It was one of the darkest days in history of corporate India. Early this morning, B Ramalinga Raju — the founder of Satyam Computers, one of India’s largest IT companies — dropped a bombshell when he sent a five-page letter to the stock exchanges confessing to one of the biggest frauds ever seen.
Satyam had nothing by way of a balance sheet and it had been cooking its books for the last many quarters, fabricating lies for the benefit of all its shareholders, for its independent directors and other directors and perpetrating a lie that went through for several years before he chose to confess this morning.
The result: the Satyam stock lost 75% of its market cap, a huge collateral damage took place across the market that tanked 750 points raising a lot of apprehensions about how the world would see it both for the IT services sector, the Indian corporate sector and its standards of governance and also to how FIIs would react to such an episode.
Shankar Sharma of First Global sees the stock going to zero levels, "probably by the next trading session because there is still 100% to be lost even from these prices." He added, "I firmly believe that no company in its right senses will want to go and take a look at its books, or try and look at it as an acquisition candidate because it is a loss-making company."
Ganesh Natarajan, Chairman, NASSCOM, feels it will take about six months to get the company’s financials back on track. "Satyam is still a good company if you trim the company a little, salvage the customers’ expectations and the customers’ projects."
Bhavin Shah, MD, Head-Technology Equity Research, JP Morgan, sees payment issues going ahead for the company as it doesn’t seem to have any cash balance.
Ramesh Damani, Member, BSE, believes that this quarter markets will not be able to cross the high of 10,500 that the Sensex made early morning today. "I agree with Shankar Sharma that someone could bottom fish and make a few bucks on Satyam but it is pointless. But I disagree with him on the stock going to zero because for some reason in India, stocks don’t go to zero even when the companies go bankrupt, even when they languish for years."
Ved Jain, President, ICAI, said they are examining all possibilities and put the machinery in the motion to find out what really happened whether the auditors were negligent or were hand-in-hand. He is sure of the fact that serious action is under contemplation and will be taken.
Vallabh Bhanshali, Chairman, Enam Securities, feels that this is an accident and to convert this into a practice in the country would be a big stretch. According to him, it will trigger a lot of action. However, he doesn't see confidence in the IT sector eroding in the country as a whole.
Harish Salve, Eminent Lawyer and Counsel, said the issue of prime importance now was the security of the 50,000 employees. "I have not had any dialogue with Raju. They had wanted to consult me in the earlier issues, which related to that acquisition, after which I’ve had no interaction with them. Today, I just made some inquires to some people and I have been told of the appalling events of the day." He added, "There are 50,000 employees and their lives are on stake. According to me, in today's time and in India, that’s of critical importance because this is a service-driven industry. This is going to be a major setback to the IT sector in India."
Here is a verbatim transcript of the exclusive interview with Shankar Sharma, Ganesh Natarajan, Bhavin Shah, Ramesh Damani, Ved Jain, Vallabh Bhanshali and Harish Salve on CNBC-TV18. Also watch the accompanying video.
Q: What is your assessment now in the evening, of what kind of collateral damage this might have to the market at large and to Satyam’s investors?
Shankar Sharma: To Satyam’s investors, I think the damage is very clear and apparent. I don’t think the damage in the stock has been done completely because just looking at the way Satyam’s business model is, and that is very important to focus on. Let’s clear away the Ramalinga Raju confession. Just look at the financials.
There is no cash on their balance sheet. Their profitability is abysmal at the operating level, which means that they are making losses at the net level, which means––by our estimates––that the company has no cash even to meet the next payroll.
So, it is not just a problem of governance and stuff. It comes down to a real crunch situation that they will be writing cheques that they cannot honour physically.
How does this situation get solved? I have no idea. I think this stock will go to zero levels, probably by the next trading session because there is still 100% to be lost from even these prices.
No company in its right senses will want to go and take a look at its books, or try and look at it as an acquisition candidate because it is a loss making company. So, why on earth would you want to take 50,000 employees––I don’t even know whether that is a correct number––whose contribution is to generate a loss quarter after quarter.
So, I doubt if there is any acquisition going to materialise. So, what is the end game here? It is a services company; it has no plant or machinery of any reasonable value save for the real estate value. So, why would you want to buyout a Satyam equivalent company? When it is a loss making, it has no assets worth the name, the clients will walk, the employees will go. I think this is dead in the water.
