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Jan
7
Satyam reveals Fraud after Fiasco
Filed Under IT BPO KPO Services, India Business, Indian Companies, Indian Government, Indian Stock Market
Today is a bad day for investors of the Indian capital markets.
Till now the belief was that Satyam’s Board did a fiasco (which is paradonable if the intent was genuine) by doing things without the right process.
But today, Satyam’s chairman has revealed fraud in financial statements over the last few years, which results in over Rs5000 cr of non-existing assests. Now its a crime, not a mistake.
Read this fax letter from: Satyam_Computer_Services_Ltd_070109.pdf
Exactly a week back, we had written of two basic issues in the Satyam fiasco. Lessons From Satyam Investor Issues
The second point was this:
2. The effectiveness of Satyam’s corporate governance
What has come out very clearly from today’s news is that corporate governance was really bad at Satyam — and this is was top 5 Indian IT services companies — so you can well imagine what kind of controls may or maynot be there in smaller companies.
So this is going to put all IT companies under a very tight spot — with unplanned extra expenses in all kinds of auditing reviews. Everyone has to learn from Infosys - the leading IT services stock — about how to be fully tranparent with investors. SEBI should use Infosys reporting as a guideline.
Investors are likely to now reduce the P/E valuaiton for mid-cap and small-cap companies, because this corporate governance risk just can’t be calculated for smaller companies when a large company like Satyam can do it wrong, despite an army of auditors and market analysts.
Every investor needs to reassess his portfolio companies and check if the parts are adding to the total. This weak global economy will expose more such examples where things were hidden under rosy valuations and positive market conditions.
Following were the comments of Narayana Murthy (NRN) of Infosys about an hour back:
I am shocked and painfully dismayed at what has happened at an important software company in India. It is a total failure of governance. I only hope that relevant authorities get to the bottom of this and take appropriate action.
It is important to remember that one Satyam does not make the entire Indian software industry. I believe it is an isolated case. I want foreign investors to realise that there are many honest managements and good companies in this country. While what has happened at Satyam is totally regrettable, I believe that it does not represent India. It just represents one individual and one company.
In the short term, investors will start looking deeper into all companies they want to invest in, and rightly so. Once they realise that things are not all that bad and that most companies are decent and managements honest, they will regain their faith.
This too will pass. Investors will consider this as an extreme case. Right now, all of us must conduct ourselves in the most legal and ethical manner. It is a good warning signal for all managements.
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4 Responses to “Satyam reveals Fraud after Fiasco”
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[...] Satyam reveals Fraud after Fiasco [...]
Its one of the worst days for Indian investors. This has shaken the confidence of investors - both domestic and global -repercussions of which could be felt over the medium-term. Hopefully, this development will now lead to greater weightage being provided to corporate governance standards by companies and investors alike.
Satyam shareholders have to file a class action lawsuit against PwC so that this auditing company can either pay-up to survive or close down. They have to face the heat the shareholders are facing.
Independent Directors like Prof Rammohan Rao of ISB and Prof Krishna Palepu of Harvard Business School have done gross negligence of duty and should be banned for dereliction of duty. They have compromised on their duties to the share holders - this was not some glory post that they can put on their CV — they have screwed up badly and resigned as if nothing wrong has happened. Each of the directors should be banned for life from any board position. They must face a D&O lawsuit. Same for the Intel chip inventor — can’t get his name — he and the other lady who existed promptly after Maytas. Nobody’s going nowhere. They have to pay.