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Continuing from the previous Post, Pathik sends me the following on Clause 49 and the Sarbanes Oxley Act;

The Sarbanes Oxley Act was primarily introduced subsequent to the Enron Scandal in order to regulate corporate governance in the US. India however failed to learn from US’s mistakes and did not introduce similar measures in India. The SEBI did introduce Clause 49 of the listing agreement requiring more disclosures from the Company. However, we are aware that Satyam managed to pull off a fraud of such magnitude despite formally complying with all the requirements under Clause 49 as well as other SEBI regulations such as the DIP Guidelines and so forth.

One also finds the need to reassess the liabilities and responsibilities of auditors under the Indian legal regime. The very fact that a member of the elite Big Four, Pricewaterhouse Coopers was caught completely unawares of the reality as it existed distinct from that portrayed in Satyam’s books of accounts indicates the need for more stringent checks on the role of auditors and to make them more accountable.

It is indeed encouraging that SEBI has already initiated steps towards strengthening the laws pertaining to Corporate Governance with the SEBI Committee on Disclosures and Accounting Standards (SCODA) met in Mumbai on January 9, 2009 and  after detailed deliberations, the SCODA recommended that a peer review of the working papers (relating to financial statements of listed entities) of auditors would be conducted in respect of the companies constituting the NSE – Nifty 50 and the BSE Sensex. Such a review would be in relation to the last quarterly results and the last audited annual financial results. For this purpose, a panel of auditors would be prepared by SEBI. This exercise would be taken up following the publication of 3rd quarter results and is expected to be completed by end of February 2009. This recommendation has been accepted by SEBI. In light of the Satyam fiasco, SEBI needs to take a re-look at the mandatory requirements prescribed and set up more checks on the lines of the Sarbanes Oxley Act. Hopefully, the Companies Bill, 2008, shall be passed by the Parliament soon and provide us with a solution to avoid frauds of such magnitude, which end up tarnishing India’s corporate image in todays era of globalization.

The Times of India reports of a teacher in a village near Ludhiana losing upto 15 lakhs as a result of the Satyam debacle. Being shocked by the loss, he was about to commit suicide when he was stopped.

Im pretty sure that he is not the only one who has been affected by India’s biggest corporate scandal and that there are millions more who can be placed in his shoes.

I am also told from close friends of mine and Mr. Raju’s family that Ramalinga Raju is not a bad person as he is made out to be by the media. My sympathies are for him if this is true. Maybe its just the greed for money that has compelled him to engage in this seemingly fraudulent transaction.

Going further, newspapers report that the ‘scandal’ re-emphasies the need for independent directors to be appointed to companies. I’d like to correct a lot of these authors in this area. Two years ago, the Securities and Exchange Board of India amended its listing agreement to insert a certain Clause 49. This pertains to corporate governance. One key provision of this amendment is that at least one-third of the board must consist of independent directors. Other measures include stronger audit standards and better financial disclosure norms.

I am told that this amendment comes from the Narayana Murthy Report on the need for independent directors and corporate governance.

Let me get this clear to the readers, Satyam has followed all the guidelines relating to the need for independent directors as prescribed by this clause. Legal compliance with this provision then is not an issue. The problem arises from fraudulent transactions that Mr. Raju has engaged in; as evident from his letter and the aspect of insider trading. The SEBI has flown down a team to investigate this aspect and the Institute for Chartered Accountants of India (ICAI) has given a show cause notice to Price Waterhouse Coopers for forged audit reports.

In light of Mr. Raju’s arrest, It would be better if ways are found to protect the investors rather than focusing on the downfall of Mr. Raju though.

I would like the readers to read India Corporate Law and Law and Other Things on the issue. Both the blogs give detailed insights to the problem at hand and the consequences.

As the year is fizzling down to an economically weak finale, Satyam Computers has found itself in a deep mire, with the Maytas acquisition deal coming under strict scrutiny.  In an unrelated development, the World Bank later announced its intention to snap all business and development ties with Satyam following allegations of data theft in one of the Bank’s projects managed by the latter.

Many might be wondering why this seemingly plain-vanilla private sector transaction is figuring in a blog that addresses larger policy issues. However, the Satyam-Maytas deal throws critical aspects of efficient and ethical corporate governance into relief. Before I venture to speculate on the  Big Picture, here’s a primer on what really happened.

On December 16,  Satyam Computer Services, India’s fourth largest IT services provider, proposed to acquire Maytas Properties and 51 per cent stake in Maytas Infrastructure for a consideration of 8,000 Cr (Approx.). The deal, which surprised analysts and shareholders alike, was held out as a plan to ‘de-risk the core IT Business’ in the face of the ongoing economic downturn. On the other hand, it was no State secret that the Maytas (a palindrome for Satyam!) Group was controlled by the sons of Mr. Ramalinga Raju, Satyam’s Chairman. The proposal and its justification raised many eyebrows as the financial crunch was yet to show a perceivable impact on the software/IT industry.

Well, eyebrows were pretty much the only things raised by this deal, because every other financial index of Satyam plummeted. The next day, the ADR (American Depository Receipts) of Satyam Computer in the NYSE tumbled by over 50 per cent. In India, the scene was less dramatic, but the stock continued to be flat, indicating little interest from the shareholders. Consequently, Satyam was forced to call off the deal, all within a span of 24 hours. Mr. Raju said,

We have been surprised by the market reaction to this decision even though we were quite positive about the merits of the acquisition.

Thus, the shareholders and investors in the company were quick to shift gears into activist mode, evoking an incident hitherto unseen in Indian corporate history. From the outset, it was clear that the deal had thrown caution to the winds, materializing without any respect to shareholder sentiments. Despite the enormity of change proposed through diversification, Satyam failed to factor in public opinion on the matter that, prima facie, seems like a family affair.  The appalling lack of transparency has forced SEBI and the Ministry of Corporate Affairs to take note of the matter and the watchdogs will certainly examining the nuances of this deal.

The issue brings the role of independent directors of a Company to the forefront; their opinion on such matters is expected to echo the views of a rational shareholder and not merely the interests of the promoter.
Business Line has an exceptional piece on the matter and the author goes on to say,

Questions will be raised rightly about the role of independent directors in issues such as this. The standards of corporate governance were sought to be raised when the stock market regulator insisted that independent directors should be in the majority on the boards of listed companies. Companies have in general complied with the rules, but the nagging doubt was whether independent directors appointed by a body of shareholders dominated by promoter can at all remain independent. The Satyam saga has brought the issue to the fore yet again.

Transparency in corporate governance is crucial as India is opening her markets to major foreign players.  If our domestic  segments cannot set an ethical example to its shareholders and investors, retail and institutional confidence is going to take a hit. Lifting the corporate veil in such cases is integral to sustain the company’s reputation and shareholder trust.

For the average shareholder/investor, the Satyam fiasco presents yet another reminder of the need to be activist and informed. The economic crisis might generate a number of transactions which are intended to be a quick-draw shortcut to ease monetary repercussions. Nonetheless, those at the receiving end have to be cautious, adopting a rational approach to the ‘lucrative’ deals that present themselves. The $50 billion Madoff fraud has left investors reeling; corporate accountability must be preserved to ensure a fair disposition of rights.