:: Nitish Sengupta

How Satyam can be sundaram

Nitish Sengupta

The Satyam Computer Services imbroglio must be considered as the biggest corporate fraud in India’s corporate history, much bigger than the Dalmia Jain probe in the early 1950s, the Haridas Mundhra event in the late 1950s and the Harshad Mehta episode.

Satyam chairman Ramalinga Raju’s confession that he had been inflating figures of the company’s profits for several years left many with the question of why this was not detected earlier. What was the company’s finance director doing? Obviously, he and other top finance managers, were in collusion. But what were the independent directors doing? How could they simply accept the figures given by the managing director, year after year, with such rare naivety? Special responsibility for this scam rests on the members of the audit committee of the board who were duty-bound to scrutinise the company’s books of accounts and to certify them to the board. For years, it seems, this task was treated as routine. Finally, what were the company’s auditors doing all these years? It was their duty to examine preliminary profit and expenditure figures before certifying the final figures.

Clearly, it wasn’t just one man’s greed. All these people cannot get away from the charge of direct involvement in this great fraud that was perpetrated on shareholders for many years.

And this case is all the more shocking as Satyam is listed on the New York Stock Exchange, and has a large number of international clients. Are we to, therefore, conclude that all this talk of corporate governance is fluff? The authorities concerned, like the department of company affairs and Sebi, should immediate steps to ensure that this doesn’t get repeated.

The simple explanation is that greed made them fudge the company’s figures for years. This fudging of accounts led to an abnormal rise in the quoted share prices for quite some time. And it has now come to light that the promoters had been selling their shares in large chunks, with the result that their shareholding is now down to around four per cent. What happened to the huge sums which the promoters amassed by selling their shares?

It has also been reported that during the same period Mr Raju and his family members bought several acres of land, not just in Hyderabad but also in other towns of Andhra Pradesh, thereby raising the price of land abnormally and hoping to make further huge profits thereafter. Unlike other IT leaders, Mr Raju’s interest in land remained his primary motivator.

The Satyam scandal has seriously dented corporate India’s image, built over several decades and sanctified by Friedman’s The World is Flat, among others. Much responsibility, therefore, rests with leaders of India Inc to come forward and offer their help in assuring the world that Satyam was an exception, not the rule. Incidentally, Satyam, in its fall, dragged Maytas Infrastructure along. The latter had bagged many lucrative contracts, including the Hyderabad Metro. The future of all the these contracts is now uncertain as "Raju & Co" were also the promoters of this company.

Where do we go from here? While investigating agencies are active, the corporate affairs ministry was the first to act. Hats off to minister Prem Chand Gupta who showed rare initiative, speed and focus in dissolving the company’s board and appointing a three-member board of well-known professionals with unimpeachable credentials. It is now up to them to start from scratch — their main asset being the 53,000 employees worldwide and the goodwill that Satyam enjoys despite severe denting.

Prima facie, it has been established that of the cash and bank-balance of Rs 5,361 crores, as shown in the balancesheet of September 30, 2008, Rs 5,004 crores is fictitious. The balance available with them is thus Rs 347 crores, plus the company’s goodwill and the on-going contracts and business responsibility. All efforts should be made to carry on with the company’s business as usual. It is also possible that some major shareholders, as at present, might be willing to take interest in the company’s management.

Before the arrest of Mr Raju and reconstitution of the company’s board, Satyam was reported to be in talks with Bangalore-based MindTree and Delhi’s HCL Technologies for cashless merger. A merger between Satyam and HCL, or between Satyam and MindTree, could create India’s largest software company. Whether they agree to this or not is an open question.

There is also the possibility that Larsen & Toubro, now the largest shareholders in the company, may be persuaded to take interest in the company’s management. Larsen & Toubro, which has a subsidiary in software industry, has a reputation for good management. If Larsen & Toubro is interested in taking over the management of Satyam, that could be a way out. It may be necessary to persuade the employees to agree to reduced pay scales. It is doubtful if the company, with its meagre cash balance, can afford to pay salaries of its 53,000 employees, especially the top management with their fancy pay scales. In any case, our best wishes to the three wise men who have been entrusted with shouldering this important responsibility. Also, our congratulations to corporate affairs Prem Chand Gupta for setting a record by his very timely and very positive action.

Nitish Sengupta, an academic and an author, is a former Member of Parliament and a former secretary to the Government of India