Something About The Law

Yesterday, there were two important press conferences in India that dealt with the establishment’s view of the crisis unfolding in Dubai. One was Mr. Anand Sharma’s, where the Commerce and Industry Minister sought to allay fears of its impact on India. Around the same, there was one by Dr. Thomas Isaac, Kerala’s FinMin, who (quite surprisingly) admitted that the Dubai meltdown is going to hit Kerala pretty seriously. Well, I guess the admission may not be so surprising since the sheer influence of expatriate Gulf Malayalis on Kerala’s economic engine is near-sacrosanct.

For long, Gulf countries have been the native Keralite’s favoured professional destination – to the extent that it has been made legendary in popular culture. On the ground, remittances from the Gulf has touched INR 2.2 million, with a CDS study stating it was probably the only dynamic factor in the State’s otherwise poor show from ‘75 to 2000. By acknowledging the gravity of the crunch in Dubai at the moment, Kerala’s Finance Minister has definitely set the cat amongs the pigeons.

Kerala has many reasons to be worried about the tidings in Dubai. Its not just a question of reduction in remittances – more importantly, it is the issue of forced repatriation back to the State that scares everyone. I call it forced, not by virtue of any hostile policy on part of the Dubai authorities (though such a situation is only a matter of time, if the trajectory remains the same), but because of acute unemployment concerns in the Emirates. A significant percentage of Gulf Malayalis are employed in blue-collar or semi-skilled professions, which will be hit the most as a result of the real estate crisis in Dubai. Infrastructure, real estate and luxury tourism  has been Dubai’s USP, since the Emirate does not have oil resources like Abu Dhabi. A slowdown in construction will affect migrant labour and employment contracts, and a good chunk of the bane will be directed at the Malayali. This, in addition to the problems of illegal migration from Kerala (which the Government has been able to curb in recent years).

Even with the sizeable number of highly skilled professionals from the State working in Dubai, the picture is definitely not pretty. When we euphemistically refer to the term ‘highly skilled’, it is often in comparison to lower rungs. Malayalis in the service sector comprising professionals as educators, scientists, lawyers, HR personnel (with the exception of doctors/nurses) are a rarity in the Arabian peninsula. Instead, the top jobs have also focused on businesses relating to real estate, construction and banking.

Whether the State will witness an unprecedented return of its residents from the Gulf is yet to be known. But the picture’s not rosy, and tough times lie ahead.

(Featured picture: A poster from Mohanlal’s hugely successful ‘Varavelpu’ [Welcome], based on the tribulations of a Malayali expatriate in Kerala after he returns from the Gulf.)

That is the theme for this year’s meeting of the high and mighty in the hamlet of Davos in Switzerland. This year, however, the World Economic Forum has been marked by a significant decrease in the number of helicopter-attendees, celebrities and dishes in the otherwise-lavish buffet spread. Indeed, there are no Richard Fulds or Ramalinga Rajus telling us how rosy the picture is/was/will be. Instead, we have a retinue of delegates and political heads who have barely survived the intense fallouts of ‘the first depression of the global age’ (Gordon Brown).

Gloom has undoubtedly been the redefining sentiment at the WEF this year. The blame game has been doing the rounds, with parallel sessions producing several culpable entities. Many bankers have chosen to remain in their offices in New York, with the Obama administration asking them to stay put and start the reconstruction process. (“How could banks be so stupid?,” several panelists asked, and allow things go so wrong so quickly? - From the BBC). The forum has admittedly been an effective platform to flesh out the possible socio-economic impacts arising from this plaguing crisis (Europe faces the risk of more social unrest unless measures are taken to quickly tackle the global economic crisis - Christine Lagarde, French Finance Minister). Many governments have been left reeling by the credit crunch, with one collapsing (Iceland). Leaders of the world have sought to identify deeper ramifications of the crisis (The economic crisis may aggravate the negative tendencies that are present in global politics - Vladimir Putin)

The efficacy of stimulus programmes and bailout packages have been thrashed about, with no clear mandate or solution to tackling the ever-aggravating crisis. Nonetheless, there may yet be light at the end of the tunnel. As the WEF fizzles down to its bleak end, one participant believes that the irrational exuberance of past years has been replaced by irrational despair. Whether rationality will eventually tide over crisis-management remains to be seen.

