Victory for good governance -Editorial

A scandalous debacle has been averted, so we can all breathe more easily about corporate governance. On Tuesday, Satyam Computers chief Ramalinga 

Raju proposed to strip the company of cash and convert it into a debtor in order to buy stakes in businesses run by his family members. He claimed that this would diversify Satyam out of computer software into infrastructure and realty, which he claimed would hold up better than software services in the difficult times ahead. But outraged investors saw the move for what it was - a massive transfer of wealth from a company in which the Rajus have a 8.5% stake to other family-owned business. 

Foreign institutional investors condemned the move and sold Satyam's ADRs in New York massively, driving down its price from $12 to $5.70. Chastened by this blow to his finances and credibility, Raju called off the deal. Optimists will say he was good enough to bow to shareholder pressure. Cynics will say that market pressure, especially exerted by foreign investors, bludgeoned him into good governance. Legally, Raju needed no shareholder clearance: approval from a supine board was enough. This approach was used by promoters galore in past decades to milk widely-held companies to benefit family-run concerns. Such wealth diversion was quite common before the 1990s. Fortunately India has been transformed subsequently. Part of the credit goes to regulators, notably SEBI. 

But more important has been pressure from investors in a liberalised economy. FIIs have been the biggest force for change, ably supported by private sector mutual funds. The Indian stock market was called a snake-pit until the early '90s, rife with rigging, front-running, fake share certificates, and constant fiddling with delivery dates by brokers. Today, India has one of the best capital markets among developing countries. Any promoter seen to be swindling shareholders suffers an instant blow to his share price, and suddenly finds future funding difficult to get, within India or abroad. Fear of such market penalties, more than any regulations, has motivated businessmen to improve corporate governance. The Satyam episode exemplifies how globalisation has helped improve shareholder value and corporate governance.