.

But the extent of the problem, as brought out in the report, is a bit unsettling. As is the fact that all this continues six years after the Satyam scam broke and shook things up. Corporate governance norms got tightened. Audit companies started being more finicky. And yet this is what India Ratings found – that audits by the Big Four (the world’s top four auditing companies) were not exactly top-notch, that the board of directors was complicit in many cases. Post-Satyam both institutions had come under very harsh scrutiny.

The problem needs to be addressed. The economy cannot afford any corporate bust-ups. And it would be best if India Inc. does the addressing and be seen to be doing it. Because there are perception issues that need to be overcome.

After a long time, India has a government which appears to be addressing all the pain points that the industry has been complaining about. Land acquisition hurdles are being eased, much-needed reforms in the coal and minerals sectors are being ushered in, red tape is being scythed and there’s a very clear attempt to make doing business easier.

Predictably, the government has been charged with crony capitalism and pandering to corporate interests at the cost of the poor. The image of the greedy, rapacious industrialist in confrontation with the hapless villager and tribal with the active assistance of the government is being bandied about again by all political parties opposed to the ruling dispensation, the left-of-centre activist brigade as well as commentators in the media. The imagery is very seductive rhetoric and guaranteed to sway popular opinion.

The budget announcement to bring down the corporate tax rate from 30 per cent to 25 per cent over four years is being projected as a sop to the corporate sector vis-à-vis no concessions to the middle class. The fact that this will mean all exemptions that companies currently enjoy will be withdrawn is edited out. This narrative is lapped up by the public.

But industry itself is, to an extent, responsible for the ready acceptance of this image.  Take this issue of tax concessions. As it is, thanks to these exemptions, the effective corporate tax rate is only 23 per cent. And yet, the India Ratings report found the companies with dodgy numbers under-reporting tax liabilities. What kind of sympathy can India Inc. expect with such a record?

Is public sympathy relevant? Yes, it is. A lot of what industry wants the government to do – labour law reforms, easier land acquisition and environmental clearances – will require political acceptance. The government cannot sell these to the public if the recipients of these benefits are seen to be playing crooked all the time. Amendments to the Industrial Disputes Act allowing easier retrenchment were stalled for years not just by the apex unions but also the reluctance of industry to be a bit more generous with termination benefits.

If the government is doing its bit for industry, then should industry not do its bit? True, the government is not doing industry a favour. The issues it is addressing are those that were holding the economy back and were needed to put it back on its feet. But a healthy economy is not the responsibility of the government alone. It cannot be built on the foundations of dodgy balance sheets.

India may not be an ideal place for doing business, but India Inc. cannot be playing victim all the time and diverting attention from its own flaws. It cannot ask for a market economy on some days and political patronage on others. The mess that the banking sector is in is because of political pressure being brought to bear on public sector banks to lend to flawed private sector projects. The 2G scam and the coal block allocation scam are as much an indictment of the corporate sector as of the political class. If India Inc. wants the government to be less interfering and more facilitative, then it needs to clean up its act as well. There is no getting away from that.