Punish Government Servants involved in Satyam

Punish Government Servants involved in Satyam

Print This Post | Email This Post -Dr Bharat Jhunjhunwala

The future of Satyam is uncertain with funds having been lost in bad investments in real estate by promoter Ramalinga Raju. Chief Minister of Andhra Pradesh YSR Reddy has asked the Union Government to step in to save the jobs of 53,000 employees and large number of small investors of the company. Union Commerce Minister Kamal Nath has stated that the Government will consider a request for bailout if the newly Government-nominated Board of the Company asked for it. Undoubtedly, it is a solemn responsibility of the Government to assist those who have been hit by untoward circumstances like a Tsunami. But the Government is not expected to assist a farmer who willfully cuts the trees in his fields leading to erosion of his fields. The underlying idea is that Government must assist the people if they are hit by natural calamities that are not of their own making. The applicability of this principle in the case of Satyam rests on whether the employees and investors are indeed helpless victims of external circumstances. Such does not seem to be the case. It appears that employees are party to the fraud that has been perpetrated. Say, the accountant of the company issued a cheque for investment in land. Normally, this should be shown in the books of Satyam as payment for purchase of land by the Company. But the accountant debited this amount to a benami borrower. The money disappeared but was shown as ‘assets’ in the books. Such transactions led to the collapse of the Company. These cannot be undertaken without active participation of the employees. Others would have helped in scouting for the purchase of lands, for getting the registration done, etc. Thus, employees were party to the fraud. It makes little difference if only few were involved in these activities. A single rat damages the closet but the homemaker gives poison to all; or a few youth throw stones on the cavalcade of the Chief Minister but punishment is imposed on the whole village by the District Magistrate. Similarly the employees are collectively responsible for the fraud in Satyam. A similar situation prevails in respect of investors. They jettisoned caution and diligence in favour of quick speculative returns. Therefore, the argument that employees and investors are innocent victims does not hold. The second argument in favour of bailout is that Satyam is a company of national importance. Collapse of the Company will adversely affect the entire IT sector of the country, hence it should be bailed out in national interest. Say, a Company was making parts for the Brahmos missile and was defrauded by its owners. Normally the shareholders should bear the consequences. Yet, the Government must step in because collapse of the company would delay the production of missiles and hit national security. This principle should be invoked in rare cases, however. American oil conglomerate Enron was subject to fraud a few years ago. The American Government did not come to its rescue. It was held that consequences of the fraud must be borne by those who perpetrated or abetted it. The use of government money for bailout would mean imposing tax on the honest taxpayer for providing relief to the fraudsters. On the other hand, the same American Government made a huge $700 billion bailout package for rescuing banks from the sub-prime crisis. The bank officials were responsible for making of this crisis just as officials of Enron were responsible for making the earlier crisis. Bank officers provided loans to borrowers of questionable creditworthiness. Yet the American Government rescued these banks because allowing them to collapse would lead to implosion of the entire banking system and impose irreparable harm on the economy. The principle here was that mistakes can be overlooked if national interest is involved. The applicability of this principle rests on national interest being transparently involved. Remember, about eight years ago American hedge fund Long Term Capital Management went bankrupt. The American Government stepped in and arranged a bailout package. The problem was solved, but only for a while. In fact, that bailout package may have contributed to the making of the sub-prime banking crisis few years later. American banks would have been more careful in giving out loans if LCTM had been allowed to collapse. It is debatable whether the bailout of LCTM was truly in national interest or not. In such cases the government must stay away. The principle of national interest should be invoked with utmost carefulness otherwise it can become a smokescreen behind which fraudsters can make merry. No such national interest is involved in collapse of Satyam. Even liquidation of the company does not mean that all assets, workers and contracts will evaporate into thin air. A US-based commentator reacted to the demands for a bailout package for US carmakers in following terms: “Even the worst-case scenario, liquidation does not mean vaporization. The assets of a firm do not vanish. Rather, they are resold to others more able to make productive use of them.” Collapse of Satyam similarly does not signal the end of India IT story. Rather it is like a bitter surgery that will cleanse the rot and put the industry on firm footing for future. I do not think a bailout will improve the international standing of the country either. The US economy has not rebounded after the huge bank bailout of $700 billion. Such bailouts may resuscitate particular firms but they pull down the larger economy. The burden of bailout of a moribund sector falls on the healthy economy. It is like asking the honest brother to stand guarantee for the misdeeds of the fraudster sibling. Such bailouts damage the reputation of the entire family. A bailout of Satyam will likewise pull down the larger Indian economy. The burden will fall on the finances of the government and deprive the nation of other necessary expenditures. A bailout will be an encouragement for other Indian companies to indulge in frauds because of the shelter provided by the Government. Instead of providing bailout to Satyam, the Government must launch a serious investigation of the complicity of various government regulators. A return was filed with the Registrar of Companies that went unscrutinized. The Securities Exchange Board of India probably did not insist on implementation of the listing agreement rigidly. The Income Tax officials blindly accepted debits without examining the same. These officials must be investigated and given hard punishments. Such action will do much more to improve the international standing of the country than a bailout package. It will also beget us more revenues in future by strict implementation of laws. Alas! Our Government run by Babus has no interest in taking action against Babus. Ramalinga Raju is the lesser evil. He played with the goodwill he had himself earned. But Government officials have played with the trust that people of the country have reposed in them. It is they who should be punished more than Raju.