Is your portfolio filled with Satyams?

May 23, 2015

In this issue:
» Skymet Vs IMD: Who is better in predicting rainfall accuracy?
» FM Jaitley repeats the rate cut rhetoric
» A round up on markets
» ...and more!

Greasing palms and receiving kickbacks appear to be the cultural heritage of India. We all know that bribery and corruption was part and parcel of the UPA regime. Though many perceive that the new government has brought an end to political corruption, corporates are indulging in this unforgivable sin rampantly. Plus they also have the courage to advertise it publically. In a widely held fraud survey carried out by EY recently, respondents from India Inc have blatantly said that corruption is justified for survival!

In fact, many participants have gone on to say that strict adherence to anti-corruption laws will harm their competitiveness. Hence, some form of bribery is acceptable to further their business interest. The sample size of the survey was large enough including executives from the top 100 companies indicating that corruption worm is deep rooted into India Inc.

If this hasn't left you bewildered the next admittance by India Inc. will leave you stumped. When a question was posed about the quality of earnings reported in the income statements; 59% of the respondents said that companies often reported financial performance better than actual.

If earnings manipulation is so rampant in India Inc then I reckon the trust in the reported numbers which is the essence for investing will soon vanish in thin air.

Though many steps have been taken to improve the corporate governance practices and transparency they have hardly yielded any results. And the reason for it is poor intent. You can have a stricter law, a protective whistle blower policy and better internal control mechanisms in place but if there is no intent to follow those violations would occur.

And the intent is not there when you do not fear the judiciary. Or even if you fear it a bit you know how to manoeuvre the law and come out unscathed. Take the case of Ramalinga Raju, the founder of Satyam and Raj Rajaratnam, a billionaire hedge fund manager proven guilty of insider trading in the US. Both indulged in corrupt practices. One is serving his prison sentence in the US jail while the other dilly dallied the Indian judiciary for long.

The point I am trying to make is Indian laws should evolve especially when it comes to dealing with corruption. A zero tolerance policy should be in place and most importantly the top management should lead by example. If not many more Satyam's would continue to breed and be a part of your portfolio unknowingly until some Ramalinga Raju opens the can of worms in public again.

While there is no foolproof way to gauge if a company indulged into any dirty trick; meeting the management, suppliers, customers etc goes a long way in determining its ethical profile. Such a channel check strategy is the best way to avoid buying a potential Satyam as management intentions are not at display in financial statements. Here you may recall what Philip Fisher once rightly said - "In evaluating a common stock, the management is 90%, industry is 9% and all other factors 1%". Trust us, we at Equitymaster pay utmost importance to management quality so as to ensure that our subscribers do not get trapped with Satyam's.

Do you think stricter laws can eliminate Satyam like frauds in India? Let us know your comments or share your views in the Equitymaster Club.

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 Chart of the day
The unbearable heat in May is making people think more about rains than corruption. Further, given the very strong linkages between rainfall and the entire Indian economy, near-normal monsoons can give a lot of cheer to India Inc. and the government alike. As such, monsoon forecasts are a matter of immense interest.

This time we have divergent monsoon forecasts from two agencies. On one hand Indian Meteorological Department (IMD) expects rainfall to be normal at 93% of the 50-year average. Contrary to this, Skymet weather services expect the rains to be in excess of 102% of the long period average. While the chances of El-Nino have strengthened, Skymet still believes there are higher chances of good rains.

Today's chart of the day captures the track record of the two agencies and the actual rainfall since 2012. While predicting the outcome is a challenge Skymet seems to have an upper hand so far with its forecasts being closer to the actual figures. It would be interesting to see if the tradition continues this time around as well or not.

Who is better in predicting rainfall accuracy?
IMD= Indian Meteorological Department; LPA= Long Period Average

If this time around rainfall remains closer to what IMD has been predicting food inflation may increase inhibiting our FM's desire of lowering interest rates. It is quite evident from his speeches that FM Jaitley has been an advocate of a dovish monetary policy.

However, what is laudable about the current RBI governor Mr Rajan is the fact that he has refused to bow down to the pressure from the government and India Inc to cut rates. This was at a time when inflationary pressures continued to persist in the Indian economy. However, over the last several months, inflation has shown signs of slowing down. This propelled the RBI to lower rates twice in 2015 so far. But in the last monetary policy, it chose to maintain status quo. As the Indian economy has not yet picked up pace and industrial production continues to remain sluggish, the pressure is once again back on the Indian central bank to cut rates. The Finance Minister Mr Arun Jaitley certainly thinks that a rate cut is in order.

But will Mr Rajan give in? We will learn soon enough when the monetary policy on June 2 will be announced. However, we would like to point out once again that even if the RBI does cut rates this time around, it may not have sufficient headroom to continue to do so in the future, unless the government steps up and effectively implements some structural reforms.

Major stock markets around the world ended the week on a mixed note after comments by US Fed Chair Janet Yellen caused uncertainty among traders. The US markets ended flat for the week after Yellen's comments that stock prices were on the higher side. Also the US Fed's position to raise interest rates in September this year seems to be intact as of now. However economic data from the US surrounding housing and consumer sentiment continues to remain mixed.

The Chinese markets were the top gainer this week riding on the monetary stimulus measures of the Chinese central bank. Economic data from China remains weak. A temporary deal between the Euro and Greece resulted in the European markets ending higher for the week. However the negotiations are ongoing and the result of the same would be anyone's guess. The Indian markets had a volatile week but ended higher by 2.3% largely due to the return of FII interest.

Performance during the week ended May 22, 2015
Data source: Yahoo Finance

 Weekend investing mantra
"If principles can become dated, they are not principles" - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Jinesh Joshi.

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3 Responses to "Is your portfolio filled with Satyams?"

Rajiv Gogate

May 24, 2015

Before introducing newer and newer laws, stricter implementation of existing rules / laws will solve the problem to a large extend, If this does not suffice, later new rules can be made.



May 24, 2015

Strict an honest implementation is of the laws/ rules is important.



May 23, 2015

I doubt if at all laws for zero tolerance level of corruption will come in force. The law makers are our parliamentarians who are themselves corrupt, law breakers and criminals. INC has all along refused to keep the criminals away from elections. Even today the candidate is selected on the basis of his caste, ignoring his criminal records,etc. MPs have been sentenced for accepting bribe for voting in parliament.

If with this back ground some one feels that it is possible to enct strict laws, GOD BLESS THEM. Jay Lalitha and Salamn Khan are recent examples.

More over it is a fact that the corrupt practices aare at times the surest and simplest ways of solvibg the problems.

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