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Impending polls may have pushed Satyam off cliff  

R Vaidyanathan   (DNA, Saturday, January 10, 2009 3:35:00 AM)

The first casualty of any election is Satyam (the Truth).

Financial wizards, accounting tigers and company law gurus are all having discussions on the fall and fall of the Raju kingdom. There are debates about international financial reporting standards â€" since Satyam was one of the first companies to adopt this â€" besides audit committees, independent directors and the role of regulators such as Sebi.
Either these experts are all from Mars and know nothing about the political economy of our country, or they are really shy of talking about it.

Let us assemble the facts first.
Fact 1
Tirumangalam is a constituency in Tamil Nadu where a by-election took place on Friday for electing an MLA. Reports suggest that each voter is given at least Rs 500 in cash. The local minister and son of the current chief minister has been accused of distributing cash and caught on camera. The state election commissioner bemoans that Tamil Nadu is "excelling" Bihar and UP in electoral malpractices.

The recently concluded elections for eight MLAs in Karnataka saw politicians of every party giving cash in the form of donations on aarti plates and the amount was never less than Rs 100. A number of women were keen to do aarti to politicians of all sizes and shapes, not because they loved them as much as because they expected cash on the plates. Elections are becoming obscenely expensive and electors expect cash â€" at least Rs 1,000 as one elderly lady voter mentioned in Tirumangalam.

Post-election bribes using the state exchequer, such as free rice or free TV, are fine, but electors these days say give us hard cash while canvassing. This is celebrating democracy in the most effective way!

This implies that the amount required for the coming Lok Sabha election is mind boggling. The major parties are not in power in all the states, unlike the sixties when the Congress alone was the ruling party in every state. Already, we find forced collection of cash by the UP chief minister from the usually corrupt departments and even allegations of murder charges against one of her MLAs.

DMK has always kept the telecommunication ministry with it, perhaps for the last 15 years, whether it is the NDA or the UPA government. There are allegations that the telecom ministry has lost nearly Rs 80,000 crore due to the spectrum allocations and correspondingly, the politicians have gained.

DMK has also always held the ministry of roadways. The Delhi High Court recently pulled up the ministry for tardy work and for having five chairmen in two years.
Same is the case in every state and every political party wants cash to fight the coming elections, in multiple crores.

Fact 2
Real estate is mainly under the control/ regulation of the state government. It is a scandal from the word 'go'.

In Karnataka, there is a fascinating project called Nandi Infrastructure Corridor (the company is called NICE), which is to connect Bangalore with Mysore with a superfast expressway and develop townships along the route. The number of court cases, allegations and counter allegations etc pertaining to this project is mind boggling.

Former prime minister Deve Gowda has brought out a large book only on this project and how it is full of corruption. The opponents accuse him of being vindictive since his bribe demands have not been met. Similarly, the real estate/ infrastructure projects are known to be obtained by being in the "good books" of politicians who have the power to approve it. Whether it is a road project or airports or expressway or metro rail, the situation is alarming. That is the reason we find many infrastructure projects do not have enough takers.

The government's ambitious highway projects under the public-private partnership mode are in serious trouble. Construction companies have either not put in bids or have withdrawn from 20 such projects, under the build, operate and transfer (BOT) scheme.
According to a report in a prominent business daily, large construction companies like Larsen & Toubro, Hindustan Construction, Nagarjuna Construction, Maytas Infra (promoted by Satyam Computer boss Ramalinga Raju), DLF Infrastructure, Gammon India and GVK Industries have withdrawn from over 15 highway projects planned in various parts of the country.

The report said five highway projects worth nearly Rs 3,000 crore have failed to find a single bidder in the last two months. These companies find BOT projects unviable due to high interest costs, which have squeezed profit margins, besides faulty traffic projections and the stiff penalty clauses if the project is delayed for reasons not under their control. In most of these projects, the companies that have withdrawn from the bids were already amongst the top six players selected during the technical qualification stage. This could leave only smaller construction companies with little experience in the fray.

Unfortunately, no newspaper will speak about the huge bribery involved in getting many of these projects. We are a shy nation, whether in giving or in taking. With politicians becoming rapacious due to the forthcoming elections, the "bribe tax" has phenomenally increased and hence no major project can be viable from the point of view of major firms. Some upstarts or completely bogus contractors can only undertake such projects where the width, thickness or even the length of the road can be compromised.

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@.... Views are personal.

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