THE Ministry of Corporate Affairs has ordered an inspection of the accounts of Satyam Computer Services Ltd. under Section 209A of the Companies Act that brings in its ambit the subsidiaries too. The Ministry has also ordered serious frauds investigation under Section 235 of the Act.
The Government may invoke more provisions of the Act but can it get to the bottom of the truth.
No. This is because the names and number of Satyam subsidiaries and their downstream subsidiaries have changed over the years. There have been a few mergers within the Satyam group over the years. There have also been a few divestures or equity dilutions.
A subsidiary, for instance, became an associate due to dilution of Satyam Computer Services Limited’s stake in it below 51%. Big companies keep tinkering with the equity structure of subsidiaries regularly for unexplained reasons.
It is here pertinent to recall the case of Sify Limited (formerly Satyam Infoway Limited) from which Satyam exited completely in November 2005 by selling its residual stake of 31.61% to US-based Infinity Capital Venture LP, which is controlled by one NRI named Raju Vegesna. Sify was once fully owned by Satyam.
Sify raised equity funds twice through American Depository Shares (ADS).
Sify splurged money of American investors on a series of controversial initiatives especially the acquisition of a small
portal company for a eye-popping price of Rs 447.9 crore in two phases beginning 1999. Sify itself had 12 subsidiaries in 2000-01.
Did Ramalinga Raju siphon off funds through Sify and its subsidiaries? If the Government gives credence to this suspicion,
can it bring Sify under its investigation even though Satyam has not held even one share in it for last three years?
Does the Companies Act provide for probe in the case of an erstwhile associate company?
Whatever the legal position, it is quite a tedious and time-consuming job to pursue money trail through a maze of subsidiaries and downstream subsidiaries.
Would the investigators from different official entities take Raju’s confession at the face value with regard to the subsidiaries? He had said the accounts fudging was limited only to Satyam standalone and books of subsidiaries reflect the true performance.
A full-fledged probe into all Satyam-Maytas group companies, their subsidiaries, associates and joint ventures may take years, and its subsequent litigation may take several years as usually happens in any corporate scam in India.
Reverting to Sify, it is pertinent to recall what Mr Raju said at the time of exit. He had said the divesture would enable Satyam to focus on its core business. The exit was thus “in line with its (Satyam’s) objective to emerge as pure play IT services and solutions company.”
He continued: “As against its original investment of $ 5 million in Sify in 1995, Satyam received a total consideration of $ 117 million till date, making it a value creating investment for Satyam’s shareholders. “
What did Satyam do with this USD 117 million? Can sleuths trace its disappearance as expenditure or as something else?
Yet another question that investigators ought to ask is as to how Raju turned the core competency logic on its head in December 2008 when he managed to secure Satyam Board’s nod to acquire Maytas Infra Limited and Maytas Properties Limited at USD 1.6 billion. He, of course, aborted the move under pressure from the stock market and got entangled into a series of subsequent bumps that ultimately led to the confession.
Mr Raju had said: “This (acquisition) would de-risk the core business by bootstrapping a new business vertical in infrastructure. ” He added: “The established brand of Satyam can further enhance the penetration into emerging markets and within the infrastructure industry. The two companies being acquired in a challenging market offer potential for significant upside in future.”
Mr. Raju’s inflated profit also resulted in exaggerated valuation of Satyam brand at Rs 9873 crore as on 31 March 2008. It is another matter that brand has now became a liability. Brand and human resources (constituting intangible assets) accounted for 89.90% of Satyam’s total tangible and non-tangible assets on that date.
Here one might have to give benefit of doubt to Raju as the aborted Satyam-Maytas deal would have shored up the tangible assets of Satyam. As put by Raju, “the aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones.”
Solely on this count, Raju has got a raw deal from the critics, including regulators, policy makers and mainstream media. This is because the critics had no qualms in shutting their eyes to equally controversial merger and acquisition deals engineered by certain promoters in 2008. They, of course, followed the due legal procedures such as seeking board approval, followed by shareholders’ approval and other statutory approvals as the case may be.
Would Raju not have done the same had there been now row? His dubious business acumen is found wanting in this case.
He would have perhaps continued to keep the accounting fraud under the carpet had he first merged Satyam’s subsidiaries such as Satyam BPO to achieve consolidation. Later or simultaneously, he could have pulled out Maytas deal as a part of big-bang approach of making Satyam a holding company and to amplify its leveraging power through mergers and acquisitions within the group. Now, of course, he would have ample time in Jail to brood over all this and similar deals that went through or are going through without any din of protest.
Take the case of BSE-listed Prakash Industries Limited (PIL), whose core business is steel and power. In April 2008, it secured shareholders approval to acquire 95% stake in an obscure company named Horizon Loha Udyog Limited (HLUL) belonging to PIL’s promoters.
PIL said it was acquiring 95% stake in HLUL at a price of Rs 7018/share of face value of Rs 10, aggregating to Rs 400 crore as latter had got “mining rights” in an iron ore mine in Jharkhand. PIL claimed chartered accountants T.R. Chadha & Compnay had valued HLUL at Rs 520 crore but a committee of board of directors proposed Rs 400 crore for 95% stake.
Is this whopping value for only a mining licence or are there any other assets being acquired?
Iron ore mining licences are not hard to obtain in any ore-bearing State? In any case, why promoters, V.P. Agarwal group, managed to acquire mining rights through HLUL and not through PIL?
PIL told its shareholders: “presently, the company has no iron ore mines of their own and they have to depend on the market vagaries of iron ore supply. Presently, there is an acute shortage of iron ore and market of iron ore is also volatile. To ensure uninterrupted supply of iron ore with consistent quality and prices the possession of iron ore mines is of paramount importance and the company has been striving to have allotment of iron ore mine or the acquisition of controlling interest in some company has iron ore mines.”
Take now the example of Indo Rama Synthetics (India) Limited (IRSL), the country’s second largest polyester company. It first unveiled polyester capacity doubling project of which captive power plant formed an integral part.
When the implementation of the project was mid-way, it said the captive power project was being promoted by Indo Rama Petrochemicals Limited (IRPL) which was under the same management as IRSL.
In the last quarter of 2007, it secured shareholders nod and later the High Court’s nod to merge IRPL with IRSL. The merger was done by issuing 16 shares of IRSL to IRPL shareholders for every 10 shares that they currently hold in IRPL
IRSL held 45% stake in IRPL and the balance 55% was held by promoter family members.
The merger helped the promoters, O.P. Lohia group, hike their stake in IRSL to 62.94% from 57.31%.
Why IRSL farmed out the captive power plant project to an associate company IRPL? Was this done with the permission from the Board and Shareholders? Where was the need for this arrangement when IRSL had earlier said it had adequate internal resources and had tied up the debt component for the expansion project?
IRSL case shows how promoters of stock market listed companies can hike their equity without coughing any premium through merger of unlisted partly-owned subsidiaries or associate companies, thereby sidetracking all the stock market regulations designed to protect the interest of minority shareholders.
The laxity and loopholes in corporate regulations are too many and too diverse to make a mockery of corporate governance. It is here pertinent to recall the case of initial public offer of Maytas Infa Limited.