Q: Come in on that because that’s an important question. We will talk about the fraud which has been perpetrated and its impact on the image of Indian IT services a bit later. But put yourself in the shoes of an IT company’s CEO (Chief Executive Officer) examining of the prospect of Satyam as a takeover or an acquisition candidate and do tell us whether there could be someone who sees value in the relationships that Satyam ostensibly has with many global companies or the revenues that it generates albeit not very profitably. Do you think companies might be keen with another management to takeover not the business and liabilities of Satyam but its operations and employees?
Ganesh Natarajan: I think so because anybody with a reasonably deep pocket obviously as was said it will take about six months to get the company’s financials back on track. But they do have very good employees, they have stellar customers and if somebody who steps in now — doesn't not wait for too much time to pass — comes in and gives confidence to customers that lot of the mission critical work that Satyam does can be continued by them and also give confidence to the employees. They can stay on board obviously some trimming will be required as was mentioned clearly maybe they have been too many employees to justify a certain number that they put out. But if you trim the company a little, salvage the customers’ expectations and the customers’ projects. I think it’s still a good company and somebody should take a very serious look at it.
Q: Last we spoke you were underweight on the stock but just on this specific concern there is on clients, do you expect to see a big exodus of clients and also the other concern is that there might be non-payment now of orders already executed––do you think that might happen as well for Satyam?
Bhavin Shah: Its client concerns are certainly going to be there. Most of the clients will be evaluating the relationship here and certainly almost every client would have a relationship with another Indian IT vendor or even a US vendor with an India operations. So they would certainly be looking at options that they have in this situation. As far as the payment issues, obviously the company doesn’t seem to have any cash balance. So there are bound to be some payment issues.
Q: Just marry this with what the market will take away from it because the big fear is that now there will be a prolonged impact on sentiment because of the enormity of this kind of a corporate governance issue. How do you see things shaping up for market and the takeaways from this Satyam episode?
Ramesh Damani: I think the first thing is that the rally that we were talking about even as early as this morning is now punctuated or at least postponed. So I don’t think this quarter we should be able to cross the high of 10,500 that the Sensex made early morning today. So that is the high water mark for the Sensex.
In terms of Satyam, I agree with Shankar Sharma that someone could bottom fish and make a few bucks on it but it is pointless. For some reason in India stocks don’t go to zero even when the companies bankrupt, even when they languish for years. So it will probably not go to zero but there is very little business that you could salvage of it.
There was talk on your channel and other channels of some sort of government bailout taking place which is hogwash. Clearly we don’t want to put tax payers’ money into company that has failed and that has cheated its customers and its employees, so why should we bail it out?
Lot of the MNCs were playing Infosys and Satyam and were trying to get cheaper rates but they must realize that when you pay a cheap rate you deal with poor quality vendor. And it is not accident that Infosys closed in the green today despite the carnage on Dalal Street.
I think there is native intelligence that the street always had of the difference of the quality of the company between Infosys, Wipro, TCS and some of the second rung companies. So I think that market wisdom played out.
So there is an impact on Satyam stock, on the market for a quarter or so but one thing I am clear about is that it will not have a long run permanent impact on Indian technology. We are a world class source there are some great companies and people will realize that they want to deal with world-class players in India they will have to pay their price and they will pay that price because India is still remains a very alluring destination. So all this talk about software going out of India, I think I don’t buy that
Q: How culpable do you think the auditors might have been and do you think it’s conceivable that such a fraud of this proportion could have been hidden from the auditors over several quarters?
Ved Jain: I agree that this is a very big fraud which as been taken place in the corporate sector but as I get the information, the confession statement which came from Mr. Raju, the figures are very high and there can be two possibilities as you rightly pointed out, if auditors can be negligent but looking at the way the figures have come up, the second question is whether the auditors were aware of what is happening inside the company or the figures were intentionally withheld? We at the profession are seriously concerned about it and we are examining all these possibilities and we have put our machinery in the motion to find out what really happened whether the auditors are negligent or they are hands in hands, but I am going to assure you that serious action is under contemplation and we will go to the route of the cause and try to find out who are the people behind this and how it all happened.
