A case study on Satyam

Hopping jets, raising money for school, advising political leaders across the world, teaching courses, working with government agencies, writing books and articles, rubbing shoulders with corporate captains on boards, suggesting to students practical marriage strategies, and more…

Living a whole new life, after a quintuple bypass surgery (‘five for the price of one’), Bala V. Balachandran, Founder and Hon Dean of Great Lakes Institute of Management, Chennai (www.greatlakes.edu.in), is in no mood to slow down. “The more and more you think a job is a joy and not a job, five years or ten years become yesterday or five minutes,” begins Bala, when we meet on the eve of the big day when his ‘new green campus’ -- located in Manamai Village, Mamallapuram -- was to be inaugurated.

“Now that it is clear that the American model has problems, where do we go for solutions,” he demands? The answer can be from Indian education and moral leadership, Bala hopes.

Excerpts from the interview.

On academia included in corporate boards.

There are a few things that professors who act as independent directors can ensure. First, why should financial statements be discussed at short notice? Why not we insist that sufficient time be devoted, prior to the exercise – say, ten days?

Second, why should we not take an active role in educating the senior management, without taking a fee? Because, if you take a fee, and it is exorbitant, then there is a question of independence-impairment.

Thus, we need standards for independent directors. Also, we should be proactive, knowing that we have a fiduciary responsibility, despite not being privy to day-in-day-out activities.

I also don’t understand how somebody can be a director in twenty companies, while continuing as a full-time employee at some other place, or as an entrepreneur. You cannot do that. Such a director could be hurting. You don’t need a Sarbanes-Oxley Act or Clause 49 to tell you this. When I see a list of twenty board memberships, I wonder if he or she is taking a rubber-stamp position.

On the Indian Institute of Corporate Affairs, the new school.

Working along with the Ministry of Corporate Affairs, we want to ensure that this new school takes as students, people with entrepreneurial talent from the rural poor, gives them all the academic and practical inputs to make them a Dhirubhai Ambani or Ratan Tata.

On a case study about Satyam.

The Union Minister for Corporate Affairs, Mr Prem Chand Gupta, and I are writing a case study, making a story of Satyam and Enron combined, and it will discuss the questions of fraud, corporate governance and so on. Deadline for the case is May 31. For the first time, a public servant, a Minister, is suddenly interested in coming up with a case to challenge the Harvard cases; it is great for this country.

Enron took two-and-a-half years to three years to go around. In the case of Satyam, the Government created a fantastic board with Deepak Parekh and others, and made sure the company could be sold to Tech Mahindra. Nowhere in the world have we seen such a swift action, resolving things in less than six months.

There is a general feeling that public servants are not so smart. I think they are smarter than some of the private entrepreneurs.

source: http://www.hindu.com/thehindu/holnus/006200904300931.htm

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

What is common between Ramalinga Raju and Anil Ambani? : Ill intention

• Satyam’s minority investors are saved but no one came forward for Reliance Power shareholders

• Are government and regulatory authorities willing to introspect their role in Reliance Power case in the wake of Satyam episode?

• Can we have adequate rules and regulations to safeguard interest of minority shareholders in a company?

At last we can see a ray of light at the end of the tunnel for minority investors as the government, regulators and analysts are seem working in the interest of the minority shareholders of Satyam Computers Ltd. The institutional investors raised their concern against the Satyam promoter’s ill intentions which led tem to call off the deal.

Satyam yesterday said it planned to enter the construction industry by buying all of privately held Maytas Properties shares for USD 1.3 bln and 51 percent of builder Maytas Infra for USD 300 mln.

Satyam founder and Chairman B. Ramalinga Raju and other insiders hold 36 percent in Maytas Infra and 35 percent in Maytas Properties. The two are builders that work on infrastructure projects including highways, ports and water treatment systems. Satyam helps develop software for other businesses.

As Satyam announced the move after market hours here in India, the investors in US dumped the ADRs of the company which fell by whooping 59%.

Institutional investors believe that the deal is against the interest of the minority shareholders. They are of the view that the huge investment in Mytas Properties and Mytas Infrastructure could exhaust it’s nearly USD 1.2 bln cash reserves and bury it under the huge debt burden.

The government and regulators have taken the serious stance on the issue and initiated investigation. The department of Company Law Board is examining the case for the role of the board of directors in the decision making and following corporate governance guidelines.

It’s good to see that government and regulators are acting swiftly. However, a year back in the similar situation when the minority investors of Reliance Infrastructure were robbed by the Anil Ambani the same government and regulators have royally ignored the complaints of several investors. Projects worth thousands of crores of Reliance Infrastructure were transferred to the Reliance Power where Anil Ambani holds higher stake of 51%.

Further Anil Amabni’s holding company AAA Projects had acquired 105 crore shares of Reliance Power Ltd at Rs. 10 and the same shares were issued to investors through public issue at Rs. 430 to retail investors and Rs. 450 to institutional investors. The current share price of Reliance power is Rs. 115.95 and the investors have lost substantial investment. Even if one considers the bonus issue of the company the cost of a share comes to about Rs. 269.

Transferring of projects of Reliance Infrastructure to Reliance Power was against the interest of the minority shareholders of the former company, however, the government, institutional representative on the board of the company or any regulatory agency failed to take action against the ill moves of the company promoters. The move was clearly not in the spirit of good corporate governance. If government would have acted in time huge losses to the lakhs of investors would have been averted.

Reliance Power entered the primary market last year with the largest IPO in terms of money being raised, at Rs 11,700 crore, drew a phenomenal response from both institutional and retail investors by taking the subscription count to 73 times the 22.8 crore shares on offer. However, due to weak fundamentals of the company and highly overvalued issue the shares failed to cheer investors after the listing. The share price fell sharply after listing and most of the investors were found them selves trapped, resulting in huge losses to them.

The irregularities in the issue were brought to the notice of SEBI, RBI, the Company Law Board, Ministry of Finance and Prime Minister’s Office. Despite pile of complaints by several agile investors and analysts the government, SEBI, LIC (representative on the board of the company), the stock exchanges and the Company Law Board were silent on the subject. If these agencies would have taken timely steps against the promoters of Reliance Power and its promoters the losses to the investors would have averted.

The track record of the ADAG group is suspicious as other group companies such as Reliance Natural Resources Ltd and Reliance Infrastructure Ltd is likely to be nailed for serious violation of foreign exchange rules and regulations.

Indian government and regulatory authority should wake up and make necessary changes in laws governing the management of the company so that the interest of the minority shareholders is safeguarded and promoters such as Anil Ambani and Ramalinga Raju should be penalized for indirectly siphoning of money of the company to personal ventures