Satyam’s options are not many

Can Satyam continue to function under a tainted board? Satyam’s board was already a thinly manned one, with just five members. Two are the promoters B Ramalinga Raju and his brother B Rama Raju who have given their resignations. Ram Mynampati is the senior executive on the board. He has been with Satyam since 1999. The company website says he is the president, commercial and healthcare, since October 2002. It is very difficult to imagine him as the interim CEO, as Raju’s letter proposes, in a situation where trust in its board has evaporated. The remaining two are independent directors TR Prasad and VS Raju.

There seems little option but for this board to quit immediately. The situation calls for the government, senior industry officials (including veteran troubleshooters) and institutional investors to cobble together a new team. This will act as a caretaker board to manage the day to day functioning. It will ensure that investigating teams have full access to the books and information and on the other hand, evaluate various options for Satyam. The person in charge has to be an outsider, someone who has nothing to lose from the revelations that are likely to come out from the various investigations that will be launched.

What will restatement of its financials achieve?
There is no official word on this but it is widely believed that Satyam will be asked to restate its financials. What is needed is a forensic investigation into its financials, which may have to go back as far as its inception. Even if that is not possible it will stretch back for a long period of time. This will achieve several objectives. One, it will help pinpoint which levels of Satyam’s management participated or were aware of this fraud. It is unlikely that the promoters could have pulled this off without the knowledge or connivance of senior officials. This will help establish responsibility. Two, restatement of financials will mean that Satyam’s true picture will have to be created for investors.

This will be a painful process and is seldom done in India. The practice so far has been to make adjustments in the current year’s performance, for any changes in accounting policies or for corrections in accounting norms in previous years. A restatement, in the true sense, will mean you will see a corrected set of numbers for FY08 and the years before that. That is an extensive exercise which may take months to complete. At the end, what will happen is that Satyam’s revenues and profits for FY08 and FY09 will be stripped off all the padding. The bigger impact will be on the balance sheet. Its reserves and surplus will fall to the extent profits were inflated, and the cash balance will fall significantly Other balance sheet items too will get affected.

If the debt of Rs 1,230 crore is established as Satyam’s liability, then its gearing will go out of whack. What are the strategic options open to Satyam? In the days of old, the government would have stepped in and nationalised Satyam, to save India’s pride. That is not an option now. It does not own CMC either, or it could have merged the company with it, citing public interest. That kind of activity is seen even now, with listed public sector enterprises getting coaxed to buy out troubled government companies.

No investor will be willing to invest in Satyam’s equity at this stage. With no clue about its true financial position, valuation will not be possible till the restatement of financials is completed. It seems very unlikely that any listed IT company will go to its shareholders with a proposal to acquire Satyam at this stage. That largely leaves unlisted companies and perhaps private equity funds, as potential investors. A possible structure is fund infusion in the form of quasi debt, which will be converted into equity at a later stage, at a valuation to be determined after restatement of financials.

A good interim team, with a leader who can inspire confidence, will help in retaining its top employees and customers. This is of utmost importance at this stage. A clutch of institutional investors own about 62% of the equity capital of Satyam and about 19% is with ADR-holders. They need to form a core group, headed by perhaps the largest and mutually acceptable investor, who will speak for this group. Their size should be enough for them to wrest control of the board and with tacit approval of the government and regulator, appoint an interim board to manage Satyam.

This is the most critical aspect. If these investors do not co-operate then a concerted effort to bring the Satyam promoters to task and get the company back on the rails will be difficult. If these institutional investors have not come out openly to find a solution, the reasons are not hard to find. The remaining retail investors, owning about 10% , are going to be an angry lot. They will demand to be bailed out and any tough haircut proposed by institutional investors will be unpalatable.

Then there are the estimated 50,000-odd employees of Satyam. If they stand to lose their jobs, in today’s world, you can expect protest marches to be held in cities where its development centres are present; most metros would qualify. If the sight of a few hundred sacked Jet staffers was enough to scare the government, imagine the impact if thousands of Satyam employees take to the streets. In an election year, that is a strict no-no. Unless the government plays ball, no one will stick their necks out on this one.

What role will the regulators play?

In the financial markets, India suffers from not having a single authority like the US SEC or the UK’s FSA to investigate such frauds. So, we have Sebi, RBI, IRDA and the Ministry of Company Affairs. In the past, co-ordinated efforts between these agencies have been few and even then, not very smooth. The Satyam case will need a concerted effort between Sebi, RBI and the MCA.

It works like this: Satyam’s accounts have been falsified, that is a violation of company law, so the government comes into place. But it also means that the corporate governance report in the annual report contains misstatements and so do the interim financial results reported to the stock exchanges. And then there is the issue of whether there was any selling of shares or irregularities in the process of pledging of shares. That’s where Sebi comes in. Satyam’s balance sheet has a big hole in its bank balance, which means either it had forged bank statements, assuming the auditor did actually check them, or the banks accommodated Satyam in some way to show an inflated cash position. The RBI is needed for that part of the investigation. A criminal investigation may see the economic offences wing of the police department too swing into action.

What will the roadmap to a recovery look like?
• Imperative is the appointment of an interim team to man the company. If customers cancel orders or if the flow of orders stops it will be curtains for the company.
• Next is the investigation to establish wrongdoing among Satyam’s senior management. All these people need to be fired. That will improve perception among customers; they don’t want to be dealing with crooks.
• Restatement of its financial statements comes next. This will establish whether Satyam can stand on its own feet, as in meet expenses and pay liabilities out of existing income and resources. This may also involve a capital restructuring exercise to clean up the balance sheet.
• Most likely, the company will have to take a hard look at its headcount, what with the promoter’s letter stating that they have been hiring to make it appear that the inflated numbers appear realistic. Some firing seems inevitable.
• Finally, Satyam will need a new name and perhaps a new house to reside in. It could either be with a private equity investor or after initial resurrection, sold to an IT company.

Where does the investor stand?

Institutional investors have egg on their faces but they will recover from this, a little wiser hopefully. Retail investors, perhaps, will suffer the most. Their shares are trading at a fraction of what it traded yesterday, and will continue to decline. If the restatement of financials reveals a totally hollowed out company, they have little hope. If they decide to stay on, hoping for a happy ending, they have a very long wait ahead of them before this gets resolved. A strategic investor may seem like a blessing but whoever comes in may restructure the company in such a manner, that may benefit the company, but not existing investors. The new year has begun on an inauspicious note for Satyam’s investors. Updated with corrected public shareholding.

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