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Private Equity Reaction To Satyam Scandal

07 January, 2009

The Satyam scandal certainly raises serious questions about corporate governance. These questions will not stop at Satyam. Many more companies will get into a scrutiny like that. Of what has happened to the fourth largest publicly listed IT company, does that anywhere hint at private equity being better suited model for corporate governance advantages due to its close involvement with the companies and allowingcorporations to be better governed creating wealth gain for investors.

VCCircle talks to private equity investors to get their reaction on corporate governance regulations in India.

On his quick reactions to the Satyam saga, Sarath Naru, Managing Director, VentureEast told VCCircle, “I am totally shocked. I am just not able to understand what provoked him to do something like this. I don’t believe that it is symptomatic of what Indian businesses are doing and does that mean I will be very vigilant as an investor.  No. Or will my behaviour change in a certain way, No. My belief is that we will continue to do what we have been doing.

One bad corporate governance will not affect the level of confidence we have with other companies. Before we invest in any company, we already have the letter of law, contract with the management. We have real close involvement with the companies that we work with, so that any untoward happening can be avoided, which prevents the management from acting funny.”

Private-equity boards typically have the advantage of in-depth due diligence that precedes a buyout, and they use this highly specific knowledge to oversee the ongoing business.

Sarath also added that private-equity boards rarely rely upon quarterly or monthly meetings alone. They review a continuing flow of detailed monthly earnings reports, and many directors engage in weekly and often daily conversations with management.

Also, most private-equity boards operate with a time horizon stretching beyond quarterly earnings reports, reflecting the complexity of corporate restructurings and other long-term growth strategies.

Taking the issue on Indian corporate governance further, Rahul Bhasin, Managing Director, Baring Private Equity Partners India told VCCircle, “There has been a lot of neglect in enhancing governance in companies. There’s no teeth behind the laws. We try to copy America but forget that the nature of governance is different in India. In our country, the rights of minority shareholders are always suppressed by the majority shareholders. In the US, shareholders have no control over the management, whereas in India everything is vested with the majority shareholders, be it the voting rights.

 

The definition of independent directors in India is wrong. It’s a complete sham. I think that the markets always knew about poor governance of Satyam, and that’s the reason their multiples have been the lowest. What indeed comes shocking is the extent of the fraud.”

 


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1 Comment
Old Hand . 6 years ago

“private equity being better suited model for corporate governance advantages due to its close involvement with the companies and allowing corporations to be better governed creating wealth gain for investors”

My foot!

If anything, private equity is interested in showing companies growing faster, not slower, and more profitable, not less profitable.

Some of these are likely to put pressure on promoters and compromise on governance. Sometime these compromises may take place with knowledge of pvt equity board members.

Can’t provide any examples here, but be sure, there are several.

The due diligence done by VC/PE often does not penetrate enough.

Private Equity Reaction To Satyam Scandal

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