Section 388 (B to D) of the Companies Act 1956 provides for a change of management in case existing personnel are found to be guilty of fraud, malfeasance, persistent negligence or default in carrying out their obligations and functions under the law, or for breach of trust. This provision has been seldom used, and Satyam remains the biggest case of board supersession in corporate India.
Ever since B. Ramalinga Raju admitted to fraud, there has been intense analysis about the events that have led to this situation and the future of the company. It is heartening that the government has acted in a measured and objective manner. The directors who have been named are among the most distinguished, of impeccable professional standing. A new set of internal auditors will go into the books of the company. Board members have been speaking to the clients, and reassuring them on the soundness of the enterprise. It is clear the objective is to reassure investors, employees and shareholders, to provide a mature management, and to reassure the country and the world that the incident is an aberration and not the story of the IT industry or corporate India.
It is not going to be easy to turn the company around, for even the last “confession” may not represent the true picture. For example, the operating margin of 3% now reported appears to be far below industry standards. The company’s September financials state that the company had as many as 690 clients, suggesting a large number of small clients. They have claimed that they specialize in enterprise- based solutions, where margins in the industry are close to 20%. The only explanation for the low revenues earned could be that Satyam was heavily discounting its services to its clients in order to secure orders and clients. The sizeable dressing up of both its revenues as well as financials makes it difficult to value Satyam’s business. But even with a new board in place, investigations launched by the Securities Exchange Board of India, ministry of corporate affairs and the police, “business as usual” will not be easy for Satyam. New clients may be difficult to come by, employees may look for alternatives, and existing order books may vanish. Any merger or takeover would have to take note of the class action suit in the US as well as the suit by Upaid in the UK.
It is here that the worry starts. The government, like Abhimanyu in the Mahabharat, could find it impossible to get out, and we would be left with a de facto acquisition. The government does not want this, and it would lead to apprehensions that it can, by notification, change managements of public listed companies, even where charges are under investigation.
The question then is, what are the objectives of this exercise? In a free market environment, even up to two years ago, the focus (as in Enron, WorldCom and the Barings case), would have been in punishing those responsible, allowing the company to implode, and to set an example through the investigative process that would serve as a warning against such misdemeanours. In China, even today, this is the approach followed in the milk contamination and bird flu scandals, the entire exercise being carried out away from the glare of publicity and the media. Even in recent cases of bailouts of financial institutions in the US, it’s the depositors and the creditors who are being protected, not the shareholders. Car makers have found difficult to access funds, while banks have been helped out, as failure of banks would have a greater impact on the economy than the failure of a car manufacturer. Extending this argument, the only reason that government intervention in Satyam can be supported is that the failure of the company will have a ripple effect on the information technology industry as a whole.
At a recent debate at the National University of Singapore on whether this could happen to other companies, the conclusion was that all companies where promoters held predominant stakes were open to such abuse, and not just in India. The so-called independent directors (especially in this case) are lulled by friendship and goodwill and more, and have little ability to correct the course of malfeasance of owners.
One can, therefore, see the desperate effort to save the image of corporate India, of friends of those in power, in mounting this effort to bolster public confidence. As part of this exercise, public attention has been turned away from two other major events associated with this company. Satyam was debarred by the World Bank for eight years from further contracts due to unethical behaviour. There is a suit filed by a US company against this firm for leaking confidential data.
At another level, there is confusion in the investigation, with multiple agencies getting into the act. The market is agog with stories about deals that can be done to let the owners off. The new board of directors, then, is just a red herring to turn the media glare away from the poor status of the investigation.
It is interesting that investors in the equity markets have started making these distinctions in the last couple of weeks. In the days following the Satyam expose, investors went back to shares where they had confidence in the management, such as Bhel, Siemens, ITC and the like, and went away from shares where they felt less confident about the results.
The public has realized that it has to look out for itself, for, as always, punishing the guilty would take the lowest priority.
S. Narayan is a former finance secretary and economic adviser to the prime minister. We welcome your comments at firstname.lastname@example.org