Will this prevent another Satyam? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Will this prevent another Satyam? 

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In this issue:
» Delhi has seen the highest fall in office vacancies
» US stimulus is turning out to be a disaster
» Indian real estate firms yet to recover
» Companies prefer redeeming FCCBs
» ...and more!!

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The SEBI in recent times has been in the news for making various proposals aimed at protecting the interest of retail investors. And also to bring transparency to the way companies and stockmarkets function. In keeping with this trend, SEBI has come out with another such proposal - capping the number of company boards that an independent director can sit on. The rationale is simple. SEBI wants to ensure that independent directors get enough time to analyse the agenda of the board meetings and make meaningful contributions.

One needs to look no further than the Satyam scandal. It laid bare various inconsistencies in the way companies were functioning. For instance, the extent of shares pledged by the promoters became an important parameter to focus upon. But what also came to light was that there were a large number of independent directors, including well-known academics that were on Satyam's board. But they did not put across some hard questions to the company.

Anyways, one does not require scandals to bring about change. Business models of Indian companies are increasingly becoming complex. Many are venturing overseas or into different revenue streams. For such rising complexities, any independent director will have to put in more time to understand what is happening and have fruitful discussions at board meetings. Will this latest move by SEBI ensure that no more frauds take place in corporate India? We are not sure, but we believe this is certainly a step in the right direction.

Do you agree with SEBI's proposal to limit the number of company boards that an independent director can sit on? Share with us, or post your comments on our Facebook page.

01:16  Chart of the day
With some signs of a recovery being visible, office vacancies seem to be dropping. As today's chart of the day shows, Delhi has witnessed the biggest fall in office vacancies as compared to other leading cities in US, Europe and Asia. With the Indian economy recovering nicely, demand for office space seems to have gone up and hence the steep fall in vacancies. In China, however, while Beijing has seen office vacancies falling, they are still higher when compared to its peers.

Data Source: The Economist

The writing seems to be on the wall. The biggest Keynesian stimulus in US history is turning out to be a disaster of epic proportions. Stimulus is supposed to create jobs. But this does not seem to be happening. Instead, as Bloomberg reports, claims for unemployment benefits in the US have continued to rise. And they are now at a level that represents recession more than a recovery. But Keynesians are not willing to listen. They argue that the size of the stimulus was too small to have an impact. Not everyone is convinced though. Even relative to economy, the US has had one of the biggest stimuli of all countries. Thus, the problem is not the size but the stimulus itself.

You see, stimulus broadly means taking money from the rich and giving it to the poor. But isn't this counterintuitive? By increasing taxes on the rich, the Government is reducing the reward for an activity. In other words, it is taking resources away from more productive sections of the society and giving it away to less productive ones. And this is certainly not good for the economy in the long run. The need of the hour instead is to reduce taxes throughout the economy. But this runs contrary to the ideologies of most Keynesians who believe that wealth distribution from rich to the poor is a good thing. And therein lies the biggest problem of our times. Hope the US stops this habit of administering wrong medicine to the sick patient. Otherwise, the patient will continue to grow sicker by the day.

Indian's real estate firms are yet to recover from the slowdown that has engulfed them since early 2008. This is suggested by the financial performances reported by some of the leading companies from the sector for the quarter ended June 2010. As per a leading business daily, these companies are still seeing a slow improvement in demand for homes. This is even when there has been a marginal pick-up in demand for office space.

These companies have their own greed to blame for the slow recovery in home demand. This is given that these companies have raising property prices before real demand actually came in. As per reports, residential prices in Mumbai and the National Capital Region of Delhi have increased by 20-30% since March, and have reached new highs!

FCCBs have been a bane for Indian corporate for nearly two years now. Issued with the objective of raising money cheap with the lure of quick run up in stocks' valuations, these instruments are no more in vogue. Instead they have caused companies to pay a heavy price for high leverage. Some are even stuck with this mistake causing much agony to shareholders. Cases in point being companies like RCom, Suzlon and Punj Lloyd. Given the fact that their stock price is nowhere near the conversion price of the bonds, the companies have little option but to redeem them. As per a business daily, 90 companies amongst the BSE 500 had FCCBs aggregating Rs 546 bn at the end of FY10. Unless converted at lower prices, the redemption of FCCBs will lead to hefty outflow of Rs 652 bn! This blunder has indeed been a learning experience for India Inc. from the global financial crisis. We only hope that they retain the memory for long.

