Chinks in corporate governance

The full story of Satyam is yet to emerge and if past corporate failures are anything to go by, it will take some time before it does. What is already clear is that it has raised many questions about corporate governance in India—the role of boards, of independent directors, of the auditors, of investors and of analysts. Many are suggesting that this is indicative of weak corporate governance standards in India and a failure to protect minority investors.

We should be cautious before we rush to conclusions about what needs to be done. On the other side of the world, the US is going through its own corporate governance crisis in the form of the Madoff scandal. Corporate governance in financial institutions in the US, the UK and continental Europe is coming under serious scrutiny. Countries with very different types of corporate governance systems, laws for protecting minority investors and different patterns of ownership of companies are facing similar crises of confidence.

Furthermore, this comes after an extensive tightening of corporate governance standards in the US in the face of the Enron and WorldCom scandals. The Sarbanes-Oxley Act was supposed to have plugged the loopholes in accounting and governance standards that previously existed. Many thought that it went too far and undermined the competitive position of the US.

The decline in foreign listings on the US stock exchanges was attributed to the unduly onerous regulatory standards that Sarbanes-Oxley imposed. Irrespective of whether this is correct, the legislation has not prevented major failures from occurring in financial institutions across the US.

The board of directors is frequently regarded as being central to good governance, and the role of the board has featured prominently in discussions about Satyam. The board is the body charged with having oversight of the operations of the firm and setting its strategy. The board should ensure that the company is upholding high standards of probity and conduct, and provide a probing analysis of the activities of management.

In particular, non-executive directors are supposed to give an independent assessment of the quality of management. But time and time again, failures of corporate governance suggest that they do not.

There are several reasons.

First, it is difficult to appoint truly independent directors. This is particularly hard to achieve in countries such as India where family ownership is widespread and there is a close-knit group of corporate leaders. Even in countries where family ownership is less prevalent, such as the UK, there are serious doubts about the independence of directors.

Further, it is unclear whether independence is a good thing. In terms of providing oversight of the activities of management it might be, but non-executive directors are supposed to perform an equally important function in guiding and advising management. They bring a degree of expertise from other companies, industries and countries that would not otherwise exist in the firm. In many cases, they are appointed to support rather than question and criticize management.

It is difficult for non-executive directors to perform a scrutiny objective at the best of times, but it is particularly difficult to do so when faced with a dominant chief executive who expects support not criticism from the company’s board. To some extent, the dominance of the chief executive can be moderated by appointing an independent chairman and ensuring a separation of functions between the two individuals.

Many countries have sought to separate the roles of chairman and CEO. However, it can inhibit firms from implementing effective strategies, especially in companies operating with new technologies, such as Indian information technology firms, that require visionary strategies. In any event, separation (sometimes with independent deputy chairmen as well as chairmen) has not prevented some of the most prominent failures of financial institutions over the past few months.

Can the role of the board be strengthened? The answer is yes. Tighter rules regarding the appointment and rotation of independent directors can be introduced. There can be rules relating to the credentials, experience and training of members of the board. The requirements on members of the board to provide oversight can be clarified.

Reporting by the independent members to external investors can be strengthened and attention can be given to the remuneration and incentives of non-executive as well as executive directors.

All of this is important. But will it solve the problem? The answer is almost certainly not. Many countries have played around with these rules to limited effect. Boards are a focus of much discussion about corporate governance, but they are not a solution. Effective corporate governance requires the direct involvement of investors, and attention is increasingly being focused on shareholder activism as an alternative to a reliance on boards.

source: www.livemint.com

Satyam Saga: What about India Inc's corporate governance?

If you spend days diving into annual reports while researching Indian boards and corporate governance standards, here are some questions you are
bound to ask. IT major Infosys’ nomination committee chose yet another co-founder as CEO— is it dynastic succession of another kind?

Was renowned Professor Krishna Palepu in the know of the financial misadventures of Satyam’s Ramalinga Raju? What value do gents like Prof. Mohammed Salahuddin Ansari, Principal, Madhupur College, Jharkhand and Dr Deva Nand Balodhia , free lance journalist, ex Officer on Special Duty to CM Uttarakhand add to the State Bank of India board that they sit on?

What are people like Shahrukh Khan, Yash Chopra, and Javed Akhtar doing on the board of Jet Airways? How does leading lawyer Suresh Talwar, manage to find a place on more than 50 boards of listed and unlisted companies? Why do many large Reliance ADAG companies like Reliance Capital, Reliance Communication, Reliance Natural Resources , and Adlabs, have just five (Chairman Anil Ambani plus four non executive directors) people on their boards while the Andhra Bank board seems to require 19 members?

Hidden in some of these questions are the reasons that have led to corporate governance being reduced to mere lip service in most Indian companies. But exceptions remain. In response to the Infosys succession question above, Co-Chairman NR Narayana Murthy demonstrated why his company is considered the gold standard in corporate governance: he got Claude Smadja, the then chairman of the nomination committee to send a detailed answer to explain the procedure of election of Kris Gopalakrishnan as CEO.

