The Men Who Saved Satyam

There was a young lady of Niger Who smiled as she rode on a tiger; They

returned from the ride With the lady inside, And the smile on the face of the

tiger.

Almost everyone of us who read this famous limerick in school must have

wondered, even in our innocent childhood days, about the sagacity of the lady

who embarked on a sojourn with the tiger. Strangely, this year on January 7,

there was an unfortunate resonance of this limerick in the confessions of

Byrraju Ramalinga Raju-when in the now infamous letter he admitted to 'getting

on to a tiger and not knowing how to get off”. The only difference was that

while the actions of the Niger lady tickled our funny bones, that of Raju was no

laughing matter. It not just shocked corporate India, but threatened to

permanently tarnish the image of the Indian IT industry built so meticulously

over decades.

Even as the moral turpitude of Raju and other top honchos of Satyam like CFO

Vadlamani were debated upon following the confession, the demise of Satyam and

its debilitating impact on the software outsourcing sector were matters of grave

concern. For once, the much maligned government or more precisely the Ministry

of Corporate Affairs, acted with haste (and with great sagacity, as was proved

later) and constituted a board even as corporate India was sort of paralyzed

with shock. That in such a short term an impending crisis was averted, and with

Satyam now under a new and respectable owner dreaming of a better tomorrow-is

one big success story of positive administrative co-operation with the industry

and deserves a major chapter in the annals of Indian corporate history.

The ominous signs were there in December '08 but only when the shareholder

fracas over the Maytas affair started did the skeletons start tumbling out of

the Raju cupboard. However, till the January 7 confessions, very few had little

inkling about the magnitude of the problem. That's why it was no surprise that

hours after Raju went public, even as both media and corporate India were still

in a state of shock, they were almost concurring on the possibility that this

could sound the death knell for Indian software exports. Paraphrasing Neil

Armstrong, “It was the misdemeanor of one single man, but it could be a giant

misfortune for the entire IT industry.”

Kiran Karnik                                Deepak Parekh

Even though the situation was unprecedented, the Coporate Affairs Ministry

under Premchand Gupta moved in fast and by January 11, they had constituted a

board to run the Satyam affairs. The Board constituted of eminent personalities

like ex-Nasscom chairman Kiran Karnik, HDFC chairman Deepak Parekh and former

SEBI member C Achuthan. Karnik, who was made the chairman of the Board,

remembers January 11 clearly: “It was a Sunday when he got a call from the

government, and by afternoon we had got together, and we started working on

January 12 itself.” In hindsight, that proved to be masterstroke as there was

little time to be lost and and the magnitude of the damage control mission was

gargantuan.

The three eminent members of the Board along with the three who joined later-Tarun

Das of CII, TN Manoharan and Suryakant Balkrishna Mainak-were unanimous from the

beginning on certain issues. First and foremost was that the turn of events

should not lead to a government takeover of Satyam. “We were very cautious about

accepting any financial bailout effort from the government, as all of us were

sure that would be a surefire recipe for disaster,” recalls Karnik. The standard

procedure of going through BIFR was completely ruled out. The collective wisdom

was that topmost priority should be given to collection of financial

receivables, that would provide the working capital on which the company could

sustain itself till it found a new owner.

“Government bailouts never work out for a company in the long run. Therefore,

though the temptation was high to go to the government, we desisted from taking

the short cut. The major problem was that there was no precedence of this scale

in India. Even in the US, corporate fiascoes of this nature only led to the

companies collapsing like Worldcom, Enron or Arthur Andersen.” So when the board

embarked on its 'Salvage Satyam' mission, the first few days only highlighted

the daunting challenges facing them.

Hold On to the Employees



The two biggest concerns were to retain customer confidence and to maintain

and sustain employee motivation; with either one failing, there would not have

been much future for the company. The firefighting was on literally from day

one, as the Board realized that US salaries had to be paid by January 15. The

immediate focus therefore was on collections of receivables even as the Board

members spoke with the US employees assuring them that compensations would be

paid even if it takes a few days' time. With US salaries being paid fortnightly,

there was the same situation again on January 31, but with collections

increasing the crises was again averted. Gradually over the next six weeks, the

situation stabilized.

