Did Satyam err with the Maytas episode?

DEBATE

The commonly-held suspicion of wrongdoing pertains to a conflict of interest, but the management maintains that the move was aimed at enhancing shareholder value.

RAJENDRA CHITALE
Managing Partner, M P Chitale & Co & M P Chitale & Associates

‘The board’s conduct shouldn’t invoke apprehension of bias in favour of any shareholder’

The board of a widely held company is a fiduciary of the general body of shareholders and not only of some select constituent group of shareholders. Therefore, while considering path-breaking diversifications that entail unprecedented cash outlay on acquisition of controlling interest in target companies held by conflicted stakeholders, the general body of shareholders of such a company would legitimately expect its board to be mindful of the following considerations:  

 

Irrespective of how compelling the business case may be in the bona fide judgement of the board, the valuation and price of the proposed mega buy-sell transaction, in the minds of the general body of shareholders, remain questionable. Indeed, the wider the disparity between the shareholding of the conflicted stakeholders in the company and the target companies, the more questionable would be the transaction and its price. And, unless the proposal is made subject to shareholders’ approval, a lurking apprehension would persist that the transaction was so structured as to side-step the shareholders’ vote thereon. The harm a mega buy-sell transaction involving conflicted counterparties can do to a widely-held well-run company’s reputation can hardly be underestimated.

Similar conflict-related issues would arise if a split-up of any large business house involving multiple widely-held and closely-held companies was structured as buy-sell transaction(s) between the splitting promoter group. Though, in such a split-up, the acquiring co-promoter group would end up having to pay cash consideration to (instead of receiving it from) the widely held company that is the seller counterpart. Indeed, it should come as no surprise that splits amongst some of the largest split business houses have been structured as de-mergers that entail the approval of the wider body of shareholders, and not as mega buy-sell transactions. Though, structuring them as buy-sell transactions could have been one way of structuring the split. 

Irrespective of the compelling merits that the widely-held company’s board sees in pursuing the path-breaking diversification, its shareholders would expect the board to explore alternative approaches that could firstly minimise the cash commitment to the initiative, and secondly, procure endorsement of a wider body of shareholders to such a path-breaking course. Illustratively, structuring the acquisition of such target companies as a merger (through a stock swap), instead of a cash acquisition, could meet both criteria, namely, minimising cash commitment and also seeking the endorsement of a wider body of shareholders.

Like morals in life cannot be codified, nuances of governance cannot be legislated through a rule book. Implicit to good governance is the notion that the board’s conduct ought not to invoke widespread apprehension about the board’s bias in favour of some select constituent group of shareholders, and against the wider body of shareholders.

T R PRASAD
Independent Director, Satyam Computers

‘The Maytas deal, had it seen the light of day, would have undergone rigorous board scrutiny’

Satyam’s independent directors have objectively evaluated the proposals placed before them and, after being convinced that the proposals will add to shareholder value, approved them with appropriate modifications and conditions. Earlier we looked at consultant companies and acquired one of them in the US also. Then the management decided to broaden the scope of acquisition by looking at companies in high-growth sectors. We realised that infrastructure was a growth sector and companies within the field provided a good opportunity for growth. It is obvious that Satyam cannot acquire really big infrastructure companies given their market capitalisation. We looked at Maytas Infra, which was perceived to have upward potential. The company’s order book, as disclosed to us, was very good. Maytas was also managed professionally. The proposal to acquire the company was formulated in accordance with the Sebi guidelines. The other non-management shareholders were being offered a higher price. Independent directors were satisfied with the justification of the acquisition.

As far as the issue of acquiring Maytas Properties was concerned, the consideration was to acquire assets at the right price. Based on the valuation worked out by the management by different models, the management proposed resolutions to invest up to Rs 6,400 crore towards acquiring Maytas Properties Ltd as a wholly-owned subsidiary as may be valued by the company in consultation with bankers, consultants, other intermediaries pursuant to the applicable statutory and other regulatory requirements.

The board has definitely given in-principle clearance but the final valuation will have to validated by the formula I have spelt out. The amount of $1.3 billion was the maximum but the actual value is to be determined by the conditions stipulated.

I wanted the land valuation to be done on a formula generally followed by land acquisition authorities. I suggested that the valuation should be done in three distinct categories, namely (a) Completed projects for which the valuation should be based on actuals; (b) Work in progress for which valuation should be brought in alignment with current market realisation; (c) Lands awaiting development should be valued on the basis of basic market value notified by the state government for such land for registration purposes. I also suggested if the final valuation arrived at by the company in terms of the above resolution is significantly higher from the sum total of the above three, then full and proper justification be provided for such a higher valuation to the satisfaction of the board. We believed this validation of valuation arrived at by the company with reference to the formula suggested would have definitely contributed to shareholders’ value creation.

As far as unrelated diversification was concerned, Satyam is not directly entering into this activity but only acting as an investor — which is not inconsistent with the existing legal provisions. We wanted to contribute to shareholders’ value; however, the decision was reversed in deference to shareholders’ views.