Corporate Law Assignment Saurabh Patel

Roll No. 99

SATYAM A CASE STUDY OF CORPORATE GOVERNANCE

CORPORATE GOVERNANCE

Corporate Governance is a system of structuring, operating and

controlling a company with a view to achieve long term strategic goals to
satisfy shareholders, creditors, customers and suppliers, and complying
with legal and regulatory requirements, apart from environmental and
local community needs.

In the wake Satyam Scandal this concept has assumed significance of a

never before proportion. In the Satyam fiasco the main issues pertaining
to Corporate Governance are:-

Role of Board of Directors

An independent and effective board is entrusted with the
responsibility of guiding and monitoring the activities of
Management to ensure safeguarding of interests of all the
stakeholders.

Satyam
Since Satyam had an Executive Director as its Chairman. At least
half its board should have comprised of Independent Directors.
Of the total of 10 Directors Satyam had 6 Independent Directors.

Ideally Non-Executive Directors exercise independent judgment in

matters of corporate practices and performance.

In reality Satyam was very much a promoter-controlled, owner-

driven paradigm. In a country largely indifferent to Corporate
Governance practices Independent Directors are appointed at
the whims of CEO.
 Corporate Law Assignment

DIRECTORS AT SATYAM

Director Category Designation Meetings Meetings Member

(Held) (Attended) in other
Boards
Ramalinga Executive Chairman 4 4 2
Raju
Rama Raju Executive Managing 4 4 3
Director
Ram Whole Time President & 4 2 3
Mynampati Employment Whole-time
Director
V P Rama Independent Director 4 3 3
Rao Non Exec
Mangalam Independent Director 4 3 1
Srinivasan Non Exec
Krishna G Non Exec Director 4 3 3
Palepu
Vinod K Independent Director 4 3 7
Dham Non Exec
Rammohan Independent Director 4 4 5
Rao Non Exec
T R Prasad ditto Director - - -
V S Raju ditto Director - - -

INFERENCE
From the table above its quite selfevident that none of the
Independent Directors barring one had attended all the
meetings. Moreover, all the Independent Directors form part of
Board of another company also. This makes it almost impossible
for them to exercise due diligence while monitoring the work of
management.

Despite the concept of having Independent Non Executive

Directors being a well thought out step in the right direction by
SEBI. It did not work out practically.

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DIRECTOR’S REMUNERATION

IDEALLY
According to the SEBI Code on Corporate Governance, the remuneration
of Non-Executive Directors shall be decided by the board of directors.

The code also specifies that full disclosure should be made regarding the
elements of remuneration package, incentives, service contracts and
Stock Options.

SATYAM

Particulars V P Rama Ram Krishna G Vinod K Rammohan

Rao Mynampati Palepu Dham Rao
Commission 12,00,000 12,00,000 12,00,000 12,00,000 12,00,000
Sitting Fee 1,30,000 80,000 30,000 40,000 1,50,000
Prof. Fee - - 87,18,000 - -
TOTAL (Rs.) 13,30,000 12,80,000 99,48,000 12,40,000 13,50,000

INFERENCE
It is often argued that the meagre remuneration of Independent directors
doesn’t impel them enough to reasonably dedicate themselves to the
cause of stakeholders of the company.
But even a cursory look at the table above is enough to make it clear
that a person drawing Rs. One Crore a year would not turn a blind eye
towards the matters of concern. Although, the manner in which Raju
framed his confession giving clean chit to the Independent directors has
made it impossible to nail any one of them.

BUT STILL

Says Andrew Holland, CEO, equities, Ambit Capital,

"Independent directors should also (in addition to the management) be

held accountable for board decisions and audit-related compliance
practices."

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AUDIT COMITTEE
DRAFT BILL COMPANIES ACT 1997

Audit committee can improve the quality of financial reporting by reviewing

the financial statements, creating a climate of discipline and control and
reducing the oppurtunity for fraud.
It provides communication link with external auditor and strengthens the
Internal Audit Function.