Q: What is your guess, do you think they were negligent they were inclusioned or things were just hidden from them, in your eyes would an auditor ever certify cash on books without seeing actually some kind verification?
Ved Jain: I don’t think the auditor can do that, the auditors can do unless looking at the cash in the bank balance actually and that’s the biggest surprise which has come to us that to how it has happened and to how it was conceived but the investigations will only unravel what happened and how it happened.
Q: What impact do you think this will have on global investor sentiment or any kind of a collateral damage it might have on perception of Indian IT services?
Vallabh Bhansali: This has been very sad. This is dramatic – very one has sat up and is looking at it but if you ask me whether this will have a lasting impact – my answer clearly is no. This is very big, very sad, shocking etc – whatever but through the day I am thinking about it. This is an accident and to convert this into a practice in the country would be a big stretch. So I think this will trigger a lot of action. But does it erode the confidence in the IT sector in the country as whole for all time to come? Not at all.
Q: Given the kind of environment and sentiment do you expect FII (Foreign Institutional Investor) flows to be impacted over the short-term, medium-term or even longer-term?
Vallabh Bhansali: I think depending upon how we deal with the situation this short-term could be little longer than it need be. In the short-term of course we have seen the market collapse today, we have seen the stock price meltdown as can be - nothing else could be expected and people will sit up and look at their portfolios, they will become risk averse in the short-term definitely no question. But how short-term whether it is a few week, whether it is a few months – will clearly be driven by what actions we take.
I think people know from their own experience that corporate governance is not the same everywhere; the stock market PE, clearly reflect that kind of knowledge and discretion on the part of the investors and therefore today everyone will be under the scanner; the stock prices, movement today show that and until people feel comfortable obviously the risk aversion will continue. But someone who has been in the market for so long does this last for ever? It never does.
Q: The fear though is what or who next? Would you say it is a fair possibility that over the next few months that we see similar episodes if not of this magnitude?
Shankar Sharma: I doubt if any other Indian promoter is sitting around watching this, having cooked his books and a lot of them went public in the last couple of years.
I doubt if there are any more confessionals arriving by way of facts. That is what is most surprising. I am actually a little less surprised at what was going on because I have been in the markets long enough and know all manners of companies, not just in India but across the world, do some degree of cooking of books, and that is let’s say ‘accepted’.
In fact a survey in the US that was conducted a couple of years back of CFOs, 70% of the CFOs said that they had always been pressurised to cook the books by the CEO, and a reasonable proportion of the 70% admitted to having cooked the books. And that is the US. So, the fact is that companies cook books.
But I am really surprised at this whole facts thing that what might have triggered this. I am just trying to relive and go through the mind of Ramalinga Raju – last night what he must have been going through. I am just unable to figure out what would he be thinking when he was penning these words. A lot of companies in India currently, the numbers that have come up, great margins, with commodity and pedestrian businesses, I think a lot of them are very poorly cooked. But I doubt if any promoter is going to come out and have a confessional of that kind. I don’t think we are that religious a country.
Q: What is the end game for this saga? What in your eyes is the natural progression of events from here? How can some value be salvaged for the various stakeholders of Satyam, employees included?
Vallabh Bhanshali: I would do two things. I would have one immediate plan and one fairly short-term plan. If he had a long-term plan, it is dead in any case.
The immediate plan should be that the company should be handed over to a credible company immediately so that all the constituencies can be protected. This can be done in a fairly transparent manner, and can be done in a short period of 24 hours if we put our hearts to it.
I haven’t seen any action on that front at this point though Mr. Raju made some recommendations to appoint somebody and take some action. It is within the responsibility of the regulators, the stock exchanges, and the government to do something like that.
Immediately I would set up a commission. That commission has to recognise that paper corporate governance cannot be trusted. I think we have had frauds and scams in the past. We have come out stronger from many of them. We must resolve to come out stronger from this.
What I would do is I would appoint a commission under someone like Mr. Narayanamurthy to go completely into how to make this paper corporate governance very effective, have a committee report out in as short a period as possible, not longer than four weeks, maybe only 15 days and implement 100% of it immediately, and restore the confidence.
Q: The fear though is what or who next? Would you say it is a fair possibility that over the next few months that we see similar episodes if not of this magnitude?
Shankar Sharma: I doubt if any other Indian promoter is sitting around watching this, having cooked his books and a lot of them went public in the last couple of years.
