Beware! More 'Satyams' in the equity mkts. - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Beware! More 'Satyams' in the equity mkts. 

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In this issue:
» Policy paralysis is just a perception?
» "India no longer deserves a credit upgrade": Moody's
» Restructured loans pushing up the NPAs for PSU banks
» Is SEC responsible for Facebook fiasco?
» ...and more!

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On a fine sunny morning, a simple statement by one of the most respected corporate houses (of the time) sent a shockwave through the Indian equity markets. The statement was from the head of Satyam, Mr Ramalinga Raju. He admitted to have orchestrated a fraud, the value of which is estimated to be Rs 140 bn. Since then things went haywire for the company. It eventually got sold out to Tech Mahindra and the rest is history. But one thing that it did wake up investors to was the need for better corporate governance.

Come 2012, and there is another corporate scandal that has shaken India Inc. This time it involves the unlisted Indian subsidiary of Reebok. As reported by Economic Times, Reebok India has filed a complaint that its ex-MD & COO have jointly committed a fraud of Rs 87 bn. The fraud is reportedly committed through fictitious sales accounted for over numerous financial years. Duplicate invoicing, issue of fictitious credit notes were just some of the ways in which the perpetrators have reportedly committed the fraud. Though the fraud has not really hurt investors in the equity markets as of now, but it has brought back a serious question. No matter how big or popular the brand, the quality of the management is more important when it comes to investing.

As an investor there is an important learning in this. You cannot sit back on an armchair when it comes to investing. Even if you have studied the fundamentals of the company it is just not enough. Things like studying the track record of the management, its reputation, the internal controls, corporate governance reports, become even more important. It is only when you find the right blend of fundamental strength and management quality should you go ahead and invest in the stock. Investing cannot be governed only by the brand image of the company's product. That is nothing but advertising. What is more important is the brand image of its leadership.

How do you think the Reebok fraud will affect governance standards in Indian corporates? You can also share your comments with us or post your views on our our Facebook page / Google+ page.

01:10  Chart of the day
The government has recently come up with a White Paper on Black Money. The paper has addressed several issues including the value of undisclosed income detected by the Income Tax department. As per the paper, the value of undisclosed income has more than doubled since FY06. In FY11, the amount stood at a whopping Rs 65.7 bn. This is the income that people have earned but have not disclosed. As a result, there is no income tax paid on the same. And this is just the amount that the tax department could detect. Even after this, there is still a lot more that has managed to escape the net.

Source: Financial Express

Which is the most raging political challenge that the country is currently facing? Most would unanimously say political paralysis. And why not, the central government has been unable to pass any of the much needed reforms. Take any issues ranging from corruption to black money to land acquisition. The government has done nothing but aggravated the ire of the people. The main reason has been its own lack of political will and an inability to take tough decisions. To add to this, Congress and its allies have had differences on several issues. It goes without saying that the Opposition has left no chance to fuel negative publicity against the government. Nonetheless, the problem of political paralysis is for real.

But Prime Minister Manmohan Singh thinks differently. He believes that it is mere misconceived perception which can be corrected. He did admit recently the need to take difficult decisions on a series of issues such as government finances, foreign investments and corruption. Will he do something soon? Or will this remain a mere lip service? We're eager to see.

After S&P downgrade, India's growth story has come under a scanner. As a result, Indian government is seen lobbying rating agencies for an upgrade. It believes that an upgrade from rating agency can reduce its borrowing cost and subsequently resurrect rupee. True, but the fact is does India really deserve an upgrade? Well, to be honest the answer is no. The debt to GDP ratio of the country has worsened. Also, government is finding difficulty in curtailing fiscal deficit due to rising subsidy burden. Even the current account deficit is running high due to higher crude prices. All in all, the overall situation appears to be gloomy now.

But the question is should India worry about its rating status and lobby these agencies to get itself upgraded? Well, we feel no. We know that these rating agencies have always been behind the curve as far as timely advice is concerned. The US sub-prime debt crisis is a prime of example to that. Also, we know what happened to the S&P chief who downgraded the US debt for the first time in its history. Integrity and consistency of ratings from these agencies has always been a moot point. Thus, India should not unnecessarily worry about its current status.

The valuation gap between public and private sector enterprises of the same sector is nowhere as distinct as in banking. After all most PSU entities have favorable policies, access to the best resources and the cheapest funding. This is while their private sector counterparts shell out a huge chunk of profits for these. However, in the banking sector, being a PSU has turned out to be a curse for many. Having painfully improved the quality of assets since their NPAs peaked after 2002 crisis, PSU banks evoked plenty of investor interest. Most complied with Reserve Bank of India (RBI) dictate and had 70% provision coverage by 2010. However, the obligation to lend to priority sector sunk their fortunes once again. Not just that. Piling up restructured assets (5.9% of loans in FY12) has brought their NPA levels close to the historic highs. Add to that the additional burden of provisions on their P&L. Not surprisingly, investors have chosen to dump these shares once more. And the valuation gap has become wider than before. Had the restructured asset not slipped, the NPA levels of PSUs would have been akin to that of their private sector peers. However, as long as they are government owned it seems unlikely that PSU banks will bask in glory for long.