C Achuthan	Tarun Das	TN Manoharan

Employee motivation was another big challenge. On the one hand there were

media rumors about the veracity of the number of employees (most saying that the

reported '53,000 employees' was overblown by at least 40%) and on the other with

no money in the coffers, there was no certainty where the next compensation

would come from. The assurances from the Board that salaries would be paid

regularly till the time a decision was reached, helped Satyam retain most of its

workforce through these trying times. Karnik is unequivocal in giving credit to

Satyam employees in helping tide over the crisis.

“We made it clear to them that this is not a Satyam scam, but a Raju scam,

and no way could Satyam employees be held responsible. It was a great company,

delivering high quality of services, and they should maintain those standards,

more so in these times of crises, to boost customer confidence,” adds Karnik.

Result: the service quality never flagged, even in the days of initial

handholding of employees. Even attrition levels were kept to a bare minimum.

Though there was a verbal understanding between companies through Nasscom not

to poach Satyam employees, there were enough instances where HRDs of competitors

either directly or through headhunters even created special cells to attract

Satyam employees. One of the Board members, on conditions of anonymity, reveals

that he is in possession of an email from a competing software services vendor

where not only is the Satyam team leader lured with an attractive position, he

is also encouraged to bring along his entire team of fifteen to sixteen members.

Fortunately, not many such offers were taken up-the scenario might have been

different if the scam had happened in 2006-07 where many jobs were available.

The paucity of jobs in recessionary times, turned out to be a blessing in

disguise for Satyam.

Once the initial media hype cooled off, it was also found, at least on the

workforce count, that the 53,000 number was accurate. While the total number of

employees not being inflated to divert funds in the name of wages was a big

relief, it was paradoxically an Achilles' heel for the Board too. Especially in

a contracting economy where the immediate need was to drastically cut the wage

bill for Satyam to sustain itself in the short term.

The Board was also able to ensure timely payment of salaries for the large

workforce so that they were not unduly inconvenienced. Most importantly, they

were able to devise the virtual pool to support the large number of workforce

already on the bench. “The fact that Satyam always had a huge bench, bigger than

most of its competitors, had given rise to the apprehension that employee

headcount too is grossly inflated. While that was not the case, we found that

there were nearly 8,000-10,000 people on the bench,” reveals Karnik.

Under the Virtual Pool concept, the Board informed those on Board to remain

at home with the assurance to call them up immediately as and when required.

However, what was more reassuring was the commitment to protect their base

salaries, provident funds and health insurances-many were encouraged to work

with NGOs too in the meanwhile. Result: though some of these people did join

other companies, most remained and Karnik is proud to mention that even before

the Tech Mahindra takeover, more than 1,000 of these were already into projects.

Another factor that helped the Virtual Pool concept succeed was the excellent

training program that thankfully the Raju regime had invested in at Satyam.

“Actually having a huge bench meant Satyam was giving continuous training to

these people and that had actually created wonderful assets of these people.”

Therefore, once they got into projects, they straightaway started contributing

into the company bottomline. Therefore despite Satyam's specializations in niche

areas like engineering services, it did not lose that many people that could

have crippled any resuscitation effort put into action by the board.

Don't Let Customers Go



The other big action-point on the Board's agenda was to retain the existing

customers-a mass exodus would have obliterated both topline and bottomline, and

unerringly led to its early demise. As a bigger picture, it would have caused

immense damage to the reputation of the Indian software services sector, though

in the short term the Board was not willing to look beyond immediate Satyam

needs.