I doubt if there are any more confessionals arriving by way of facts. That is what is most surprising. I am actually a little less surprised at what was going on because I have been in the markets long enough and know all manners of companies, not just in India but across the world, do some degree of cooking of books, and that is let’s say ‘accepted’.
In fact a survey in the US that was conducted a couple of years back of CFOs, 70% of the CFOs said that they had always been pressurised to cook the books by the CEO, and a reasonable proportion of the 70% admitted to having cooked the books. And that is the US. So, the fact is that companies cook books.
Q: A lot of individual stocks in real estate, infrastructure as sectors, fell off 20–25% today. They were singled out for punishment. Do you think the market fears are legitimate, that even if there is no confession, there might be disclosures now from managements who have been sort of propping up their books if not cooking them?
Damani: It is a great question and if you ask me, off the record, I could name you 50 companies where I am not convinced about the quality of earnings coming through or the QoQ clock work reports that they do. Beginning this quarter, the market will examine, with a whole new microscope or a whole new magnifying glass, to see exactly what the quality of earnings is. Is it legitimate, is the bank balance legitimate, and there are lot of well-created, highly liquid counters where we always puzzle and scratch heads as to how they produce these results in an operating environment that is so non-conducive. That is good. Companies will inevitably have to face analysts who are more hostile, auditors who are more hostile, and inevitably, there will be a lot of companies that fall through the crack. There may not be any confessions, but one will see, suddenly, downgrade of earnings taking place over the next few quarters. So it is, almost certainly, going to happen.
Q: Do you think it’s ethically or morally correct for someone from the existing board to be running the ship at Satyam?
Natarajan: He is primarily talking about Managers and they have set-up what they call a taskforce, and obviously, in the short-term that’s the only solution because one must have some continuity, especially to restore confidence in the minds of the customers. So, in a sense, in the very short-term what he is doing is correct. But as somebody was saying over the next two–three days, we must have a much stronger method of ensuring confidence among the employees as well as the customers because this is really short-term. One really has to have a complete change in management there to be a continued confidence in the value proposition of the company.
Q: We are trying to understand what the next process will be because in the letter they have indicated that there will be a fresh audit how long does this process usually take and what might be the modalities of it?
Ved Jain: There is no such procedure to have a second audit. It can be a special audit added by the government. Raju said in the letter that there should be a re-audit and the books should be restated; however, there is no such mechanism available. The disclosures which have been made, new auditors can be appointed, there can be a special audit and it can be done in a period of about one month or two, depending upon the situation and the facts emerging during the course of the audit. This is one of the exceptions which has happened, and as rightly said by Bhansali, this is one of the accidents that has happened in the Indian corporate industry and never in the past have I seen such a big issue coming up in the Indian corporate sector. So that’s why it’s a major accident. The fallout is there but we need to retrieve the situation, we need to work for the future and see how best we can work and ensure that the confidence of the FII’s, investors and shareholders is maintained.
Q: We were talking to you just a few days back and you were saying that you had agreed to be counsel to Satyam on these matters. What's your observation today, and have you had any dialogue with Ramalinga Raju or the Satyam Management on how things have transpired today?
Harish Salve: I have not had any dialogue with Raju. They had wanted to consult me in the earlier issues which related to that acquisition. After which I’ve had no interaction with them and today I just made some inquires to some people and I have been told of the appalling events of the day and that they are trying to put together some sort of an interim management team. There are 50,000 employees and their lives are on stake. According to me, in today's time and in India, that’s of critical importance because this is a service-driven industry. This is going to be a major setback to the IT sector in India. This is going to be a major setback to the corporate image in India.
Q: Your solution––that Satyam be given to another company. Do you think any private company, tech company would want to touch it without much more rigorous audits for next few days and weeks, They know what their business is all about, or are you suggesting that it’s a government company which takes over because of the lack of any private company doing it?
Bhansali: I think, as Bhavin Shah rightly said, there maybe value to the core business but how do you separate it. The example was set in America that how the government stepped in and said that alright we guarantee this part and the rest you take over. Something similar has to be thought of.
Every crisis is an opportunity for a county like ours with aspirations to say that yes we know how to tackle a crisis. So, we must attempt it; at worst we don’t have a solution whatever has to happen will happen. However, we must show speed and we must show imagination and confidence and that is what I am trying to say.