SATYAM
Composition and other details
1. Mr. V P Rama Rao, Chairman
2. Dr. (Mrs.) Mangalam Srinivasan, Member
3. Prof. M Rammohan Rao, Member

During the year, the Audit committee met 8 times. Mr. V P Rama Rao
attended seven meetings, Dr. (Mrs.) Mangalam Srinivasan attended four
meetings and Prof. M Rammohan Rao attended all the meetings.
The meetings of the Audit committee were attended by the Head of Finance,
Head of Internal Audit and Statutory Auditors as invitees. The quarterly and
annual audited financial statements of the Company were reviewed by the
Audit committee before consideration and approval by the Board of
directors. The Audit committee reviewed the adequacy of internal control
systems and internal audit reports and their compliance thereof.

INFERENCE
Raju confessed that Satyam's balance sheet as of the September 30, 2008,
carried inflated figures for cash and bank balances of INR 5,040 crore (as
against INR 5,361 crore reflected in the books). It carried an accrued
interest of INR 376 crore which was non-existent. An understated liability of
INR 1,230 crore on account of funds was arranged by himself. An overstated
debtors' position of INR 490 crore (as against INR 2,651 crore in the books).
He claimed that none of the board members had any knowledge of the
situation in which the company was placed.

While all this seems highly unlikely in the wake of a functioning Audit
Committee. This throws open question marks not only on diligence but on the
very purpose of Audit Committee.

The extent of negligience on their part was such that they failed to verify the
existence cash balance. Such a scenario begs for greater transparency and
accountability in the dealings.

Says N K Jain, secretary and CEO, Institute of Company Secretaries of

India.

"Professionals should be made accountable and consequences should follow if

there are any deficiencies and slip-ups,"

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SHARE HOLDER’S COMMITTEE

SEBI’s CODE

SEBI’s Code for Corporate Governance provides for constitution

ofshareholder’s committee under the chairmanship of a non-executive
director to ensure that the grievances of shareholders are properly
received. And solved.

SATYAM
In 2008, Satyam attempted to acquire two infrastructure companies
founded by family members of company founder Ramalinga Raju -
Maytas Infrastructure andMaytas Properties ) - for $1.6 billion, despite
concerns raised by independent board directors. Both companies are
owned by Raju's sons. All this was done without consent of shareholders.
Satyam's investors lost about INR 3,400 crore in the related panic
selling. The USD $1.6 billion (INR 8,000 crore) acquisition was met with
skepticism as Satyam's shares fell 55% on the New York Stock
Exchange. Three members of the board of directors resigned on
Monday 29th Dec 2008.

RAMIFICATIONS
Institutional investors have the tools, bandwidth and clout to extract
information and play an activist role (as had happened in Satyam's
case) in ensuring that managements don't go off-track.

But the retail shareholders whose consent wasn’t even sought before Raju
went ahead with the Maytas deal are the ones who are the real
sufferers but are still indifferent about corporate governance, the
Satyam episode will probably highlight the need to weigh this aspect.

In such a scenario establishing minority shareholders' groups can also be

a positive step. Individual shareholders through these groups can
communicate with institutional shareholders for taking up their concerns
with the company's management.

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CONCLUSION

RAJU RIDING A TIGER

While the corporate governance framework in the country is seen at par

with other developed markets, the same has to be implemented in 'letter
as well as spirit.

The fact that white collar crime continues to occur, and seemingly at an
increasing rate, suggests that the expected costs do not outweigh the
expected benefits from cheating. Stronger penalties are needed.

At the end of the day, the actions at Satyam were perpetrated by one
or two individuals who simply may not have realized that the small
distortions they created in the past would lead to massive problems
today. Hopefully, creating an awareness of the large consequences of
small lies may help some to avoid this trap.

After all this is what Raju had to Say in his Confession : -

"What started as a marginal gap between actual operating profit and the
one reflected in the books of accounts continued to grow over the years . .
..
. . . . It was like riding a tiger, not knowing how to get off
without being eaten.”

***

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