While I was out of circulation and not blogging (business trip and vacation) the Satyam saga was unfolding. I remained abreast of what was happening but didn’t post anything on it. It’s been well covered by other bloggers and the media in general both in India and abroad. So I won’t bother adding my opinion except to say that if India Inc. is to redeem itself, what happens from here on out is what matters. The Rajus, on the other hand, cannot redeem themselves. Nor can the independent directors, unless they publicly say that critical information was withheld from them.
But I have several questions about the whole affair. Some of them are rhetorical, others are real questions. So if you know the answers or where I can read up on material, please let me know.
I understand that so far, nothing illegal has been done insofar as the the announcement of the acquisition (now withdrawn) is concerned. The size of the deal was within (exactly) the limit prescribed by the Companies Act beyond which shareholder approval is required [uTVi]. That insiders had pledged their shares without public disclosure is also not prohibited apparently [Jayanth Varma]. So does that mean this is now business as usual for Satyam and the Rajus?
Who were the bankers for Satyam? They must have gotten a top investment bank to advise them on this. And according to Raju they had a Big 4 accounting firm in the mix as well.
Rajus’ share of the company is now down to about 5%. Even if it was 8%, that is just too low to retain control of the company in a fair fight with shareholders. The question that I am not able to get an answer to is – how do shareholders assert themselves now? In the US, I understand how it goes. A private equity firm or someone like Carl Icahn will acquire the minimum stake in the company to put up a slate of directors and force a shareholder vote. Typically management will not go through the process unless they have a hope of retaining control. There are poison pills and different classes of shares and other stuff that complicate this process, but roughly that is how it works. I can’t remember a case where something like this might have happened in India. Proxy fights in India are typically between one industrialist and his brother, not with shareholders at large.
Even if nothing illegal was done so far, can the shareholders sue the board for gross negligence? After all, they have lost 40% of the value of their shares because their actions. That’s a lot of money.
Should the independent directors have resigned or should they have stuck around and fixed things? Now the Rajus have untrammeled control over the board and the company. But I guess they (the directors) need to look out for themselves first.
Has any government official or SEBI official issued any statement on this matter so far? I guess they think that nothing illegal has happened so far, so why should they. But make no mistake. Investors outside the US are watching this very, very closely. It’ll be bad if the Rajus get away with this. It will be far worse if the concerned authorities do not do a mea culpa on this and then quickly act to strengthen shareholder rights. Think about this, when your stock market is 60% down from its peaks and every institutional investor is looking at emerging market risk in a different light, who will want to invest in a country where the management of a company can hollow out the company and enrich themselves at the expense of the shareholders and they can do nothing but wring their hands.
6 am pacific 
The impropriety in the Satyam saga is not as much of inadequacy of regulations as it is of interpretation, application and compliance. Indian Companies Act and Clause 43 of the LAsting Agreement with stock exchanges stipulate the appointment of Independent directors and the objective behind such appointment is well known to all. Still if the directors compromise their independence once they huddle inside the Board room and suck up to the management that showers them with liberal fee, commissions and consulting offers (and god knows what else – a Duplex apartment in MAYTAS building in the heart of the city or is it a floor in its office complex?), there is no point in blaming it on regulators. Regulators can’t be expected to run chastity tests, after all š
And this is not just in India. US had its much condemned SOX Act and strict Audit regulations despite which excessive leverages got perpetrated over the years and the mortgage crisis happened. And never forgive the institutional investors that were in the majority and remained passive all along (they never asked why Satyam kept so much of liquidity in current accounts, don’t they get annual balance sheets, why didn
t they ask for larger payout of dividends?) and wake up one day to realize that management is wiping out the treasury of $1.6 billion!
They pay for their sloth! They are not puritans either…
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Sorry, it’s Listing Agreement (not Lasting Agreement as it came out :-)…satirically, I suppose!
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Krishna,
I do think that there are places where the regulation and disclosure in India needs to be tightened. One is in shareholder rights. Two is in insider trading.
Independent directors are nominated by the CEO and cannot be considered to be truly independent anywhere. Michael Eisner had the principal of his child’s school on the board of Disney. Which is exactly why shareholders should be able to present a slate of directors and force a shareholder vote.
A promoter pledging his shares and not having to disclose it is an error, an omission in the rules concerning insider trading and should be plugged.
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Basab,
Promoters can hold stakes that are subject to `lock-in’ upto a minimum prescribed limit for a stipulated period of time (depending upon the age of the company and the recency of its issue) and the listing agreement and SEBI regulations already impose restrictions to the effect that *no lien* can be established on these shares in favor of any third party that are subject to lock-in. Companies Act also prescribes that promoters cannot have any lien on shares subject to lock-in. For shares that are held in excess of the lock-in mandates (treasury/portfolio stock) and that portion of locked-in shares that have already outlived the mandatory period are allowed to be created a lien on, either by way of pledge or collateral. That is permitted since otherwise the principle behind `joint-stock’ ownership of corporations and its various freedoms granted by the statute (company is an artificial person created by law and has a perpetual existence that can outlive its promoters, managements or shareholders as opposed to partnerships where the firm is not an independent entity separate from its partners) would be laid redundant.
Still I would say the spirit of the law is important than its letter and conscientious promoters (oxymoron, perhaps) should declare creation of third party lien on them. But if it is mandated by regulations, it will entice the promoters to invest their surplus funds in stocks of other companies (rendering their own stocks illiquid that flies in the face of liquidity logic behind listed corporations) to take advantage of favorable price movements during bullish phases.
As for insider trading, there are periodical declarations to be made under SEBI’s SAST regulations as and when the promoters or key managerial personnel acquire or divest their company stock. As such if the promoters stock meet with margin calls and are eventually liquidated by lenders, it amounts to divestment and is therefore required to be declared forthwith – even under existing laws.
In India, in fact we need less regulations, lesser bureaucracy. That will attract overseas investments. Why do people route funds thro tax havens, hedge funds and other opaque investment vehicles? Lax laws, liberal tax regimes, least transparency. In times of recession like we have, Governments should create space for investors to free up their funds if the intention is to expand the risk appetite. I don’t buy the argument that intensive legislation will lead to extensive compliance. In fact, it’s the other way round.
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Krishna,
These shares were not locked-in shares. The issue is about disclosure. Insiders need to be able to buy or sell their shares as per rules of black out periods etc. but with proper disclosure. Pledging shares should also be included in the list of transactions that require insiders to report the transaction. Please see Prof Jayanth Varma’s post on this matter indicating that current regulations do not cover pledging of shares. http://www.iimahd.ernet.in/~jrvarma/blog/index.cgi/Y2008/Satyam-pledges.html
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With due respects to the author you mentioned, provision for formal disclosure of pledge, hypothecation or mortgage already exists under Indian laws. Pledging of shares is required to be disclosed under the Companies Act, 1956 under "registration of charges" in the prescribed form that is to be signed by both the lender and the borrower. This is a public document available for inspection at Registrar of Companies concerned. So the issue, I insist is one of `lack of vigilance' excercised by institutional shareholders and not need for another new law.
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Here's a breaking story Satyam heads towards disaster with Rs 8,000 cr fraud" on the scandal.
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Latest news. Now the saga has gone over to the realm of illegality .
Seems assets were mis-stated to the tune of $1Billion!!
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