Saturday, January 10, 2009

Cooking Indian Style

HOW do you convince 250,000 shareholders, a board including four professors, and a “big four” accounting firm that you have over $1 billion in cash that does not in fact exist? India is still rubbing its eyes in disbelief at the audacious illusion conjured by B Ramalinga Raju, the founder of Satyam, which was once India’s fourth-biggest IT company and is now its most spectacular corporate scandal. He claims to have inflated Satyam's profits over “several years”, cooking the books slowly like the best biryanis. But others think perhaps Satyam’s cash did exist until recently. Now, they conjecture, the money is probably buried in a “land bank”, invested in real estate and property deals that may, or may not, have gone sour.

Economists have shown some ingenuity in detecting the tell-tale signs of private fraud in public data. Most pertinent to the Satyam case may be a paper by Marianne Bertrand, Paras Mehta and Sendhil Mullainathan, which found evidence of “tunnelling” in India in the 1990s. Tunnelling is a term coined in the Czech Republic to describe the transfer of assets out of a company (as if by an underground tunnel) to the detriment of minority shareholders.

In India, the tunnels run through business groups arranged into “pyramids”. The top of the pyramid is a firm controlled by a business family or corporate “promoter”. That firm will then hold controlling stakes in a number of other businesses, which will, in turn, own stakes in a third tier of firms at the base of the pyramid. In this way, the promoters can control the entire pyramid, even though they own the lower tiers of firms only at one or two removes.

What really perplexes me is that despite already having millions, these cavalier business icons who have been entrusted with 1000's of lives, continue to play the market as if it were a game of monopoly. What use is it, if the wealth of the wealthy cannot help others, but be the seed of ruin for thousands.

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