The modern thinking Indian

What should a person look for when to invest in the stock market ? The stock market is always said to be a reflection of the economic future of the country, and in the view of many experts, seen to be an indicator of the next 6 months to 1 year. So what does the future say for the country ? You need to be cautious, monitor the sectors of the economy that are not so affected by the company, look at market value of companies as opposed to their book values, look at their future potential, and so on.
Well, the last few months have been a major shakeout. The world economy is projected to have an overall negative growth or zero growth with most developed economies contracting (in fact, China and India are supposed to be among the few countries that are still growing). Scratch the details, and you see how things are pretty bad. The United States is going through a recession not like what it has seen for decades, with consumer sentiment way down. Jobs are being shed on a huge scale, industries are down, and major corporations are reporting losses or sharply reduced profits. Obama is pushing huge packages in order to try and turn around sectors such as finance, housing, auto, etc, but the economy is very slow to respond.
The slow-down in these developed economies has had a ripple effect on economies that are export led, such as China, East Asia, and even India. Sectors such as textiles, IT, gems, etc have been impacted pretty badly. At the same time, the overall sentiment is badly negative, and this has impacted growth in sectors such as Finance, Realty, Construction, Auto, name it, and the sectors are impacted. Industry is looking at getting good encouragement from the Government, but in an election year, populism is the key. At the same time, since inflation is down below 4%, one can expect some key monetary steps such as reduction of interest rates to try and boost the economy. One needs to evaluate companies that are well run, fundamentally sound, and does not indulge in unsound practices.

Labels: Company, Economy, Finance, Future, India

India has seen corporate scandals in the past, but never one of this magnitude. A software company, touted as a success story, the 4th largest software company in India and one that services around 1/3rd of the Fortune 500 companies, the events of the past one month have been a total shock. They have called into question the entire range of issues related to ethics, corporate governance, fiduciary responsibilities, professional auditing, and so on. There will be a lot more soul-searching that will happen, a lot more inspection and suspicion of other companies, search for more skeletons in the cupboard, and so on.
What has Mr. Raju brought forward. Starting from the surprise news about Satyam trying to buyout the realty companies, Maytas (run by Mr. Raju's sons), this is almost like a film story. The news about Satyam using its huge estimated surplus of more than $1.2 billion to buy companies related to the promoter (especially when the promoter held only 8% shareholding in the company) was a huge blow to all norms of corporate governance and met with huge resistance. Seeing this resistance, the company decided to roll back this proposal, but things would not stop from that point onward.
The issue kept on snow-balling, and when a popular issue comes up in the press, they can push at all areas and get more secrets out. So, questions started being asked about respected board members such as Vinod Dham as to whether they asked the right questions and acted in the interests of the shareholders. Other news started disclosing that actually the promoters had already pledged all their shares and effectively could be actually holding no stake in the company. And then the World Bank announced that in continuance of an earlier investigation, Satyam has been found to have a great many security problems with their last work (including probable sniffer tools and a data hole), and hence Satyam has been banned from further World Bank contracts. By now the independent board members had started resigning.
There was a lot of news about how attractive Satyam could be because of its huge holdings of cash and high book value vs. the value of shares, and then there were even more reports questioning whether Satyam really did hold onto these reserves.
And now, finally the CEO of Satyam has revealed all. The company was cooking its books, and once started, there was no going back, and hence the company eventually has declared reserves to be $1.5 billion more than what they actually hold.
All this came as a huge shock to the people of the country; how can such respected promoters actually commit this huge fraud, can one really believe them now when they say that they did not benefit ? What were the independent auditors (Price Waterhouse Coopers) doing when they were doing audits since 2001 ? There are already too many jokes about lawyers and accountants, so maybe this was another reason why accountants cannot be trusted. Is it possible that only a few board members and CEO knew about this, and no one else ? This was money that was supposed to be coming into the company, how can senior management (besides the promoters) claim that they did not know ? There are too many questions, and one wonders as to whether all this will really become clear ?
Now what happens ? Well, it is not like Satyam is bankrupt - it still has a large number of clients (although some of them would want to bail out), it has a huge number of people on its rolls (50,000), it is a huge part of the reputation of Hyderabad as a big IT city, and there are still institutions who hold a huge amount of the company's shares. It is difficult to let such a company go out of business, and one expects that there will be pressure to ensure that while the investigation goes on, the company is retained as a going concern. However, the US has a law where auditors and the company's management are responsible for the accounts of the company, and this is a blatant violation.

Labels: Company, Economy, Finance, Fraud, Investigation, Software