SEBI

Fed-up with Satyam?  Be ready for more!

Radical restructuring of SEBI is extremely imperative

Is it becoming a unique Indian trend to first shower companies with all kinds of fancy awards only to be egged in the face in a few years’ time after all the wrong doings, malpractices and manipulation that went unheard and unseen in those companies? While the Satyam fiasco suddenly awakened the investors’ community about the intriguing aspect of how lectures on corporate governance & best practices and fudging of accounts can go hand in hand, the matter of the fact is that Satyam is not a one-time case. In1999, two sister software companies namely, Pentasoft Technologies Ltd and Pentamedia Graphics Ltd. had a phoenix like rise and a subsequent fall faster than nine-pins thanks to a mindless expansion spree and  attempts of diversifying into real-estates and multiplexes while the core business of software development got compromised. Their promoter V. Chandrasekaran was reported to be associated with broker Ketan Parekh in artificially raising the share prices.

So, does the model sound familiar? If not, then next in the line is the Dinesh Dalmia who promoted DSQ Software Limited. In the year 2000, CBI arrested him for his involvement in a stocks scam of Rs. 5.95 billion and for his attempts to make quick money through unallotted shares worth Rs. 13 million (which were not listed on any stock exchange). He also cooked his books in the typical Ramlinga Raju style. Sadly, corporate India is littered with cases of similar frauds. Just like Satyam, the South India-based IT Company Silverline Technologies was also vested upon with lots of awards and Ravi Subramanian, Chairman of Silverline Technologies was even tagged as the next Narayana Murthy in the making. It was ranked among the top five IT companies in India. Akin to Satyam, Silverline took-over Seranova, but didn’t have money to pay up for the deal. And remember all these were happening just under the nose of SEBI. While Dalmia is still fighting it out to get his bail approved, Silverline is back in business and has been re-listed on BSE.

Incidentally, most of the seemingly disparate frauds that plagued India have been on similar lines. The IT industry, unlike the rest, deals largely with non-tangible commodities like services and data transactions. Tangible assets, at best, are minimal. And here lies the catch. Since there is no tangible asset and commodities transaction, it virtually becomes impossible to implement any checks and balances on transactions. For that matter, there exists no concept of custom duties or excise checks that otherwise can make sure that the transaction is as per the stipulated regulations. Eventually it makes the statutory auditors incapable and incompetent to verify the asset/liability position, thanks to the complexities and criticalities involved. Thus creative accounting viz. phantom entries, manipulating revenues, shifting of the revenue expenditures to capital, falsifying liabilities, et al become child’s play.

The second biggest irony is the literal blanket protection given to IT sector, given the size and contribution of the sector to the economy (accounts for one-fourth of the country’s total exports and 12% of India’s total employment). Protection in forms of tax rebates (tax holiday for 10 years and exemption from excise and customs) should be for those industries that are weak and small and need temporary crutches for growth and not for mammoth IT companies. What’s more surprising is that this nexus succeeded in influencing regulators to indefinitely postpone implementing stringent rules on the sector.  Even after back-to-back scams, SEBI never tightened the noose; unlike it did for the share market after the Harshad Mehta and Ketan Parekh scams (remember introduction of the Demat account, ECS, to name a few). When the same hypothesis was put forward in front of IT analyst P. Phani Sekhar of Angel Trade, he replied, “Regulators (like SEBI) have never been stringent. None of the promoters has even been punished.” He further suggests that, “IT being an intangible business, whatever checks and balance we talk about; it is important for investors to do a channel check, talk to clients, understand the working of the off shore development centre and thus the viability of the company.” Companies often alter the rules of the game to facilitate their bidders; so eventually small share holders suffer. 

SEBI might be the Indian counterpart of Security Exchange Commission or SEC of the US, yet SEBI rather has a long way to go to even become a shade of SEC in terms of stringency. SEBI at best is a watchdog which doesn’t know how to bite. SEC, on the other hand, doesn’t even care two hoots as to who has what political contacts or lobby when it comes to crushing fraudulent companies. Remember what SEC did to Enron and Arthur Anderson? The problem with SEBI is that it acts more as a prosecuting agency rather than an enforcing one. Whenever a scam happens, fingers are pointed at auditing companies and not at stock market regulators. Ironically all these manipulations do happen to take advantage of the lacunae in the legal systems that govern stock trading in India. Take for instance Satyam, where the blame went to PwC that had little role to play as it was bound by Non-Disclosure Agreement. However, the role of auditor can be enhanced if it is allowed to report to the regulatory body directly, which is now confined to just the company’s board. Alternatively, one can think of replicating France and Denmark’s model of ‘dual auditing pattern’ or a system of joint auditing. On this Sudhir Gupta, Consultant, Planman Group suggests, “SEBI should have some kind of moral responsibility. Whenever there is a scam or fraud, SEBI’s top brass should voluntarily go ahead and resign. The authorities in charge should do so taking a hint from our ministers and leaders who do the same whenever they are alleged with criminal or corruption charges”. At the least, SEBI should copy the way SEC functions & have power to raid, search and seize, if it senses any abnormal activities. Presently, SEBI does not have any such powers. But until the government endeavours to structurally change SEBI, it’s only a matter of time before the next Satyam happens.