The second fraud at Satyam - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
The second fraud at Satyam A  A  A

14 MARCH 2009

The tragedy of our country is that the political leaders care not a whit about its own people. They are in politics only for their own personal wealth. This manifests itself in several areas.

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Look at the second fraud at Satyam. The first one was committed on Indian investors by its promoter, Ramalinga Raju, who falsified accounts and admitted to doing so. The second one is by the authorities, in penalising already suffering investors.

The normal rules of takeover have been tweaked, so that a buyer emerges bold, or foolish, enough to want to bid for it. The buyer will pay the average of 2 weeks stock price, instead of the past 6 months price, which would be higher. Why? Because of the fear of impending liabilities in the case of 2 class action suits filed by its ADR holders in the US. What does that signal to us?

One that the US judicial system works in penalising defaulters, ours does not! Bernard Madoff, for example, is likely to spend the rest of his life in jail for the fraud he committed; has that ever happened to a fraudster in India? Madoff's entire property/assets have been taken by the Government and will be used to settle claims; has that happened in the case of Satyam? The reason it hasn't is because of para 1.

Result? Investors in India would get a lower price because of liabilities of claims by US investors. Now ADR holders hold 19% of the stock, Indian investors hold 79% and the promoter holding is down to merely 2% (his interest in the sinking ship is thus non existent). Since his is a self confessed fraud, should the political leadership not attach the assets of him and his family, as the US leadership has done? In a true democracy, which survives for the people, it does!

Now we get a figure of $ 600 m. as the cost of a likely out of court settlement of the two class action suit liabilities. This exceeds the market cap of $ 550 m. for the company. In short, the Indian government is trying its best to get in a buyer to pump in money, which would be used to settle the 19% American investor liability (who would not suffer from their investment as a consequence) and damn the 79% Indian investors, who have suffered and continue to suffer tweaking of rules to ensure that the salvage price of the vessel is even lower.

On top of this, and this is really rich!, is the statement by the tax authorities that capital gains tax would be payable by domestic investors (not by foreign ones, mind you) if the price in the takeover is higher than their purchase price. In other words, it is alright to tweak rules in order to find a sucker, sorry buyer, for the salvage, but it is not alright to tweak them for domestic investors. Its rather like imposing a tax on firewood used for their cremation!

This is Indian democracy at its finest!

The global situation is also bad, although last week saw the start of a possible bear market rally, after Citi and BOA announced that they had made profits in Jan and Feb. and after President Obama announced extra budgetary spending. The problem is that if Governments start to protect domestic jobs and businesses as a condition for a bail out package, the increased protectionism would impact global trade and this would take a long time to recover. Governments, facing drastically reduced production and job losses, would be compelled to take protectionist measures, which would prolong the agony. Production in January 09 was down 31% in Japan, 26% in Korea, 24% in Spain, 16% in Russia etc. Ships piling up in Chinese ports to offload Australian iron ore are more than thrice the normal number, which indicates that China would also slow down. Growth in global merchandise exports in the period 2000-07 grew 5.5% CAGR, against a 3% CAGR growth in world GDP. In 2009 this is expected to shrink 2.5% -3%.

So if the bear market rallies now, as it could, investors ought to be cautious and not get into the trap. Iconic manufacturing companies are likely to fold or restructure. One overheard a wag saying he had read 10 Chapters of 'General Motors biography' and was waiting for Chapter 11. The auditors of GM have opined that they may not be able to state that it is a going concern! There are concerns, too, about General Electric, for many years on the list of the Most Admired Companies in the world.

Last week, after an initial dip, the Indian market coloured up after the Holi festival, and the BSE-Sensex shot up on the last two days of the week to end at 8756, gaining 430 points over the week. The major contributors were Reliance (with 122) and ICICI Bank (with 60). The NSE-Nifty added 99 points to end at 2719.

Now that the sensex has recaptured the 8400 floor it had briefly broken under, its possible that it may rally further. Although India's index of industrial production fell 0.5% in Feb, year on year, it is improving month on month, since December. And, compared to the other countries mentioned above, a half percentage yoy fall is not bad at all.

What is appalling is the lack of infrastructure, which subsumes any manufacturing efficiency. The Government squandered resources in the boom and now has few to spend on improving it. There is a huge resource pool which is available, but the political leaders are reluctant to tap into it, for reasons best known to themselves. This is the pool of money lying in Swiss banks, and other tax havens, reportedly exceeding $1.5 trillion! (estimates go to $3 trillion). Swiss banks are now willing to provide details of accounts to any Government that simply asks for them. This money can be used to improve infrastructure and to get India out of the global financial mess. But will it? No! because the politicians won't ask Swiss banks for the details. One wonders why.

One hopes the electorate will throw up a Government that would regard their well being as primary and above the well being of themselves. Now, would somebody get me a cup of coffee so that I can wake up and smell it?

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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