What the Board members did in the initial few weeks was to individually speak

to each client, offering their assurance that the 'show would go on' with no

drop in quality of services. Karnik, with his Nasscom legacy and experience of

dealing with many of these customers, was the preferred negotiator in most

cases. “I personally met about seventy to seventy-five customers with the

message that, yes, there has been a huge fraud, but now the government has

stepped in and all measures are being taken to retrieve the situation. And, yes,

there will be no deterioration or break in delivery of services or QoS,” says

Karnik.

Thankfully, the strategy paid off and hardly any company left at that stage.

The regulatory investigations on Satyam in the US persuaded a few companies,

like one consumer brand, to jump ship, albeit reluctantly, because of the

apprehension of the damage the continuing Satyam association could have on their

brand equity. Fortunately, not too many thought on these lines, though they had

a proviso of returning when things stabilized under a new owner. And, another

company left after the Tech Mahindra takeover, though for completely different

reasons. They compete with the Mahindra group in tractors and business interest

conflict therefore led to their departure.

Another problem faced initially was to verify how many of the customers and

the financial deals in place with them were genuine. While the two audit firms

KPMG and Deloitte were checking the antecedents of each customer as well as each

and every transaction quarter-by-quarter, going back to 2001-02 (time of the US

ADR), the investigating agencies including CBI too wanted to check whether the

customers were genuine or not. “The problem was that it was one thing for these

companies to receive letters of verification from KPMG or Deloitte, and another

thing receiving them from CBI. It gives rise to the apprehension that something

is seriously afoot and it's prudent to stay away from investigating agencies.”

The Board fortunately was able to convince the CBI to deal in this matter with

extreme sensitivity so it did not lead to customer exodus.

...of Hercules and Ceaser's Wife



That the Board entrusted to save and rescue Satyam performed its two biggest

challenges of retaining employees and customers with aplomb, the credit must go

largely to the six eminent personalities appointed by the government, and to

some extent to the Ministry of Corporate Affairs. On the government side, the

very fact that there was no procrastination in constituting the Board in record

time itself was laudable. Even more praiseworthy was its action in not

unnecessarily meddling with its affairs-it kept its trust on the eminent Board

members and their recommendations. “The government was helpful but it was hands

off; whenever we wanted support, we got it, but there was no undue interference

that could have complicated matters,” says Karnik.

But it was the six board members who performed the Herculean task of cleaning

Satyam's Augean Stables, perhaps even more muddled than the Greek original. Some

decisions of the Board stood out: foremost, was the decision not to accept

government financial doles. Another crucial decision at the very beginning was

around the composition of the Board. The decision was taken not to have any

bureaucrats on board, not even retired ones, as their set style of functioning

could delay the process.

Also, while the initial clamoring was to have many eminent IT personalities

on Board (Satyam being an IT company), the Board members argued against the

reasoning. Their point of view was not to fall prey to a knee-jerk reaction and

look at this as an IT problem, and to instead go for personalities from the

finance world who will understand the financial and accounting aspects. More

importantly, someone from the regulatory side with an understanding of

regulations and statutory knowledge. Thankfully, the government not just

consulted the Board members but listened to their advice too.

The six board members need to be lauded for not just making themselves

available at such short notice to take up the challenge, but for working pro

bono despite their professional commitments. Meetings were convened once or

sometimes twice a week, members had to travel to Hyderabad at short notice, but

despite their busy schedules the members hardly missed any meetings. They also

convinced both SEBI and the Company Law Board against proceeding on any takeover

option; in fact, they managed to create a solution that was more generic and did

not look at Satyam's as a one-off case. Thanks to the board, corporate India now

has a blueprint of the course of action to follow in case there is another such

incident.

The Board successfully co-ordinated with top sets of legal firms in both

India and the US to protect itself against the class action suits threatened in

the US and also against many of the SEC regulatory investigations. It also co-ordinated

with two top sets of audit firms to check out whatever discrepancies there were

in the accounting system and subsequently devise a fresh set of norms and

guidelines that would help not just Satyam but also provide a corporate

governance guideline for India, Inc.

