MINISTER FOR CORPORATE AND MINORITY AFFAIRS PROMOTES

UNCLAS SECTION 01 OF 03 MUMBAI 000346

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DEPT PASS TO USTR

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TAGS: ECON EFIN EINV SOCI IN
SUBJECT: MINISTER FOR CORPORATE AND MINORITY AFFAIRS PROMOTES
CORPORATE GOVERNANCE AND AFFIRMATIVE ACTION; MAHINDRA CONTINUES TO
DIGEST" SATYAM

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1. (SBU) Summary: In a recent talk in Mumbai, Salman
Khurshid, Union Minister of State for Corporate Affairs and
Minority Affairs, promised a "hands off" attitude towards the
state's role in corporate governance. He praised the effective
handling of the Satyam scandal, but called for further
government efforts on establishing auditing and corporate social
responsibility policies. In his "Minority Affairs" role,
Khurshid renewed the call for reservations in the private sector
for disadvantaged groups, a stance which the corporate world has
consistently opposed. In a separate conversation, the new
owners of Satyam, Mahindra & Mahindra, expressed confidence in
their turn-around of the company, but acknowledged that
intellectual property right disputes and class action suits in
the U.S. could pose a serious financial risk. End Summary.



Corporate Affairs Minister Promises "Light Touch"

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2. (U) ConGenOff attended an address by Salman Khurshid, the
Union Minster of State for Corporate Affairs and Minority
Affairs. This talk, sponsored by the All-India Industries
Association of India, was part of Khurshid's first trip out of
New Delhi since taking office late May. In his presentation,
Khurshid laid out his "hands off" approach towards corporations,
stating that the government should not micromanage corporations
and that shareholders, not the government, should determine
basic elements of corporate governance and reporting. Khurshid
reminded the audience that their primary investor and customer
is the "aam admi," or common man, and that government's
challenge is to demystify the "corporation" for him. He agreed
with his predecessor's decision to change the ministry's name
from the Ministry of Companies to the Ministry of Corporate
Affairs, believing that "company" has a narrow legalistic
definition, whereas "corporate" is broader and includes issues
such as management and social responsibility.




3. (U) In addressing the Satyam crisis, where the Ministry of
Corporate Affairs intervened to appoint a management board to
control, restructure, and sell the company after its owners
admitted to a multi-billion dollar fraud, Khurshid claimed that
the company's near-collapse was a remarkable opportunity snapped
from the jaws of crisis. He favorably compared the Indian
government's approach to the crisis, where talented business
leaders were sent in to resurrect the company, to the U.S.
government's large financial bailouts for banks. He suggested
that the Indian government will follow this model in the future
for failing companies, if necessary. Noting that current
regulations allow for an individual to serve as a director on up
to 15 corporate boards, Khurshid asserted that only a "Super
CEO" would be able to provide the needed oversight to execute
their responsibilities diligently. (Note: The number of board
memberships allowed has recently been reduced from 20 to 15, and
many, like Khurshid, argue it should be reduced further still.
End Note.) Khurshid also stated that regularly changing a
corporation's auditors - for instance, every three years - could
promote greater corporate responsibility and avoid situations
like Satyam in the future.


4. (U) Swapping hats to his "Minority Affairs" role, Khurshid
extolled "affirmative action" by corporations for scheduled and
backward castes. (Note: "Scheduled castes" is the official
term for untouchables, or dalits. End Note.) Khurshid said he
would like to see "affirmative action" expanded to not only
include lower castes, but also other disadvantaged groups such
as women, the poor, and the handicapped. (Comment: This
directly echoes statements made by Prime Minister Singh in his
2007 "Ten Point Social Charter," in which he stated that
"industry must be proactive in offering employment to the less
privileged, at all levels of the job ladder," and praised the
Confederation of Indian Industries "Report on Affirmative
Action," which called for aggressive steps on the part of
industry to hire and retain these type of employees. End
Comment.) According to Khurshid, the Indian government needs to
be more proactive in developing a code of Corporate Social
Responsibility (CSR). He suggested that "social credits,"

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similar to "carbon credits," would provide corporations the
incentives they need to take on greater responsibility.

Mahindra Pleased with Satyam Buy, Despite Legal Problems

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5. (SBU) In a separate conversation, Bharat Doshi, the Chief
Financial Officer of Mahindra & Mahindra, told CongGenOff that
the company was pleased with its purchase of Satyam. (Note:
After the company was restructured, the Indian government
auctioned Satyam to the highest bidder, which was TechMahindra,
a relatively smaller IT company. American investment bankers
Goldman Sachs brokered the sale and described Mahindra's bid as
a "surprise winner," in that TechMahindra was the smallest of
the bidding companies, yet its bid was significantly greater
than the next highest. After their winning bid, the company
struggled to line up the financing; Goldman Sachs characterized
their bid as "a far reach that almost didn't get there." End
Note.) Doshi admitted that Mahindra has found a few more
financial problems in Satyam - which was expected - but expects
resolution soon. According to Doshi, TechMahindra worked
quickly to stave off the loss of customers, which was crucial in
preserving the health of the company. They were forced to put
8,000 workers on 40 percent pay, but have reinstated 1,000
workers at full pay since then, and expect to hire more in the
next few months. Doshi added that since TechMahindra was
considerably smaller than Satyam, there will continue to be
"digestion" problems.




6. (SBU) Referring to those "digestion problems," a senior
executive from Cognizant, a rival firm, told Congenoff in
Chennai that Satyam is struggling to maintain its clients. He
acknowledged that while Satyam is retaining a good number of
clients for whom it is too difficult to extract themselves from
Satyam (i.e. they rely on Satyam for complicated, core IT
systems),the company is not getting any new business. Those
legacy clients are looking to other IT partners for any new
projects, fearing further entanglement with Satyam. He also
noted that Satyam's staff has been picked over by its
competitors - many of the strong employees have been drawn to
other companies, leaving Satyam with particularly weak middle
management.




7. (SBU) Doshi's biggest concern is the two legal cases in the
U.S. against Satyam, which TechMahindra has inherited. The
first is an intellectual property rights (IPR) case in Texas,
which predates the scandal, and the second is a class action
suit prompted by shareholders in New York. Doshi stated that
the plaintiff in the IPR suit is asking for damages of $1
billion, "even though the company had never had revenues more
than $20 million in its history." Doshi claims that the case is
being heard in a jurisdiction notoriously sympathetic to
plaintiffs, and fears that TechMahindra will be seen as a
"foreign outsider" by the jury. The company is taking no
chances, and is advertizing its local investments - Mahindra has
a tractor factory in Texas - and has become a NASCAR sponsor.
Doshi is more worried about the class action suit, where
plaintiffs are suing Satyam for fraud (Note: Satyam was listed
on the New York Stock Exchange. End Note.) Doshi expects
settlements in both cases; Mahindra weighed the risks of class
action suits before buying, and has calculated that if the
amounts do not exceed $300 million overall, the purchase will
have been worthwhile.




8. (SBU) Comment: Khurshid's call for reservations in the
private sector, if serious, will raise concerns among
corporations, which have long opposed such a move. His calls to
reform some corporate governance rules, however, will likely be
welcomed. Many believe that too many boards are packed with
independent directors who aren't independent, or who are on too
many boards to provide responsible oversight. With the Indian
corporate landscape dominated by family-owned companies,
however, the composition of most boards are unlikely to make too

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much of a difference. As for Satyam, Mahindra's turnaround
efforts will be complicated by the legacy risks of Satyam, with
the U.S. courts now the center of activity. As these cases go
to trial, we should expect negative publicity to follow. End
Comment.
FOLMSBEE