Two weeks later, the Satyam saga can be broken down into four distinct elements. Each requires a different set of responses. For instance, how the regulators and investigating agencies need to deal with the fraud has little or nothing to do with the tasks of the new board of directors. This article outlines the four issues and suggests what actions we require for each.

The first is the criminal behaviour of the promoter, B Ramalinga Raju, and his accomplices who have committed a mammoth fraud on the listed corporation and its shareholders and, according to newspaper reports, siphoned off thousands of crores of rupees out of Satyam to finance sundry property-related ventures in Maytas and possibly other family-held companies.

What should we expect in the Raju et al fraud issue? The most important is for the government and its agencies to demonstrate that this will not be another example of under-enforcement. If Raju and his co-conspirators have defrauded the company, as it seems they have, they must very quickly receive maximal civil and criminal punishment. Investors will not tolerate yet another case of Indian investigative and legal procrastination, especially for a crime of this scale. They won’t put up with needless turf battles between the ministry of corporate affairs, Sebi, Andhra police, Serious Frauds Investigation Office and CID. These agencies had better cooperate — perhaps for the first time in their history — and bring the criminal(s) to book double-quick. The press needs to be hawk-like on this one. There will be those in high places who won’t want the truth to come out, especially on the land deals. We must exert enough pressure to ensure that such worthies can’t muzzle the investigations and delay the findings.

The second relates to Satyam’s auditors. Who did the company’s internal audit de facto report to — the CFO or directly to the audit committee of the board of directors? Did the internal auditors detect serious irregularities in financial controls and the financial reporting processes? If so, what did they do with their findings? We also have to examine the role of the statutory auditors, Price Waterhouse, which did the Indian GAAP audit as well as the audit according to International Financial Reporting Standards (IFRS). Are Raju’s confessions in his January 7, 2009 letter true? Was there, in fact, a hole in the cash and bank balance of Rs 5,040 crore as on September 30, 2008? If so, why was it not detected? Was there, as Raju confessed, a Rs 588 crore over-statement of revenues and net income for the quarter ended September 30, 2008? Was such a fraud occurring quarter on quarter, as Raju suggests? If so, how did it escape scrutiny? In short, was the statutory auditor, especially its signing partner, Srinivas Talluri, sleeping on the bridge of the ship? And were these errors of omission, or connivance?

As yet, I am not terribly hopeful about the audit-related investigations. For one, there is the possibility that considerable paper has been destroyed at Satyam. The investigators need to really grill the Raju brothers, the CFO (Srinivas Vadlamani) and others in the finance department and Price Waterhouse — and do so with considerable financial and forensic intelligence. Unfortunately, such skills are scarce in India, especially among our investigating authorities. So the task will be difficult. For another, past records suggest that the Institute of Chartered Accountants of India (ICAI) hasn’t been proactive in investigating and debarring errant members. That may change in the present instance. We need to ensure that it does.

The third relates to the independent directors on Satyam’s board, before they resigned or were replaced by the new crop. How did they acquiesce to the huge $1.6 billion proposed related-party transaction between Satyam and Maytas? Why did none think that the proposal was inappropriate? Business Standard’s headline on January 18 (“Satyam’s directors asked questions, but only just”) is unfortunately true. The minutes of the December 16, 2008 board meeting show that no director dissented to a colossal related-party transaction — that was being proposed by a management whose promoters allegedly held a mere 8.74 per cent of the company’s equity — which involved transferring $1.6 billion to companies where the promoter, his family and associates owned 36.6 per cent of equity. The issues discussed were valuation, core competencies and how to make a “compelling presentation” to outside shareholders and analysts that the deal was value-enhancing. No independent director said, “I don’t like this huge related-party transaction. So, I will dissent, say what you will.”

As an independent director on the board of some listed companies (including Infosys, which is a competitor of Satyam), I believe that we must honestly ask ourselves how we can improve the discharge of our fiduciary responsibilities. Yes, we mustn’t tar everyone with the same brush. Equally, however, we need to work much harder. Independent directors are watchdogs appointed by the shareholders to look after their interest. They can be collegial with management; but they can’t be longstanding buddies. If management suggests anything that may be inimical to the value or reputation of the company, or can hurt minority shareholders, it is their responsibility to bark. Only one definition of ‘independence’ matters: you must stand up to management whenever needed. It’s time we went back to that basic principle, and evaluated our board-level corporate governance principles and conduct yet again.

The fourth issue relates to the role of the new board of Satyam. It must quickly appoint a new CEO and CFO; arrange for funds to keep operations going; assure customers about Satyam’s quality and delivery capabilities and ensure that client work does not suffer; prevent other competitors from actively poaching business; comfort the company’s employees; get a sense of the real financial position and legal liabilities; and start a process of finding a good buyer for the company’s real assets — its projects, facilities and people. These are the parameters by which one should judge the new board.

Four distinct sets of issues; four distinct sets of expectations and responses. Let’s understand these clearly, and monitor the outcomes. That’s a sensible way of looking at this god-awful mess.

Published: Business Standard, January 2009