Synopsis: The promoter's power goes beyond the numbers.
In 2004, Ramalinga Raju was the most “feared” man in USA.
Outsourcing
His was the face identified with the rising Indian outsourcing industry, causing job losses in many Western countries.
The National Australian Bank (NAB) is one of the largest individual clients. In offshoring key IT functions to Satyam, the company’s investing heavily in training, transition costs and redundancy exposed them to the risk a service shutdown down with Satyam’s demise.
Satyam’s 85 major clients including Fortune 500 listers have, in similar fashion, suddenly become aware of their own vulnerability. World Bank, Australia’s Telstra and US-based State Farm Insurance have severed their ties. Others like NAB, UN, FIFA, and GE are currently reviewing options.
Regulatory control
India Inc’s credibility is now questioned. The system is new to such issues of corporate governance. In the West, the Boards are perceived as the connecting link between ownership and management of concerns. Corporate reforms focus on empowering them for managerial checks and balances.
Problems in India have generally rooted in conflicts between major and minor shareholders in public service units or in multinational corporations. Hence regulator agencies, like SEBI, are set up to protect minority shareholders from the power abuse by the majors.
The narrow mandate creates regulatory dilemmas over “shareholder democracy” and “micromanaging” company’s internal affairs. In Indian business groups, the promoters tend to hold this minority stake. The Rajus directly controlled only 8.61 percent through family holdings.
In a company managed by the minority group, the process sidelines the regulators. SEBI now waits its turn to grill the Rajus on their corporate malpractices. Clearly Indian regulatory systems have so far lacked teeth.
The sources of power
Theorists say that the promoters have an “amorphous” power that goes beyond the numbers. Other corporate investor groups like the financial institutions that have significant numbers contribute to it by not exercising their clout.
The Indian government-owned financial groups are traditionally passive. Satyam’s foreign investors may have similarly been non-interfering. This facilitated the Rajus’ say in Board nominations as well. It put them effectively in control on all fronts.
Hence they could “structure the business, transfer assets and run a parallel black economy” (Varma). They enriched themselves without opposition or questioning, cheating on taxes and on the legitimate dues of both employees and investors.
Protecting the collective
Bureaucratic institutions in India are generally accused of being ponderous, and slow to react on general issues. The government’s social outlook is pro-poor. The systemic response is far quicker with regard to large-scale disasters, like earthquakes or floods.
But here, the government has moved swiftly to protect the nation from economic disaster created by the face now feared within the country. Satyam’s erstwhile Board was dissolved, its members sacked. Directors nominated from outside the company took charge to salvage credibility for the company and the collective industry.
The government however, won’t provide an economic bailout for the company. Under the new independent Board’s direction, Satyam must rebuild from within to swim the tide - or sink to oblivion.
Comments/opinions, anyone??
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