Wipro let loose its baggage - The 5 Minute WrapUp by Equitymaster
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Wipro let loose its baggage

Jan 12, 2009

In this issue:
» Wipro discloses World Bank ban
» Who's the most unethical of all?
» ICAI watched for account mis-practices
» India's industrial output grows
» ...and more!!

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The disclosure bandwagon continues! "In light of the current developments, we decided it was better to disclose more rather than less." This is what the CFO or Wipro said while divulging that the company had been barred by the World Bank in June 2007 (for a four year period ending 2011) for offering improper benefits to the latter's staff. Wipro incidentally had offered World Bank's key employees shares in its IPO in the US way back in 2000. Interestingly, Wipro's disclosure comes just three weeks after Satyam let loose its baggage of lies, which included hiding from stakeholders the World Bank ban on the back of data theft by its employees.

As per Wipro's counter argument, this share allocation was done with the objective of "involving employees and customers with the IPO to expand the company's brand and recognition." The participants had signed a statement that their purchase did not create any conflict of interest. While Wipro has indicated that the share of revenues from World Bank is marginal, thereby making the impact of the development negligible, the fact that the company did not choose to disclose this fact earlier is uncomforting. This announcement did not go down well with the investing community as Wipro's stock lost over 9% in today's trade.

The realisation finally sets in. A poll carried out by a leading business daily, Mint, has identified that the Reliance-ADAG Group, the Mukesh Ambani group, and realty companies are the least trusted in corporate governance practices in India. Fund managers, stock brokers are market analysts constituted the audience for this poll.

Too many cash dealings and opaque nature of transactions were among the key reasons these groups were considered poor on the ethical parameter. While the results are no surprise to us, we only wish such polls are conducted in 'good' times when companies bend all rules of the game and still see their stock prices rising.. sometimes even faster!

A banner outside the Churchgate railway station in Mumbai reads, "Satyam Maha-ghotala. Zimmedaar Kaun?" Its English translation would be "Satyam's big scam. Who's responsible?" The banner is advertising a seminar to discuss the course of action for shareholders in the company.

Well, a lot of ink has already spilled over questioning who's responsible for the scam that was unearthed last week. And the fingers keep turning towards various parties - auditors, audit committee, independent directors and bankers. The fact is that all these parties are equally responsible for the part that each had to play in the making of this the scam.

Well, the government has now given the task of finding and eliminating remaining cockroaches in the Satyam kitchen to three bigwigs - Deepak Parekh (Chairman, HDFC), Kiran Karnik (former president of Nasscom), and C. Achuthan (director, NSE). These three have been instated as directors on Satyam's board to save the company and its shareholders from further trouble.

The company is already facing a failed leadership team, lawsuits, pressure from clients, and questions about survival in its current avatar. In the meanwhile, Bloomberg has talked about a possibility of the company being broken up after the past earnings are restated.

Talk about bad times. No, we are not talking about global recession, bankruptcies or any more frauds. What we are referring to is the dilemma that the victims of the frauds have been subject to, for no fault of theirs'. Take the case of employees of Satyam Computers. Some 50,000 of them are struggling to get their foothold firmly on the ground after having been swept off with their Chairman's shocking revelations.

While their jobs and remunerations for the month are certainly at risk, even banks are not willing to come to their rescue. Employees of the beleaguered company are now finding it difficult to get personal loans or pay back equated monthly installments. Even their credit card limits have been reduced by as much as 80% by banks that become wary of potential NPAs (non performing assets), given the severe cash crunch at Satyam. To add to the crisis, the poor job scenario in the Indian IT industry that has been facing the heat of the global economic meltdown offers very little recourse to the employees of Satyam.

Look who's following advice of the best investor in the world - that of being greedy when others are fearful. As per an Economic Times report, individual investors have increased their stakes in about 107 out of 200 companies during the October-December quarter. That is despite the fact that the Sensex declined by 26% during the period. Traditionally such downward swings in stocks have been enough to scare retail investors away. But this time it seems like these investors are finally showing some signs of maturity. But will the Satyam episode bring the scare back? We need to wait and watch!

Fearing intensive competition from new entrants to the nationwide GSM mobile business, market leader Bharti Airtel has reduced entry level prices for its lifetime prepaid services, which are now available for Rs 99, from Rs 195 earlier. Given that the quality standard of mobile services in India is already poor, more players and cheaper subscriptions without any major addition to available spectrum, is only going to make the call quality worse.

Even as the timeline for repaying a US$ 3 bn (approx Rs 140 bn) bridge loan is fast approaching, Tata Motors, India's largest manufacturer of commercial vehicles is struggling to put together a plan that will see it raise financial resources for the said loan. Although Rs 40 bn have been raised through a rights issue and some more could come its way via the three-year fixed deposit scheme that the company has come out with (at 12.83% pre-tax interest rate), there is still a gaping hole that remains to be filled. While we expect a company of the size of Tata Motors to finally come clean on its promise, exactly how it will manage to do so is anybody's guess right now.

The watchdog is being watched! As per a leading business daily, the Income Tax department has withdrawn tax exemptions from the Institute of Chartered Accountants of India (ICAI), the regulatory body of CAs. Apparently, it has not complied with norms regarding getting accounts signed by auditors, providing loans to partners without interest and disclosing income from coaching business.

The body has not yet presented its side of the story. The irony is that ICAI has recently said that Satyam's auditors will be severely penalised if found guilty. Hence, it is really ironical that the accounts of the accounting watchdog itself are now being questioned!

Here's another example of too much government and too less governance. Economic Times has reported that the Maharashtra government is yet to finalise its Eleventh Five-Year Plan, which runs from 2007 to 2012. What's more concerning is the fact that despite the two year delay, the state government is yet to have a preliminary meeting to discuss the plan. That's utter disrespect to the planning process and those governed!

Anyways, the link for 'good governance' on Maharashtra government's website will take you to the document that was prepared way back in 2001, and that too for forming a committee to look into the issues of governance!

If one of the largest states in the country has such precedents to set, where are we all heading?

Despite news of an unexpected rise in industrial output, India was the worst loser among Asian markets today. The benchmark BSE-Sensex lost 3.5%, or 320 points. Meanwhile, India's industrial output grew by 2.4% YoY in November 2008, after a 0.3% fall in October. Other key losers included Hong Kong (2.8%) and Korea (2%). Stocks in Europe are also trading in the red currently.

Today's investing mantra
"Individuals who cannot master their emotions are ill-suited to profit from the investment process."
- Benjamin Graham

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