And yes, Mr Palepu wrote back too, defending his actions as an independent director. His note said: “During my tenure as a director with Satyam, I fulfilled my responsibilities fully and appropriately. I look forward to providing my complete co-operation to regulatory agencies as they investigate this matter. The actions of Mr. Raju and his brother have caused Satyam, thousands of Satyam employees , customers and investors, and India, enormous damage,”

While in this sea of stink there are shining examples like Infosys, Wipro, Mahindra and Mahindra, Godrej, Bharti, ICICI Bank, HDFC Bank that have set themselves apart, they are few and far between. As one moves down the ET 500 ranking, the standards begin to fall. No doubt, corporate governance standards are far too complex a matter to be captured in plain numbers, but numbers do tell a story.

More than 70% of ET 100 boards don’t have women in their boards and of the 2211 BSE listed companies that have filed data with the Exchange only 4.9% of all directors are women. More than 70% of the ET 100 boards still haven’t split the Chairman and CEO posts. More than 80% of ET 100 boards still don’t have lead independent directors in place. The fact remains that hundreds of listed companies still have to comply with clause 49 norms; in BSE itself there are 390 companies still to file data.

Governing The Corporate

And now research by an investment bank proves what industry watchers have suspected all along: large-scale manipulation of accounting standards. A report by the Noble group says that one in five BSE 500 firms has accounting issues — companies tamper with revenues, manipulate sales and play around with cash. So are the members of auditing committees of these companies sleeping?

No, the independent directors say, they have to rely on the management for information, and often information and time is short supply in board meetings. “For some promoters , revenues are a matter of opinion not fact and somehow they always have to rush to meetings after the board meetings . We have no choice but to take the management’s word for most issues,” says the CEO of a company who is on prominent boards.

The fact remains that all three pillars of protection for investors — the independent directors, the auditors and the regulators are misaligned. “The institutions of corporate governance are not good enough. We have to reapply ourselves to restructure the institutions of corporate governance,” says Arun Maira, Senior Advisor, BCG who is on five boards.

And corporate governance (which in its true form starts after basics like board composition, size, committees, systems of check and balances, have been put in place) is often just reduced to meeting the minimum legal requirements in most cases. “Only the ritualistic portions of corporate governance are being met with, I haven’t seen a material change in thinking towards corporate governance,” says N Vaghul, Chairman , ICICI Bank, one of India’s most respected business leaders.


The promoters’ play


Boards historically have been networks of influence for promoters, so family and businessmen friends are often nominated, leading to a cosy relationship in which both objectivity and independence are lost. Indian promoters, unlike in the West, hold large equity stakes and to quote a well known CEO of a FMCG company who is on several boards himself, still have an ‘I know what’s best for my company’ attitude.

source: http://economictimes.indiatimes.com/

Corporate Governance

Tata Company is committed to maintaining the highest standards of corporate governance in its dealing with its various stakeholders. It is an integral part of the Company's core values which include transparency, integrity, honesty and accountability. Your Company follows the philosophy of working towards the creation of wealth by enhancing the value of stakeholders, meeting the needs of customers and employees and the community at large.

The Company attaches great importance to investor relations. With a view to enhance shareholder participation in corporate affairs, the Company follows the policy of keeping its shareholders informed by putting up relevant information on its corporate website www.tatapower.com, by issuing public notices of meetings and informing stock exchanges of new developments.

The Company also lays great stress on risk management and internal controls. The internal audit department reviews the effectiveness of the risk management system and internal controls and the Audit Committee oversees the same.

With a view to ensuring excellence in its functioning, Your Company has adopted the Tata Business Excellence Model for introducing systemic changes in all areas of its functioning. Your Company has also adopted the Tata Code of Conduct which serves as a guide to uphold the highest levels of business ethics. Your Company is in compliance with the conditions of corporate governance stipulated in Clause 49 of the Listing Agreement entered into with the Stock Exchanges.
Tata Code of Conduct

The fountainhead of the corporate governance of the Tata Power Company is the Tata Code of Conduct. The Company is committed to abide by it, in its letter and spirit. And the Company has earned the Tata Brand name by virtue of this commitment. It draws its strength from the five Tata values:

* Integrity
* Understanding
* Excellence
* Unity
* Responsibility

In Tata parlance they stand for –
Integrity

We must conduct Your business fairly, with honesty and transparency. Everything we do must stand the test of public scrutiny.

Understanding

We must be caring, showing respect, compassion and humanity for Your colleagues and customers around the world, and always working for the benefit of India.

Excellence

We must constantly strive to achieve the highest possible standards in Your day-to-day work and in the quality of the goods and services we provide.
Unity

We must work cohesively with Your colleagues across the group and with Your customers and partners around the world, building strong relationships, based on tolerance, understanding and mutual cooperation.

Responsibility

We must continue to be responsible, sensitive to the countries, communities and environments in which we work, always ensuring that what comes from the people goes back to the people many times over.

