Satyam- Case Study Of Corporate Governance

Corporate Law Assignment

SATYAM

Saurabh Patel Roll No. 99

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, ownerdriven 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 (Held)

Meetings (Attended)

Ramalinga Raju Rama Raju

Executive

Chairman

4

4

Member in other Boards 2

Executive

4

4

3

Ram Mynampati

Whole Time Employment

4

2

3

V P Rama Rao Mangalam Srinivasan Krishna G Palepu Vinod K Dham Rammohan Rao T R Prasad V S Raju

Independent Non Exec Independent Non Exec Non Exec

Managing Director President & Whole-time Director Director

4

3

3

Director

4

3

1

Director

4

3

3

Director

4

3

7

Director

4

4

5

Director Director

-

-

-

Independent Non Exec Independent Non Exec ditto ditto

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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Corporate Law Assignment

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 Commission Sitting Fee Prof. Fee TOTAL (Rs.)

V P Rama Rao 12,00,000 1,30,000 13,30,000

Ram Mynampati 12,00,000 80,000 12,80,000

Krishna G Palepu 12,00,000 30,000 87,18,000 99,48,000

Vinod K Dham 12,00,000 40,000 12,40,000

Rammohan Rao 12,00,000 1,50,000 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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Corporate Law Assignment

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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Corporate Law Assignment

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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Corporate Law Assignment

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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Corporate Law Assignment

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