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Shobhana Subramanian: A new low for India Inc

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It’s not often that one uses adjectives like audacious, preposterous, outrageous and shocking to describe a single event and still feel one hasn’t quite done justice. But the aborted Satyam Computer-Maytas deal has left most people at a loss for words. That a promoter, with less than 9 per cent stake in his company, would have the nerve to try and transfer $1.6 billion of cash to two completely unrelated businesses owned by his sons is unthinkable. And to pass that off as a ‘wonderful’ opportunity! Satyam chairman Ramalinga Raju says he didn’t anticipate investors’ reactions and was surprised.

He can’t be blamed. In the past institutional investors in this country haven’t really spoken up against corporate misbehaviour. Even Sterlite’s attempt, in September this year, to transfer the high-quality aluminum business and merchant power to Malco, in return for the low-quality, high cost, copper Konkola mines, again without so much as a by-your-leave, didn’t anger shareholders. In that instance too, the promoters were enriching themselves, at the cost of minority shareholders, but no mutual fund really said so. There have been numerous other instances, admittedly of smaller consequence, that should have provoked mutual funds to ask questions.

But they haven’t. Now, suddenly the same institutional shareholders have found their tongues. This time, their stake is big — just over 50 per cent. And Satyam isn’t a Reliance or Tata or Birla. Also, they realise how vulnerable and helpless they are because, had Ramalinga Raju wanted, he could have pushed through the deal. And no one could have stopped him, because the board had voted unanimously. Institutional investors have their own vested interests; they are known to cosy up to managements of firms in which they have large positions so as to have access to privileged information. It’s well-known that there are back-to-back arrangements between mutual funds and corporations: Funds buy into the firm’s stock in return for investments in their income schemes. Instances of stock being dumped just before the bad news is out or shares being snapped up before the good news is flashed aren’t always ‘coincidental.”

But now it’s time institutional shareholders got together to show promoters that they simply cannot get away with this kind of behaviour. In the US, shareholders have booted out boards; in India it only needs a 10 per cent stake to call an EGM. Even if the matter is dragged to the courts, shareholders need to fight this one out. If they let Satyam off the hook, Indian promoters will continue to believe they can get away with anything. As it is, most managements in India have scant regard for even the basics of corporate governance or respect for minority shareholders.

As do the independent directors on the boards. One can hardly ask for more qualified people than Vinod Dham and Krishna Palepu. But the fact that they voted in favour of the Satyam-Maytas proposal is shocking. What’s the point in having independent directors if they can’t guide the management on critical issues? As Adi Godrej has pointed out, we need to see more resignations from independent directors. But even before that, we need to see some fresh thinking on the way they are appointed. Godrej also says he prefers less regulation for corporate governance and more principles. But that may not work in India today, and so, some amount of fresh regulation is needed. For instance, managements should be asked to take shareholders into confidence for any unrelated diversification, with the definition of ‘unrelated’ clearly spelt out. If their intentions are above board, they shouldn’t object to this.

Also, all related party transactions —mergers and acquisitions—must be cleared by minority shareholders, without the majority shareholders participating in the voting. Some countries already have this rule in place. So, even if the promoters have a majority 51 per cent stake, such a transaction would not go through without the consent of minority shareholders. That may seem restrictive and cumbersome but since Indian promoters have clearly failed to keep the interests of minority shareholders in mind, they deserve this.

Shareholders in Satyam have been sitting ducks—overnight the value of their investment has been eroded by 30 per cent. The story was similar with Sterlite where the price plunged 18 per cent after the restructuring announcement and is yet to recover. In an economic downturn such as this, when the markets have crashed, there are many more Satyams which are vulnerable to hostile takeovers because the promoters do not have a controlling stake. Such promoters will be tempted to take cash out of their companies and park it elsewhere.

A CLSA study of the state of corporate governance, in 20 countries across Asia, shows that India ranks among the top three in terms of regulation. In other words, the rules are in place. But either they’re not stringent enough or they’re being flouted. Otherwise the Satyam-Maytas deal would not have been conceived. This is clearly a new low for India Inc.

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