Satyam Minutes Show Directors Raised Questions
JANUARY 16, 2009, 2:19 A.M. ET
By NIRAJ SHETH and JACKIE RANGE
online.wsj.com
NEW DELHI -- Minutes from a crucial December board meeting at Satyam Computer Services Ltd. shed new light on how the giant outsourcer's directors wound up approving two deals that were a key part of the massive fraud that has since engulfed the company.
The minutes, a copy of which was reviewed by The Wall Street Journal, show that at least three directors asked questions about the proposed $1.6 billion acquisitions. But in the end, the deals were approved by the board after extensive presentations on the merits by senior Satyam management. (See a copy of the meeting's minutes).
The deals at issue were the acquisition by Satyam of two infrastructure companies -- Maytas Properties Ltd. and Maytas Infra Ltd. -- that are run by the sons of the founder and then-chairman of Satyam, B. Ramalinga Raju. Mr. Raju also had a financial interest in the companies.
The deals are significant because they set in motion a chain of events that culminated with Mr. Raju's confessional letter to the board last week that he had cooked Satyam's books for several years, including the creation of a fictitious bank balance in excess of $1 billion.
Mr. Raju said in his letter that the proposed acquisition of the Maytas companies was a last-ditch attempt to plug the hole created by the fraud in the company's balance sheet.
But when the deals were announced, many Satyam investors criticized them as ill-conceived and dumped their shares. Satyam backtracked and rescinded the deals.
In the wake of his confession, Mr. Raju was arrested along with his brother, B. Rama Raju, the company's managing director and a board member. They have both been charged with forgery, cheating and fraud. Their lawyer declined to comment Thursday.
Police say they are pursuing whether board members knew of the fraud, according to court documents. In his confession, Mr. Raju said that "none of the board members, past or present, had any knowledge of the situation in which the company is placed."
The board minutes show that the Raju brothers didn't participate in the discussions at the Dec. 16 meeting over whether to approve the deals because they each hold stakes in the Maytas companies. Chairmanship of the meeting was handed to M. Rammohan Rao, who was then dean of the Indian School of Business.
The board heard presentations supporting the deals from three senior Satyam executives.
One, then-Chief Financial Officer Srinivas Vadlamani, presented the board with valuations on both companies, including one on Maytas Properties prepared by accounting firm Ernst & Young.
Mr. Vadlamani was taken into police custody in the city of Hyderabad last week, arrested on charges of fraud. His lawyers weren't reachable.
In a prepared statement, Ernst & Young said it had provided the valuation for another purpose and was "not given to understand by any party, explicitly or implicitly, during the valuation exercise, about Satyam's plans to acquire Maytas Properties."
Some independent directors raised questions at the meeting about the ties between the Raju family and Maytas. At the time of the meeting, six of the nine board members were independent.
"The proposed acquisitions have two complicated aspects -- unrelated diversification, and related party transactions," said Krishna Palepu, a Satyam director and a Harvard Business School professor of corporate governance who participated in the meeting by phone conference, according to the minutes.
Mr. Rao, the board member who chaired the meeting, voiced the need for a careful valuation of the companies from multiple sources. "There should be complete transparency and justification for the [valuation] methodology to be adopted," he said, according to the minutes.
Another independent director, Mangalam Srinivasan, said the board should have been involved earlier "to avoid the impression that the board is used as a rubber stamp." When Mrs. Srinivasan asked why the company was proposing the acquisition now, one of the presenters, Ram Mynampati, a director and president of Satyam's commercial and health-care outsourcing business, told her the downturn in the technology industry made it "the right time to de-risk."
Mr. Mynampati, who is still with the company but is no longer a director, told reporters last week that he had been unaware of the financial irregularities at Satyam. He didn't return calls seeking comment Thursday.
In the end, the board unanimously approved the acquisitions. Two directors, Mr. Palepu and Vinod Dham, who were granted a leave of absence because they weren't physically present, didn't vote, according to a person familiar with the meeting. The Raju brothers also didn't vote, according to the minutes.
Mr. Dham, the executive managing director of NEA-IndoUS Ventures, a Silicon Valley venture-capital firm, couldn't be reached for comment. Mr. Rao and Mrs. Srinivasan also couldn't be reached. The three directors resigned in December, without publicly citing reasons.
Mr. Palepu, who also resigned from the board in December, said in a statement Thursday that to get the company back on its feet, board members would have to spend much more time in the country for meetings, which he couldn't commit to, leading him to resign. He said that he had fulfilled his responsibilities on the board fully and appropriately.
The government removed the directors who remained on Satyam's board as of last week. It installed three new board members Sunday and three additional members on Thursday.
—Eric Bellman in Hyderabad contributed to this article.
Write to Niraj Sheth at niraj.sheth@wsj.com and Jackie Range at jackie.range@wsj.com
Printed in The Wall Street Journal, page B1
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