Lead Story

Why institutional investors duck governance issues

Corporates, especially in India, get away with just about anything because financial institutions look the other way

In December 16, 2008, B Ramalinga Raju stunned the market by announcing that Satyam Computer’s board had approved a decision to acquire Maytas Properties for $1.3 billion and a majority 51% stake in Maytas Infrastructure for $0.3 billion. The late evening announcement saw the ADRs listed on the US market tank 54.5% in a single session. In a conference call with institutional investors that same evening, Raju and his board came under fire from aggressive mutual funds and foreign institutional investors, who threatened to oppose the move. Jayesh Shroff, who was then with SBI Mutual Fund, was particularly scathing in his attack on Raju.

“No foreign investor in the country will track any Indian company after your move. Do you understand the implication of this move? …You had no business wasting money and paying back the promoters of Satyam and promoters of Maytas Properties,” Shroff said in the concall. The carnage continued on the Street when the local market opened the next day, with the stock tanking more than 33%. There was more trouble in store for Raju when, at the behest of Madhusudan Kela (who was then with Reliance Mutual Fund), some of India’s leading top-notch fund managers from ICICI, Templeton, Birla and a couple of FIIs got on a call with the promoter. The institutional investors informed him that they had taken a legal opinion about his proposal and threatened that they would take the case to the Company Law Board, if need be. Under immense pressure from investors, Raju and his board dropped the proposal and intimated the same to the exchanges.

A couple of days after the development and before Raju went public with the truth about Satyam’s cash position, Kela invited the country’s leading fund managers and FIIs for a meeting at the Reliance Mutual Fund office. The idea behind the meet was to discuss the possibility of creating a united forum comprising of fund houses and foreign institutional investors to oppose such instances of corporate misgovernance and malpractices. The meeting, as it turned out, saw just a handful of representatives in attendance and what emerged from the discussion was that there were too many conflicts of interest for the fund managers themselves, given that most of them were part of AMCs promoted by corporate houses and institutions.


Birds of a fe


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