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16/12: The plight of two Rajus

C H Prashanth Reddy in Hyderabad | December 18, 2008 09:54 IST

December 16, 2008 is a day two high-profile corporate honchos from Andhra Pradesh will not forget in a hurry.

It was on this day when the head of the Rs 12,500-crore (Rs 125 billion) Nagarjuna Group, K S Raju, was sent to jail on judicial remand for a fortnight for defaulting on repayment of deposits collected from the public.

The same day, another pioneering industrialist from the state, B Ramalinga Raju, announced that the country's fourth largest software services provider -- Satyam Computer Services [Get Quote] -- will acquire Maytas Infra and Maytas Properties for Rs 7,680 crore (Rs 76.80 billion).

Within 24 hours, Raju had to call off these acquisitions following strong opposition from investors and fund managers.

In the process, Satyam's share value plunged by nearly 30 per cent with the company losing the confidence of its shareholders.

The issue of flouting corporate governance norms also cropped up, more so with Raju's two sons sitting on the boards of the two Maytas firms and Raju and other promoters of Satyam having only 8.74 per cent shareholding in the company. The public shareholding in Satyam, including that of FIIs and FIs, is 71.80 per cent.

Incidentally, both K S Raju and Ramalinga Raju have their ancestral roots in the two fertile Godavari districts of Andhra Pradesh, which are considered to be the rice bowl of India. Both their forefathers also have the same agricultural background.

K S Raju is the only son of K V K Raju, a first generation industrialist who founded the Nagarjuna Group by establishing Nagarjuna Steel and Nagarjuna Fertilizer and Chemicals. After the death of his illustrious father, K S Raju steered the group into diverse areas of agrichemicals, irrigation systems and energy.

While the Nagarjuna Group continued to flourish and almost became a household name in the coastal areas of the state, it had set up Nagarjuna Finance in 1982 with the objective of entering into financial services.

The group's reputation was so high that several thousands of people, including farmers, deposited their hard-earned money in NFL. The operations of the non-banking financial institution were impeccable till 1998.

However, things took a different turn thereafter. NFL plunged into an acute liquidity crisis when its borrowers defaulted on repayment of loans. The company, which had discontinued its financial services activities since 1999-2000, had also defaulted on repayment of matured deposits.

With Raju disowning the responsibility of repaying depositors stating that he had sold NFL to Mumbai-based Mahalakshmi Factoring Services, the shocked and aggrieved depositors approached civil courts, police stations and consumer fora and filed cases against NFL directors. This led to his arrest denting his reputation as well as the 35-year-old Nagarjuna Group.

In the case of Satyam's decision to acquire Maytas firms, Ramalinga Raju said the combined entity would deliver greater shareholder value.

But the general perception is that it will benefit Maytas promoters at the cost of Satyam's shareholders. This was reflected in the heavy beating Satyam's stock received on the bourses after the announcement of the deal.

Defending the decision, one of the company's executive said, "Satyam, as a company, was built over the years." However, it is common knowledge that it takes years to build a reputation of a company, which can be eroded overnight with one wrong move.

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