It is easy to see why shareholders were convinced the Board did not even have a fig leaf of a cover: Both the companies that Satyam planned to acquire are run by sons of Mr Ramalinga Raju.

Satyam Computer’s announcement of an acquisition, subsequently called off within a day, is not so much an example of aggrandising behaviour by the promoter group as a manifestation of cavalier attitude, bordering on contempt, of the company’s Board of Directors towards its shareholders. The investing public, and not just the existing shareholders, would be justified in wondering if the Board’s decision to embark on a diversification that would have taxed its managerial skills to the hilt, was at all born out of careful consideration of circumstances. If that was indeed the case, then the least that one would have expected of them would have been to put up a spirited defence of their conviction with arguments and facts.

It is easy to see why shareholders were convinced the Board did not even have a fig leaf of a cover: Both the companies that Satyam planned to acquire are run by sons of Mr Ramalinga Raju, and no one was naïve to buy the argument that this transaction was strictly concluded on an arm’s length basis. 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.

The company spoke of foraying into real estate and construction to de-risk the original software business. These two new businesses may well be inherently profitable in the long run and investing in them at a time when valuations are attractive may be the right thing to do. There are equally compelling grounds to hold the exact opposite view though. After all, there is as yet no clarity on the software industry’s fortunes in the face of a prolonged recession in the West. Throwing practically the entire cash hoard of a company into an unrelated diversification in these times is perhaps not the best use for such surplus. The absence of transparency in the decision making process suggests that these perhaps were compelling circumstances for the target companies in the acquisition rather than for the acquirer. Whatever be the circumstances, a false market had been created in the shares/depository receipts of the company for howsoever a short time that was entirely avoidable.

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(This article was published in the Business Line print edition dated December 18, 2008)
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