ANGRY shareholders last week forced India’s fourth-largest information technology services company, Satyam Computer Services, to back-out of a controversial deal to acquire two firms – Maytas Properties and Maytas Infra Ltd – owned by the promoter family.

While B. Ramalinga Raju, the chairman of the Hyderabad-based group, was forced to call off the deal – which involved Satyam Computers paying $1.6 billion for two real estate sector firms owned by his family – he succeeded in tarnishing the reputation of the group. Investors are now likely to seek his scalp and Satyam could very well end up being acquired by some other company.

Of course, what Raju did was nothing new in corporate India, especially among family-promoted groups. For years, promoters have indulged in all kinds of unfair practices, treating the companies started by them – and in which they later became minority stock-holders – as their personal fiefdom.

In the past – in the pre-reforms era, when foreign institutional investors were also absent – there was very little that shareholders could do. Institutional investors were mostly government-owned insurance companies, banks and mutual funds. Promoters indulging in unethical practices would ensure that none of the government firms would object to their dealings, even going to the extent of bringing political pressure on the officers.

Retail investors had virtually no say, so family-promoted groups could ride roughshod over all and sundry. There were countless deals – many more serious than the one that Raju tried to force through last week – in which public money was treated like personal wealth and businessmen misused their power.

In fact, when Non Resident Indian (NRI) industrialist Lord Swraj Paul – who earlier this month became the first Asian deputy speaker of the British House of Lords – tried to acquire a few Indian companies in the 1980s, he was virtually booted out of the country by promoters of the targeted firms, who despite their low shareholdings, managed to exercise their political clout and forced the government to intervene and ‘protect’ them.

Ironically, India’s information technology sector has stood out from the rest of the business world, thanks to the refusal of its top guns – including N.R. Narayana Murthy, the founder of Infosys Technologies and Azim Premji, chairman of Wipro – to dabble in politics.

The top-three Indian IT firms – TCS (part of the Tata group), Infosys and Wipro – have established strong corporate governance norms and are looked upon internationally for their fair practices. Satyam, though the fourth-largest in terms of revenues and exports, was never really bracketed along with the top-three all these years, in terms of corporate governance.

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SHOCKINGLY, other directors on the board of Satyam Computers, including some of the most prominent business personalities who were there as independent directors, failed to raise objections when the management of the company tried to steer through the controversial deal.

The independent directors included Vinod Dham (who is claimed to be the ‘father’ of the Pentium chip, having worked with Intel at a time when it was being developed), Krishna Palepu, professor of business administration at the Harvard Business School, M. Rammohan Rao, dean of the Indian School of Business, Hyderabad, and T.R. Prasad, former cabinet secretary to the Indian government. Both Dham and Palepu were not in India for the board meeting, but participated through conference calls.

The directors now claim that the acquisition of the two Maytas firms would have helped Satyam significantly, especially at a time when the growth of the Indian IT sector is expected to slowdown because of the global recession. The valuations of the two companies were also attractive and Satyam would have gained substantially, they argue.

But leaving aside the business proposition, what has shocked critics is the manner in which the entire deal was being rushed through. Ramalinga Raju, the chairman, and his family, have a mere 8.7 per cent stake in Satyam Computers. Foreign institutional investors have a 48.22 per cent stake in the company, making them the largest controlling group. Indian financial institutions have another 12.91 per cent stake. The rest of the stake is with the public and a few other groups.

The Rajus had promoted the two companies – Maytas (which is Satyam spelt in reverse) Properties and Matyas Infra Ltd. They now have 35 per cent and 36 per cent stake respectively in the two companies.

There has been a sharp slowdown in all three segments of business – information technology, properties and infrastructure. Since Satyam Computers was sitting on a pile of cash – of about a billion dollars – Raju decided to get his board approve the controversial proposal of spending $1.6 billion on full acquisition of the two companies.

This was in effect a bail-out of the two companies – in which Raju and his family had a substantial stake – by Satyam, in which the chairman had a negligible holding. While the directors timidly approved the proposal, the company had to pay a heavy price. All hell broke loose at the New York Stock Exchange, where the company’s shares are listed, as investors dumped Satyam scrips, hammering it down by 55 per cent within hours after the board approved the move to acquire the two firms.

Raju fortunately decided not to brazen it out and quickly called off the controversial deal. “We have been surprised by the market reaction to this decision even though we were quite positive about the merits of the acquisition,” remarked Raju after the market massacre. “However, in deference to the views expressed by many investors, we have decided to call off these acquisitions.”

But furious investors on the domestic exchanges continued thrashing the shares, and Satyam shed about 30 per cent on the Bombay Stock Exchange the following day. Worse, the company and its promoters lost their credibility, with some of the enraged institutional investors demanding their scalp.

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DESPITE its best efforts, Satyam Computers has never been clubbed along with India’s top three IT firms. The company suffered from an image problem and a governance perception, which was reflected in its lower price earning multiples.

A self-made businessman, Raju belonged to a farming family. In the late 1980s, just at the time when India’s software services industry was taking roots, Raju established Satyam Computers. Soon, he managed to get offshore contracts from American companies.

At the turn of the century, Satyam sniffed opportunities in the Y2K business, and grabbed millions of dollars in business. Later, Raju managed to rope in top American clients, including General Electric. He then acquired about half a dozen international firms and managed to diversify geographically to other countries.

But analysts now fear that Satyam Computers will have to pay a heavy price for the shocking blunder committed by its board and promoters. There are apprehensions that some of its leading clients – including firms like Cisco Systems, Du Pont, GE, Sony, Nestle and Unilever – may review their ties with Satyam.

About $200 million worth of outsourcing contracts are due for renewal over the coming months. In the wake of the global financial crisis and the ham-handed manner in which the company alienated thousands of international and domestic investors, many of the international partners might be reluctant to renew their contracts, it is feared.

Perhaps the only good thing to come out of this ugly episode is that other Indian family-promoted groups would have learnt a lesson and might not opt for such unethical practices, annoying investors who are increasingly asserting their rights.