The Satyam Fiasco - A good opportunity for corporate India to come to terms with reality

The last 3 days have been probably the most dramatic in the history of Corporate India for quite some time. Satyam (which ironically means truth in Sanskrit) - India's 4th largest IT Exporter which is listed even on the US bourses saw its fortunes crumbling overnite with an interesting confession from its chairman that it has been lying about its accounts and that the firm was an artificially stacked up pack of cards hanging on a slim thread. He equates his journey to a ride on a tiger not knowing when to get off and also avoid being eaten up. What followed was absolute chaos. A quick team of Satyamites with equally dubious credentials tried to cough up a task force to handle the impacts of this confession which ended up only making the scene worse. No doubt, this has been talk of the town in just about every television channel/radio/newspaper and just about everywhere. Of course, Satyam claims to have over 53000 employees who are supposedly facing a blank future and this is supposed to be a complete blemish on India Inc's image. A hero became a vilain overnight as India came to terms with its own Enron. The parallel with the failed Energy giant could not be ignored as we do have an international auditing firm Pricewaterhouse Coopers doing what Andersen did to Enron. The auditors seem to have ignored some very simple measures like Cash position/Accrued Interest. Suddenly IT is no longer the spoilt child that Indians thought was going to be their gateway to a super-power. We have had some ridiculous programmes on the supposedly intelligent media channels where reporters try to dramatise the accounting disasters emerging (bear in mind that all of these are based on pure speculation as it is going to be a while before the true financial statements come out). Of course, the SEBI, Ministry of corporate affairs (i dont think that many realised that there is such a ministry around) the Andhra Pradesh Government (which till a few days ago was calling Ramalinga Raju as one of its illustrious sons) and the ICAI have all stepped into the game in an apparent move to get at the truth. Of course the share markets did their bit by battering the stock to just about par value which has resulted in a new bunch of stakeholders holding the stocks and pressurising the governement to incldue them in the scheme of things as it tries to assemble a new board.

When you step back and take a slightly more objective look at things, one would realise that this is not such a bad thing after all. It is an essential part of any sensible capitalist market to have a few disasters along the line which generally tend to only improve things. You do need an Enron to get a Sarbanes Oxley act and to get the Accounting firms which also used to offer consulting services for the same clients, to part ways. (Imagine advising a client to do a certain action and then auditing the same). Anybody thinking that Indian companies are world-class in corporate governance or financial transparency must be truly kidding. We are still an infant in the big brute world of globalization and will grapple with challenges. There are definitely more Satyams lurking in the background (The American markets did have Worldcom/Tyco/Xerox/CA among a host of others which did similar illegal stuff and some of them survive even today). Regarding the employees facing a bleak future, they do face some uncertain times but the good ones will find happy homes soon. Satyam was to a large extent, an unusually succesful also-ran that was intelligent enough to make some inroads during the Y2K and the boom period for outsourcing that followed. More than anything else, this is a great opportunity for Corporate India to step up and clean its house. The financial world is no longer constrained by geographical boundaries and is extremely inter-twined as the sub-prime crisis taught us. A bad quarter for Wal-Mart means closing down of a few textile mills in a remote city of Tamilnadu in India. At the end of the day, India might probably be the world's second largest populated country but it is still a blip on the world's corporate arena and most of this noise will have negligible impact globally. The western world to a large extent hardly gave more than a passing reference to this episode as it tries to grapple with even larger issues like rising US unemployment and the Gaza crisis. But let us make sure that we crank up on our regulatory mechanisms and use this to clean our act. The US did send a strong message with the succesful convictions of Bernard Ebbers (Worldcom)/ Kenneth Lay and his gang (Enron)/ Dennis Kozlowski and quite a few others. Bear in mind that the actions of these exalted professionals with amazing qualifications has significantly larger after-effects than what Mr. Raju has done. Above all, don't let the crazy folks from the stock markets prevent the business leaders from taking tough decisions that may be painful in the short run but would offer benefits in the long run. A bad quarter is sometimes the right panacea for sustainable long term growth. Let us learn from this minor disaster and reduce the risk of major ones happening in the future. After all, nothing like a good crisis to fuel such actions.

Demystifying the Financial Crisis

The last few days have been quite nerve-wrecking for investors across the world and for the Average Indian Investor (AII) in particular, who would have seen his portfolio come crashing down by almost 125% vis-a-vis the peaks achieved in the early parts of the year. World famous financial institutions have fallen like nine-pins erasing trillions of dollars from across the world. Goverments have been spending sleepless nights trying to saving the erosion of public welath even it means putting some more taxpayers money back into the same hands that caused the crisis in the first place. Oil prices have widely fluctated from all-time peaks to depressing lows which makes one wonder at the potential of that eternal hope spoiler - Speculation. The crisis is definitely out there and it is time for us to sit back and understand what is going on so that we are prepared for the economic famine in the days to come.

I would probably call it as the wake-up call for the AII to realise that the honeymoon is over and it is time to get to the reality of an integrated world built on the platform of globalization where the pains as well as spoils are quite universally distributed. I have recently had a number of questions from colleagues/friends about the sub-prime crisis, the continuous collapse of financial institutions around the world and the impact of this on their personal wealth creation/erosion. While i am by no means an expert, i decided to put up a list of material (put together by other experts) which would help demystify the chaos that is currently pervasive all around. Nevertheless i am still a fan of globalistion/capitalism as this does hold the hope to a world of creativity and independance where people can compete and excel as per their choice

• The hindu carried an interesting article a few weeks back which explains the sub-prime crisis in a simple and lucid manner. This is definitley something which a layman can understand.
• There is understandably a wiki on the sub-prime crisis which gives a detailed view of the housing crisis - the genesis for the current disorder
• Mr. Warren buffet, the Oracle of Omaha who bailed out Goldman Sachs with a pyshic investment of 5 billion dollars has advised investors to use this opportunity to build up a portfolio of good stocks with good fundamentals at a low price. As he says, fear is the best time for investment.

Here is my view on 5 trends that are likely to hit the AII in the days to come

• There is going to a bloodbath in the construction industry as people have jacked up the housing prices based on the eternal hope of housing prices never coming down. Though i dont see prices coming down over the short term, the number of quality properties in the market is going to go down which will subsequently lead to a price decline and the evolution of affordable housing will once again become a reality. So for guys planning to buy a house, your dream house will still be some distance away but it might be worthwhile to wait.
• Interest rates will come down as there is an imminent need to put in liquidity (not just to boost the stock market but also to keep investments going to keep up to our GDP rate)
• The Sensex will probably bottom out at the 7000 levels, keep fluctuating for a year or two and will then again start rising in a more systematic manner. The bull run during 2006-2008 will be a distant dream
• Inflation will come down but will still be a cause of concern over the next 2 years as the growth in salaries is likely to become more flat.
• Sizeable investments in alternate energy sources (Wind/Solar etc.,) as well as next generation automobiles which will run on alternate energy (Barack Obama has committed to massive investments in this area)