Satyam, World Bank and media hype!

Satyam Another Enron! 

Satyam Computer Services Ltd. (Satyam) has recently been too much in the news for all the right and wrong reasons. Nonetheless, each new piece of information has raised more questions, leaving a lot many questions unanswered. Sitting in remote corners away from the corporate corridors, individual investors are the most confused creatures with all sorts of news items coming in quick succession. This article seeks to analyse the spate of news items from individual investor's perspective about the wrong-doings of Satyam and the severe punishment meted out to the Company by its institutional investors.
The story of Satyam started in June 1987 when it was incorporated as a private limited company at Secunderabad in Andhra Pradesh. Satyam became a public limited company in 1991. Thereafter, the company never looked back and it did have an upward graph continuously on all business parameters. Rather, the company did have a meteoric rise under the leadership of Ramalinga Raju, the founder and chairman of the company supported by Rama Raju, the co-founder and the CEO. Performance-wise Satyam claims to be “... one of the youngest IT service companies to reach US $1 billion in annual revenues”. Its revenue exceeded US$1 billion in 2006. Today Satyam is a global business and information technology services company. In its Annual Report for the year ended 31 March 2008, Satyam claims to be a global organization on the basis of the following facts:
Associates >51,000 (over 60 nationalities)
Revenues in USD >2,000,000,000 (2008 Fiscal)
Customers: 654 (Including one-third of the Fortune Global & US 500 companies)
Geographies: 63 (Number of countries)
Global Solution Centers: 31
Listings: NYSE, US and Euronext, Amsterdam, Europe in addition to BSE and NSE in India.

Like a bolt from the blue, the things at Satyam suddenly took an ugly turn on 16 December 2008 when the company announced a US$1.6 bn deal to acquire Maytas Properties and Maytas Infrastructure, companies run by Ramalinga Raju's sons B Rama Raju and Teja Raju. The business of Maytas Properties is urban infrastructure development and Maytas Infra is into infrastructure construction and asset development. The official line of argument was that the proposed take-over deal would work as a diversification to mitigate the business risk of Satyam's core business of IT services.

According to the announcement made on 16 December 2008, Satyam would have acquired 100 per cent shares of the unlisted Maytas Properties for US$1.3 bn and 51 per cent of construction firm Maytas Infra for US$300 mn. Satyam’s founder and Chairman B. Ramalinga Raju and other insiders hold 36 per cent stake in Maytas Infra and 35 per cent in Maytas Properties. As regards the funding of the proposed deal, Satyam planned to fund 75 per cent of the acquisition with cash available on its balance sheet and the rest by raising debt. Satyam planned to acquire 31 per cent in Maytas Infra from its promoters (who are also promoters of Satyam) at a price of Rs 475 a share. Satyam also planned to make an open offer for an additional 20 per cent at a price of Rs 525 a share.

Had it been a boom time in the market, the investors would not have paid any heed to this intra-group deal because such transactions are commonplace in the corporate world. But this time two factors worked against Satyam. Firstly, these are highly depressed times for capital markets and secondly, the foreign institutional investors (FIIs) have a substantial exposure to Satyam. The very fact that the FIIs have a substantial exposure to Satyam, the motives of the company were under their close scrutiny. Obviously, the Board's decision to acquire closely-related family companies angered investors. They started offloading their holdings and drove down Satyam’s American Depository Receipt (ADR) value by a record 55% on 16 December 2008, i.e., the day of announcement of the company’s plan to buy Maytas Infra and Maytas Properties. The foreign shareholders construed the deal in utter disregard of corporate governance. The FIIs found it shocking that Satyam management did not deem it appropriate to take the proposal to the so-called minority shareholders whose stake in the Company is many times more than that of the promoters.