The name of TATA says it all. It encompasses the lowest common Tata denominator – the way others see the Tata Group.

Trust

Acceptability

Transparency

Accountability

Management Practices

For consistency and faithful implementation of the corporate objectives of Tata Power, the Board has followed certain management practices even prior to the same being made mandatory, viz., Constitution of an Audit Committee, Remuneration Committee, etc.

source:http://www.tatapower.com/aboutus/corporate-governance.aspx

The myth of corporate governance

Dr Bala V. Balachandran, J.L. Kellogg Distinguished Professor of Accounting, Information Management and Decision Sciences, and Founder and Honorary Dean, Great Lakes Institute of Management, Chennai, is an independent director on the boards of several Indian companies. Two years ago, at one of India’s leading companies (the good professor prefers not to name it) on which Balachandran is an independent director, an acquisition strategy was being discussed. The company had begun intense negotiations and had put in an offer, only to be pipped by a competitor who came in from the cold with a higher price. The discussion at the board meeting revolved around whether a renewed offer needed to be made. The directors were veering around to the view that yes, they should go for the kill. Balachandran thought otherwise. “I put my foot down and said no. I told them that it was time to back off as shareholder wealth would suffer if we went ahead,” he said. The board listened and didn’t pursue the deal. With hindsight, stepping back proved to be the right decision. For, as the Kellogg professor points out: “The company that finally did manage to win is today stuck with it (the acquisition).”

Cut to Berjis Desai, Managing Partner at Mumbai-based law firm J. Sagar Associates, who is on the boards of at least six listed companies. Three-to-four years ago, he along with other directors shot down a diversification plan of a capital goods company, even though the promoters were keen on going ahead. The company, he says, had a poor track record of managing a diversified business. Desai, however, admits that very few independent directors make an attempt to short-circuit proposals or decisions of promoter directors.

Indeed, independent directors who stand up against a board or management are as rare as hen’s teeth. After Satyam’s outrageous boardroom antics last fortnight (see Satyam’s Six Deadly Sins, page 38), the B. Ramalinga Raju-promoted company has become everybody’s favourite whipping boy. But fact is that the IT services major isn’t the only Indian company that has given corporate governance the five-fingered salute. The Satyam episode is shocking because of the sheer brazenness of the promoters. But you have to wonder: Are some of the world’s most renowned and most respected minds, who are independent directors mere stooges, used to push through proposals that promoters and managements are keen on?

Rubbish, says a section of independent directors. “People don’t treat independent directors like ornamental pieces. For every Satyam kind of event, there would be 100 other instances where directors asserted themselves and their views were well respected by the board,” says Shailesh Haribhakti, Managing Partner, Haribhakti and Associates, who is also an independent director on the boards of 14 companies, including ACC, Future Capital Holdings and Pantaloon Retail (India).

To be fair to independent directors, there have been instances when they’ve taken extreme action. Recently, a high-profile head of a private equity firm resigned from the board of a Mumbai-based midtier e-governance company. Reason? Commitments made to him by the promoters were not fulfilled; one of them included the appointment of a professional CEO, which never took place even after two years. Moreover, some aggressive plans, which included big contracts from the government, were not in the interest of the company as they involved huge capital expenditure; the director was not in favour of this due to financial constraints of the company.

Indeed, such active participation of independent directors is the need of the hour at a time when some of the biggest names of India Inc. are in a mood to walk the grey line. In a recent report, titled Risks to Valuation?, foreign brokerage house CLSA highlighted some “permitted but not best practices” of Indian companies (see Walking the Thin Line).

But, how much can independent director really do? Prithvi Haldea, Chairman & MD, Prime Database, says: “Independent directors can’t be expected to be the masters of business. They are not clued into the business.” Haldea sits on the board of Nucleus Software, a midtier IT company. “Our role is to protect the interest of minority shareholders in whatever decisions are taken by the management or the board,” he adds. Pradip Shah, Chairman, IndFund Advisors, who sits on the boards of 12 companies, feels there are few options for independent directors if managements don’t take them seriously. “If management continues to ignore (your voice), the only option for an independent director is to step down. You can’t expect them to be panacea for all ills,” says Shah, a market veteran. In the past, he along with other directors defeated the attempt of an MNC to transfer assets to an unlisted company.

There have been boards that have rejected potentially valuedestroying moves. Recently, for instance, the Gujarat government suggested that all PSUs in the state should donate 30 per cent of their profits before tax as charity! The shareholders of at least one company, Gujarat Alkalies & Chemicals, where the government has a 36.7 stake, defeated the proposal. However, another state-owned firm, Gujarat Mineral Development Corp., could do little as the government held 74 per cent in it. But that didn’t prevent shareholders at the company’s annual general meeting (AGM) from raising Cain, which resulted in the AGM being postponed. Several fund managers and institutional investors have made informal requests to the government and the management of these companies to drop the proposal.

