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On Monday, three other independent directors - Krishna Palepu, Vinod Dham, and Rammohan Rao – at Satyam resigned leaving the board with just two independent directors and three executive ones. So, what should Satyam do now? Experts delve deeper.
Senior Advocate Harish Salve said there is no question of Satyam's board not meeting on January 10. "The board needs to meet to decide on the company's future. The board is non-compliant post resignations by the three independent directors which needs to be corrected as soon as possible. The IT major's priority is to find a group of people to induct on the board."
This urgency is shared by Nishchal Joshipura of Nishith Desai & Associates. He feels institutional investors will play a big role in the board reconstitution. "Satyam still has 180 days to appoint an independent director. Three violations of Clause 49 of the Listing Agreement arose due to these resignations."
According to Joshipura, the role of independent director should be to guard the interest of minority stakeholders. "We expect promoters, institutional investors to arrive at a consensus and get the individual directors."
Here is a verbatim transcript of the exclusive interview with Harish Salve and Nishchal Joshipura on CNBC-TV18. Also see the accompanying video.
Q: Four of the independent directors are gone, is a reconstitution of the board impeditive now or can the board convene on January 10 and not go for reconstitution just immediately?
Salve: They have to meet to decide the way forward, so there is no question of not meeting on January 10. They have to take stock of what has happened and move ahead. These things happen, these storms come, but you have to deal with them.
Q: Do you think the institutional investors of Satyam in this case are holding a very large majority of the stock and can actually push for a reconstitution of the board and have any say in choosing the members?
Salve: I am sure they will find a consensus because it is a large corporation. It is a situation where heads have to be put together and solutions have to be found of moving ahead because you cannot let the baby go with the bathwater. That is for sure.
Q: For a board which has only two independent members and primarily members of the Ramalinga Raju family or the promoter group and no institutional or investor representation, do you think left to themselves they will be able to come out with a solution which is acceptable to institutional investors?
Salve: It is very difficult to say. Discussions are going on with the major institutional investors and I am sure they will find a way forward. One will not know the day-to-day developments. When the solutions are right, they will be announced. I have no doubt in my mind.
Q: What is your sense of how much influence institutional investors will have because they have majority stake in the company? Do you think they will have a significant say on how things evolve post board meeting on January 10?
Joshipura: Definitely, I think the institutional investors will definitely play a bigger role because they were the first to show their discomfort towards the Satyam-Maytas deal. What is more important here is that primarily there have been three violations of Clause 49 of the Listing Agreement. The first violation is that half of the board size should be non-executive directors and half of the board size should be independent directors. Since the resignation of the four directors, the board size has reduced to five with two independent directors and three executive directors.
So on both counts, for non-executive directors and independent directors, there is a serious gap as far as the compliance with Clause 49 is concerned. At the same time, there is also a violation of audit committee size where under Clause 49 at least three members should be there out of which two-thirds of the member should be independent directors. Previously, the size of the audit committee was four members out of which two members have already resigned. So, there also the minimum requirement of three members on the audit committee has not been complied with.
Now Clause 49 also mentions that there is a time period of 180 days available to the board to fill in the gap of an independent director which is not in compliance with Clause 49 or the listing agreement. So, it maybe possible that on January 10 board meeting to assuage the investors and the shareholders they may appoint an independent director, but under law they still have a time period of 180 days to appoint the independent director.
Q: Given the constitution of the board right now would it be in the spirit of things to go ahead and take decisions about the future roadmap of the company not just the legal implications of the violation of Clause 49 which Joshipura spoke about?
Salve: I agree with you that in the first instance they have to bring the board in line with the existing corporate governance norms and I am sure they are working towards that. At the same time, if there are some critical decisions to be taken which cannot be delayed, a board is and must act and take those decisions even if on a pro tem basis, till the full board is constituted. So, this is actually an ongoing exercise. It is a crisis which has precipitated. The independent directors have left because of which the board is suddenly now non-compliant. I would not say it is a breach of the agreement, I would say it has become non-compliant, because it has happened suddenly on account of resignation. That has to be corrected immediately. There is no question about it. I am sure they are trying to talk to institutional investors, arrive at a consensus, appoint directors, and move ahead.
