Satyam saga shows holes in India corporate governance

Just three months ago, India's fourth-largest software services exporter, Satyam Computer Services received a Golden Peacock award from a group of Indian directors for excellence in corporate governance.

Now its board is in turmoil and its shares have plunged after a botched attempt to buy two infrastructure firms in which management held stakes, sparking concerns about conflicts of interest and a lack of transparency.

Analysts say the saga exposes serious shortfalls in corporate India that must be addressed to ensure its credibility in an increasingly globalised and competitive world.

Four independent directors have resigned from the board of Satyam since the scandal erupted. But that does not fix the problem, said Premchand Palety, director of the Centre for Forecasting and Research in Delhi.

"Independent directors are supposed to be the watchdogs, the ones responsible for safeguarding the interests of minority shareholders. They clearly failed in their duty," he said.

Satyam says it adhered to corporate governance rules, appointing the requisite number of independent directors with excellent credentials, including the dean of a top business school in its hometown of Hyderabad and a professor at Harvard business school.

But there are concerns that some directors may be too close to Satyam's chairman to be considered truly independent, and all of them failed to ask tough questions about the now controversial infrastructure deals, Palety said.

"If Satyam's board was convinced about the merits of acquiring (the two firms), then good corporate governance demanded that it should have taken into confidence at least the major institutional shareholders," he said.

Even though the company aborted the plan, the damage was done: New York-listed Satyam's shares have plunged by a third since it first announced plans to acquire two sister firms for $1.6 billion and then abandoned the deal two weeks ago.

Satyam's board will meet on Jan 10 to consider more options to improve shareholder value and corporate governance.

DEEP INTROSPECTION

Change has come slowly for Indian family-owned businesses that have long battled issues such as nepotism, mismanagement, weak boards and a lack of transparency and professionalism.

About half the companies in the benchmark 30-share index are family-controlled.

With the opening of the economy in the early 1990s, bringing with it tighter regulations and greater foreign investor interest, Indian businesses have been forced to clean up their act.

But problems remain, with long-drawn out leadership succession battles such as the months-long standoff between the wealthy Ambani brotherrs highlighting the stranglehold by founders as well as the failure of regulatory authorities.

Not all matters of corporate governance are big.

"In some cases, it could be as small a matter as keeping minutes of meetings, or spending too much time on routine matters," said Raman Uberoi, a senior director at ratings agency CRISIL, which also has a corporate governance ratings service.

Some analysts say the market watchdog, the Securities and Exchange Board of India, lacks the teeth for ensuring compliance on governance, while others say the rules don't go far enough.

In the case of independent directors, for example, the SEBI mandates they must make up one-third of a board where the chairman is a non-executive director, and half the board where the chairman is an executive director.

With a limited pool of qualified and experienced managers from which to pick independent directors, company founders typically tap a network of associates, and it is not unusual to see the same familiar names on several boards.

And even independent directors may be hamstrung by a cultural distaste for dissent, said Anjali Bansal, director of consultancy Spencer Stuart in India.

"The vast majority of independent directors are intimidated or unsure of how their criticism will be taken," Bansal said.

It also boils down to the ethics of the top management and deep-rooted issues of education and corporate government awareness, Palety said.

"If the basic culture is not ethical, then what good will rules do? It is time for deep introspection at our companies, at our business schools, and at our financial media," he said.

The economic slowdown may be a trigger for better governance.

When funding is tight, better corporate governance makes companies more attractive in the eyes of investors, Bansal said.

"Also, with the bull run, companies were getting good valuations anyway. Now, perhaps they will pay closer attention to corporate governance for better valuations," said Uberoi.

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US Recession, Tight Credit Compound US Housing Woes

The US housing sector has been hit hard throughout the year by an oversupply of homes that gradually forced high prices to fall. Tumbling prices, in turn, hurt the overall economy by battering financial institutions, reducing the wealth of homeowners and prompting job cuts in the housing sector.

Now, the worsening recession in the US is further damaging the housing market. Consumers who lose their jobs are adding to homeowner defaults, pushing forecasts for when the sector will hit bottom into the second half of 2009 or later. Until the housing market turns around, the overall economy is unlikely to grow much. Economists call this cycle an adverse feedback loop.

Sales of existing homes tumbled 8.6% in November from the prior month to an annual pace of 4.49 million units, the National Association of Realtors said. The figure reflects contract closings, which lag behind sales activity, and as a result capture the credit-market turmoil that hit the economy starting in mid-September.

New-home sales declined 2.9% to an annual rate of 407,000 units, the Commerce Department said, continuing a nearly three-year decline.

Infosys, ICICI Bank pull down Sensex

The Sensex opened 70 points higher at 9,639. Fresh buying in early trades helped the index move up to a high of 9,706. The index, however, could not hold gains and slipped into red.

The selling intensified in late noon deals amid talks of a possibility of war with Pakistan. The index tumbled to a low of 9,295 - down 411 points from the day's high.

