Corporate governance - Satyam and other Indian companies

I think most of you must be aware of what has been happening with satyam lately. I will not go over the details as you can find it on the net easily.

The key events seem to be
- Satyam decided to buy out Maytas infra using the surplus cash on it balance sheet. The logic provided was that the company was trying to de-risk its IT business and diversify
- The market did not like the deal due to the conflict of interest (Maytas is owned by the same management)
- The stock price of Satyam crashed even after the deal was cancelled
- The Rajus (promoters) had pledged their shares against loans taken by them. Due to the price drop, they got into a margin situation and some of their holdings were sold off.
- This drop in the holding has created an interesting situation as the Promoters held around 8% of the stock earlier which may have dropped further. This has put the company into play and there seem to be several other IT companies/ PE players, which are interested in satyam now.

I have been surprised by the above turn of events. However, i am not a bit surprised by the corporate governance fiasco. Does anyone think that this incident was an exception?

I have been reading and analyzing companies for the last 9 years. I can safely bet that almost 90% of the Indian companies have corporate governance issue. One has to search for companies, which are shareholder friendly. There are issues like huge cross holdings, excessive compensation, poor disclosure, diversion of surplus cash to other promoter firms and in some cases pure apathy where the management just sits on the cash and does nothing with it.

These problems are not limited to Indian managements. MNC’s are worse than Indian companies in this respect. Most MNCs have unlisted subsidiaries which are used to launch new products, whereas the listed subsidiary is allowed to just stagnate. Some of these listed subs have huge cash holdings with no clear plans for the cash. In several cases after allowing the listed sub to stagnate, the parent has come out with a buy back offer at a price which is above the quoted price (but way lower than the intrinsic value). I think that is daylight robbery.

The annual reports of most MNC subs and Indian companies are a joke. There is minimal management discussion and analysis of performance. The disclosures are limited to whatever is mandatory. In some cases the companies don’t even care to post their Annual reports and quarterly statements on their website.

I could go on and on, but the key point is that corporate governance in India is very poor. It reflects our overall psyche. People in power, be it politicians or promoters care two hoots about others. The typical promoters thinks that the company is their personal fiefdom and they treat it as such.

The difference this time around has been that Satyam was listed in the US and has large FII and foreign holdings. These investors are not as apathetic as Indian shareholders and reacted negatively to this incident.

Such corporate governance issues happen in foreign markets too. However these markets have more active investors and thriving M&A market. If the market reacts negatively to the company’s performance or its governance practices, the company is put in play. An undervalued company then becomes a target for buyout or takeover. This threat keeps the management in check.

I personally don’t expect much to change after this incident. Our security laws are weak and managements can get away with anything. There is very weak market for hostile takeovers in India and as a result even if the company is undervalued, you will not find too many takeover bids.

There are a lot of undervalued companies in India (i hold several of them). In the US, a value investor can count on a hostile takeover to eliminate the undervaluation, if the management does nothing about it. I don’t expect it to happen in India.

As an investor my approach is to identify companies, which are undervalued and are a bit shareholder friendly (or atleast are not bent on stiffing the minority shareholder). I have given less wieghtage to corporate governance and management quality in the past. Although quality of management is a subjective issue and cannot be analysed with precision, I plan to pay more attention to this factor in the future.

Now this is one cheerful post to start the new year :)