Q: I believe you are also legal council for Satyam. What exactly would you be advising them on?
Salve: That is something which I cannot share with you.
Q: Would it be to do with reconstitution of the board or nitty-gritties of the strategic nature of the company?
Salve: Wherever they need my help, I will help them.
Q: The other issue is the mandate which Satyam has given to the Merrill Lynch. Do you think it will end up in them scouting for a strategic investor or do you suspect that mandate is different because it seems very general and brought to us from the contours of what has been disclosed?
Joshipura: I think definitely one of the key reasons for giving the mandate would be to find a strategic investor, but at the same time to find a solution where all stakeholders are agreed to the solution which has been agreed by the board together with DSP Merrill. So, they will obviously look at various options including a private equity investor or a strategic investor or maybe a merger of Satyam with any other company with good leadership. So, all this avenues are possible. It will depend on the facts and circumstances of the case and how the events rollout in the next few days.
Q: Do you think it is easy for a private equity investor to come and do a deal right now because you have got a fairly strict six month average for the open offer price which would be significantly higher than the current market price of Satyam? Is that a bit of stumbling block or not quite?
Joshipura: Definitely, that would be a stumbling block in the sense that the pricing requirements of security’s laws have to be complied with. But depending on the facts and circumstances of the case, the board together with the DSP Merrill and other stakeholders will take a decision, which is in the best interest of stakeholders.
Q: Has there been any kind of precedent to this, where large institutional investors have taken control of the company without necessarily selling their stake to a strategic or financial investor after an episode like this, particularly when the promoter stake is in low single-digits?
Joshipura: Not to my knowledge.
Q: Does it matter in the constitution of the board or the role of the executive chairman that the executive chairman shareholding in this case is probably less than 5%?
Salve: It is a company which is structured the way it is structured and the promoter stake appears as low. I don’t have much details. In a company like this, what has happened is there is a bigger problem and that is a crisis of confidence.
Satyam is one of
Q Those independent directors in this case should they be appointed by promoters themselves or should they be appointed by institutional investors?
Salve: I am sure a consensus will evolve. There are certain names of people, there are people whom we all know from the corporate world who are people of substance and if they are appointed, nobody asks who has appointed them. If you have a person who is appointed, if it is a person of credibility and reputation, it doesn’t matter.
Q: The other independent directors who have resigned are also people of substance. Vinod Dham certainly is, Krishna Palepu certainly is, and they have not exactly accounted themselves very well in the Maytas episode. So, would the institutional investor be within his rights to ask for the nomination of these independent directors?
Salve: This is not a time to discuss rights and contracts. This is a time to deal with a company as a living organization that is more important. It is a service company and is a company in which confidence in the corporation is more important than anything else. It is not a matter of respective legal rights, nobody is slanging it out in court, nobody is fighting over my share, your share, my percentage and your percentage.
Everybody has to put their heads together and say let’s find a group of independent people whom we can get back on the board and get back to business. That is the consensual approach which I am talking about and which I would advice Satyam and any other client at this particular point of time, because you are heading into a storm, the winds have begun, and the storm is yet to hit. This is my personal perception. At this time, strength is what will help you survive, otherwise you will go under.
Q: What is your own advice, suggestion, and expectation on which way this board will get reconstituted?
Joshipura: On the resignation of independent Directors, I think there could be two approaches. First, the approach adopted by the first director to resign, where moral responsibility was taken for whatever happened. The other approach, which
Q: What is your own best guess of what happens on January 10? What is the outcome?
Joshipura: I think on January 10 most probably what would happen is that promoters will work with institutional investors to find a solution. On January 10, they should be able to arrive at a solution, which is good for all the stakeholders and at the same time get some independent directors, if at all they are able to restore the board back to normalcy.
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