Minutes reveal how Maytas deals were cleared after initial hiccups.
Most independent directors on the Satyam board asked searching questions on the sanctity of the Maytas deals on December 16, but none of them went far enough to block the proposal — a reason why it was passed “unanimously” after initial hiccups.
The minutes of the meeting, which have now been made public, can also be a case study of how companies take directors for a ride by giving misleading information.
As the board meeting began, at least one director, Mangalam Srinivas, cautioned the board not to use the directors as a “rubber stamp to affirm decisions already reached”. Srinivas, the longest-serving board member and the first to resign after the controversy erupted, also wanted to know if there was any particular reason for this initiative and the timing of the proposal.
M Rammohan Rao, former dean of Indian School of Business, wanted to know if the foray into these areas would dilute Satyam’s core competency of information technology. Rao, who chaired this meeting as Raju had stepped aside while the board deliberated the Maytas buyout, wanted to know if the diversification was fraught with risk. He was told “there may be some risk but it can only be known from the marketplace.”
On an enquiry by Rao about the possibility of any competitive bid, the management said the possibility was distant, given the Securities & Exchange Board of India regulations.
Compared to Srinivas and Rao, the other directors opted to ask much softer questions. Vinod Dham, known as the father of the Pentium chip, said since it was a related party transaction, it was important to demonstrate how the acquisition would benefit the shareholders.
Harvard professor Krishna Palepu, another independent director, said that creating synergies between different entities was a challenge associated with the proposed acquisition and it needed to be managed well.
On his part, T R Prasad said the valuation of Maytas Properties should be done in three distinct categories — completed projects for which the valuation be based on actuals, work-in-progress for which valuation be brought in alignment with the current market realisations, and for land awaiting development the valuation should be based on the basic market value notified by the state government.
He also added that if the final valuation of Maytas Properties was significantly higher than the aggregate of the three valuations, full and proper justification should be provided for that.
The concerns prompted Rammohan Rao to ask for a presentation from Vadlamani Srinivas, the company’s former chief financial officer, who is now in police custody along with the Raju brothers.
Vadlamani said the valuation of Maytas Infra was done under Sebi’s rules for takeovers while Ernst & Young had valued the unlisted Maytas Properties — something which the audit firm has vehemently denied.
Vadlamani said Ernst & Young had valued Maytas Properties at Rs 6,523 crore, but the company has considered only Rs 6,410 crore. He also said Luthra and Luthra, a Delhi-based law firm, had carried out the due diligence for this valuation. This, too, has again been denied by the law firm.
The CFO also said that the name of the valuer could not be made public due to a non-disclosure agreement. No director questioned this odd statement.
The CFO said Maytas Properties had a land bank of 6,800 acres and could build 245 million square feet of space. “This is almost one-third of DLF’s properties but the valuation considered is one-tenth of DLF’s valuation,” he said, adding that the revenues from the two Maytas entities would account for 25 per cent of Satyam’s revenues by 2010.
The board was also told that the public shareholders will have to pay Rs 525 per share to acquire 20 per cent through an open offer and promoters will have to shell out Rs 475 per share to the promoters of Maytas Infra for acquisition of 31 per cent stake.
No one asked the management the basis for the E&Y valuation or when it was done, or the reason for the pricing of the open offer. In fact, directors like T R Prasad and V S Raju commented that the pricing for public is generous.
Srinivas also seemed to have given up her initial reservations and said the proposal seems to be “encouraging good news”. Palepu only said the management should also make the “same compelling presentation” to the investors.
Rao then moved the resolution which was finally passed by the board.
To be fair, even after the passage of the resolution, the board members asked the company to make sure that compliance was ensured to their comments and proper justification was provided in case the actual value of the acquisition target turned out to be below what was told to them.
The minutes say that “without prejudice to the unanimous approval by the board members of the acquisition of Maytas Properties, board members further reiterated that compliance shall be ensured for the comments made by all the directors as deliberated and discussed during this meeting, particularly that proper justification be provided to the board members in the event the valuation of Maytas Properties is significantly higher than the aggregate of the actual value of completed projects, current market realisation value of the work-in-progress and the basic market value notified by the state government for registration of lands awaiting development.”
