One day in early January 2009, C B Bhave, chairman of India’s securities market regulator Sebi, was checking his mail a little after coming in to office in Mumbai’s business district, BKC, when he noticed a communication from the promoter of the Hyderabad-based software services company Satyam Computers, one of the fastest growing firms of that era. The contents of the mail were stunning: B Ramalinga Raju had written that he was riding a tiger, and was bound to be killed either way — if he stayed on, or jumped off. The mail referred to the fudging of accounts in the company whose revenues were then shown to be a little over $ 1 billion. He didn’t know what to do, Raju had apparently written.
Coming from a listed company — one whose stocks were also traded on Nasdaq — this was explosive: something that would have a huge impact on the financial markets, and for corporate India. This was material information that would have to be disclosed to the market.
After he had finished reading the mail, the Sebi chief got in touch with top officials of the two stock exchanges — the Bombay Stock Exchange and the National Stock Exchange — to check if they too had received similar emails. They hadn’t — and Bhave then instructed both exchanges to get in touch with Satyam’s compliance officer and find out whether the company’s chairman had indeed sent a mail to the regulator that morning. With no response coming after five minutes, he told the exchanges to keep calling the compliance officer. Finally, the official in Satyam confirmed that the email was indeed sent out by Raju himself — after which the information was released to the Indian stock markets. Only a day earlier, a top investment bank had flagged concerns over the company’s accounts — and told the regulator that it was getting out of a mandate that it had secured from Satyam.
The regulator briefed key government officials in Delhi, including the Secretary in the Ministry of Corporate Affairs, about the possible fallout of the situation — and the need to coordinate a response. This was an unprecedented development in Indian corporate history — a promoter conceding that his company’s accounts books were cooked, and false invoices had been created showing huge cash balances.
A joint team of officials from Sebi and the Registrar of Companies went to Hyderabad to seize documents and to inspect them. The government swiftly disbanded the board of Satyam Computers — which had marquee names such as Krishna Palepu of the Harvard Business School, known for his expertise in corporate governance, M Rammohan Rao, dean of the Indian School of Business and a former director of IIM, Bangalore, and former Cabinet Secretary T R Prasad, on it.
Raju and his CFO Vadlamani Srinivas were soon arrested. There was drama after Sebi sought access to Raju. Faced with repeated adjournments, the regulator appealed to the Chief Judicial Magistrate and, after failing to succeed, approached the High Court with a writ petition seeking a direction to the magistrate. Finally, Sebi approached the Attorney General of India, Goolam E Vahanvati, who sought special permission from the Supreme Court to take up the case. The AG had to tell the court that this was a matter of national importance — one in which India’s reputation was at stake. In what was considered unprecedented action, the Supreme Court directed the superintendent of the jail in Hyderabad where Raju was lodged to allow Sebi officials to question him.
Prime Minister Manmohan Singh was briefed by the Sebi chief and by government officials. The importance of bringing top-quality professionals and respected names on the revamped board of Satyam was discussed. Kiran Karnik, a former head of industry body Nasscom, HDFC chairman Deepak Parekh, and a former head of the Securities Appellate Tribunal (SAT), C Achuthan, were nominated to the board. The names were discussed with the regulator and approved at the highest level of the government. Singh invited the regulator and all others involved in the firefight to reach out to him for support as he himself monitored the developments.
There were other challenges to handle. The revelations about Satyam included allegations of falsifying accounts and fudging, and Sebi got in touch with the Institute of Chartered Accountants of India to get independent external auditors to verify the cash in hand of the listed companies who figured on the Sensex and Nifty. That helped reassure investors, even as some of the new independent directors engaged with regulators and investors abroad before getting down to work to set the company’s affairs in order. With a retired Chief Justice of India, S P Bharucha, too around to supervise, a quick turnaround was made possible — leading to a public auction by April of the company, in which the Mahindra group acquired it.
Interventions by the government in a corporate entity are often criticised. But this was one case in which it was widely acknowledged to have been the right step — and one which helped boost confidence. The intervention was prompted by the fact that the reputation of corporate India was at stake — and the integrity of financial statements of some of the top listed firms.
More recently, the shocking ouster of Cyrus Mistry as the chairman of the house of Tatas is also a blow — but it relates more to issues of corporate governance and apparent values. That’s why there is unlikely to be any direct intervention by the government this time.