As the Satyam case has revealed, active investors can often be more effective than independent directors in persuading managements to change their minds (see Cry Freedom!, page 11). Yet, that’s hardly a case for independent directors to abdicate their roles. “They (independent directors) should constantly monitor their ability to devote essential time so as to be able to discharge their onerous responsibilities. If they can’t, then they should not be on the board,” says V.V. Ranganathan, a former senior partner of Ernst & Young. Recently, he resigned from the board of Zee News as independent director as he didn’t think he would be able to devote enough time to this role in 2009.

P.K. Vijay, MD, Corporate Professionals, an advisory firm relating to corporate governance, suggests regulators (like Department of Company Affairs and SEBI) form a pool of directors; and it’s from this pool that companies should choose directors rather than selecting on their own. Now, that’s some food for thought at the next seminar on corporate governance

source:

http://businesstoday.digitaltoday.in /content_mail.php?option=com_content&name=print&id= 9524

Corporate governance comes under lens

The Satyam episode has sparked a big debate on whether India possesses adequate laws and guidelines for corporate governance. Risk managers say that
while India has no dearth of such provisions in various enactments, the real issue emanates from the ability to follow these provisions in spirit and the means to monitor and enforce the same.

The law makers in India, they believe, need to ascertain the merits of encouraging a principle-based approach (like in the case of the combined code in the UK) to compliance — where the nature, size and complexities of a business govern compliance and disclosures — instead of a standard rules based approach for universal compliance (like in the US).

Says Monish Chatrath, national markets leader, Grant Thornton: “Companies in India must have the flexibility to ascertain those aspects which are practical to comply with and others where they can provide suitable and logical explanations for non compliance. This will enable them demonstrate their true intend to comply, where practical, and make to transparent disclosures in other cases.”

Chatrath also feels there is a need for a clear distinction between corporate governance norms for publicly listed entities and for other forms of businesses involving a relatively limited set of stakeholders. According to him, market capitalisation, size and complexity of a business are other parameters which may be used to distinguish between various governance requirements.

The Satyam scandal has, ironically, uncovered the second most populated country in the world, of having a problem with numbers in terms of finding the requisite number of directors who can exercise their independence while influencing decisions of the board. The challenge for India Inc, believe industry experts, is to come out of the mindset that only well known personalities can be nominated as independent directors.

“The entire process through which independent directors are identified, nominated and recruited needs a careful introspection. The visibility and market perception or relationships with the promoters should not be the only criteria while choosing independent directors,” says Chatrath.

In India, guidelines for corporate governance are provided in clause 49 of the listing agreement and also in various sections of the Companies Act. Industry experts hold view that once appointed, the performance and contributions of these directors should be monitored and evaluated objectively with peer reviews serving as a means of such evaluations.

Richard Rekhy, chief operating officer, KPMG India, even raises questions on the constituents of corporate governance, including board meetings and agenda code of conduct, ethics, independent directors, CEO succession and performance, and risk management and oversight. “Integrity and ethical values are not given enough attention in Indian companies, which needs to change,” feels Rekhy.

source:http://economictimes.indiatimes.com/Features/The_Sunday_ET/Special_Report/Corporate_governance_comes_under_lens/articleshow/3962128.cms

Plug loopholes in corporate governance: Nasscom

Corporates on Wednesday expressed deep shock over the financial fraud in one of India’s leading information technology firms, Satyam Computer Services, and asked the Government to plug loopholes in corporate governance so that the confidence of companies and investors, particularly global, could be restored in the Indian corporate sector.

Terming it as a ‘stand-alone’ case of corporate governance failure, the apex body of IT and BPO industry, the National Association of Software and Service Companies (Nasscom), said: “This is not in any manner a reflection on the industry or corporate India. We will ensure that customers and other stakeholders get the right perspective. We will also work with the Satyam taskforce to reach out to their customers and employees and guide them through the transition.”

“This incident is particularly unfortunate as the Indian IT-BPO industry had set high standards of ethics and corporate governance. Nasscom advocates the highest standards of ethics for the industry and we will work with our membership to re-commit to maintaining the highest standards of governance and transparency,” it said, adding that the law will take its course (in the matter). Satyam’s Chairman and Founder B. Ramalinga Raju has once been Nasscom Chairman.

Chambers’ reaction


Similarly, top apex chambers have also expressed their disappointment over the entire episode and urged government and regulatory authorities to take immediate corrective measures. “Satyam was always seen as one of the top Indian IT companies and often represented as shining example of Indian liberalisation and entrepreneurship. This fraud on the investors and employees of the company shows a systemic breakdown in audit and board’s oversight of the company,” said Rajeev Chandrasekhar, MP and President, Federation of Indian Chambers of Commerce and Industry (FICCI).

Mr. Chandrasekhar stressed the need for regulators to move quickly to demonstrate that this was an exceptional case amongst corporates and that investors need not worry about Indian corporate governance and accounting standards. “This is critical to revive and rebuild the confidence and trust in India Inc amongst investors,” he added.

