Past graft is tainting new India

India’s world-class technology sector was the epitome of “New India,” a nation that had left behind its feudal past to embrace modernity and the market.

But the billion-dollar scandal at Satyam Computer Services has exposed old-fashioned corruption: a patriarch willing to go to any length to keep control, a web of cozy relationships among members of a seemingly untouchable elite, and a governance system that failed to keep either in check.

“The challenge is not that there is corruption in India,” said Rajeev Malik, an analyst with Macquarie Securities, “but that these issues surfaced in a company that only recently was awarded a prestigious international award for corporate governance, and was in a sector that set the bar higher for other sectors.”

In September, Satyam was awarded the Golden Peacock award by the World Council for Corporate Governance; in 2007, B. Ramalinga Raju, now Satyam’s former chairman, was named Ernst & Young’s Entrepreneur of the Year.

Now the Satyam scandal has some Indians questioning the very notion of a new India.

“The heroes for modern India have been the entrepreneurs,” said Barkha Dutt, a journalist who is the host of “We the People,” a talk show, and is regarded as India’s Oprah Winfrey.

These businessmen “helped to shape the confidence Indians derived as a nation,” Ms. Dutt said. “We are no long the poor country, we’re in the Forbes list of millionaires,” she said, describing the nation’s pride in its business leaders.

Now the fear that old corruption is still endemic could have the opposite effect. “How much of this was monopoly money?” she asked, questioning the statistics showing the economic boom. “Were we a delusion? Did we just overread and overstate our place in the world?”

Mr. Raju, the founder of Satyam, did. In a resignation letter made public on Jan. 7, he shocked India and much of the world by announcing that $1 billion in cash that the company had claimed did not exist.

In a later confession, he said that he had been cooking the books for seven years, in part to keep control of his company, and that a recently aborted deal to buy his sons’ development companies was a final effort to hide the fraud.

A flood of money has come into India, much of it tied to self-starters like Mr. Raju.

Foreign direct investment reached $32.4 billion in the last fiscal year, a tenfold increase from a decade ago. And no industry has been more global than information technology.

Founded by entrepreneurs who, because of deregulation, were able to bypass the infamous “license Raj,” the business permits handed out by the government in exchange for cash, the industry is a magnet for international investors.

In the last decade, Indian companies have expanded exponentially, internationalized with overseas offices and gone on far-flung buying sprees, picking up businesses as diverse as pharmaceutical companies and marquee car companies.

Because the entire information technology industry was a start-up, it had “none of the baggage of the traditional industries in India,” said N. Vittal, a former secretary in the Telecommunications Ministry who was also vigilance commissioner, an anticorruption post. “The Satyam case has blown up that assumption,” Mr. Vittal said.

Some say that rather than ending corruption, the rush of global cash and multinational companies into India has stoked fraud.

India ranks 85th on Transparency International’s 2008 “corruption perceptions index,” meaning at least 84 countries are seen as less corrupt, including Saudi Arabia, Ghana, Mexico and China. But 90 percent of those surveyed predicted that corruption in India would increase over the next three years, the highest number for any country.

Goldman Sachs ranks “governance” as the greatest obstacle to India’s reaching its economic potential, bypassing the United States in gross domestic product by 2050.

Corruption in its many forms costs India an estimated $170 billion annually using the Asian Development Bank guidelines of 17 percent of a nation’s G.D.P.

If India were to improve on world corruption scales to, say, the level of the United States, per capita incomes would rise to $25,000 in purchasing power parity, from $3,800, C. K. Prahalad, a professor at the Ross School of Business at the University of Michigan, estimated last year.

Many of India’s largest companies, once family-run, have given up the family’s hold on a majority of the company’s shares and moved toward global standards like independent boards and regular outside audits. But these moves have not always prevented problems.

Ramgopal Agarwala, an economist and senior adviser to RIS, Research and Information System for Developing Countries, a research organization in New Delhi, said that a few years ago, just getting a telephone connection or electricity or filing taxes required paying bribes.

That is no longer the case, he said. But a flood of new money means that, in big business, brazen corruption is “becoming legitimized and institutionalized,” he said, in part because so much money can be made.

As one corporate scandal after another explodes in the United States and Europe, business leaders and investors in India are loath to point fingers at specific problems here — after all, fraud is an international phenomenon. Still, several factors help support corruption.

India’s corporations get into trouble in part because of the country’s notorious red tape. To cut through the bureaucracy, companies often bribe local officials, and these bribes are particularly prevalent in land deals.

Securing the clearances necessary to develop land often requires bribes of nine or 10 times what the land is worth.

At same time, outside auditors in India rarely blow the whistle on fraud or bribery. Even when overseeing the books of a public company, the accountants tend to consider the company’s founders their client, not the audit committee or public shareholders, said Ajay Gandhi, an accountant in Hyderabad who has been in the business for 30 years. “Raju would have been the owner, so what he wanted here would have been done,” Mr. Gandhi said.

Because many wealthy Indians are involved in more than one business, the accountants often wind up doing work for the founder’s other companies and may even handle the founder’s personal accounting and tax planning, Mr. Gandhi said.

Elite business communities in Indian cities tend to be tightly knit, as in many countries, developing and developed. Business leaders invest in one another’s companies, serve on one another’s boards and belong to the same clubs. Nowhere is this more true than in Hyderabad, Satyam’s home city, where just a few families control many of the best-known enterprises.

A case in point is the relationship between Satyam and Nagarjuna Finance, another company involved in a scandal that rocked the city in recent weeks. Nagarjuna Finance attracted investors by offering high rates of interest for fixed-term deposits. But the company got into trouble after it refused to return more than $20 million that about 85,000 investors had deposited in 1997 and 1998.

Last month, the Hyderabad police arrested K. S. Raju, the finance company’s chairman, with P. K. Madhav, the chief executive of Maytas Infra. Mr. Madhav was a member of the Nagarjuna board at the time the deposits were collected.

Maytas Infra’s vice chairman is Mr. Raju’s son Teja Raju and the Raju family owns 36 percent of Maytas Infra. “Maytas Infra is not connected with the action taken on Mr. P. K. Madhav,” a company spokesman wrote in response to questions.

Land development and real estate are probably the most corrupt and most lucrative industries in India, say most analysts and bankers interviewed and even the entrepreneurs involved in land deals. The industrialization of India has meant the introduction of giant port, road and airport transportation projects worth billions of dollars that have attracted global investors.

Maybe that is why few in India say they believe Mr. Raju’s confession, particularly his contention that operating margins at Satyam are just 3 percent.

Running an I.T. company with that sort of margin, when the industry average is 25 percent, would have been impossible, analysts say. They and investors worry that cash was siphoned for other uses, possibly land deals the family is involved in through Mr. Raju’s sons’ companies. “No Indian believes that the Satyam scandal has to do just with those three executives” who have been arrested, said Arundhati Roy, the novelist and activist. “It has to do with huge land deals, with infrastructure projects and it all dovetails into the political system.”

“Why should the I.T. industry be any cleaner than others?” Ms. Roy asked. “All we can hope for is a system of justice that makes people accountable.”

Source: blueridgenow