In this context, it is revealing to have a look at the shareholding pattern at Satyam. According to a Forbes report, “large investors including Aberdeen Asset Management, Fidelity and ICICI Prudential hold roughly 60.0% of Satyam, dwarfing the 8.3% stake held by the family of the company's founder and chairman, Ramalinga Raju, and leaving the company vulnerable to a hostile takeover."
The shareholding pattern on 31 March 2008, as reported on the Company’s website, was as under:
Shareholding Pattern of Satyam Computer Services Ltd.Promoters 8.74%
Domestic Institutions 13.00% (MFs. 4.88%, Fin. Inst./Banks 0.09%, Ins. Cos. 8.03%) Foreign Institutional Investors 48.22%
Bodies Corporate 0.59%
Individuals 8.75%
NRIs, Foreign Nationals & Trusts 1.24%
Shares held by Custodians and
against which Depository Receipts
have been issued. 19.46%
TOTAL 100.00%
The latest news reports indicate that now even this 8.74 per cent holding of promoters in Satyam is questionable. It is reported that the promoters had pledged their shares to raise loans and those shares have been sold by the lenders as a part of Margin Call procedure.
When the announcement about Mytas-acquisition was made Indian markets were already closed on 16 December 2008. The next day Indian bourses also reciprocated to the price erosion on the NYSE. Satyam shares closed down by 30.22% at Rs 158.05 on 17 December 2008 touching an intraday low of Rs 153.80. It was the lowest level touched by Satyam shares in the last five years. The stock had a 52-week high of Rs 544 on 30 May 2008.

In a knee-jerk reaction, the company immediately announced withdrawal of its proposal to acquire two Maytas companies. Srinivas Vadlamani, Chief Financial Officer, Satyam Computer Services Ltd. said in a brief statement, “Based on input from our shareholders and investors, we decided to call off the Satyam-Maytas acquisition. Satyam has called this (29 December 2008) board meeting to consider the proposal for buy-back of shares.”

Soon after the Maytas fiasco, there followed a series of comments and articles by the financial news reporters, analysts, securities firms and brokerage houses condemning Satyam as the fit case of bad corporate governance. It is ironical that Satyam was awarded the Golden Peacock Global Award for Excellence for Corporate Governance in September 2008. Also, to quote from Satyam’s website, “Your Company retained its eminent position in the 2008 Investor Relations Global Rankings for the Asia, Pacific and Africa Region and won the following recognitions:
• IR Website: Top 5 in region
• Corporate Governance Practices: Top 2 in region
• Financial Disclosure Procedures: Top 5 in region; First in Technology; and First in India.”

What is more intriguing is that Satyam management did not come out with any further explanation about its two actions with regard to Maytas acquisition. The top level management at Satyam comprises the following members of the Board:

Executive Directors:
1- Ramalinga Raju, founder and chairman
2- Rama Raju, co-founder and CEO
3- Ram Mynampati, member of the board and president
Non-Executive Directors:4- Prof. Krishna G. Palepu (since resigned effective from 28 December 2008)
5- Vinod K. Dham - Independent Director (since resigned effective from 28 December 2008)
6- Prof. M. Rammohan Rao - Independent Director (since resigned)
7- T. R. Prasad - Independent Director
8- Prof. V. S. Raju - Independent Director
9- Dr. (Mrs.) Mangalam Srinivasan – Independent Director (since resigned on 26 December 2008)

Talking of corporate governance at Satyam, Prof. Krishna G. Palepu (non-executive director) offers courses on Corporate Governance at Harvard Business School. The independent director, Prof. M. Rammohan Rao, is the Dean at the eminent Indian Business School, Hyderabad. He is also a member of government's appointment committees for positions such as the RBI deputy governor, Sebi chairman and Telecom Regulatory Authority of India (Trai) chairman. Another independent director Dr. (Mrs.) Mangalam Srinivasan has held senior academic positions at the University of California at Berkeley, American University in Washington DC, and Harvard University. Similarly, Prof. V. S. Raju, independent director on Satyam’s board, is the ex-director of IIT. T R Prasad is the ex-cabinet secretary and Vinod K Dham is considered as the father of Intel's Pentium chip. With such a galaxy of non-executive/independent directors, it is really ironical that matters of corporate governance have come to such a sorry pass at Satyam!

