Sucheta Dalal :Satyam’s Mischief – A Case of History Repeats Itself?
Sucheta Dalal

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Satyam’s Mischief – A Case of History Repeats Itself?  

December 17, 2008

By Debashis Basu

 

 

 

 

All hell broke loose among institutional investors when Satyam Computer Services Limited announced it audacious plan to acquire controlling interest in two companies linked to the promoter family -- Maytas Infrastructure and Maytas Property for a whopping $1.6 billion.
The move amounted to transferring money from Satyam's shareholders to the pockets of Rajus who control both Satyam and Maytas. Mutual funds and institutional investors were outraged. They threatened legal action and Templeton Mutual Fund got into activist mode and announced that it would go to any extent to block the deal. On Tuesday evening, fund managers and large investors were spewing outrage at the action. The word corporate governance, or the lack of it, in this case, was bandied about by everybody. But remember, the deal was cleared by its board of directors, inspite of the fact that promoters hold a stake of only 8.5% in the company (More on this later).
 
Satyam’s ADR crashed over 50% and after an ineffectual attempt to defend the decision Chairman Ramalinga Raju gave in and cancelled the deal. The share price still fell 30% on Wednesday and some investment experts were of the view that the promoters had lost investors’ trust and it would be hard to rebuild.
Is that really true? For those of us who have been tracking corporate behaviour for a long time, what Satyam did was only mildly shocking. Such anti-investor actions are not new to them, but investors’ memory, especially that of fund managers, is very short!
 
We all know that Satyam was one of K-10 companies - stocks of companies that Ketan Parekh was rigging in 1999-2001. That apart, in mid-2000 Satyam Computers merged Satyam Enterprise Solutions in a way that hugely benefited Srini Raju who was running SES.
The merger ratio, fixed by KPMG, was 1:1. Before the merger, Satyam Computers renounced 800,000 shares of SES in favour of Srini Raju at a price of Rs 10 when the shares were trading at Rs 1500 in the stock market. The 1:1 merger ensured that Srini Raju got 800,000 shares of Satyam Computers (paid for at Rs 10). When the information leaked out to investors, they were incensed. The stock collapsed. Among the big sellers were outraged foreign funds.
 
I remember that some ‘old economy’ business leaders were pleased that an icon of the new economy – a highly valued tech company, which was supposed to embody the virtues of transparency, disclosure and corporate governance, fell from grace.
The news of Satyam having `defrauded’ shareholders hit the investor public through a newsbreak on the website Indiainfoline.com. (The news probably managed to leak out to insider traders one day before it was up on the site, which is why the stock suddenly turned weak the day before.)
 
 Things got worse, because Satyam was daft enough to try and explain that the information was actually old hat. The merger had happened one year ago, the shareholders had been informed, the swap ratio was worked out by KPMG and the merger had, in fact, been cleared by both shareholders and courts. Funnily, nobody knew the details or implications of the management actions. The news broke one day before the AGM where angry investors shouted at the management. Strangely, CEO Ramalinga Raju had not even bothered to show up at the AGM.
This is not the only time Satyam has displayed dubious governance. It was in the news when its FY 2001 results were flashed on two web sites 15 minutes before the board meeting was scheduled to start.
In August 2002 more governance issues came up. The Department of Company Affairs was asking questions about Satyam’s accounting methods but the company managed to suppress it.
What does this tell you? Well, simply that smart investors must not be taken in by the claims of institutional investors that they will shun the shares forever. That is a naïve interpretation of how things work in the corporate and investment world. The Maytas affair will soon be forgotten because fund managers are as much steeped in greed, stupidity and wrongdoing.
Even in the year 2000, when the news of self-serving merger came out, Satyam hit a low of Rs 1900 on Monday 31 May 2000, and then bounced back with incredible ferocity to sail past Rs 2500 on Wednesday. Since the stock was trading a little below Rs 2500 the day before the news broke, one could conclude that the terrible news of shareholders being defrauded had only a temporary impact.  

Another point about the Maytas fiasco: If this is the low standard of governance that is repeatedly displayed by Satyam, a Sensex stock, what about the small companies, where FIIs still have large stakes? They wont even bother to reverse the deal as Satyam has done. If they are really under stress, they will ask investors to take a walk! But what about the board of directors what is supposed to guard investors’ interest?


-- Sucheta Dalal



 



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