The Confederation of Indian Industry (CII) also called for immediate examination of the loopholes in regulation, accounting, audit and governance that allowed such lapses to occurThe Associated Chambers of Commerce and Industry of India (Assocham) demanded a special committee to be set up to investigate the entire Satyam issue so that culprits are identified and brought to book.

source: http://www.hindu.com/2009/01/08/stories/2009010854251600.htm

Satyam faces risk of losing governance award

Satyam Computer Services, the Indian IT outsourcer reeling from an aborted $1.6bn acquisitions deal, faces further embarrassment after the London-based World Council for Corporate Governance said it was considering stripping the company of a prestigious corporate governance award.

India's fourth-largest software outsourcer received heavy criticism after it last month attempted to acquire Maytas Properties and Maytas Infra - real estate and infrastructure companies that are controlled by the family of Satyam's chairman.

There was heavy criticism after it emerged that the deal - planned by Ramalinga Raju, Satyam's chairman - had not received shareholder approval.

According to calculations from Mumbai-based brokerage IIFL, the deal also valued Maytas Properties at $1.3bn, even though it had a net worth of only $225m.

The acquisitions would have reversed Satyam's net cash position of more than $1bn to one of net debt worth about $400m.

Satyam was forced to abort the acquisitions hours after their announcement to the New York and Bombay stock exchanges, after an unprecedented revolt by its shareholders who had not been consulted on the bid.

Four independent board members were forced to resign over the matter and Satyam shares have since fallen nearly 30 per cent after several profit downgrades by foreign banks.

Just days later, the World Bank barred Satyam from doing business with it for eight years for providing "improper benefits to bank staff" in exchange for contracts and providing a "lack of documentation" on invoices.

Yesterday, the WCCG, which awarded Satyam a Golden Peacock last year, said it would seek legal advice to understand the mechanics of the aborted takeovers, as part of its effort to re-assess whether Satyam still deserved the award. Manoj K Raut, an India representative for WCCG, said the organisation feared that its name might be tainted if Satyam continued to use the Golden Peacock logo in its marketing.

"We have to reconsider and rethink our decision as the company [Satyam] can use our logo for the next three years. . . If we find out that they are not following the necessary corporate governance rules that we have awarded them for then they will have to stop [using our logo]."

Mr Raut said the Golden Peacock was "the holy grail of corporate governance, as we follow stringent standards to assess companies, with a crème de la crème jury." Ola Ullsten, former prime minister of Sweden, and James McHugh, former chairman of British Gas, are among the members of the Golden Peacock Awards jury.

"We have not received any communication to this effect from Golden Peacock," a Satyam spokesperson told the Financial Times.

Premchand Palety, director of the Centre for Forecasting and Research consultancy in Delhi, said: "The independent board members were supposed to defend the shareholders' interests, but they clearly didn't, in fact it seems they were looking after the chairman's interests."

The local press has also hit hard at the IT service group, over fears that Satyam's actions could taint India's corporate reputation.

source: http://www.ft.com

Strong corporate governance need of the hour: Cognizant

Expressing shock over Satyam's revelation of accounting fraud, US-based technology giant Cognizant on Wednesday said the entire
episode reinforces the importance of strong corporate governance.

"We are shocked and dismayed by today's announcement of fraudulent accounting by Satyam. Such a situation reinforces the value and importance of strong corporate governance and many other additional controls imposed on US companies that are subject to the Sarbanes-Oxley Act," Gordon Coburn, Chief Financial and Operating Officer, Cognizant said.

"At Cognizant, we follow rigorous corporate governance practices. In addition to independent testing of our annual compliance with the Sarbanes-Oxley Act, Cognizant retains both outside legal counsel and independent accountants to ensure that good governance practices and regulations are followed," he added.

Chairman of the country's fourth biggest software exporter, Satyam, B Ramalinga Raju today resigned and admitted that the company was "fudging" its accounts for several years.

source: http://economictimes.indiatimes.com/Infotech/Software/Strong_corporate_governance_need_of_the_hour_Cognizant/articleshow/3947973.cms

IT's graveyard is full of victims of governance

Satyam Computer isn't the first big IT company to be hurt by their compromises with corporate governance. Several companies
have been dealt severe blows in the past, either because they took liberties with corporate ethics or chose to diversify into unrelated areas.

Pentafour Software was No 3 in Nasscom's ranking of India's top 20 IT companies in 1998-99. Two years later, the two companies that it was subsequently split into Pentasoft and Pentamedia Graphics were Nos 9 and 10 respectively. Today, they have almost disappeared, at least partly on account of their moves to acquire a resort and set up multiplexes, thus losing focus on delivering animation and software solutions.

DSQ Software was ninth on the 1998-99 list, 15th on the 2000-01 list. Today, its promoter Dinesh Dalmia is in a Kolkata jail. Kalpathi Suresh of SSI set up a real estate arm, and eventually cashed out by selling the software services and software education businesses.

"We find this happening all the time with people coming into IT with a background in traditional Indian business," says Avinash Vashistha, CEO of IT investment advisory firm Tholons. He says they tend to bring with them "poor corporate governance practices and corruption".

