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Fact 3
The companies which Satyam wanted to acquire are in real estate and infrastructure, such as roads, ports, metro and power. The original proposal (later withdrawn) was to acquire Maytas Properties and 51% stake in Maytas Infra for $1.6 billion (about Rs 8,000 crore). Satyam would acquire 100% stake of promoters in Maytas Properties, a private entity, with immediate effect for $1.3 billion. With regard to Maytas Infra, Satyam would buy 31% from the promoters (at Rs 475 a share) and 20% from the public at (Rs 525). At that time, Satyam was supposed to be sitting on a cash pile of Rs 8,235 crore.

The deal raised the eyebrows of analysts as both the firms are led by the sons of Raju. While Maytas Properties is headed by his younger son, Teja Raju, the elder son leads Maytas Infra. Of the proposed Rs 8,000-crore buyout, Rs 6,500 crore would go to Maytas Properties alone.

At that time, it was said that Maytas Properties owned a land bank of 6,800 acres in top cities with a potential of developing 245 million sq ft, compared with DLF’s land bank of 10,000 acres. With regard to Maytas Infra, the valuation was supposed to be based on Sebi guidelines. It holds an order book of Rs 11,554 crore, including the Rs 12,000 crore metro rail projects. Because of a hue and cry by institutional holders, primarily of the company’s ADRs, the decision was withdrawn.

Surmises
Had there been political pressure, which we surmise; for providing funds for the coming elections from politicians to whom the owner might be beholden in the last two decades of “growth,” then that would have caused this problem.

Case one: The company did have cash and this was the reason for politicians to want to encash the past IOUs and Raju was not able to give it from the main company and hence decided to shift it to the infrastructure and real estate pool to meet the obligations. But the so-called investors’ activism killed that route.

Case two: The company did not have cash and hence when politicians demand to encash past IOUs, the owner is not able to do anything. Thought he can shift the “cash fiction” to the infrastructure and real estate pool and somehow meet the demand later. To quote from his unsigned letter to board members, “The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas’ investors were convinced that this a good investment opportunity and a strategic fit. Once Satyam’s problem was solved, it was hoped that Maytas’ payments can be delayed. But that was not to be.” The clue to this puzzle is the existence or otherwise of the cash.
In such a context, it is important that we turn corporate governance on its head and impose stringent conditions on promoters to be present and swear that the resolutions related to their interest is as per laws and norms. Currently, they are absent and the independent directors are the party to deciding it.

In the American context, the entire governance issue is related to protecting shareholders from the rapacious managers or executives of the firm. The entire genre of agency theory in the eighties is based on this. In India, the issue is different. Here, we need to protect shareholders from the promoters and politicians. Hence, the law should be amended to explicitly make promoters responsible on those resolutions connected with them with preferably a sworn affidavit.

New age entrepreneurs who have grown in the eighties in various states are all beholden to politicians in regional or national parties. There are many more IOUs pending.
Raju mentions in his unsigned letter to his board of directors that “it was like riding a tiger, not knowing how to get off without being eaten.” He may not be talking of accounting tigers but about political tigers. We can expect many more revelations from other corporates before the forthcoming elections. Happy viewing.

The writer is professor of finance and control, Indian Institute of Management -Bangalore, and can be reached at vaidya@iimb.ernet.in. Views are personal.