Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

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.

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