Q: Another point that was made earlier today was the fact that the premium for many of these tech ADRs might get sliced quite a bit- do you think overseas as we might take some amount of damage by way of good will?
Damani: Almost inevitably. I think it’s going to be a very brutal quarter. It’s scary to see how Satyam opens this morning on NYSE. There will a lot more collateral damage; however, ultimately, native intelligence would pick up. People will understand that there is a difference between the wheat and the shaft.
I am supremely confident that there is no long-term damage to technology industry in India. People make mistakes, people pick a wrong vendor. I pick a law firm in America; I pay the price for it so will Americans if they have dealt with world class companies like TCS, Wipro, Infosys they are fine of. The fears that Indian technology sector will be battered because of this is way overblown. To reiterate it is not an accident that Infosys closed in the green today.
Q: I want to flesh out that point that is being made about clients and perhaps an exodus to other existing IT companies. At this point, is there a lot of overlap between key clients that Satyam has and a lot of our major IT players, and in that sense, in a perverse way you think some might actually benefit from what’s happened with Satyam?
Shah: Potentially, there are two types of benefits. There is certainly potential that some business gets transferred to the other major IT vendors. Also, one might suddenly have some very good talent becoming available. Some of the good employees of Satyam, may be, they have very good customer relationship, may be they are good at certain skill sets might be willing to join the other companies. So there are benefits of two sorts here that might take place.
There are obviously going to be downward pressure on wages which obviously reduces their input cost. So, in some ways I have to say it is positive for the other major Indian IT vendors.
Q: What about the market because Satyam had very large holders like Aberdeen and Fidelity and they would probably not take much out of this? Do you think it dents the image and perception, and therefore, raises the risk profile of operating in India because such a large company has done this fraud?
Bhansali: We have had Enron in America, it was a 65 billion dollar company when difficulties hit. So in a capitalistic society one doesn’t rule out such things howsoever painful they are. The clear question is that the security mechanisms right from internal professionals to the analysts on the street, merchant bankers, auditors and so on. I identified as much as 6–7 filters, and all of them failed and nobody expected them to fail. So we need a re-examination of everything and you have someone like Narayan Murthy with great creditability experience and sagacity to look in to these things and quickly say that yes these are the changes that need to make and bring them back. Then we will become better as a system because of that and if you don’t do anything then we will leave things to imagination of people and then it can go anywhere.
Q: I was asking you about the impact on the market and whether this is just one knee-jerk or it has potential of stopping this multi-week pullback rally dead on its tracks?
Sharma: No, I don’t think the rally was anyway going to carry on for much longer because interestingly the market has rallied between bad news. So, you had bad news on the Lehman collapse and then the resultant sell-off in October when markets fell 30–35%. From there we had a bad November as well when India sold off 10–12%. So, December was anyway due. December is a slow month, no numbers out, generally everybody goes to sleep. So, the markets took this chance to stage a weak rally globally, not just in India. If you see globally, the market has started weakening from today. Europe is also weakfish; India was obviously accentuated by Satyam. So, I think the rally was weakening; it was on its last legs. For India, the fall has obviously happened a lot quicker. I think it is just that I don’t like markets that rally ahead of poor earnings season. I would have been happier had the markets been low and then poor earnings come through and then have a pretty strong rally because the markets could say, okay the numbers were bad but not that bad.
But once you’ve rallied and on the average stock that was beaten down, you were up 40–50%––Tata Motors or Tata Steel or a Jaiprakash Industries––which has virtually doubled, Suzlon has gone up 60% odd. Then you go into a poor earnings season, markets by most logical analysis will be ripe for a sell-off rather than a rally because how much rally can you have for a Tata Motors, which is selling 8,000 vehicles a month, and is already up 50% from the lows. You cannot expect a rally any more in those. So, while this is a knee-jerk reaction, I don’t think it is going to have a huge, lasting impact. The fact is that, overall, in an already bearish situation. It will have a terrible impact for the next few weeks. Had it happened in 2005, I think, markets would have moved on. It would have been another 2004 ‘Black Monday’ equivalent or in 2006 there was a big crash in March I think.
