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Does India Inc cook the
books?
By Indrajit Basu
KOLKATA - With the scandals embroiling Enron,
WorldCom and Merck & Co, accounting has never been
so exciting - for all the wrong reasons. But for India,
since most of the action occurred far away in the United
States, it was just distant thunder.
And then
suddenly it happened in India, too. A street smart
analyst and the country's apex corporate monitoring
authority, the Department of Company Affairs (DCA),
discovered in mid-July that two blue-chip companies,
Rolta India Ltd, a software major, and Reliance
Petroleum Ltd, a petroleum giant and part of the famed
Reliance Industries Group, had slickly fudged their
accounting statements.
While Rolta inflated its
revenue by about $15 million by including an
inter-departmental sale, Reliance Petroleum, "as a
result of an unfortunate printing error" coolly "omitted
to include" in its annual report trading of $200 million
worth of shares of its group companies.
That is
not all. Xerox Inc even managed to embarrass the Indian
government by revealing that its Indian subsidiary, Modi
Xerox, had paid $700,000 in grafts to government
officials for pushing sales.
But it is not just
a question of Rolta, Reliance Petroleum and Modi Xerox.
In its much publicized report analyzing nearly 700 India
companies' accounting statements, Global Data Services
of India Ltd, a division of one of India's leading
credit rating agencies, Crisil, found that 266 companies
had been cutting corners to report dressed up annual
reports.
According to Global Data Services these
companies adopted measures that resulted in significant
variances between reported profits and the profit
figures arrived at by the agency. The list included
large companies such as Wipro, Tata and SPIC - some of
the best known Indian business groups.
Global
Data Services clarified that most of the adjustments
were well within the law, although they may have
violated the spirit of the law. "These corporates are
following the letter of the law, though not its spirit,"
said Madhu Dubhashi, chief executive officer of Global
Data Services.
Indeed, Indian companies aren't
less creative in accounting than their US peers. But
even as the Crisil study and other exposes have shown up
the inconsistencies of corporate India's annual reports,
the problem is more fundamental. Most people do not
believe these annual reports and their contents.
"I think given the fact the average market
capitalization of Indian companies is just 0.2 times the
sales and most price earning ratios are in single
digits, that's market intelligence that tells you we
don't believe in numbers anyway," said stockbroker and
analyst at the Bombay Stock Exchange, Ramesh Damani.
However, despite the Global Data report and
exposes, some experts believe that India is still better
placed than the US.
"You should understand why
it is happening in the US," said Y H Malegam, managing
partner of SB Billimoria, a leading audit firm in India.
According to him, stock markets in the US are more
sensitive to reported results than those in India. The
US markets are used to analysts making forecasts as to
what should be, and if companies do not produce results
in line with what analysts have predicted, market values
and market capitalization of US-based companies drops
immediately. This in turn affects the ability of a
company to access the market, thereby increasing its
cost of funds.
But importantly, says Malegam,
the performances of the CEOs in US are linked to the
market price of the shares, and therefore a CEO is
always under pressure to deliver results equivalent or
close enough to what the analysts have predicted.
Moreover, a CEO's remuneration is largely conditioned on
the company's stock price, therefore CEOs in the US have
a vested interest in ensuring that share prices remain
high. "I do not think all these factors prevail in
India, at least at this stage, so Indian CEOs are not
under pressure as they would be in the US," said
Malegam.
Further, "India has a very interesting
system," says Amit Mitra, secretary-general of India's
leading industry association, the Federation of Indian
Chambers of Commerce and Industries. "A system of an
entrepreneur-promoter; professionals on the board;
financial institutions that lend money, and this
combination lends some credibility to corporate
governance in India." According to Mitra, it is more
difficult to cook the books within this structure.
But many disagree. "India Inc is strewn with
manipulators who often take small investors for
granted," said Kirit Somaiya, a politician and head of
the Mumbai-based Investors' Grievance Cell.
"Business ethics is a very individual matter;
the chances of management cutting corners become more
for companies that are in serious financial trouble,"
says Bajaj Auto chief Rahul Bajaj, one of the biggest
industrialists in the country.
Most analysts
agree in private that Indian companies' annual reports
are opaque and few have any idea about the true value of
an India company. In public, though, they are chummy
enough with companies and recommend their stocks.
Change, nevertheless, is around the corner. The
Securities and Exchange Board of India (Sebi - the
equivalent to the SEC in the US) along with the
country's certifying authority, the Institute of
Chartered Accountants of India, have recently formulated
a set of accounting standards that promise a paradigm
shift in Indian reporting. "From fiscal 2002 companies
will not only have to obey the standards but also adhere
to the spirit behind them," said Pradip Kar, executive
director of Sebi.
The Department of Company
Affairs is also going ballistic on disclosures.
According to reports, DCA, along with the country's
Center for Monitoring Indian Economy, plans to unlock
information on 80,000 public companies and 500,000 other
companies and make it available to the nation and
important stakeholders, such as financial institutions,
rating agencies, financial analysts and researchers on
public policy.
(©2002 Asia Times Online Co, Ltd.
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