Aftermath of Satyam Fraud
On April 13,2009 Tech Mahindra forwarded its claim on Satyam computers by bidding for 31 percent stake in the company at a price of rupees 58 per share. This ended all speculations about the future of Satyam computers. Indian share market, already plagued with the virus of global economic recession got shattered when CEO of Satyam computers conceded that he manipulated company’s account to the tune of Rs. 7000 crores in the past few years; such that cash and bank deposits reflected in the accounts, actually did not exist. This was not limited to share markets alone; in fact, the whole nation lost faith on corporate governance by this episode.
Earlier common belief was that private sector companies could take care of themselves on their own. Corporate governance is capable of handling any eventuality. Representatives of public sector financial institutions and independent directors have always been on the board of directors of these private sector companies. In addition to this, various regulatory bodies such as Company Law Board, Securities and Exchange Board of India (SEBI) also keep vigil on the activities of the companies. For all these reasons, corporate governance was claimed to be complete in it self and it was argued that there is no need for any intervention in the management of these companies on the part of the government. In addition to the well-placed institutional mechanism as enumerated above, these companies get their accounts audited from auditors of international standards. Thus in this process accounts of these companies are also thoroughly inspected.
However, this well placed faith in corporate governance was shattered by the exposes of Satyam. We understand that any kind of report could be obtained from auditors by luring them, including giving exorbitant fees (in this case auditors were given a fees of rupees 4.3 crores, whereas normal fees was rupees 2 crores). This fraudulent behavior of auditors is not limited to Satyam only. In fact, there are examples of hundreds of such frauds in India and all over the world helped by auditors. Frauds committed by Arther Anderson, which lost its existence by manipulating accounts of Enron, grant of AAA rating to the companies under deep financial crisis and ultimately filing for bankruptcy by Price Waterhouse Cooper, (which incidentally is also auditor of Satyam), are already in public knowledge. Further ‘dependence' of ‘independent' directors on company's management is also well known. Failure of SEBI and Company Law Board is also well known.
Under these circumstances, the government reconstituted the Board of Directors of Satyam computers, by including personalities from IT sector, corporate sector and the legal luminaries. Offers were invited from willing parties to take over the management of Satyam in a transparent manner. In the process a leading construction and engineering company Larsen and Toubro and leading IT and software company Tech Mahindra, which is a joint venture of British Telecom (BT), a UK based company and Mahindra and Mahindra, participated in the bidding. Tech Mahindra emerged as the successful bidder by offering the highest bid of Rs. 58 per share.
Future of Satyam and Tech Mahindra
Tech Mahindra which at present is sixth largest IT and software company would become fourth largest company in the field after taking over Satyam. After the takeover biggest challenge before Tech Mahindra would be to maintain client base of Satyam, apart from dealing with the obstacles to the growth of IT sector due to the recessionary trends. Tech Mahindra will also have to deal with cases of fraud against Satyam abroad. After a new offer of Tech Mahindra, which was much higher than earlier offer of Rs. 45.90 of Larsen and Toubro, share markets responded quickly by showing a general uptrend. Market seems to be confident about the future of Satyam after its take over by a leading software company. Even Larsen & Toubro is not willing to off load the 12 percent stake in the company, which it had purchased in anticipation of its success in bidding, as L&T is confident that share prices will go up after the take over.
Lessons for Future
Maturity of Indian legal and political system is very well demonstrated by the fact that in just 3-4 months of the fraud, not only that Board of Directors was reconstituted but also even the process of handing over the same to the new company was almost completed in most transparent manner. In the process due consideration was also given to the fact that the new incumbent meets the requirement of possessing essential experience and capabilities to run the fraud stricken company.
Though the problem is seemingly solved for the time being but this is also correct that regulatory agencies like SEBI, independent directors, Company Law Board, auditing firms etc. have all proved to be incapable of handing such situations. Finding solution to the problem arising out of Satyam fraud does not in anyway provide any guarantee against repetition of such frauds. Incapability of the regulatory agencies has been sufficiently proved in earlier cases such as Harshad Mehta fraud, Ketan Parikh fraud etc. This does not mean that officers of these regulatory agencies are incapable. It seems that the present structure of these regulatory agencies is devoid of sufficient provisions to avoid such frauds. Thus, there is an urgent need to make suitable changes in the constitution and powers of these agencies.
The government also has to ensure the safety of the investment of the public sector institutions and the public in big companies of private sector. We understand that Comptroller and Auditor General of India (CAG) audits public sector companies' accounts. This is also a fact that in the past there has never been a fraud to this magnitude. We can make suitable changes in the law, bring private sector companies having business more than Rs. 1000 crores under the scanner of CAG, and thus put a stop to these frauds.