Early-warning system for frauds needed: Salman Khurshid

Union Minister for Corporate Affairs Salman Khurshid says his ministry will gauge the efficacy of an early warning system to detect corporate frauds like Satyam, a year after it first came to light. He is pinning his hopes on the new Companies Bill to make statutory auditors and independent directors of companies more accountable. In an interview, the minister admitted to an unwholesome interface between business and politics.

What are the lessons from Satyam and what has changed from then?
It is important to put the Satyam episode in perspective. We had incorporated provisions in the Companies Bill 2008 to address crucial issues on corporate governance norms before Satyam’s erstwhile promoter admitted to perpetrating the fraud. The Bill lapsed. In a sense, we had anticipated that something like Satyam could happen. So, it is not as though everything proposed in the Companies Bill 2009 was a consequence of Satyam. Greater disclosures by companies, better accountability of independent directors, the separation of internal audit from statutory audits, audit committees headed by an independent director and so on were already in the pipeline when Satyam happened.

Certainly, we have been able to focus specifically on many of these issues, post-Satyam. For instance, we found that the SFIO had limited powers when the investigations began. After the passage of the Bill, the body will have more teeth. We also have to put in place a software-based early-warning system to detect frauds. We will be able to assess if the system can throw up results that we are looking out for, a year after its operation.

Has Satyam set a precedent for the government to step in when promoters indulge in fraudulent practices?
The Satyam episode is a model worth studying for anyone who wants to see how a ‘minimum invasive surgery’ can put things right when such a crisis takes place. This experience will come in handy if something was to happen again. We should not underestimate the ability of people to do wrong if they want to do so. We have, therefore, taken several steps to avoid a repeat of something like Satyam. The new Companies Bill, once legislated, would provide for higher penalties and better systems of accountability and adjudication. We will also allow investors to file class-action-suits in India, but with safeguards to prevent any misuse.

At the heart of the scam is the siphoning off funds by the promoter B Ramalinga Raju and this is yet to be legally established. How do you see the progress of the investigation?
It is far more difficult to trace money that has found its way out of the company. The smoking-gun evidence is generally available closer home. One reason why people think that the investigation and prosecution are tardy and slow is because the rehabilitation effort in Satyam was so quick. So, in contrast, there could be a perception that the investigation is slow. The CBI, which is not under my ministry, has filed an additional charge-sheet and is waiting for the enforcement directorate to find more details on the fund trail. The Serious Frauds Investigation Office (SFIO) has filed its charge-sheet as well. We (SFIO) have a limited reach as we have no right to seek information from foreign jurisdictions. That is something we are trying to deal with now.

Investigations now show that the promoter forged board resolutions to raise loans of over Rs 1,200 crore from banks. Will you intervene if the onus of discharging these liabilities falls on the new owner?
As far as any liability is concerned, the new management has to deal with it. They have come with their eyes open and ultimately the responsibility is on their shoulders. They must find a solution. The new management has done an exceptionally good job. This is a case study to see how honest new managers can revive a failing company. Also, the role governments can play in being of critical help in such moments and the board in the interregnum that did pro-bono work to help the company tide over the crisis. Obviously, Satyam had some inherent strengths and not just the fictitious strength that had been created by the previous management.

How do you ensure greater accountability of statutory auditors and independent directors?
The role, rights and duties of auditors are defined in the Companies Bill that will help maintain integrity and independence of the audit process. Statutory auditors will have to become a lot more accountable than what they seem at this point. But certainly, under their professional requirement, company secretaries and statutory auditors are answerable to their professional institutes as well.

The Satyam scam has political dimensions as the promoter diverted money from the company to fund land deals. It has also brought to the fore the need to have greater transparency in corporate funding of elections.
We are not directly concerned with electoral reforms, though we have ideas to contribute. Business and politics have a wholesome and an unwholsesome interface. You have to eliminate the unwholesome interface. For that, electoral reforms are being considered from time to time and we have views to contribute if the discussion is carried forward.