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The Red Flags of Satyam

January 12, 2009
To think that, Satyam’s fiasco couldn’t have been foreseen by the individual investors leans more towards excuse than a legitimate concern. A prudent investor could have foreseen the mess long time before the truth came out.

Looking back and realizing the mistakes is easy. For after all, it doesn’t take much of wisdom to realize where things have gone wrong. And this holds the most truest in the unseen, undecided world of business where a hesitation may prove costly, a gut feeling can pay off handsomely and prudent research can pay fortunes.

Looking back, its perhaps very easy to engage in SATYAM bashing and put all the blames of their misfortune on Raju and his cronies. No doubt, they are scamsters of the first degree, but the onus is on investors to save themselves from ignominy.

And to believe that those signals, those small tiddly widdly bits of information which create the first seed of apprehensions are that far to look for is a mistake.

Let us start with the red flags of SATYAM.

Today in Livemint, Mobis Philipose and Manas Chakravarty have come up with a brilliant report, “SATYAM’s strange obsession with current accounts“. Do give it a read, its a good piece of investigative business journalism.

The crux of the story is, that from balance-sheets ranging from 2006 to till date,SATYAM’s deposits with scheduled banks remained almost the same at Rs.3,300 crores but the funds in non interest paying current accounts swelled from Rs 238 crores [as on 31st December 2006] to Rs 1841 crores[as on Sept 2008].

The issue arises when you ask yourself why did

  • The real deposit didn’t improve and increase since last 8 quarters?
  • And more importantly, why was a huge amount of cash was stored in non interest paying current account?

I must say, that one particular analyst from Kotak Securities, Kawaljeet Saluja did mention about such a situation in one of the conference calls. [Read about the conversation between Kawaljeet Saluja and CFO of SAY in Livemint’s column given above]

From the conversation, I sincerely doubt, if Mr Saluja was convinced with Vadlamani and Raju’s answers. If he still quelled his doubts and continued staying invested, then its unfortunate for it was indeed a keen sight of his which led him to ask that.

SAY

Secondly I sincerely believe that the ethics of a company and a corporate culture is squarely set by example by the top management. That is, top sets the tone.

And with breaches like, UPAID and WORLDBANK, even if we allow an elbow room to the management of SAY and put the operational blame squarely on some middle managers, I must say, an equal and perhaps a larger blame lands on the management. So in this situation, when you realize that questionable deals appear in SATYAM’s case since 97-98[the UPAID case goes back to deals between SAY-UPAID in 97-98

If you as a company involve yourself in court cases when you are just toddling, then its shameful in fact, no less.

Three lessons come out for individual non sophisticated investors:

1. Research the balance sheets thoroughly. Ask yourself, if you think something is right. Don’t buy the management’s bluffs.

2. Buy and Hold doesn’t always work. When it does, then be ready its a bubble.

3. Read strong and high quality opinions coming out of blogs. Blogs in business is perhaps the best thing to happen to individual investors. But India as such, has a pitiable number of serious blog content providers.

One thing for policymakers comes out heavily.

You must, allow sophisticated funds to operate without any fear and preconditions. I sincerely believe hedge funds, especially the discretionary ones are the devil’s advocate in a financial system. Had there been such a force in Indian markets, this would have come to light far earlier and perhaps with less damage.I am reminded of the case of hedge funds shorting Lehmann stocks with impunity when Richard Fuld went on convincing White House and Capitol Hill that the company is healthy and the fall in stock prices is due to bear hammerring.

Almost 3 months later, Lehmann went bankrupt. You don’t get bankrupt by bear hammerrin’, you go bankrupt when you got no money to pay the  bills.

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4 Comments leave one →
  1. Some One permalink
    January 13, 2009 6:58 pm

    Dudes, yes we accept that Satyam has done a unforgettable fraud, but why blame a single person out there men, if he is the only person who has done this, so is the rest of the management healthy and legal…..come on….

  2. January 14, 2009 1:06 am

    “Why blame a single person?”

    Indeed, why blame a single person. I am not. In fact, I am blaming the rest of the board more than the perpetrator of the crime. My question was, why on earth did, board members allow such a free reign to Raju? And why there were no ‘independent board members?

  3. January 14, 2009 9:57 am

    This is a nice cartoon on Satyam’s situation

    http://bonchibuji.blogspot.com/2009/01/satyam-shivam-scandalum.html

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