Of course, there are huge uncertainties on the business front as well. Satyam’s accounts are still not known and it remains to be seen how many clients will stay on under the new owner.

It could well turn out that in a year or two from now the value of Satyam’s assets could be lower than the value of its liabilities. J.R. Varma of the Indian Institute of Management, Ahmedabad, points out in his blog: “If the liabilities turn out to be larger than the cash and other assets, Tech Mahindra can walk away and put Satyam into bankruptcy. If the liabilities turn out to be small, then Tech Mahindra can merge Satyam into itself and absorb the surplus assets."

Also See Strong Showing (Graphic)

The fact that Tech Mahindra has chosen to do the transaction through a separate entity rather than itself makes this even stronger. Even if Satyam is put into bankruptcy, Tech Mahindra’s assets can’t be attached.

Varma suggests that by offering Satyam’s new owners only a 51% stake, the government has essentially created a conflict of interest.

Tech Mahindra now runs two IT services companies—in one it has a 100% stake and in the other, 51%. As has been observed in a number of multinational companies operating in India through two subsidiary companies, the attempt always is to shift value creation to the company with 100% shareholding.

The blog post states: “Over a period of two to three years, Tech Mahindra, which is itself in the same industry, could transfer the entire Satyam business to itself. This could be done as new contracts are signed or existing contracts are renewed." If this strategy is followed, there’s even more incentive to walk away from Satyam’s potentially huge liabilities.

There’s nothing in Indian corporate law that stops Tech Mahindra from adopting such a strategy. When Satyam’s software services contracts come up for renewal, sales managers could merely state the vendor as Tech Mahindra rather than Satyam. It’s not as if a project is being transferred between the companies, and issues of arms-length pricing won’t apply.

But easy as this strategy may seem, it carries the huge cost of reputation risk. It would soon be evident from Tech Mahindra’s financials that it has begun diversifying into non-telecom industries. The resultant value erosion at Satyam will cause its minority shareholders to cry foul. Note that the Satyam episode started with minority shareholders taking up cudgels against the erstwhile promoters about their decision to buy group companies in the real estate space.

Having said that, the walk-away option still exists and provides Tech Mahindra the exit route if the going gets too tough.

Graphics by Sandeep Bhatnagar / Mint

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