THE SATYAM SAGA – WHERE THE GOVERNMENT FAILED ON GOOD CORPORATE GOVERNANCE

Well the cat is out of the bag.

Tech Mahindra has emerged as the highest financial bidder for acquiring 31% of the expanded equity share capital of Satyam Computer Services as also making an open offer for additional 20% of the equity share capital at a price of Rs. 58 per share. (Yes the open offer will also be at Rs. 58 per share and not the 6 months average price which, being higher, ought to have been applicable instead of the bid price, as per the SEBI Takeover Code. More on that later.)

The curtains seem to be drawing upon an episode in Indian corporate canvas which has set many precedents and is likely to stay fresh in the memories of the different strata for a long time to come. It had all the ingredients of a fictional masterpiece, ranging from corporate fraud, to big sums of money, to political linkages and criminal investigations.

However I do not wish to write on that as much has been written on the same over the past three months, since Mr. Raju chose to ‘come clean’ with his tell all redemption letter which he released for public consumption and self detriment in January this year. Nor do I have anything new to add to the long list of possible motives being attributed to the Rajus’ for their (mis)conduct or the conspiracy theories abound on the true skeletons in the closet which was meant to be locked forever via the aforesaid confessional letter.

I wish to only express my deep concern on what I consider as the biggest lapse in the entire episode. A lapse, which is magnified by the fact that the perpetrators are not the Rajus, but the regulators themselves.

It is not the first time that a promoter/entrepreneur has thrown corporate governance to the wind, and has been found guilty of having committed accounting fraud or embezzling cash from his company. Nor do I believe that this has been the longest running fraud in the global corporate arena. Furthermore, the amount, though large (Rs. 7,000 crores or upwards) is dwarfed by the amounts involved in scams such as the recent Madoff controversy (where the amount involved was approx USD 50 bn, i.e. over 30 times the Satyam amount!!!).

However what is noticeable is that even after the scandal unravelled, the government agencies have failed in handling the matter in a manner which would have ensured the best interests of the company and its shareholders. The government bodies have breached the code of corporate governance which they seek to diligently impose and enforce on private subjects.

Why do I say so?

It’s very simple…

Till date, no shareholder of the company, other than the Raju’s and the insiders, know the correct financial position of the company!!!!

While the government nominees to the Board of the company had proactively taken charge of the company and taken steps to immediately get the accounts of the company restated, for which they had ironically appointed yet another one of the ‘big four’ firms, the accounts as restated by said firm have not been shared with the shareholders of the company. They have, on the contrary been shared with the bidders of the company with a view to enable them to bid for the company. This I believe, is the biggest breach of interest of the minority shareholders, in the history of Indian corporate roadmap, especially since the breach has been done by, and under the active supervision of the regulators.

The first and most important party, which ought to have been given the full disclosure of facts was the minority shareholders of the company. They are the ones who are already invested in the company (some of them having been shareholders for years). The least such shareholders deserved, having been duped by Raju for years, was to finally get the correct picture of the company they own!!!

But Mr. Karnik, Mr. Parekh et al did not think that necessary. They thought more of the potential bidders and the need to disclose due and proper information to them first.

Well excuse me, but if I was a shareholder of Satyam, and my company was being auctioned, before allowing the same, I would have first liked to know what was in it so that I could make an informed decision myself even before an outsider!!!

It is unfortunate that the regulators (namely the CLB) thought nothing of mandating the publication of the restated financials of the company as a first step to the salvage operations of the company and its corporate governance practices. I do not think this would have in anyway prejudiced the auction process anyway!!!

On the contrary, it would have brought in more transparency and competition into the bid process. A company, whose financials are public, is subjected to bids all the time (recent examples being JLR, Corus, Arcelor etc). In the process, each minority shareholder knows full well what his company is worth and can then decide whether or not to tender his shares in the open offer by the successful bidder or to refuse or to dump the share even before the bid process.

However in this instance, the shareholders of the company knew nothing about the net worth of the company /book value of their shares. They have been left to rely on rumours and speculation to decipher the worth of their shareholding.

It was amazing to listen to the so called ‘experts’ who have proliferated our living rooms and offices courtesy CNBC and other business news channels. The ‘experts’ gave their views on a fair price for the Satyam bid and even recommended course of action to the minorities as to whether they should exit or stay invested if the bid came in at ‘x’ or ‘y’. I could not believe my ears!!! Is everyone that stupid??? How the hell can anyone know or advise on the shareholding of Satyam without even knowing its current financial position???

Doesn’t running an auction process, wherein the management of the company shares the financial position of the company with the bidders to the exclusion of the minority shareholders tantamount to the gravest form of oppression, actionable under Section 397 of the Companies Act???

What’s even worse is that even SEBI has abetted in this process of letting the minority shareholders down by relaxing the requirements of the takeover regulations on price at which open offer ought to have been made by the successful bidder.

As per the formula, the applicable price in the present case would have been the 6 month average price (which I guess would have been in the region of Rs. 180 or so). However, with a view to ensure the bidders would not have to over pay, this criterion was abandoned. And with it, was abandoned the sanctity of the Takeover code.

If the average price of the scrip over 6 months is Rs. 180, that’s the price at which the unsuspecting, bonafide shareholders have acquired the shares of the company, while the wool was being pulled over their eyes by the management and the promoters. It could be argued that they chose to risk their capital when they invested in this asset class, however I am only advocating that they ought to have been given the benefit of the circumstances in the face of the fraud which had been perpetrated on them by the promoters.

Thus, any incoming bidder ought to have been required to factor in the cost of the open offer at such high price while making a financial bid to acquire 31% of the shares by way of issue of new shares by the company. While this would have meant a lower price for allotment of new shares, the bonafide existing shareholders would have gotten a fair exit. However, this was not thought necessary by SEBI. Perhaps it also labored under the objective of ensuring a qualified company emerging and acquiring Satyam so as to protect the company, its employees and lenders. But this protection could well have also been achieved by the government appointing an interim custodian management for the company.

So what has ultimately played out is that everyone except the bonafide minority shareholders knew of the company’s correct financial position before the bids came in. This included:

1.       The management;

2.       The Rajus;

3.       The board of the company, including the government nominees;

4.       The deposed auditors;

5.       The firm appointed to restate the accounts;

6.       The regulators, including CLB and SEBI; and

7.       The bidders.

It has been a disgrace to watch this transpire, and even though many trumpets have been sounded on the sheer transparency of the process under the auspices of former CJ of India, the fact remains that what has happened amounts to nothing different than the police coming into your house after you have been robbed, and auctioning whatever is left, by showing it to a third party who bids a price for it, without even letting you know what it is that you have been robbed of and what it is that is left!!!!