Everybody agrees that IT still is the cleanest industry in India, partly on account of the global client base, and partly because leading companies like Infosys, TCS and Wipro took proactive steps to create high governance standards to meet client requirements. Some hold up Wipro chief Azim Premji as a great example of somebody who did not get into the "traditional business" trap, despite having come from that background.

"Transparency in Indian IT is the best. Infosys and Wipro lead the pack in corporate governance," says Harit Shah, IT analyst with Angel Broking. He thinks it's unfair to put Satyam and Pentafour in the same bracket, but he admits the Satyam episode shows people will not tolerate any nonsense.

Firms set up or run by IT professionals, with a passion for technology—most notably Infosys and HCL—are seen to face fewer problems. Analysts say those that are started by others should ideally professionalise the management at the earliest. "Professionals don't have the guts to do what others from traditional business backgrounds do. They know it's bad," says Vashistha.

source: http://timesofindia.indiatimes.com/Business/India_Business/ITs_graveyard_is_full_of_victims_of_governance/articleshow/3954168.cms

Roles of independent directors exposed

Independent directors on the boards of many companies across various sectors said their roles remained relevant despite the Satyam episode. They also acknowledged however, that their fees (remuneration) had increased substantially over the last few years, which could prompt individuals to overstay in organisations. Besides, some felt that not much should be expected from them, especially if the auditors fail in their duty to detect financial frauds.

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"Even the best independent director of a company cannot detect a fraud if the auditor cannot detect it. And most independent directors are not involved in the workings of a company for more than 15 days," said Omkar Goswami, founder and Chairman of Corporate and Economic Research Group (CERG) Advisory Private Limited, and an independent director of companies such as Infosys, Crompton Greaves and Godrej Consumer Products. B Ramalinga Raju, founder and chairman of Satyam Computer Service, today resigned, admitting to falsifying accounts and assets by overstating revenues and profits while understating liabilities. But this was just another nail in the coffin.

Following the aborted deal, he resigned from the committees set up to elect the deputy governor of Reserve Bank of India (RBI) and chairman of the Securities and Exchange Board of India (Sebi). He had also quit as a member of the Telecom Regulatory Authority of India (Trai).

"The role of the independent director is basically a myth. Their only role in the company is to protect the interests of the minority shareholders vis-a-vis the promoters," said Prithvi Haldea, promoter of primary market-monitoring firm Prime Database, and an independent director of Nucleus Software Exports.

"Also, there is no age limit or qualification required for an independent director and they are usually not tuned in or technically equipped to be aware of such issues, hence one should not expect anything from them," he added.

An independent director in over half-a-dozen companies, Gurcharan Das, former CEO of Proctor & Gamble, concurred: "It is an impossible job for an independent director to penetrate the company from outside. Unless the independent director doesn't get deeply involved with the activities of the company, such kind of malpractice cannot be detected."

Some of the independent directors said that when a noted auditor like Price Waterhouse could not detect the scam, it was useless to expect them to be aware of it. They felt that given the current scenario in which an attractive remuneration is the only draw for many to join companies in that position, firms should lay down clear-cut policies specifying the role of an independent director and that the Company Law should be amended so that an individual is not allowed to assume the directorship of more than 7-8 companies.

"In the last three years, the fees or remuneration of an independent director has grown so substantially that an individual is often tempted to have an extended stay in the organisation. Most of these directors would go by the decision of the promoters of the company without examining the details a company," said S L Rao, who is an independent director for companies such as Reliance Infrastructure, Reliance Power, Reliance Natural Resources and Kanuria Chemicals and Industries. Rao added that a company should have a clearly laid out policy where there should be a specified tenure and age limit of an independent director.

R C Bhargava, chairman, Maruti Suzuki (also independent director on many boards of companies) admitted that "the Satyam episode has tarnished the image of independent directors at Satyam" but added "it has not diluted the objective of having an independent director". He, however, wondered how the internal audit committee (mostly populated by independent directors) could have missed the irregularities.

A few directors, however, said the very role of an independent director needs to be more specified and an individual should not be allowed directorship of more than eight companies

source:http://www.business-standard.com

Ramalinga Raju quits Satyam; admits to fraud

Satyam Computer on Wednesday plunged into a deep crisis, as B Ramalinga Raju resigned as its Chairman after admitting to major financial wrong-doings and saying his last-ditch efforts to fill the "fictitious assets with real ones" through Maytas acquisition failed.

The beleaguered IT giant, already under scanner over the aborted acquisition of firms promoted by the Chairman's family, received a rude shock days ahead of its January 10 board meeting, with Raju stepping down along with his brother and Managing Director B Rama Raju.

"It was like riding a tiger, not knowing how to get off without being eaten," Ramalinga Raju said in a letter to Satyam's board of directors, wherein he listed major financial wrong-doings over the years to inflate the profits.

Listed at New York Stock Exchange, the company could face regulatory action in the US, analysts said.

While Raju recommended DSP Merrill Lynch be entrusted the task of "quickly exploring some merger opportunities," the company informed the stock exchanges that the investment banker has terminated its engagement with Satyam.

