Satyameva Jayate - let the truth prevail - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Satyameva Jayate - let the truth prevail A  A  A

20 DECEMBER 2008

Trust, like a beautiful bowl of Morano glassware, takes years to build and moments to shatter into a million shards. It ultimately boils down to good governance, whether in private sector or public sector, or in Government. It becomes more acute when potential conflicts of interests arise, as discovered last week by Satyam Computer Services Ltd. last week.

On Wednesday Satyam announced it was paying $1.6 b. to acquire a 51% stake in Maytas Infra and a 100% stake in Maytas Properties. Crossword buffs would soon figure out that Maytas is the inverse of Satyam, and the two sons of Ramalinga Raju, the founder of Satyam, have controlling stakes and management control of them. This created a potential conflict of interest to which more attention needed to be paid both by Mr Raju as well as by the independent directors on his board.

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Mr Raju owns just 8.6% of Satyam; hence the payment of $ 1.6 b. to acquire family owned companies appeared to be a 'mirror, mirror on the wall, who is the fairest of them all' kind of transfer of funds from a company with a significant public ownership to those with larger family ownership. The investment community strongly voiced disapproval heeding which the deal was negated. The trust, however, was shattered in a million shards and the drop in value of Satyam in the three days following the announcement of acquisition, was $800 m, or about half the deal size and about a third of its market value prior to the disastrous announcement.

Conflicts of interest are also centrestage in the imbroglio between the NSE, India's leading stock exchange and Financial Technologies India Limited (FTIL) a leading provider of software for exchanges. The NSE has debarred access to its currency futures segment to FTIL, by withholding from it its application programme interface, without disclosing any reason. This deprives those who had bought FTIL software, ODIN, access to NSE's futures segment. Perhaps NSE feels there is a conflict of interest for FTIL, which has been cleared to set up its own currency futures business at MCX, an exchange promoted by it. Perhaps FTIL, as creator of ODIN, may be able to insert into the software some features that could give it an edge.

However, NSE has its own conflict of interest. It had, six months ago, bought a 26% stake in Omnesys Technologies Pvt Ltd, and a seat on the board. Omnesys has developed software to compete with ODIN. The NSE, a professionally managed exchange which has taken the lead over the (hitherto) broker managed BSE on account of the management structure that has avoided conflicts of interest, now seems to be slipping into the same problem.

The matter is now sub judice and ought to be resolved swiftly. It can be argued that with SEBI having cleared the currency futures segment for FTIL, it has perhaps examined the conflict of interest situation prior to approval. No technology supplier, if he meets given standards, should be denied access. The solution to any potential misuse of technology use would lie in technology itself and not in denial of access. Denial of access till our slow legal system resolves the issue only serves to increase the advantage of an incumbent and is thus an uncompetitive practise/ Witness the inability of the BSE to gain market share in derivative trading after the initial denial to it, consequent on its poor self regulation as demonstrated by the Harshad Mehta and Ketan Parekh scandals.

Poor governance in the political arena is legion. The latest, and most sordid, episode is the asinine allegation by AR Antulay, Minister for Minorities, that there was more than met the eye behind the death of ATS Chief, Hemant Karkare, who was killed by a terrorist. He is seeking to rake up a religious controversy and become a centre of attention, from the biggest tragedy ever to have happened in India. How can Congress allow him to govern?

Not only in India, poor governance and regulation is the scourge behind the global financial crisis. Barnard Madoff, a former Chairman of NASDAQ, ran up losses of $ 50b. in a ponzi scheme, in a fund which had $ 17b in assets! He duped people from his own Jewish community (including Stephen Spielberg and Jeffrey Katzenberg), foundations and charitable trusts and bankers (Banco Santander of Spain for $ 3.1 b., various Swiss banks for $ 4 b., HSBC for $ 1b.). In 2006, on a complaint filed in late 2005 by Harry Markopolos, the US SEC discovered that Madoff had misled the agency about how he managed customer money but yet missed the chance to uncover the Ponzi scheme years before it bloated to $ 50b.

The Government is likely to pump in another Rs 42,000 crores on top of the previously announced spend of Rs 20,000 on infrastructure. Without proper governance, these would be just numbers. The UPA has not completed a single one of the 47 highway road projects it has undertaken. It has announced a spend of Rs 5000 on rural roads, which are abysmal. India has 3.3m kms of roads, the largest but one in the world. But most roads are of pitiful quality, because those in charge of giving contracts to build them have a vested interest in poor quality roads, the repair of which gives them an annuity income. Dual carriage roads account for only 8,000 kms of the 3.3m kms. In China they are 53,600 kms (Economist, Dec13).

Unless we, as a nation, focus on good governance, whether in public domain or in private domain, we would never shine. One hopes that the forthcoming general elections, due before May 2009, will have political parties focus on governance instead of on divides and vote banks. The people are completely fed up of divisive politics and would not tolerate the nonsense anymore.

Last week stockmarkets rose after the US cut its interest rates to almost zero, oil fell to $ 38/b and inflation in India fell to 6.8%. (I doubt if the shoes hurled at President Bush by an Iraqi journalist had anything to do with the rally). The BSE-Sensex gained 309 points to end at 10,099 and the NSE-Nifty rose 156 to end at 3077.

Where now? Some investors may be feeling that the global problems are behind us, given the determined and concerted actions taken by Governments (the US Government approved a bailout package for their auto industry last week). Domestically LIC is to invest Rs 12,000 crores before March. So the market may continue its rally for a while. However, it would be prudent to be cautious and exit at some stage in this rally. When to exit would depend on one's risk appetite. Left too late, it would hurt one's own appetite! The financial crisis is hitting the real economy and the effects are likely to be felt in 2009.

2009, by all appearances, seems likely to be anus horriblis, no crudity intended (hey! Even Queen Elizabeth used the term, okay?!) Better to lighten and wait for better opportunities.

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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