So, every year you saw two or three weeks, it would have probably melted within that and the markets would have gone on because liquidity was high, India was riding high, 10% GDP growth. In this situation, this will do its own negative bit. But I doubt if incrementally it will continue to hamper the markets. I think bad earnings number and bad macroeconomic numbers will again be back to centrestage in just a few days.
Q: I just want to get back to the point that you were making about possible lawsuits because there might be some SCC action as well. How worried would be about that and how much more impact Satyam or even IT as a space might take from it?
Shah: It is still really about Satyam rather than IT sector. But clearly there are many precedents for all types of legal action in the US. Satyam is listed in US, so it is perhaps likely to face some sort of legal action. I would certainly be worried about that. Obliviously, there is very clear evidence here in form of a confession. So that itself is enough of a proof for anyone to file a legal claim. So I would certainly be quite concerned about that.
Q: What kind of a legal action shareholders can take now, particularly, some of the majority share holders which also include a lot of large domestic names?
Hirani: We need to briefly look at the various statues that come into play in a situation like this. Firstly, you have the securities regulation contract and under that the Sebi can direct the stock exchange to take action against Raju and other Satyam Board members, There is an imprisonment provision in that law as well as a fine that is prescribed upto Rs 25 crore. Interestingly, the SCRA says that if there is any prosecution under the SCRA, it bars the civil courts or bars any action taken in the civil courts. So, talking about the shareholders, for a second if you read the SCRA, then they could effectively be barred from taking and filing a civil suit to recover any damages. However, again there is no precedent on this, so that’s one issue which would have to be looked at. Other than that from the shareholder perspective you also have criminal action that could be possible under the Indian penal court. In our opinion, clearly, there has been a terminal breach of trust because there is intention to defraud as per the statement made by Mr. Raju. There can also be allegations of cheating and consequent provisions under sections 415–420 of the Indian Penal Court. So that could be commenced as an FIR being filed in court by the share holders and then investigations commenced. Thus, that’s another line of action that’s possible.
Also, there is the Companies Act under 397 and consequent sections of the companies act there has been clearly oppression and mismanagement on the share holders of the company. So it is open for share holders having a 10% stake to approach the company law board for any suitable remedies that are possible and in a situation such as this where the key promoter and the board member has acknowledged guilt effectively and has resigned and the company law board really hasn’t much of a role to play because there is no need to injunct or prevent anybody from doing something so these are the broad spectrum of things that could be initiated by the share holders.
Q: I want to bring in on one important point because every shareholder of Satyam must be wondering what he can take as truth. I mean what exists in Satyam after the horrible confession of Mr. Raju. What would you believe as Satyam because in Q2 the confession was that we showed Rs 2,700 crore as revenues but actually it was Rs 2,100 crore. We showed Rs 600 crore as profits but actually it was Rs 60 crore––from your knowledge of the industry at NASSCOM can you say with certainty that Satyam actually does have these marquee clients? Actually, has hard revenues of Rs 8,000–10,000 crore and makes some profits or could it all be in the realm of fabrication and fiction?
Natarajan: We ourselves, as a company, share 14 clients with Satyam, and wherever we have worked with Satyam, their people have been doing excellent work. But having said that, in terms of exact revenues nobody can really vouch for that and as this whole investigation will probably throw that up much more significantly. However, the company does have good clients. They have had a good record. We have heard many of their clients speak glowingly about the work that Satyam has done. So which is why I’ve said even to enlarge this discussion, I don’t think there is going to any doubt on the quality of work done by India IT and by Satyam.
It is a question of one company; what have they declared, how true is that and what action has to taken.
Q: Your view is that the stock will fall to zero or nearly zero. Do you think some of it can be salvaged, if some other company takes over? There really is a business that can be sold at some other point if the operations can be separated from the liabilities and the promoter, or you think that there is no way out?
Sharma: If you extract the business out of Satyam, you sell it to somebody for a cash consideration, and inject the money into the company, and that will go into settling a lot of lawsuits. Those things take a lot of time. I doubt if somebody has any incentive. No acquirer has any incentive to walk in that quickly and do this. They are sitting pretty, it is an already tough environment for them. Justifying to their own shareholders will be difficult, why are you going and bidding for a ‘me too’ company because most Indian IT companies are very similar.
