Fixing the Satyam problem - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
Fixing the Satyam problem A  A  A
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16 JANUARY 2009

As the Satyam saga unfolds, it is interesting to read the various reactions and theories as to why what happened did happen.

Some readers of Truths of the Untruth asked me how I could call Mr. Raju a crook when he is not proven guilty by the courts. My explanation: he has confessed and told us he is a crook. The law, the legal system, and the government machinery may take its own course and decide one way or the other over the next few decades. For now, there is the confession letter which says that he has done something wrong and illegal. Whether he did it to save Satyam, to give a better valuation for the ESOP holders, or just to save himself - that is not relevant. A crime was committed. A voluntary confession has been tabled.

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Keep the business - change the ownership
Satyam - as many in the software industry have qualified - has 53,000 employees who did nothing wrong. Their founder has done something wrong and affected the financials - and survivability - of the company. As far as I know, no client of Satyam has come up and said: "Hey, this company did a lousy job of my software project. Shut them down!"

From a client’s perspective, the clients paid money to Satyam and Satyam delivered the product. The employees of Satyam got their salaries. So where is the danger of Satyam shutting down? Whether they made a 3% operating margin or a 24% operating margin is a problem for the shareholders in Satyam stock - including the employees who own the shares. It has no material impact on the client or his decision to hire Satyam. Have you stopped buying Toyota and Honda cars because they are losing money? Have you stopped shopping at Pantaloon because it may lose money as a store? Have you stopped flying Jet Airways because it is losing money?

But, Satyam is in trouble - the danger exists. Because of the way the government is reacting. The government is confused between trying to save the company - and trying to save the shareholders. There are 2 distinct issues here: shareholders who have been cheated because of a dramatic oversight from the still silent audit firm of PricewaterhouseCoopers, PwC - and the fact that Satyam has done satisfactory work for its clients.

Panellists on TV channels, commentators, and industry experts are all howling about the "Satyam problem". The international press is barking about the terrible business practices in India - but they forget to focus on the fact that the auditor, PwC, is part of a global company.

The solution, in my opinion, is pretty simple:

  1. The government should take over Satyam at the market price of Rs 30 or so - the level it is bouncing around at. Some mutual funds may howl but we are investment professionals and must take the price of a bad call. And we have the freedom as investors to file our lawsuits against PwC, the audit firm.

  2. The government should send a one-page letter to all clients that Satyam is under government ownership for the next 3 years and it is business as usual from a client-project perspective - Satyam will be IPO-ed in the stock market after 5 years and it will be run by a professional team with a completely independent board of directors. The government will have no say in the business decisions. And if some foreign government or press reporter asks whether government ownership disqualifies Satyam from any business - please ask them to look around the mess in their own country and list out businesses and banks which are now owned by their governments. And please inform them that these government-owned banks and businesses are still winning business contracts in India.

  3. The government should extend a line of credit to Satyam which is equivalent to 2 years of working capital needs (staff salaries, travel expenses, rents) and charge Satyam the cost of interest for this line of credit.

  4. They should hire a CEO from within Satyam who, along with a new set of auditors, should review all supply and marketing contracts that Satyam has to ensure that there is no "leak" in the system.

  5. The equity owners of Satyam - fund managers or employees - take the hit that they anyway have taken. There is no escaping that. The employees, though, will still have their ESOPs in place. If Satyam succeeds as a company over the next 5 years, they will again be rich - this time with a "real" share price.

It is important for the government to understand the problem at Satyam: a real company with real people and real clients - but an unreal founder. And investors who put real money behind fake numbers verified by PwC.
This will allow the government to "fix" Satyam.

We know there will be more terrorist attacks and Satyams down the road - we need to know how to deal with them efficiently and quickly.

Be prepared
As a boy scout, we were told: Be prepared.
Well, Satyam has fired the warning shot.
Because we all know there are larger companies out there which are more corrupt than Satyam. Which have thrived - and bribed - on the strength of their government connections. Companies where the founders have drained large amounts of money to further their personal wealth. Like Pakistan’s treatment of terrorists - branded as an "international migraine" by former Secretary of State Madeleine Albright - these emperors of corruption are the biggest obstacles to India’s growth. Their acts may deny India credit flows that it deserves to fund economic growth.