Sensing the Maytas episode to be merely a tip of the iceberg, reporters and analysts started further digging up. It was revealed from the transaction details that the top management executives of the Company sold as many as 4,57,978 shares during the period April-December 2008. It is now any body's guess that no purchases of Satyam shares were made by the top executives during this period. The details of share sales by Satyam executives are as under:

1- Srinivas Vadlamnani- Chief Financial Officer 92,358 shares
2- Ram Mayanampati -President/member of board 80,000 shares
3- V Murali Head – Commercial & Contract Management 60,000 shares
4- Manish Mehta- Global Head - SAP 48,000 shares
5- M Pavan Kumar- Chief Technology Officer 40,000 shares
6- A S Murthy- Head – Delivery & Leadership Development 36,605 shares
7- Papani Sriram Prasad - Head – Enterprise Applications 30,500 shares
8- Hari T - Chief Marketing Officer 28,000 shares
9- G Jayaram - Company Secretary 26,015 shares
10- Kiran Cavale - Head – Business Intelligence 16,500 shares
TOTAL SHARES SOLD 4,57,978

In a news report on 23 December 2008, Mr. T R Prasad, one of the Independent Directors, was quoted “saying the board hadn’t fully signed off on the $1.6 billion, or Rs7,568-crore, valuation placed on the two companies by Satyam management.” Similarly Prof. V S Raju, another Independent Director, is also quoted saying, “There were several suggestions from the board members regarding valuation and those were to be taken up during the due diligence process, which was yet to be done,” said V.S. Raju, a former director of Indian Institute of Technology, Delhi. “Now that the deal has been called off, all such discussions are academic in nature.” However, the Company spokesperson simply commented there is no official information regarding these matters.


Meanwhile, the severest blow came to Satyam from the World Bank on 23 December 2008. In a statement the World Bank informed that it banned Satyam for eight years, alleging “improper'' benefits were given to the World Bank's employees and for failing to maintain documentation to support fees charged for its subcontractors. Consequently, next day Satyam shares were once again hammered down on the bourses. Again, Satyam management declined to comment on this news item saying it is not Satyam’s policy to comment on client- related matters.
The news about the World Bank’s ban on Satyam was reported extensively throughout the world. But the version of facts was different because every reporter has his/her own perspective of looking at the matter. For example, Financial Times from UK reported on 24 December 2008 that “the World Bank has barred India's Satyam Computer Services from doing business with it for eight years, in one of the severest penalties by a client against a large Indian outsourcing company.” However, additional inputs came from Taiwan (http://www.etaiwannews.com/) which reported on 24 December 2008, “The bank (World Bank) said it suspended relations with Satyam in February and made the decision permanent in September.”

This additional input aroused my curiosity because if the ban on Satyam related to September 2008 and February 2008, why it is being highlighted so prominently now in December 2008? I started rummaging more news reports about Satyam and the real break came through the report of IDG News Service. Unlike the FT in the UK, the Boston headquartered IDG News Service reported all the pertinent facts with regard to the World Bank statement about Satyam through its Bangalore Bureau in India on 23 December 2008. The additional input provided by the IDG News Service report was that – “And Upaid Systems Ltd., a mobile payments company, is suing Satyam on charges of fraud, forgery and breach of contract.”

What is interesting about the IDG News Report is that it invites comments from the readers and interestingly enough one reader, though anonymously, provided a clue that - “Who fact checked this because it is false . Go to http://web.worldbank.org/external/default/main?pagePK=64148989&piPK=64148984&theSitePK=84266&theSitePK=84266&contentMDK=64069844&querycontentMDK=64069700&sup_name=SATYAM&supp_country ……and see for yourself. There are many companies that have been debarred from the World Bank. Satyam is NOT one of them!” - By Anonymous on December 23, 2008, 5:12 pm.

On following this link, it is found that Satyam’s name is nowhere mentioned in the list of Debarred Firms on the World Bank’s website. All the attempts to search information about the ban on Satyam Computer Services Ltd. were met with the automated response on the screen saying 'no matching results found'. The latest addition in the World Bank’s current list of ineligible firms on its website is a Korean firm with ineligibility period from 31 July 2008 to 31 July 2012. May be the list is not updated or Satyam’s case does not fit in this category of debarred firms!

