Satyam saga has a dozen lessons for the industry'

Rakhi Mazumdar, ET Bureau Dec 18, 2009, 01.45am IST

KOLKATA: It was a fraud that threatened to dent India's image and its FDI inflows. So serious that within hours of L'affair Satyam breaking out on January 7, the PMO was directly looking into it. So much so that before he was wheeled for cardiac surgery on January 24, Prime Minister Manmohan Singh, is supposed to have said even while he is inside the operation theatre, Satyam should be top priority. December 16 marks one year of the crucial Satyam board meeting to approve merger of Maytas and Satyam that quite literally burst the Satyam bubble. From his vantage point as head of legal side charting Satyam's turnaround and ultimate sell off, Shardul S Shroff managing partner of Amarchand Mangaldas had a insider's view of it all. Mr Shroff shared some never-told-before facts about L'affair Satyam to a select gathering of legal eagles on Wednesday at Bengal Chamber of Commerce. What emerged out of it was a unique story of how a company with a $1.8-billion hole in its balance sheet was turned around in 100 days. Of how the country's entire regulatory mechanism was harnessed and tweaked to achieve it. How Satyam employees and even its competitors like Wipro, Infy and TCS helped it. "It is perhaps the only company in corporate history to come out of such a major fraud. The Satyam saga has nearly a dozen lessons for Indian industry and for the world. Little wonder, Harvard Business School is now doing a case study on it. India can now offer a unique vertical globally Crisis Management," Mr Shroff told ET. It proves India has a good crisis management system, but there should be an early warning system embedded in financial system to prevent it. The role of invited directors came into question. This has also led to a new voluntary code of corporate governance to be adopted on December 21. Depending on its success, the code will be made mandatory. "It underlined need for rotation of auditors and liability of independent directors. Six former Satyam directors have been sued since there is no insurance against fraud and a D&O (directors & officers) coverage does not apply in a case of fraud. More important, it opens up an whole new area in law regarding insolvency of a non-bricks & mortar company and issues on how to recover information that resides on computers of a bust company in cross-border locations. The future is fraught with such questions," Mr Shroff said. Post-Satyam, it calls for every set of accounts to be reviewed by independent auditors. If auditors qualify the accounts, it needs to be picked up, reviewed by the company board and re-done. "But it is also a story of effective government intervention in selection of directors with relevance to the company the six wise men who laboured pro bono, 24x7 for four months at a stretch. There have been several instances when a director for instance, was on global customer calls at 2 am," Mr Shroff pointed out. "For a virtual company, two of its biggest assets are its people and its contracts. Both have risk of flight. For employees, it was a personal crisis and you cannot compel people to stay back. So, unlike a manufacturing company, Satyam needed a fast turnaround to survive an event of default," Mr Shroff said. For the first time, the Satyam case threw up questions like whether customers can pull away

software embedded in systems/servers located elsewhere. That is real challenge in a virtual company and all big gun IT companies need to take note of it. Thanks to Satyam, a number of things like 'forensic accounting' were tried out for the first time. Each and every hard disk, server and laptop with key individuals at Satyam was scanned to gather data from 2002 to 2009. It yielded some two terabytes of information! No warehouse in India could store it. So all information had to be sent to the UK where accounting firms could hire locations for its storage. An army of 80 people scanned every single entry. The idea was to detect a pattern, which was finally traced right back to the chairman's office. Indian regulators need to develop skills in this unlike the SEC in the US has a 400-strong team on forensic accounting. Another little known fact was that eight different means were adopted to check falsification of Satyam 53,000 employee base, like employee bonds, mails, mail IDs, etc. With barely Rs 100 crore left in balance, against a January wage bill of Rs 400 crore, the new directors and the Satyam employees worked their hearts out to generate Rs 700-900 crore in receivables, including futures ones. A loan of Rs 600 crore from Citibank, IDBI Bank and Bank of Baroda helped build a Rs 1,300-crore reserve the amount estimated to tide over the optimal survival period before the sell-off. All this in a situation, where 300-600 of its core, trained staff were resigning every week! "Satyam's competitors, Wipro, Infy and TCS, too, chipped in, when they decided against poaching Satyam staff," Mr Shroff said. "The lesson here is to set temporary, short-term goals when faced with a crisis in people, contracts and cash," Mr Shroff said. Companies also need to establish trust. "In a person-centric organisation like Satyam each of 16 verticals worked in silos. Without Mr Raju, there was complete atrophy in the organisation," he added. There were enormous external challenges, too. The Securities and Exchange Commission (SEC) was active on Satyam. Five agencies, including Serious Frauds Investigation Office (SFIO), local police, CBI and RoC, were looking for evidence all at the same time. Amidst all this, the first tender documents for sale of shares came out on February 5. By the second batch of documents, four potential bidders were already doing due diligence and four data rooms were opened for this. "It was an unprecedented fast track turnaround. Not even an ordinary company gets sold in 100 days let alone one facing such a serious fraud. Satyam was truly a one-off case," he pointed out. SEBI had already ceded its jurisdiction on Satyam, a listed company, since it was brought under CLB after becoming a government-controlled entity. Sebi also dispensed with its two week high-low for the price part. "It agreed to a man-made process rather than stick to a rule-made process," Mr Shroff added. "In a sense, it was also one of the most creative periods in the country's corporate history," Mr Shroff remarked.