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The worm turns

Satyam will be forgotten. But companies dressing up their books won’t be spared any more by vigilant investors, writes Udayan Mukherjee.

india Updated: Jan 09, 2009 23:37 IST

If you think the Satyam scam is the story of a crooked promoter siphoning off a few thousand crores of cash, you may be surprised. There are so many unanswered questions that I am beginning to feel this is a scam of much more monstrous proportions that extends well beyond Satyam.

I fear it is the proverbial can of worms that will eventually go on to implicate several other members of Satyam, B. Ramalinga Raju’s family, politicians, bureaucrats and, possibly, even the real estate mafia in Andhra Pradesh.

The more I think about the curiously- worded nature of the confession, the way it landed up at everyone’s desk, the mysterious vanishing act of Raju and the inaction of regulatory authorities so far, the more I get convinced that the financial scam is simply the tip of the iceberg.

While the expected reactions of shock and outrage have rolled in, the episode drives home some unpleasant truths. The auditor Price-waterhouse will bear the brunt of criticism and litigation, perhaps justifiably too. Yet there are many others who need to introspect.

There is an old axiom in the market: ‘Profit is an opinion, cash is real’. Well, in this case neither was. Yet the ease with which a large company could effortlessly cook its books and fool an army of local and global equity analysts, a supposedly vigilant media (I include myself) and pedigreed independent and executive board members is alarming.

The uncomfortable truth is ‘most’ independent directors in India have little clue about what is going on in any company and will rarely, if ever, question the executive management. Investors and the media accept ‘audited’ reports quite blindly as the basis of their analysis and you now know where that could lead. And worst of all, if a management does want to dress its books up, they can get away with it fairly easily.

I hate to admit this. Here’s a small question for the Securities and Exchange Board of India (Sebi) too: since the Maytas scandal erupted a month back, the key apprehension has been the existence of Rs 5,000 crore of cash on Satyam’s balance sheet and the inclination of the promoter to siphon it off. Was it so very difficult for Sebi to establish whether that cash was indeed there? Why, it would have required all of five phone calls to Satyam’s bankers to ascertain and the lid would have been blown many weeks before the confession.

Now a lot has been said about the aftereffects of this episode. Here I differ from consensus opinion. Fears of a massive derating of the Indian market or an all-pervasive mistrust of Indian corporate houses are vastly exaggerated. The truth is, people have very short memories. Insensitive as it is to say this, how many people in the financial world even remember 26/11? When it happened, people reacted as if India had changed forever after that event. Today I hardly ever hear it even mentioned. People have moved on.

Trust me, even Satyam will be forgotten soon. If Satyam’s overseas clients can move over seamlessly to other Indian IT vendors, then this will do little to dent the image of Indian IT either. Remember these clients reside in the US and Europe, where such frauds are far more commonplace. And no, global investors will not put India on the same pedestal as Russia either, after this incident.

Life will carry on, with one exception. Those companies who were dressing up their books, blinkering their auditors, directors and market analysts, will face the wrath of investors.Wherever investors sense even a shadow of doubt, they will simply walk away, leading to a material derating of such stocks. I fear many large Indian companies will not be able to stand up to the test of a closer scrutiny, even if their promoters have not perpetrated outright fraud like Raju.

And for Satyam’s shareholders, I fear the worst. While Satyam does have a real business and real clients, it is a crumbling edifice with negative net worth and equity holders may be the last in line, as always, to salvage anything from the wreck.

So do I have a recipe for damage containment? The government superseding the Satyam board is the right way to go. Now the Finance Ministry needs to appoint an interim CEO. No, an erstwhile board member of Satyam simply won’t do. This CEO needs to appoint two independent auditors immediately.

In the next two weeks, the end objective should be to usher in a private company to take over the core operations of Satyam and its employees, minus the liabilities, if it can be done. I doubt if it will be easy, as it is likely that the clients and employees of Satyam will move to other IT companies anyway. So why would they want any part of the Satyam mess?

Yet, that’s the only way out, and to achieve it, speed is of the essence. Else, Satyam may hurtle towards bankruptcy.

Meanwhile, be prepared for more twists in the tale and pray that this episode does go some way in tightening up a system still basking in the afterglow of a bull run that ended a year back.

Udayan Mukherjee is Managing Editor, CNBC TV18 Barkha Dutt’s ‘Third Eye’ will be back next week.