The Sensex finally ended with a loss of 240 points at 9,329.

The BSE IT and Realty indices dropped nearly 4% each to 2,149 and 2,201, respectively. The Bankex shed 3% at 5,211.

The market breadth was fairly negative - out of 2,532 stocks traded so far, 1,598 declined, 865 advanced and 69 were unchanged today.

INDEX SHAKERS...

Reliance Infrastructure and DLF slumped 6% each to Rs 542 and Rs 276, respectively.

Infosys and ICICI Bank plunged over 5% each to Rs 1,110 and Rs 418, respectively.

Mahindra & Mahindra tumbled 4.7% to Rs 266. Hindalco, Jaiprakash Associates, ONGC and BHEL dropped around 4% each to Rs 49, Rs 74, Rs 644 and Rs 1,300, respectively.

SBI and Sterlite shed around 3% each to Rs 1,244 and Rs 249, respectively.

Tata Steel and Larsen & Toubro declined 2.7% each to Rs 212 and Rs 744, respectively.

Tata Motors, Reliance and Wipro slipped around 2.5% each to Rs 156, Rs 1,212 and Rs 227, respectively.

Hindustan Unilever and ACC were down around 2% each at Rs 252 and Rs 457, respectively.

...AND THE MOVERS

Grasim and Maruti moved up 1.7% each to Rs 1,205 and Rs 511, respectively.

Ranbaxy advanced over 1% to Rs 219.

VALUE & VOLUME TOPPERS

Bharti Airtel topped the value chart with a turnover of Rs 194 crore followed by Reliance (Rs 187.25 crore), DLF (Rs 177.60 crore), Reliance Capital (Rs 177 crore) and Satyam (Rs 163.20 crore).

Reliance Natural Resources led the volume chart with trades of around two crore shares followed by Reliance Petroleum (1.73 crore), Unitech (1.54 crore), Suzlon (1.40 crore) and Satyam (1.17 crore).

News...

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- Parsvnath puts on hold 12 SEZ projects

- Bank of Japan cuts interest rates to near zero

- Chanda Kochhar to head ICICI Bank

- Fiscal package will be required in FY10 too: Montek

India shares turn down; angry investors dump Satyam

Indian shares fell more than 1 percent on today morning, surrendering a stronger opening, with shares in outsourcing firm Satyam plunging more than 30 percent as investors vented anger over a now-abandoned deal.

Satyam tumbled as much as 30.75 percent to 156.85 rupees, its lowest in more than 4 years, as it was dumped by investors furious at a plan to pay $1.6 billion for control of a construction and a real estate firm that management held stakes in.

Satyam abandoned the deal after its shares fell 55 percent in New York.

"It's an overall hit for market sentiment. It reflects poorly on corporate governance in Indian companies, and it's an issue that investors are now faced with," said Nikunj Doshi, investment manager at Envision Capital.

Largest-listed firm Reliance Industries, a favourite with foreign investors, was down 3 percent at 1,344.90 rupees, adding to the losses.

At 10:43 a.m., the 30-share main stock index was down 0.98 percent at 9,879.29 points, with 21 components losing ground. After opening up 0.96 percent, the market fell as much as 1.48 percent in morning trade.

Key losers included shares with high foreign institutional investor (FII) shareholding. Traders said there had been some selling from foreign investors worried over governance issues, but expected it to be temporary.

Reliance Infrastructure was down 6.8 percent at 593.45 rupees, Reliance Communications was down 4.1 percent at 224.25, and Bharti Airtel fell 0.9 percent to 738.05 rupees.

Foreign institutional investors have been net buyers of about $440 million worth of Indian shares so far in December, but have dumped a net $13.2 billion in 2008. They were net buyers of $17.4 billion last year.

As Satyam plunged, shares of other software exporters rose, which traders attributed to portfolio reallocation.

Tata Consultancy Services rose 0.9 percent to 485 rupees, Infosys Technologies rose 2.8 percent to 1,154.70 rupees, and Wipro rose 0.8 percent to 241 rupees.

In the broader market 1,122 gainers led 811 losers on volume of 129.5 million shares.

The 50-share NSE index was down 0.77 percent at 3,018.20 points.


STOCKS ON THE MOVE

* Construction firm Maytas Infra fell 14.9 percent to 413 rupees after Satyam Computer called off its plan to acquire 51 percent in the company at 475 rupees a share.

* Auto ancillary stocks rose on expectation that a bailout package for U.S. auto majors will be announced later on Wednesday. Bharat Forge rose 11 percent, Amtek Auto rose 5 percent, while Amara Raja rose 8 percent.

* Moser Baer India rose 3.1 percent after the company acquired exclusive home video licence for UTV Motion Pictures' 25 films for the next five years in a deal worth 250 million rupees.


