Independent directors exit Satyam: Is mgmt change on cards?

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The Satyam saga gets murkier and murkier each day. CNBC-TV18 has learnt that a bulk of the shares pledged by Satyam's promoters with four institutions have been sold. There's a chance that the promoter holding has declined from a little over 8% to as low as 3.5%.

 

Meanwhile, the company's oldest serving director Mangalam Srinivasan quit on Friday. She was followed by three other independent directors - Krishna Palepu, Vinod Dham, and Rammohan Rao leaving the board with just two independent directors and three executive ones. No reasons have been offered for these resignations.

 

So, does this herald a constitution of a brand new board at Satyam? What does it say about the management?

 

Shailesh Haribhakti, who's been on the board of many Indian companies, believes what has triggered this is the apparent loss of discernable promoter in the company. "That seems to have made a big difference to the people's thought process and decision making. I am of the view that where there is competence and where people can play to their strength, those persons should be retained on Satyam's board."

 

Legal eagle Somasekhar Sundareshan of J-Sagar Associates said there is no requirement in the law to have a chairman. "The law states that if there is an executive chairman, we need to have one half of the board comprising independent directors and if it is a non-executive chairman, one-third of the board should comprise independent directors. So, there is no requirement in the law to have the chairman."

 

Here is a verbatim transcript of the exclusive interview with Shailesh Haribhakti and Somasekhar Sundareshan on CNBC-TV18. Also watch the accompanying video.

 

Q: Mr. Sundaresan,  half the board's gone, you have less number of directors required as per Clause 49, what happens now does the board have to go for a dissolution or do you need to get rid of the entire board to reconstitute a new one, what does the law require?

 

Sundaresan: The law says that if there is an executive chairman, we need to have one half of the board comprising of independent directors and the non-executive chairman of one third.  So there is no requirement in the law to have the chairman to begin with. If it doesn't have a chairman or if it has a non-executive chairman, the whole scenario changes and it wouldn't be that there is not enough number of independent directors on the board.

 

Q: So there is no need to dissolve the board, all they need to do is incase there is a misbalance in the number of independent directors, just appoint new independent directors?

 

Sundaresan: Yes that's correct.

 

Q: Mr Haribhakti over the weekend, we had some members speak to the media including Vinod Dham saying the meeting is to take place in January first week, all the issues that have come up in the last two weeks would be resolved. They would talk about strengthening governance etc and then now we have three of those directors resigned, Vinod Dham who was speaking with the media on Saturday, resigned Today, Krishna Palepu and Ram Mohan Rao also resigned today, what do you think that has triggered this?

 

Haribhakti: Basically what seems to have triggered this is the apparent loss of any discernable promoter in the company that seems to have made a big difference to the people's thought process and decision making. That's what resulted in perhaps the resignation, there might have been and also other factors that weighed with them including their thinking that there was ground for restructuring the board having made a decision which brought the company's shares into such steep downfall.

 

Q: What does this mean for the management of the company, this is unconfirmed information but we do understand maybe the promoter stake could have been halved because of those pledge shares being should, what does this mean for the shareholder's ability to shareholders to demand professional management and move away the existing management which is led by the promoter family, that is Mr. R. Raju's family?

Sundaresan: This concept of promoters etc is very typically Indian concept which has been forced upon Indian companies as if you need to make an IPO you have to declare somebody to be a promoter and hold minimum stake. All this needs to be done away with altogether, shareholders have the wisdom to appoint who they want to and the board is appointed by the shareholders. I have a slightly different perspective on why I think the independent directors resigned and it was quite evident that they all took a unanimous decision which was disliked by the share holders and maybe they are just owning up moral responsibility and going.

 

Q: But this all was on Friday but on Saturday they resigned?

 

Sundaresan: It sometimes takes time to sink in and maybe the realized later which some others did earlier.

 

Q: So you don't think this paves the way for the shareholders to make way for a stronger demand for professional management?

 

Sundaresan: Any bunch of share holders who hold more than 10% can requisition a share holders meeting and with a simple majority vote, they can appoint or change the board. So, it's for shareholders to come together and decide who should run their company. Whether the promoter stake is 8% or 4% to my mind means nothing.

 

Q: Mr. Haribhakti, you have been on multiple boards in this country, if you were on the Satyam board, what to you is the most straightforward way of cleaning out this mess?

 

Haribhakti: Everything will depend on who is requested to chair the board. I will look at two scenarios, if an independent director like Mr. Prasad is requested to chair the board then maybe he would be empowered to select people with the advice. I was told that they have hired an investment bank to look at the reconstitution of the board. So, in consultation with them independently or taking whatever inputs we could get to reconstitute the board they could bring on additional directors but I would make certain if I was in his place to take into account the views of people who own almost 61% of the equity of Satyam today namely the institutional investors, I would like to take a sampling of their views, make the process very democratic and very transparent and make sure the reconstitution would really create an appropriate DNA to make sure that the company's assets including its IP, relationships, capabilities are protected from unfair consequences of this board and company level situation and make sure that the sustainability of the company is preserved and kept as what should be uppermost in any fair or independent chairman's mind.

 

Q: So in your assessment, does the management also need to change as well?

 

Haribhakti: It depends on what you define as management. My own view is that where there is competence and where people can play to their strength those persons should be retained and I don't make any distinction between professional and family management I have only placed my faith in competence and relevant to the task at hand.

 

 Q: Do you think Mr. Raju and his family members need to leave the company or the board or at least the active management?

Haribhakti: As I said it will depend on the assessment on how they have performed and whether they can create the sustainability in the company afresh.

Q: If you had to reconstitute the board as Mr. Haribhakti said he would do if he were on the board. What is the procedure that it entails just ask all the Directors to resign and go to an extraordinary meeting and ask the shareholders to pick a new board?

Sundaresan: No, the existing board can appoint new Directors, who are additional Directors and will hold office until the next shareholders meetings. Then at the shareholders meetings those Directors can be confirmed, the old Directors could resign once the additional Directors are appointed by the board.

Q: And you need the simple majority of the shareholders present to be able to confirm the directors, is that correct?

 

Sundaresan: Yes that's right though I must say, some of this is in the realm of speculations, we can't assume that the board is going to be churned and overturned.

 

Q: So what's your final take on the situation?

 

Sundaresan: We will have to wait and see for shareholders who genuinely want to change this board whether the persons in management ought to hold any shares to begin with what's in the best interest of the company and independents who can make a difference, ask the right questions and actually vote one way or the other and stand by what they have done.