As regards Satyam’s soured business relationship with the British firm Upaid Mobiles, Upaid released a statement in London on 25 December 2008: “That Satyam would proceed with a transaction that seems so clearly designed to deplete its assets in advance of a judgement, rightfully concerns Upaid that Satyam may be willing to engage in fraudulent transfers to avoid its legal obligations.” It is pertinent to mention here that Upaid filed a lawsuit in the Texas court against Satyam in April 2007 seeking damages of at least $1 billion on the allegations of fraud, forgery, misrepresentation and breach of contract involving transfer of intellectual property rights issues. All these allegations are in the context of a project the firms jointly worked on in late 1990s when Satyam was an outsourcing vendor for Upaid.

It was on 26 December 2008 that Satyam came out publicly seeking an apology from the World Bank. It claimed that the statements by World Bank representatives to the media are inappropriate and therefore the World Bank should withdraw the statements, issue an apology for the harm done to the company due to World Bank's actions, and provide Satyam with a full explanation of the circumstances that necessitated the public statements. Satyam further advised the World Bank that it would evaluate all possible options in view of both the Bank's inappropriate public statements and its response to Satyam's requests. This delay in demanding the apology is understandable because the Company might have taken legal opinion about its line of action apart from weighing the pros and cons of client sensitivity. However, the World Bank declined to accept Satyam’s demand for apology as the Bank stood by its statement about the ban.

Another significant development on 26 December 2008 was the resignation of Dr. (Mrs.) Mangalam Srinivasan, one of the Independent Directors on Satyam's Board. Of course, in between there were reports quoting the independent directors that they were not informed about the real reasons of the World Bank’s sanctions against the Company. Subsequently, another two directors, viz. Prof. Krishna G. Palepu (non-executive director) and Vinod K. Dham (independent director) also resigned effective from 28 December 2008. And, now there is a news report that Prof. M Rammohan Rao has also resigned from the posion of Independent Director on Satyam's board.

All these media reports have raised a number of questions in the minds of individual investors:
1. If Satyam was debarred way back in February/September 2008, what prompted the World Bank to prominently highlight this fact so late in December 2008?
2. If Satyam was debarred way back in February/September 2008, why all the analysts at the brokerage firms and financial reporters were silent till 23 December 2008 about the far reaching consequences on the fortunes of Satyam because of the World Bank's action against Satyam?
3. Whether the timing of this announcement by the World Bank in December 2008 was engineered to put Satyam in discomfiture, particularly in the wake of Maytas fiasco?
4. Whether the World Bank was prompted to issue such a damaging statement in December 2008 at the behest of vested interests?
5. Why Satyam was silent till 26 December 2008 about such a disparaging statement of the World Bank against it? Was it merely due to consideration of straining relations with an important client like the World Bank?
6. Why the independent directors chose to remain silent about the Maytas fiasco and the World Bank episode till these matters were ferociously pursued by the media in the second half of December 2008?
7. Why all of a sudden the management decided to call a Board meeting on 29 December 2008 for considering buy back of shares?
8. If the promoter stake was reduced to only 8.74%, why the FIIs with higher holdings did not ask for seats on Satyam’s Board?
9. It is reported that the Board meeting scheduled on 29 December 2008 has been postponed to 10 January. In a crisis-ridden situation like this, is it not appropriate to hold a Board meeting immediately and discuss strategies to control the damage to the Company’s reputation?
10. What is the role of independent directors - whether the independent directors can really be independent and vigilant?

Evidently, there are a lot many unanswered questions than what has been fed by the analysts/media to the individual investor community.
As per latest reports, the institutional investors are in search of a suitor who can take over Satyam. If materialized, it would be a sort of record in the Indian corporate history - a company, founded and fostered by a family is forced to parts its ways with the founder promoters at the instance of outsider shareholders! Looking to the meager and questionable stake of founder promoters (8.74%), there should be no surprise if there is a change in the management of Satyam!