Satyam is dead, long live Alt Satyam

15 Jan 2009,

Here’s what to do with Satyam. Create a new company, say, Alt Satyam, under a credible management, migrate all employees and outsource all of
Satyam’s present work to it, leasing out Satyam’s premises and equipment to the new company so that Satyam can sort out its problems without disrupting the work entrusted to it or letting its employees suffer.

There is a case for the government to step in to salvage the wreck that is left of what used to be India’s fourth largest information technology company. Outsourcing rests on confidence — that the job entrusted to a bunch of anonymous people in some remote corner of the world would be done, and done well.

If India’s fourth largest IT company fails to live up to this promise, that could hurt India’s IT sector in general and the smaller outsourcing firms in particular. This has to be avoided.

Then, there is the question of India’s ability to clean up this sort of a corporate crisis. As China takes its place as the world’s third largest economy, surpassing Germany, can India fail the test of institutional capacity to handle a corporate crisis of the Satyam kind?

Satyam directly employs 53,000 people. It is estimated that every such job creates seven other indirect jobs. So, at stake are 424,000 jobs, in this time of slowdown.

So, the government should step in. And it has, by appointing a new board of directors. However, it is not easy for the government to pump in money, which the company probably needs, thanks to the sudden disappearance of its reserves running to thousands of crores of rupees.

Hidden old liabilities and unpredictable new liabilities arising from class action suits filed against Satyam by US investors make Satyam a potential minefield for any new investor or lender, including the government. So it is eminently desirable that the government’s intervention strategy avoid infusing money into the company.

Then again, there is no reason for the government to bail out investors in Satyam. Equity capital is risk capital. If the company does well, equity holders gain handsomely. If the company performs poorly, shareholders suffer.

If shareholders fail to exercise their right and duty to monitor the functioning of the management, they are likely to suffer. There is no reason for the government to vitiate this logic of corporate ownership.

The concerns for the government should be protecting India’s credibility as an outsourcing destination, institutional integrity of oversight, regulation and corporate governance and the fate of the employees.

What happens to Satyam, the corporate entity, matters little to the public beyond these concerns. How would the Alt Satyam proposal work? Would such an alternative company that absorbs all of Satyam’s workforce and work be legally tenable?

There can be no legal challenge to workers leaving one company and joining another. There could be some problems with Satyam outsourcing its already outsourced work. For one, stipulations in some contracts could prohibit transmission of sensitive data or intellectual property outside the contracting party, namely Satyam. These would need to be addressed on a case-by-case basis with individual clients and their contracts modified at short notice.

T K Arun, ET Bureau