Indian investors usually vote with their feet when they are unhappy with a company’s decision or if there are corporate governance issues.
Satyam Computer Services Ltd is a classic case, where shareholders have exited in droves, leading to a 40% drop in the company’s share price in just six trading sessions. The massive wealth destruction of Satyam’s shareholders seems all the more unfair in light of the fact that the promoter group, which is responsible for it, holds just 8.6% in the company.
Satyam currently has a market capitalization of just Rs9,070 crore, although the cash on its books is at least Rs5,300 crore. Even if one were to assign a lowly price-earnings valuation multiple of five times trailing earnings, the company should have a market cap of around Rs9,000 crore.
Satyam’s current stock price suggests that the markets are assigning no value to the cash on the company’s books. The company may have backtracked from the acquisition of two promoter-owned companies for $1.6 billion (around Rs7,568 crore), but the inescapable conclusion is that markets don’t seem to think the cash is safe.
Would Satyam’s promoters have acted the same way if they owned, say, 80% of the company? Would they then be more diligent in working towards value creation rather than clumsily destroying value?
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If the answers to those questions are in the affirmative, the implication is that shareholders may be better off investing in companies with large promoter holding. But that would be too simplistic a conclusion. Some promoters may not be bothered about the paper wealth of their shares, but would be more interested in generating cash.
But all that is hypothetical.
On a practical level, what can be done to recompense Satyam shareholders the value they have lost?
There’s little doubt that, if the promoter group gets out of the company, Satyam’s valuation should soar, if only to reflect the value of the cash on its books. Getting the promoters out should thus be the objective.
According to chartered accountant Jayant Thakur, shareholders holding 10% of the capital can apply to the Union government for an investigation into the affairs of the company under section 235 of the Companies Act. The government could also initiate such investigation on its own under section 237 in case of an alleged fraud on shareholders. Shareholders could also make a petition to the Company Law Board under section 397/398 of the Companies Act claiming oppression and mismanagement if the feeling is that promoters tried to gain at the expense of other shareholders. The sooner they take these measures, the faster they will gain.
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