B Ramlinga Raju, Chairman of Satyam Computer Services had announced that Satyam will acquire stake in 2 companies for $ 1.6 bn i.e 100%stake in Matyas Properties for $ 1.3 bn,while 51% in Matyas Infrastructure for $300 mn. The Chairman said “The business model of IT services has become riskier and depends on the export market and currency fluctuations. Rather then buying another IT asset, we decided to de-risk and diversify”. The board of directors had approved the proposal and then it was been passed, but the shareholders reacted by withdrawing their money, which lead to fall in prices of the shares. Satyam ADR is listed on NASDAQ (U.S Stock Market). So after the announcement was made, the prices ofSatyam fell down by 55% @ Nasdaq, but later it recovered as the company called out the deal. The unfortunate part is that they didn’t had any plan B prepared if the proposal fails as said by V Srinivas CFO, Satyam Computers.

The chairman has a stake of 8.6% in Satyam, 35% in Matyas Properties and 36% in Matyas Infrastructure, while his son Rama Raju Jr., is the promoter of Matyas Properties and hiselder son Teja Raju is the vice president @ Matyas Infra. The Matyas stocksalso fell by 25% on the same day, which resulted in the family a loss of nearlyRs 597 crores in a single day.

CORPORATE GOVERNANCE

The shareholders said that they should have been asked before taking such a hasty decision. Questions have been raised on Satyam regarding its corporate governance. Satyam has won several corporate governance awards in the previous years. The shareholders said that the Chairman who has just 8.6% stake in Satyam should have asked the shareholders first and then only make decisions.

Let’s take law into consideration and see the overall picture. According to Sec 372 A of Companies Act 1965, “It empowers a board tomake any investment without passing a special resolution by the shareholders if the value is either 60% of the aggregate of the paid up capital & free reserves or 100% of its free reserves, whichever is more”. According to Edelweiss Securities report, which states that 60% of the aggregate of company’s paid up capital and it’s free reserves stood @ $ 1 bn, while 100 % of it’s free reserves stood @ $ 1.63 bn”. Now if you see the deal which was worth$ 1.6 bn which is under the stipulated limits of $ 1.63 bn. So if you take law into consideration, it’s well within the stipulated limits.

The only question which still remains unanswered is which company did the valuation for Matyas Properties and Matyas Infra. The Chairman said one of the Big four auditing firms i.e PwC, E&Y, Deloitte and KPMG did the valuations, but when EconomicTimes asked all the four firms denied doing the valuations. So now stands a question on corporate governance, because the objective of any company is to increase shareholder’s wealth, but this case is surely value destruction, asthe Chairman has overvalued the 2 companies even in recessionary markets wherereal estate sector is badly affected.

QUESTIONS TO BE ASKED TO THE CHAIRMAN AND BODs

1. Why the decision wasn’t announced taking into confidence all the stakeholders of the company?

2. Satyam has a cash file of $ 1.2 bn, which was been completely used for acquisition. In turbulent times, why didn't the company keep cash for uncertainties and raise debt.

3. If you wanted to diversify why only these companies as you have many big companies in this sector and if this company then why both at the same time?

4. Why the name of the auditing firm who valued these companies has not been revealed to the shareholders?

5. Why didn’t any of the Board of Directors including the independent directors reacted to the proposal?

6. Why would investors want the company to diversify, when they themselves have an option to diversify by purchasing shares of real estate companies?

7. Does Satyam follow any ethics when they do business?

It’s difficult for a company to come out of real estate sector if it wants to as it can't change the business model overnight, but for an investor he can come out easily by selling the shares

Satyam has been majorly impacted, when World Bank banned Satyam from providing software services to the financial institutes for 8 years due to alleged malpractices including bribery. It started providing IT services to World Bank in 2003. Satyam’s credibility is at stake. They tried to increase the shareholder’s wealth by buy backing the shares. The management has to take hard and fast actions to overcome this problem as investor’s have lost confidence in the company.