Noting that every attempt to eliminate gaps in balance sheet, purely on account of inflated profits over several years, failed, Raju said: "I am now prepared to subject myself to the laws of the land and face consequences thereof."

Low percentage of promoter equity in the company, where four independent directors resigned in the last two weeks over the acquisition fiasco, could lead to a takeover and expose the gap, he said in the letter, also sent to regulator SEBI.

The promoters' share in Satyam has now dipped to just over 3 per cent that too is pledged with lenders.

Shares of Satyam plunged by over 40 per cent immediately after the announcement of resignations, necessitating an overhaul of the Board and management.

Following is the text of the letter Raju wrote to the Satyam board:

"It is with deep regret and tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice:

1. The Balance Sheet carries as of September 30, 2008,

a) Inflated (non-existent) cash and bank balances of Rs 5,040 crore (as against Rs 5,361 crore reflected in the books);

b) An accrued interest of Rs 376 crore, which is non-existent

c) An understated liability of Rs 1,230 crore on account of funds arranged by me;

d) An overstated debtors' position of Rs 490 crore (as against Rs 2,651 reflected in the books);

2. For the September quarter(Q2) we reported a revenue of Rs 2,700 crore and an operating margin of Rs 649 crore(24 per cent of revenue) as against the actual revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore (3 per cent of revenues). This has resulted in artificial cash and bank balances going up by Rs 588 crore in Q2 alone.

The gap in the balance sheet has arisen purely on account of inflated profits over several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance).

What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years.

It has attained unmanageable proportions as the size of the company operations grew significantly (annualised revenue run rate of Rs 11,276 crore in the September quarter, 2008, and official reserves of Rs 8,392 crore).

The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify a higher level of operations thereby significantly increasing the costs.

Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in the takeover, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten.

The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas' investors were convinced that this is a good divestment opportunity and a strategic fit.

One Satyam's problem was solved, it was hoped that Maytas' payments can be delayed. But that was not to be. What followed in the last several days is common knowledge.

I would like the board to know:

1. That neither myself, nor the Managing Director (including our spouses) sold any shares in the last eight years - excepting for a small proportion declared and sold for philanthropic purposes.

2. That in the last two years a net amount of Rs 1,230 crore was arranged to Satyam (not reflected in the books of Satyam) to keep the operations going by resorting to pledging all the promoter shares and raising funds from known sources by giving all kinds of assurances (statement enclosed only to the members of the board).

Significant dividend payments, acquisitions, capital expenditure to provide for growth did not help matters. Every attempt was made to keep the wheel moving and to ensure prompt payment of salaries to the associates. The last straw was the selling of most of the pledged shares by the lenders on account of margin triggers.

3. That neither me nor the managing director took even one rupee/dollar from the company and have not benefited in financial terms on account of the inflated results.

4. None of the board members, past or present, had any knowledge of the situation in which the company is placed.

Even business leaders and senior executives in the company, such as, Ram Mynampati, Subu D, T R Anand, Keshab Panda, Virender Agarwal, A S Murthy, Hari T, S V Krishnan, Vijay Prasad, Manish Mehta, Murli V, Shriram Papani, Kiran Kavale, Joe Lagioia, Ravindra Penumetsa, Jayaraman and Prabhakar Gupta are unaware of the real situation as against the books of accounts. None of my or managing directors' immediate or extended family members has any idea about these issues.

Having put these facts before you, I leave it to the wisdom of the board to take the matters forward. However, I am also taking the liberty to recommend the following steps:

1. A task force has been formed in the last few days to address the situation arising out of the failed Maytas acquisition attempt.

This consists of some of the most accomplished leaders of Satyam: Subu D, T.R. Anand, Keshab Panda and Virendra Agarwal, representing business functions, and A S Murthy, Hari T and Murali V representing support functions.

I suggest that Ram Mynampati be made the chairman of this Task Force to immediately address some of the operational matters on hand. Ram can also act as an interim CEO reporting to the board.

2. Merrill Lynch can be entrusted with the task of quickly exploring some merger opportunities.

3. You may have a 'restatement of accounts' prepared by the auditors in light of the facts that I have placed before you.

I have promoted and have been associated with Satyam for well over 20 years now. I have seen it grow from few people to 53,000 people, with 185 Fortune 500 companies as customers and operations in 66 countries. Satyam has established an excellent leadership and competency base at all levels.

I sincerely apologise to all Satyamites and stakeholders, who have made Satyam a special organisation, for the current situation. I am confident they will stand by the company in this hour of crisis.

In light of the above, I fervently appeal to the board to hold together to take some important steps. TR Prasad is well placed to mobilise a support from the government at this crucial time.

With the hope that members of the Task Force and the financial advisor, Merrill Lynch (now Bank of America), will stand by the company at this crucial hour, I am marking copies of the statement to them as well.