It is no doubt a darling of the social networking space. However, when it comes to stock markets, it has failed miserably to weave a similar spell on investors. We are talking about -who else - Facebook. Looks like another controversy has hit the firm. Reports are doing the rounds that some of the lead under writers to the issue lowered their projections for the firm right before the IPO (Initial Public Offering).

Although unusual, there is nothing wrong in doing this we believe. What is shocking though is the fact that this information may have been leaked only to a select group of special investors and not all investors. Though the allegations have not been proven, the poor listing of the firm does add a good deal of fuel to the fire. Retail and small investors, it seems, were left in the lurch yet again.

This whole saga reiterates the importance of doing one's own research. At no point should one rely on outside experts, especially the ones who have vested interests in the success of an IPO.

A country's central bank key role is to ensure that money supply is balanced in such a manner where growth remains firm and inflation is well under control. But, considering the volatility in current times, maintaining a good balance between the two would definitely be tricky. With most of the Asian economies seeing their growth rates slowdown on the back of a lower demand from the western part of the world, their central bankers have gone in for policy easing- in the form of lower interest rates and more liquidity - in recent times. In fact, China pledged this week that it would focus more on bolstering growth.

The World Bank expressed its concerns regarding the same recently. It has asked policy makers in Asia to not overlook inflation risks. The bank also cited the potential for an oil price shock. "An uptick in activity, aided by accommodative monetary policies, also poses an upside risk to inflation, so policy makers should be prepared to reverse recent easing." it said.

India is definitely grappling to maintain a balance between growth and containing inflation. With recent inflation numbers showing no signs of cooling, can it be expected that the RBI does not given into the pressures of growth levels at the cost of inflationary risks? Guess we will have to wait and watch until the next monitory policy is announced.

In the meanwhile, after opening the day in the red, the Indian equity markets continued to trade in the negative zone. At the time of writing, BSE Sensex was down by 82 points (0.8%). Stocks in the consumer durables and power space are witnessing maximum losses. Among the stocks leading the losses were Tata Power and Maruti Suzuki Ltd. The other major Asian stock markets have closed the day on a negative note as well with Japan and Taiwan leading the losses in the region.

04:50  Today's investing mantra
"You need a different checklist and different mental models for different companies. I can never make it easy by saying, 'Here are three things.' You have to derive it yourself to ingrain it in your head for the rest of your life." - Charlie Munger

Click here to read our series on 'Lessons from Charlie Munger'
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6 Responses to "Beware! More 'Satyams' in the equity mkts."


Jun 1, 2012

todays arrest of sebi offical shows by cbi how the regulator is functioning threatening the promoters harrasiing the intermediaries mutual funds ,harrasing the investors by passing laws against the inv intersest by keeping silent when corp ministry issues aorder that share holders need not be sent hard copy and only soft copy and corpoartes by stealing the email id from nsdl demat format which makes mail id compulsory and sending the share holders that co swill send only soft copy and all like this why satyam like fraud cannot happen because hwen asked in a meeting at chennai uk sinha goes on record saying that if you want to buy a thing you enquire various shops the same way investor shold find out one can apply for public isue or not so by this remark we can guess sebi does not hold responsible but allows co to loot the investing public where the issue price of 300 rs comes to rs 10 on the same day of listing .no explanation offered. why the sebi the regulator need 2000 crores at his disposal the sebi get systematic revenue from the shares traded on the bourses.over and above by way of so called consent orders and asking the company to get delisted and run away from clutches so promoters take the loot and sebi attaches the money from the corporate and leaving the investors to watch luckily one airlinepilot has taken the pain to question the sebi by way of writ pettion in delhi court hope we will find somerelief .since sbi does not do anything to the investors there may be many satyams in the offing



May 24, 2012

Is anybody in India have any fear and respect on law & order and judiciary? More over these two departments are not functioning up to the level. Police department is remotely controlling by politicians. No serious punishments are awarded by our judiciary. Decades time is taking to give a judgement. So people doesn't have moral fear and that's why they are resorting for white collar crimes. What is the need of a permission to prosecute a criminal, whether he is an IAS or a politician. Judiciary working system should be changed. White collar criminals should be hanged in day light hours that to in publicly and it entire episode should be live telecasted..


R V Iyengar

May 24, 2012

Till Ramalinga Raju made a self confession, he was a blue eyed boy in not only Andhra but all over India. Had he envisaged that he could carry on further none would be wise to it.
Thus it is not easy for an average investor,who is engaged in his own job, to get such details about management. What he looks for is the performance report, and if that is doctored , god help him.


sunilkumar tejwani

May 23, 2012

as far as IPO of Facebook goes I was right thru predicting doomsday for such IPO. Facebook is neither a manufacturing company nor a high margin trading company. It is a social media company having no stable streams of revenue model. The share issued at a price of US $ 38 is ridiculous. If I were to have been allowed to trade on NASDAQ I would have shorted on the day of listing at around frenzied price of 42 odd and would have covered my short sale at around 23 odd US $ or even lower.

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sunilkumar tejwani

May 23, 2012

the American system of segregating ownership from management is fraught with big risks. The CEO of every company would be tempted to get higher salaries and fat bonuses. In the quest of the same there is a possibility of accounting manipulation to show a false better picture to project better health of the company. The Reebok management, probably relied too much on the company's Indian CEO and CFO which has resulted in such a mess.

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May 23, 2012


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