One of the key features of the Indian economy is that much of the demand is driven by domestic consumption. Compare that to China, which is mostly export-driven. Of course, the Indian economy would benefit from more exports. And the government is keenly aware of the fact. As per Reuters, the government has offered incentives to some exporters to help them tide over an uncertain and fragile global economic recovery. It will allow duty free imports of capital goods until the end of FY12 and provide an interest subsidy of 2% to textiles, leather and jute industries for FY11. However, the trade minister Anand Sharma has also cautioned that fiscal consolidation might not allow continued support in the future. In fact, this is exactly why the incentives have not been given for all export-oriented sectors. They are targeted towards labour-intensive industries and those which are important for capacity expansion in the economy.

When most talk about Asian countries or emerging markets, there're quick to express their optimism about the same. However, the time frame for that optimism is usually not more than 10 to 15 years. But ace investor Jim Rogers recently expressed his overwhelming optimism for Asia not only for the next decade or so, but for the next 100 whole years! In a recently interview to the International Business Times, the following is what he said. "In 1807, if you had moved to the UK, you and your heirs would have been much, much better off for the next 100 years. If in 1907 you had moved to the US, you and your heirs would have been much better off for the next 100 years. In my view, moving to Asia in 2007 means my heirs are going to be much better off in the next 100 years." And so, without mincing any words, Rogers has given the most emphatic thumbs up to Asia that one possibly could. Sure seems like this is going to be the century of Asia!

After opening in the green, markets continued to slump further and further into the red. The BSE-Sensex was trading 113 points lower at the time of writing this. Stocks from the FMCG space were trading flat while realty and metal stocks saw steep declines. Sentiments were mixed in the rest of Asia, with Japan down by 1.3% while China was up by 0.4%.

04:56  Today's investing mantra
"Wall Street makes its money on activity...You make your money on inactivity." - Warren Buffett
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26 Responses to "Will this prevent another Satyam?"

Prem Khamesra

Aug 26, 2010

I agree with SEBI 100%. Independent directors should be custodians of minority interests and small investors. They must know the company and its business inside out. This is possible when they are able to devote time and attention. When a person is a director in a large number of companies he can only hop from one meeting to the other and can hardly do justice to his position in any one company. Moreover, his entire behaviour is reactive and not pro-active. I would go a step further and say that there should be proper training for Independent directors, SEBI should create a panel of persons who can be nominated as Independent directors and the companies should pick people from this panel only.


Dr Gangadhar

Aug 26, 2010

Yes, it is a very good decision by SEBI to restrict the directorship to maximum 3 to 4 companies. Highly appeciate the right direction


jaspal singh

Aug 25, 2010

I agree with the idea of limitimg the directorship to maximum 3 to 4 companies & they should own the performence of the company including liabilities


SL Narasimha Rao

Aug 25, 2010

YES. SEBI's move, for capping the number of company boards that an independent director can sit on, is the first step in the right direction. But where is the independent director? All are picked and chosen by the promoter MD. Even in PSUs the IAS babu decides whom to put on the board. So you have to butter the promoter MD in case of a private company and please the Minister and/ or the concerned secretary in case of a PSU. The taking of real responsibility by an independent director is still decades away.


rakesh kumar chaudhry

Aug 25, 2010

This is first step in the right direction. All independent directors must be adequately compensated for the time spent on overseeing the corporate governance of any company and simultaneously they must be made responsible for any fraud done by the management if they have been negligent in performing their duties which must be prescribed broadly by SEBI/Min. of corporate affairs.


Manoj Kumar

Aug 25, 2010

Nothing can guarantee the prevention of another Satyam like episode but the job of SEBI is to keep making it difficult and unproductive for individuals who may be harbouring such dreams.



Aug 25, 2010

independent directors should never be appointed by the board or share holder,sebi.


David Livingston

Aug 25, 2010

Yes. SEBI's Decision is correct. I would like to suggest little more. After each board meeting, the problems faced or raised or realised by any board members/ officials and the recommendation of each Director should be available on the website of the company to all investors which can be accessed through the PAN number of each Investor. Then only investors could smell and raise the issues in GBM. Management also would be alert, and Investor can be protected.



Aug 24, 2010

Yes.It is a belated move and it is better late than never.


D. Sukumar

Aug 24, 2010

It is a good move by SEBI to restrict the number companies directors can sit in. There has to be accountability for independent directors too when companies err. Often times, directors are too busy to offer any advice or interfere with the functioning of the company. In short they are fancy directors, often to boost the credibility factor of a company or to camouflage the ineptness.

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