Under the circumstances, I am tendering the resignation as the chairman of Satyam and shall continue in this position only till such time the current board is expanded. My continuance is just to ensure enhancement of the board over the next several days or as early as possible.

I am now prepared to subject myself to the laws of the land and face the consequences thereof.

(B Ramalinga Raju)

Copies marked to:

1. Chairman SEBI

2. Stock Exchanges.

source:http://www.expressindia.com/latest-news/Ramalinga-Raju-quits-Satyam-admits-to-fraud/407747/

Asatya vachan Raju takes Satyam down; stock falls 77.11%

Satyam Computer Services Ltd’S Mr. B Ramalinga Raju has tendered his resignation as chairman of the company. Reacting to the news, shares Satyam's board members

of the IT company were down 77.11% at Rs 41. Also, immediately following the news, DSP Merrill Lynch has terminated its engagement with the company.

Raju will continue in the position only till such time the current board is expanded.

In a letter to the board of directors, Raju states that Satyam’s balance sheet as on Sep 30, 2008, carries an inflated (non-existent) cash and bank balances of Rs 5,040 crore (as against Rs 5,361 reflected in the books).

Further, it carries an accrued interest of Rs 376 crore which is non-existent.

An understated liability of Rs 1,230 crore on account of funds arranged by me. An over stated debtors position of Rs 490 crore (as against Rs 2,651 crore in the books).

For the second quarter ended Sep 30, 2008, the company reported a revenue of Rs 2,700 crore and an operating margin of Rs 649 crore (24% of revenues) as against the actual revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore (3% of revenues). This has resulted in artificial cash and bank balances going up by Rs 588 crore in the second quarter alone.

The letter further states that the gap in the balance sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance). What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew significantly (annualised revenue run rate of Rs 11,276 crore in the September quarter of 2008 and official reserves of Rs 8,392 crore).

As the promoters held a small percentage of equity, the concern was that poor performance would result in a takeover, thereby exposing the gap. The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones.

To quote: “It was like riding a tiger, not knowing how to get off without being eaten.”

A task force comprising imminent members such as Subu D, TR Anand, Keshab Panda and Virendra Agarwal and AS Murthy, Hari T and Murli V has been formed in the last few days to address the situation arising out of the failed Maytas acquisition attempt.

Ram Mynampati would be made the Chairman of this task force to immediately address some of the operational matters on hand. Merrill Lynch would be entrusted with the task of exploring some merger opportunities.

In the letter, Raju has apologised to all Satyamites and stakeholders for the current situation.

Raju says that neither he nor the managing director sold any shares in the last eight years except a small proportion sold for philanthropic purposes.

A net amount of Rs 1,230 crore was arranged to Satyam (not reflected in the books) to keep operations going by resorting to pledging all the promoter shares and raising funds from known sources by giving all kinds of assurances. Significant dividend payments, acquisitions, capital expenditure to provide growth did not help matters. Every attempt was made to keep the wheel moving and to ensure prompt payment of salaries to the associates. The last straw was the selling of most of the pledged shares by the lenders on account of margin triggers.

Raju also acknowledged that neither he nor the managing director took have benefited in financial terms on account of the inflated results. He confessed that non of the board members had any knowledge of the situation in which the company is placed .

source:http://economictimes.indiatimes.com/Satyams_Raju_resigns_admits_fraud/articleshow/3946209.cms

Satyam's fraud shameful: Ministry of Corporate Affairs

The ministry of Corporate Affairs is looking into the statement sent by Ramlinga Raju to stock exchanges admitting fraud in Satyam's accounts.


"If the message was true and a fraud has happened in Satyam it is very shameful. It should not have happened," Corporate Affairs Minister Premchand Gupta told reporters on Wednesday .

The corporate affairs ministry is in constant touch with market regulator SEBI and since this is a complex issue, the ministry will look into the roles of company directors, company auditors and company secretaries in the fraud, the minsiter said.The ministry might refer the case to Serious Fraud Investigating Office once the message of fraud has been verified. "Once there has been a verification of the fraud, coordinated action will be taken along with the SEBI," the minister added.

In his statement to stock exchanges, Mr Raju, who resigned as the CEO of Satyam, said, "It is with deep regret and tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice:

1. The Balance Sheet carries as of September 30, 2008, a) Inflated (non-existent) cash and bank balances of Rs 5,040 crore (as against Rs 5,361 crore reflected in the books); b) An accrued interest of Rs 376 crore, which is non-existent
c) An understated liability of Rs 1,230 crore on account of funds arranged by me; d) An overstated debtors' position of Rs 490 crore (as against Rs 2,651 reflected in the books);

2. For the September quarter(Q2) we reported a revenue of Rs 2,700 crore and an operating margin of Rs 649 crore(24 per cent of revenue) as against the actual revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore (3 per cent of revenues). This has resulted in artificial cash and bank balances going up by Rs 588 crore in Q2 alone."

Source:http://economictimes.indiatimes.com/Infotech/Software/Satyams_fraud_shameful_Ministry_of_Corporate_Affairs/articleshow/3946750.cms