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January 8, 2009 7:56 pm

Twin blows leave foreign investors badly shaken

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Corporate India has suffered two devastating blows in almost as many months.

The first was the Mumbai terror attacks, which struck at the heart of India’s financial capital. The second is the fraud at Satyam, India’s fourth-largest IT outsourcing company.

In both cases, India’s business community has been left appalled, fearing for the country’s attractiveness to foreign investors.

Fortune 500 company executives stayed at the Taj and Oberoi hotels on Mumbai’s waterfront, and the same companies entrust their clients’ information to India’s IT outsourcing companies and count on their integrity.

While the carnage of the Mumbai attacks is clearly of a different order of magnitude to the Satyam fraud, the country’s response to the twin disasters faces close scrutiny.

In Mumbai, the emergency services were found severely wanting. It took more than half an hour for the police to respond to gunmen firing in the lobbies of the hotels. It took even longer for elite troops to be flown in from New Delhi.

The failures have prompted a massive reassessment of India’s anti-terror strategy, its personnel and its equipment.

The failures at Satyam are likely to trigger a similar review. The authorities’ response over the past two days already looks hesitant.

B. Ramalinga Raju, the company’s disgraced former chairman, was allowed to go to ground after handing a letter, in which he confessed to fraud, to his board and to the Securities and Exchange Board of India.

Although Mr Raju faces a possible seven-year jail sentence for his manipulation of the company accounts, local police in Hyderabad did not immediately launch a hunt for the self-confessed fraudster. Mr Raju is regarded as a business pioneer and philanthropist in his home state of Andhra Pradesh.

Local reports said the police were waiting for a complaint to be filed by the financial regulators before taking any action. Satyam on Thursday said it had no idea of Mr Raju’s whereabouts. Speculation spread that he had fled the country, possibly to the Gulf or the US.

Only late in the day did S. Bharat Kumar, Mr Raju’s lawyer, say that his client was in Hyderabad and would co-operate with any government investigation into his possible wrongdoings.

Mr Raju’s colourful letter – with the now infamous line about riding a tiger of deceit – was received on Wednesday. But it was only a day later that Sebi’s investigation team arrived at Satyam’s offices in Hyderabad. The delay could be costly in terms of finding evidence with which to mount a prosecution.

Some analysts say the difficulties at Satyam have thrown into sharp relief some of the pitfalls surrounding India’s largest companies, many of them still family controlled.

“When investing in an Indian company, you are often investing in a family rather than a company,” said one forensic expert at KPMG, the professional services firm. He said the behaviour of the company’s board was of particular concern.

“It’s a black day for Indian corporate governance. This scandal raises fundamental questions about the role of regulators and auditors in investor protection,” said one London-based investor.

Others are worried about the difficulty of bringing a swift and successful legal action against the perpetrators of the Satyam fraud.

“The test of this is how quickly we bring justice into play,” said Amit Mitra, secretary general of the Federation of Indian Chambers of Commerce and Industry.

“In the case of Enron, the quickness of action that was taken [was important]. What is crucial in this is the quickness of prosecutors, which for our foreign investors will change the atmosphere.”

On Thursday, many of the country’s business associations said they would replace Mr Raju on their committees. But the Associated Chambers of Commerce and Industry of India said any sanction would only be applied if Mr Raju were tried and found guilty.

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