Of course, these corporate thieves have "given" some of it back to us all in the form of higher share prices - just as Mr. Raju did. But we should be smart enough to know - just as the Satyam investors now realise - that all this "giving" can vanish in one day. And the shares we own will be useless.

Who are the companies we need to stay away from as investors?
We are scared to mention their names because, for all we know, we may be raided by some friendly government agency or shot and dumped in some side street. Or maybe even shot in broad daylight in a busy area.

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Not that dying is a problem, but writing The Honest Truth when one is dead would be a problem.

There are many companies that are built on the connections and influence of the founding families - enthusiastically called "entrepreneurs" for discovering more ingenious ways of institutionalising corruption. Many in the media shower them with accolades and awards. They glamorise them as business barons we should all aim to emulate. The emperors of corruption, meanwhile, shower the media with advertisement money.

Money is power. The powerful are even part of business associations. When I hear representatives of FICCI or CII or ASSOCHAM talk about corruption in government and the exposure of the political-business nexus because of the Satyam episode, I laugh at that pathetic hypocrisy. If these associations disqualified all their member companies who paid bribes or bought favours, I am afraid there would be a very short list of companies that they would need to represent.

But it would be a quality list. A list that we could, as investors, scrutinise for further investment. That would sure make our life easier. Today, we have to go through all the muck that the Indian stock markets have to offer in the guise of "business houses" and "business barons" and "future leaders".

"Be realistic," these businessmen would argue, "this is India - we need to survive. We cannot take this impractical stand."

That is why, as investment managers and advisors, we take the practical - and difficult - stand of staying away from companies and managements that we suspect.

Be careful where you work
In most companies that thrive on corruption or fraud, many of the employees are not directly involved in the corruption angle. But they do receive the benefit of the licenses obtained and the monopolies granted in the form of a salary or bonus. Many of the employees know what their bosses do to actually get the business contracts. When the next terrorist strike comes from corporate India, they don’t deserve sympathy. These employees are part of the problem. They have knowingly joined a company that has a reputation for crooked dealings. Like the street sellers who help the drug lords sell their stuff. When the drug lord is exposed, would you feel sorry for the distributors? Would you try to rescue them and give them jobs and ensure that the banks still gave them loans?

Satyam is unusual in that it has not bribed its clients to get contracts. Or bribed the government to get any special benefit which other IT companies do not enjoy. Well, at least no client has come forward to say that. (The World Bank has debarred Satyam because of a corruption issue but the World Bank is another animal and is reportedly going through its own overhaul process to weed out corruption in within.) By and large, Satyam has competed in the market space and won contracts. It has real employees (whatever the number may be) who have not joined a corrupt company - but it was run by a crooked person.

The Satyam episode exposes the government’s lack of preparedness on how to deal with a crisis. Just like it has been exposed during the terrorist attacks in Bangalore, New Delhi, or Bombay.

The government needs to have a crises management in place. For companies like Satyam - with mostly innocent employees - and companies (like the ones I cannot mention) where most of the employees know their bosses are crooked and willingly sign on to be part of some greater India mission.

Can we stop corruption? Of course we can. As investors, employees, business heads we need to continue to work with honest people in a dishonest world. That will truly make India "sundaram".

P.S. An airplane with 155 people crash-landed into the Hudson River just west of New York City at 1 am Friday, India time. I am watching the scenes live on television. Ferry boats, police boats, and some sort of crane boat rescued every passenger. La Guardia airport was closed for a while and reopened for normal traffic in what seems like 90 minutes from the time the plane hit the river.

Let’s assume a plane takes off from any Indian airport and lands into a river. The plane moves in fast currents, in freezing weather, in below-freezing water, and is sinking as it fills up with water. How many passengers do you think would have been rescued?

Maybe buying shares of companies listed on the Indian stock exchanges is still a safer proposition!

Note: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt Ltd and Quantum Asset Management Company Pvt Ltd.. Views expressed in this article are entirely those of the author and may not be regarded as views of the Quantum Mutual Fund or Quantum Asset Management Company Private Limited.

Mutual Fund Investments are subject to market risks. Please read the offer documents of the respective schemes before making any investments.


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