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Why Satyam's Raju must resign

December 24, 2008

The position of the manager-promoters in Satyam Computer Services [Get Quote] has become untenable, as is clear from the revelations that have come tumbling out after the company's aborted bid to buy two companies belonging to the promoter group. What makes matters even worse is that serious charges have been cited by the World Bank while barring the company from all WB contracts for eight years.

Clearly, there is a great deal wrong with Satyam, and not just at the level of its promoters or directors. If it is true that the company pursues wrong business practices, and violates ethical codes, then the only thing that will save the company (which is India's fourth largest exporter of software services) is a thorough spring-cleaning -- which perhaps can be done only by a completely new management committed to the kind of ethical business practices emphasised in the same field of activity by companies like Wipro [Get Quote] and Infosys [Get Quote].

In the case of the aborted takeover of two companies belonging to the promoter group, it was claimed initially that the valuation of one of the companies being acquired had been done by one of the big four international accounting firms; subsequently, all four denied that they had done any such valuation. The basis of the valuation has still not been revealed. Now independent directors of the company have disclosed that the board of directors had not agreed to any valuation at all, that the approval to the buy-out was only clearance 'in principle', and that the company management was to revert on the valuation issue.

This does not, of course, absolve the independent directors of their share of the responsibility, because no such buy-out -- involving potential conflict of interest, a change in the fundamental character of the company and indeed the emptying out of its cash balances as well as the acquisition of substantial debt -- should have been cleared without going to the general body of shareholders.

But the more serious issue is that the independent directors are saying things now that are at sharp variance with what was stated earlier by the company. This suggests that what was sought to be pushed through was something that even the board, let alone the shareholders, had not approved. With no valuation basis being revealed either, and the supposed valuers having denied any role, the whole thing stands revealed as sleight-of-hand and a corporate scandal.

In the absence of any clarification or contesting of these revelations by the promoter-group, any doubts that may have been entertained about the buy-out having been only an error of judgment, without any mala fides, stand removed, because it would appear that the promoters (who own about 8 per cent of the company) were seeking to benefit at the expense of the rest of the company's shareholders. Indeed, the revelation that the company is involved in litigation in the United States, with the possibility that it may have to pay substantial damages claimed, puts a new colour on the aborted buy-outs. Were the promoters wanting to cut and run, with all the money in the company plus money that the company would borrow?

In short, B Ramalinga Raju's position in the company as a director and as the chairman of the board has become untenable, and he has to go. Unconfirmed reports have been circulating that he has indeed put in his papers. If these reports are correct, it is just as well that Mr Raju has bowed to the inevitable. If not, the rest of the directors should prevail on him to quit in the interest of the company which he started.

Satyam's reputation has taken a hammering in the share market and customers, and the promoter-group would have lost the trust of employees. Business will suffer as competitors grab clients from Satyam. The only way to salvage the company is for those guilty to bow out without delay, and to put a new, untainted team in charge.

Also see
World Bank bars Satyam for 8 years
Sebi finds no violation by Satyam
Did Satyam err with the Maytas episode?
Satyam-Maytas deal: Impact on the companies
A new low for India Inc
Just what went wrong?
How Satyam case has dented India Inc's image

Satyam clients likely to re-evaluate contracts
Satyam blames investors, media
Satyam may launch shares buyback to appease investors
Satyam calls off $1.6-bn Maytas deal
It made sense to buy an infra firm: Raju
Satyam under fire for $1.6 bn Maytas deal



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