Corporate Governance Blueprint



In fact, by January 11 night, the board had appointed the lawyer firm of

Amarchand Mohandas as there was already a $2 bn class action suit pending

against Satyam in the US. The Indian set of lawyers subsequently tied up with a

US legal firm as the first few weeks involved lots of firefighting with teams

from SEC and SEBI. Next, was the focus on receivables collection to ensure

payment of salaries-fortnightly in the US and monthly here in India. And the

first few weeks also involved hectic parleys with employees and customers,

convincing them to stay on. “During this phase, we also needed to make the

government understand that for an IT company, employees and customers are the

biggest assets. You know the traditional mindset in the government in such

situations is to look at the real estate available and such. We gave the analogy

of a fruit and vegetable market: like today you pay the full rate for the

foodstock, you also get good value for the company with biggest assets.

Tomorrow, you have to sell the same vegetables at 20% discount, and it's the

same if some of the assets leave. The day after, once all the assets are gone,

you have to pay to dispose off,” says Karnik.

Once, by March, when things had stabilized, the board was embarking on its

last crucial role of finding a new and trustworthy owner for Satyam through a

fair and transparent bidding process. In fact, the situation had stabilized to

such an extent that some started questioning the need to sell at all, though

none of the board members was supporting that. Again, they were able to convince

the government not to set a floor price for the sale.

“It was critical in the Indian context to see how many bids come and the

whole process needed to be transparent. Whenever the government had set a floor

price like in Tulip or Centaur Hotel sales, there have been controversies, so we

decided to go for an auction based mechanism for the bids,” explains Karnik.

Again, in an option-based mechanism for a fair and transparent bidding process,

there was the need to have someone as Ceaser's Wife. Ex-Chief Justice Sam

Bharucha consented to join in and meticulously signed every bid and document-in

quick time.

Even when various potential bidders were informally treading the waters, the

board members had to constantly parley with customers to allay their

apprehensions. Many of them were uncomfortable with an MNC company taking over

Satyam-both IBM and Accenture were talked of as potential buyers. “Many of them

wanted an Indian company and that was the rationale for them to outsource to

India. IBMs and Accentures already have relations in the US, and they don't want

to extend them to India both for reasons of diversity and cost.”

Some were not comfortable with the likes of Indian majors like TCS taking

over Satyam. The reason was that they consciously outsource to multiple vendors

and do not want to put all their eggs in one basket now. And some were reluctant

to see any of the traditional IT bigwigs taking over Satyam, in a tacit

acknowledgement of Satyam's specialized niche skills. In fact, one aerospace

client of Satyam was apprehensive that Satyam's new owners might deviate from

its strong engineering services pedigree and lead the company on the BFSI path.

Ultimately, according to the Board members, Tech Mahindra was an appropriate

choice as the new owner. They had two advantages-barring the appointment of a

CEO and a few positions in top management-they hardly had to undergo any

restructuring. And, more importantly, being telecom-centric till now, they will

be able to cross-sell extensively between Tech Mahindra and Satyam clients. And

like ideal surrogate parents, the Board members had been able to find the most

appropriate foster parent for the child they saved from imminent demise. Or,

more in keeping with the Indian tradition, the father selected the best groom

for the daughter-the future of course rests on the luck and fortune of the

bride.

As an acknowledgement of the efforts of the six board members in steering the

Satyam ship through the troubled waters, for motivating and retaining the large

workforce, for ensuring that most customers stayed back and consequently

retaining confidence in the Indian IT services sector, for ensuring the survival

of Satyam without any monetary doles from government, for successfully abiding

with all regulatory and investigative mechanisms of different bodies in India

and the US, for successfully finding for Satyam a new and respectable owner

through a fair and transparent bidding process, and finally for successfully

creating a new model for corporate governance in India, Dataquest has chosen the

government appointed Board of Satyam for Dataquest IT Persons of the Year 2009

award.

Rajneesh De



rajneeshd@cybermedia.co.in