MAIN TOP 3 BY VOLUME

* Satyam Computer Services on 16.7 million shares

* Reliance Natural Resources on 6.1 million shares

* Suzlon Energy on 5.9 million shares

Sensex ends up 142pts; Grasim zooms 9%

Mirroring the positive trend in the global markets, the Sensex opened 132 points higher at 9,822, and touched a high of 9,948 in the morning trades. Some profit-taking at higher levels saw the index pare gains and slip to a low of 9,749.

The index, thereafter, exhibited range-bound movement and finally settled with a gain of 142 points at 9,832.

Out of 2,572 stocks traded today - 1,935 advanced, 556 declined and the rest were unchanged.

The NSE Nifty closed 60 points higher at 2,981.

INDEX MOVERS...

Grasim zoomed over 9% at Rs 1,174, and Hindalco soared nearly 6% to Rs 56.

Sterlite surged over 5% to Rs 308. Larsen & Toubro and Tata Steel rallied over 4.2% each to Rs 820 and Rs 227, respectively.

ONGC gained over 4.1% at Rs 673 while ACC was up 3.9% to Rs 513.

Mahindra and Mahindra advanced 3.5% to Rs 303. HDFC Bank and Jaiprakash Associates were up 2.7% each to Rs 945 and Rs 86, respectively.

Tata Motors moved up 2.6% at Rs 158. Reliance gained 2.4% to Rs 1,338.

...AND SHAKERS

Reliance Communications slumped 4.1% to Rs 239, and TCS plunged 2.6% to Rs 470.

Tata Power tumbled 2.5% to Rs 732. Wipro declined 1.6% to Rs 235 and HDFC shed 1.4% at Rs 1,612.

State Bank of India was down 0.8% at Rs 1,204.

MOST ACTIVE COUNTERS

Reliance topped the value chart with a turnover of Rs 505.79 crore followed by State Bank of India (Rs 234.15 crore), Reliance Natural Resources (Rs 206.80 crore), DLF (Rs 193 crore) and Reliance Capital (Rs 145.51 crore).

Reliance Natural Resources led the volume chart with trades of around 3.51 crore shares followed by Unitech (2.29 crore), IFCI (2.24 crore), Reliance Petroleum (1.50 crore) and GVK Power (1.46 crore).

News...

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# Playboy lays off 14% staff

# Electrolux cuts 3,000 jobs worldwide

# Asia mkts up on fresh US auto plan

SBI says economy likely to need more help

State Bank of India, India's biggest bank, said today there was some concern the economy would require further stimulus beyond large interest rate cuts and extra government spending announced last weekend.

Chairman O.P. Bhatt's comments followed remarks from the central bank (RBI) governor on yesterday that India's growth projections for the current financial year ending in March 2009 may be cut and 2009/10 may be a "more difficult year".

"There are still concerns the economy may require more," SBI Chairman O.P. Bhatt told reporters at a banking conference in New Delhi, although he did not elaborate on what measures were needed to counter the deepest global financial crisis in 80 years.

The Reserve Bank of India (RBI) slashed its key short-term rate by 100 basis points and the central government announcing $4 billion in extra funding at the weekend.

The head of a banking sector body said banks would consider interest rate cuts for housing and small and medium-sized firms that have been hit by the credit crisis.

"We will see what relief can be given. It can entail interest rates also," said T.S. Narayanasami, head of the Indian Banking Association and chairman of state-run Bank of India.

Analysts from firms such as JPMorgan, Morgan Stanley and Citigroup have said while the fiscal package and rate cuts were welcome, they were unlikely to reverse a slowdown.

Morgan Stanley yesterday cut its forecast for India's economic growth in 2009/10 to 5.3 percent from 5.7 percent, saying higher cost of capital could crimp domestic demand.

US House passes auto bailout, Senate prospects uncertain

The House of Representatives approved bailout legislation on Wednesday that would force U.S. automakers to restructure or fail, sending the measure to the Senate where prospects for passage are uncertain.

Democrats sought to reclaim momentum in the $14 billion bailout effort, with the bill they negotiated with the Bush administration clearing the chamber by 237-170.

"This legislation is about offering Detroit and America a chance to get back on track," House Speaker Nancy Pelosi said in a floor speech before the vote. "It gets down to a question of tough love."

The White House weighed in just before the vote with a public endorsement aimed at Republicans skeptical of the rescue and demanding a tougher approach for helping General Motors Corp, Ford Motor Co, and Chrysler LLC.

"We believe the legislation developed in recent days is an effective and responsible approach to deal with troubled automakers and ensure the necessary restructuring occurs," White House spokeswoman Dana Perino said in a statement.

Democrats advocated passage based on the belief that government inaction could lead to an industry collapse that would cost taxpayers far more than the loans intended to see them through March and help them restructure.

While the House stuck to its plan for quick action, uncertainty gripped the Senate where a razor-thin Democratic majority cannot ensure passage. Sixty votes are needed to clear procedural hurdles.

A vote could come as early as Thursday, but some Republicans have vowed to slow or even block the legislation.