Second, indications that the Indian government and its corporate sector are genuinely interested in plugging whatever gaps the Satyam scandal may reveal. Also, how severely and quickly will justice be dispensed to the investors. At last count, four different inquiries have been launched by central government agencies. More may come at the state level. By chance, the country’s 52-year-old Companies Act is before a parliamentary committee for revision. The Satyam scandal is likely to mean severer penalties for fraud in the new act, including the right to class-action lawsuits. The Securities and Exchange Board of India (SEBI) has already set up a panel to review all quarterly audit reports of the 80 firms that makeup the two major stock-market indices.
Third, an understanding of why such a firm, whose peers had operating profits of 20% or more, had to play around with its accounts. Preliminary evidence indicates Satyam never actually developed a business model on par with other big software firms like Infosys and Wipro. It won outsourcing contracts by bidding 20% to 30% less, even if it made no money on them.
Mr. Raju, fearing, as he wrote, "that poor performance would result in a takeover," hid this by inflating profits. He probably funneled his own wealth into realty with the idea of having Satyam later takeover these real-estate assets with its nonexistent profits. If this is proven, it will almost come as a relief to corporate India. Satyam failed because it was unprofitable and, ultimately, the market caught up with it.
India is facing a broad corporate transition. In the past, its companies were either small and family-owned or large and state-owned—and neither had any incentive to prioritize corporate governance. Today, more and more Indian firms are becoming profit-driven, professionally managed and, thanks to a need to tap foreign capital, incentivized to clean up their financial act. All three credit-rating agencies that provide corporate governance advice in India agree on this general trend.
Making that transition is difficult. A survey last year of some 6,000 listed Indian firms by India Forensic and the Bombay Stock Exchange’s figures for members who handed in corporate governance reports come up with roughly the same figure: about 20% of listed Indian firms fall short. The majority of these are, no surprise, state-owned or mom-and-pop concerns.
Satyam, for all its glitter, was a firm whose owner ran his software company in the manner his forefathers did land deals. It failed to make the jump between the two centuries, as will many others. But enough Indian firms are succeeding to give foreign institutional investors a reason to maintain a stake in the India growth story.
Pramit Pal Chaudhuri is senior editor of the Hindustan Times, New Delhi, a former Asia Society Bernard Schwartz Fellow, and a member of the Asia Society International Council.