Replacing the Maytas board is not warranted

I was interviewed by CNBC Awaaz today on the government decision to move the Company Law Board to replace the Maytas Board in connection with the Satyam scandal. I disagreed with the move though I was among the first to argue that the government should replace the Satyam board early last month (see here and here). The Maytas situation is different both because the urgency of the Satyam case is lacking and because there are serious conflict of interest issues.

Satyam presented a complete governance vacuum: the Chairman had confessed to a fraud, the promoters probably no longer held much of their shares, and the independent directors had lost all credibility. This is not the case in Maytas. Second, Satyam had value only as a going concern as the tangible assets were a small fraction of its enterprise value. Maytas on the contrary is in real estate which is almost as valuable in liquidation as it is on a going concern basis.

More importantly, the prime allegation in respect of Maytas is that money looted from Satyam ended up in Maytas. This means that the stage is set for litigation between Maytas and Satyam. The government by taking over both these companies is interposing itself into a commercial dispute between two companies. Since Satyam is a much more high profile case, the temptation would be there for the government to favour the Satyam shareholders over the Maytas shareholders. This alone is a strong argument for not allowing the government to appoint a new Maytas board.

What does make sense is for the Company Law Board (CLB) to forbid any mortgage or sale of property by Maytas. The CLB could also order an emergency meeting of the shareholders to elect a new board. This was not a feasible option in the Satyam case because of the urgency emanating from the intangible nature of its assets.

The power to replace the board is an extraordinary power to be exercised only in extraordinary situations. Power has a tendency to become addictive; having used it once, the temptation is to use it again and again even when the circumstances do not warrant it. This temptation must be resisted.

Posted at 12:55 pm IST on Wed, 18 Feb 2009         permanent link

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