As the year is fizzling down to an economically weak finale, Satyam Computers has found itself in a deep mire, with the Maytas acquisition deal coming under strict scrutiny.  In an unrelated development, the World Bank later announced its intention to snap all business and development ties with Satyam following allegations of data theft in one of the Bank’s projects managed by the latter.

Many might be wondering why this seemingly plain-vanilla private sector transaction is figuring in a blog that addresses larger policy issues. However, the Satyam-Maytas deal throws critical aspects of efficient and ethical corporate governance into relief. Before I venture to speculate on the  Big Picture, here’s a primer on what really happened.

On December 16,  Satyam Computer Services, India’s fourth largest IT services provider, proposed to acquire Maytas Properties and 51 per cent stake in Maytas Infrastructure for a consideration of 8,000 Cr (Approx.). The deal, which surprised analysts and shareholders alike, was held out as a plan to ‘de-risk the core IT Business’ in the face of the ongoing economic downturn. On the other hand, it was no State secret that the Maytas (a palindrome for Satyam!) Group was controlled by the sons of Mr. Ramalinga Raju, Satyam’s Chairman. The proposal and its justification raised many eyebrows as the financial crunch was yet to show a perceivable impact on the software/IT industry.

Well, eyebrows were pretty much the only things raised by this deal, because every other financial index of Satyam plummeted. The next day, the ADR (American Depository Receipts) of Satyam Computer in the NYSE tumbled by over 50 per cent. In India, the scene was less dramatic, but the stock continued to be flat, indicating little interest from the shareholders. Consequently, Satyam was forced to call off the deal, all within a span of 24 hours. Mr. Raju said,

We have been surprised by the market reaction to this decision even though we were quite positive about the merits of the acquisition.

Thus, the shareholders and investors in the company were quick to shift gears into activist mode, evoking an incident hitherto unseen in Indian corporate history. From the outset, it was clear that the deal had thrown caution to the winds, materializing without any respect to shareholder sentiments. Despite the enormity of change proposed through diversification, Satyam failed to factor in public opinion on the matter that, prima facie, seems like a family affair.  The appalling lack of transparency has forced SEBI and the Ministry of Corporate Affairs to take note of the matter and the watchdogs will certainly examining the nuances of this deal.

The issue brings the role of independent directors of a Company to the forefront; their opinion on such matters is expected to echo the views of a rational shareholder and not merely the interests of the promoter.
Business Line has an exceptional piece on the matter and the author goes on to say,

Questions will be raised rightly about the role of independent directors in issues such as this. The standards of corporate governance were sought to be raised when the stock market regulator insisted that independent directors should be in the majority on the boards of listed companies. Companies have in general complied with the rules, but the nagging doubt was whether independent directors appointed by a body of shareholders dominated by promoter can at all remain independent. The Satyam saga has brought the issue to the fore yet again.

Transparency in corporate governance is crucial as India is opening her markets to major foreign players.  If our domestic  segments cannot set an ethical example to its shareholders and investors, retail and institutional confidence is going to take a hit. Lifting the corporate veil in such cases is integral to sustain the company’s reputation and shareholder trust.

For the average shareholder/investor, the Satyam fiasco presents yet another reminder of the need to be activist and informed. The economic crisis might generate a number of transactions which are intended to be a quick-draw shortcut to ease monetary repercussions. Nonetheless, those at the receiving end have to be cautious, adopting a rational approach to the ‘lucrative’ deals that present themselves. The $50 billion Madoff fraud has left investors reeling; corporate accountability must be preserved to ensure a fair disposition of rights.