VZCZCXRO6887
RR RUEHAST RUEHBI RUEHCI RUEHLH RUEHNEH RUEHPW
DE RUEHNE #0241/01 0410523
ZNR UUUUU ZZH
R 100523Z FEB 09
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 5320
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 NEW DELHI 000241 
 
SIPDIS 
SENSITIVE 
 
STATE FOR SCA/INS AND EEB 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV EIND KCRM KCOR IN
 
SUBJECT: SATYAM PUTS THE SPOTLIGHT ON CORPORATE GOVERNANCE IN INDIA 
 
¶1. (SBU) Summary:  Indian government and industry leaders are 
working to make the fraud and failure of corporate governance at 
Satyam appear to be an isolated incident.  However, industry 
insiders and legal experts view Satyam as indicative of widespread 
lack of corporate governance especially in companies that are family 
owned.  Regulatory changes are coming, as well changes in the way 
industry governs itself, but the question remains, will good 
corporate governance become the norm for those companies that have 
so far only paid it lip service or will it be business as usual once 
domestic and world attention fades over Satyam? End Summary. 
 
Corporate governance prior to Satyam 
----------------------- 
 
¶2. (SBU) Several legal experts told Econoff that, prior to the 
Satyam debacle, corporate governance for many Indian companies was 
an afterthought, especially for small to mid-sized family owned 
companies private or publicly held.  This was believed not to be 
true for the top tier publicly traded companies until Satyam raised 
the specter that even these blue chip companies might not be 
following best practices.  According to these legal experts, it is 
not difficult for companies to adhere to the legal formalities of 
corporate governance as required by the Companies Act or Clause 49 
of the Listing Agreement, if they are publicly traded, while 
internally governing themselves as they see fit.  The hope now is 
that, since Satyam has put the spotlight on corporate governance, 
better practices will become the norm for those companies that have 
paid them little attention in the past. 
 
Expected changes in the law 
-------------------- 
 
¶3. (U) The consensus among these legal experts, the Director and 
Head of the Financial Sector and Corporate Laws at the Federation of 
Indian Chambers of Commerce and Industry (FICCI), and the Head of 
Policy for the Confederation of Indian Industry (CII), is that 
significant regulatory and statutory changes in the law are likely 
to occur as a result of Satyam.  The Securities Exchange Board of 
India (SEBI) is reportedly working on a concept paper to revise 
Clause 49 of the Corporate Listing Agreement to give independent 
directors more powers and strengthen disclosure norms, and the new 
Companies Bill submitted in October of 2008 to Parliament is also 
likely to undergo changes to address the problems brought to light 
by the fraud at Satyam.  The primary reason for the expected changes 
is recognition in all sectors that the perception that Indian 
companies engage in good corporate governance is critical to 
regaining the confidence of domestic and foreign investors. 
 
¶4. (SBU) A complicating problem is that, because current laws are 
not enforced, some believe new laws will meet the same fate.  Courts 
in India are woefully overburdened and cases often take years to be 
concluded.  Added to this is the potential that corruption may 
influence the outcome of litigation.    At a recent conference on 
economics, lawlessness and justice, Montek Singh Ahluwalia, Deputy 
Chairman of the Planning Commission, among others, openly 
acknowledged both corruption and the overwhelmed judicial system as 
a deterrent to effective corporate governance in India. 
 
¶5.  (SBU) In Satyam's case, fast action may actually occur because 
of domestic and world attention, and a prevailing view among many in 
India that an example of the company must be made.  The fear is that 
to do otherwise would discourage investment in an already uncertain 
market because of the recent Mumbai terrorist attacks and the global 
economic slowdown.  The concern is, however, that, even with strong 
criminal and civil action against those responsible for wrongdoing 
or negligence in the Satyam debacle, similar expeditious action is 
unlikely to result in similar cases in the future, especially if 
they are on a smaller scale.  One potential solution on the table is 
the creation of separate courts to hear and quickly dispatch cases 
involving Clause 49 and/or the Companies Act.  Whether such a system 
will be created remains to be seen but it would be a good indicator 
that India intends to tackle its corporate governance problem. 
 
Industry self governance 
---------------------------- 
 
¶6. (U) CII has created a special task force comprised of industry 
heavy weights as a direct response to the corporate governance 
issues raised by Satyam.  Naresh Chandra, former Cabinet Secretary 
and Indian ambassador to the U.S., heads the task force and its 
findings are expected to be released in forty-five to sixty days. 
One of the primary reasons the task force was formed is to show that 
the concerned parties in India are acting quickly to cut the Satyam 
cancer from the corporate system and prevent it from recurring. 
 
¶7.  (SBU) Indian industry is worried, however, about too stringent 
changes in the law.  Industry reps told Econoff that they do not 
 
NEW DELHI 00000241  002 OF 002 
 
 
support Sarbanes-Oxley-like legislation because it will raise the 
costs of doing business to an unacceptable level.  They noted that a 
previous committee headed by Naresh Chandra, formed in 2002 at the 
behest of government to address similar corporate governance issues 
recommended against adopting Sarbanes-Oxley provisions such as the 
creation of the Public Company Accounting Oversight Board (PCAOB) 
that in the U.S. regulates and disciplines auditors of public 
companies.  In addition, a refrain Econoff heard more than once was 
that good corporate governance is a moral issue.  For it to truly 
take hold, industry must create an environment where good behavior 
is rewarded and sets the standard by example. 
 
¶8. Comment:  (SBU) Despite public statements of support for stronger 
corporate governance by senior government official and industry 
leaders, good corporate governance in India is not the norm.  The 
hope is, however, that Satyam will be the catalyst for positive 
change.  For this reason, new laws and practices regarding corporate 
governance are likely to be promulgated soon.  However, their 
success will depend on active enforcement by both the government and 
private sector. 
 
MULFORD