I have another point, and that has been bothering me ever since I read Mr. Raju’s letter, that in the last quarter they had revenues of Rs 2,100 crore and operating profits of Rs 61 crore, and margins at 3%. This is Satyam Computers. This is the genuine revenue. That is roughly an Rs 8,000 crore annualised revenue base on which you are making Rs 240 crore of operating profits, and 3% margins.
Is that the real margin in this business overall for the Indian IT industry? That is what the more sinister question is, which is now beginning to bother me that as Ganesh said that Satyam was a good company and were doing good work and clients are speaking glowingly about them. And all they are giving them is 3% margin. So, how on earth is this whole industry so damn profitable? If the marquee name in this industry that Satyam was, was able to charge only 3% operating margins, and therefore, making a loss at the net level. That is the real question that is bothering me. I am not an IT analyst, I don’t understand IT. However, as a pure financial analyst that is what is coming up, like what is the margin in this business for the entire industry? With Satyam, with all its marquee clients and glowing reports of good work done, good people, gets only 3% margin. This means a lot of the contracts are actually under water. If their aggregate is 3%, on sum they might be making 10%. It means a lot of their businesses are under water. So, is that the real margin in this entire IT fairytale that India has had?
Q: With a lot of bankruptcies and recent scams in the West, the stock holder is the one to get anything out of it because you settle claims, go to debtors, etc. and the stockholder always comes last. In this case if there is any other company taking over Satyam’s operations will there be some kind of a merger or something like at which the current Satyam Share holder gets something out of it or he is the last in the line here as well and shouldn’t hope for too much?
Desai: It is going to be extremely difficult to hope that the shareholder of Satyam is really going to get anything out of this. It is not going to be easy at all to take over Satyam or to merge it with any other company. I believe that this is a case of deliberate accounting misstatement which amounts to securities fraud and Sebi is going to invoke the provisions of the fraudulent and unfair trade practice regulations, where it is going to regard this as a securities fraud and this is very similar to what happened in the Worldcom case in the US where this was regarded as a securities fraud and the CEO was indicted and sentence to imprisonment for 25 years. The legislation which we have the regulations the unfair trade regulations are modeled on the lines of similar US security laws and so far we have used this regulations for insider trading for market manipulation and price ragging cases.
This is the first time that possibly we would be using for a case where there have been deliberate accounting misstatements which amounts to securities fraud. In addition to that, the serious fraud enquiry commission of the ministry of corporate affairs is also going to get into action very fast and they may fine criminal cases under the Indian Penal Court for criminal breach of trust as well as for cheating against, at least, the whole-time directors, hopefully, not the independent directors. So, there are going to be class action suits in the USA, and possibly, even in India and we do have provisions for it. So at the end of the day after all this is unravelled, I believe that the Satyam shareholder will get very little and one more thing I feel that this written admission by Mr. Raju at first blush may seem to be a bit surprising but this might be a red haring or some kind of a smoke screen to divert matters or to take the wrap on himself in a hope to try to ring fence others who are involved in this. Perhaps, this maybe the tip of the iceberg and there could be many more things which may come up as investigation unravels, I believe, I would not be very hopeful at all for the helpless Satyam shareholder.
Q: In your understanding, what kind of legal action can be taken against the auditors involved with this company?
Desai: If it is established and proved that the auditors were negligent, then of course action will follow. But in this case again in the USA, the WorldCom case that I spoke about, not only the independent directors had to settle billion dollar class action suit and some of the independent directors who did not settle the billon dollar class action suit are still continuing and there was also a class action suit against the auditors. So in this situation at least in the USA considering that Satyam is listed there, we are going to have class action suits possibly against the auditors also and it all depends when a special audit is done, which is bound to be done in due course, and we find what exactly were the misstatements or what are the irregularities. Perhaps at that stage we will know the degree to which there has been negligence if at all. Till then I think we have to just wait and watch.
Q: There was an expectation that the market might be displaying more in this pullback rally, and that maybe the first three months of the year would shape up stronger than many imagined. Where would you cap the gains at for the market now?
Sharma: If you take right from the bottoms of October, then a good 20-25% rally. But that is just for the index. On the average beaten down stock, you’ve probably made 30-100%. I think that is done. But the thing about this rally is that the quality end of the market has really been hurt. So, Bharti has underperformed the market, Sun Pharma underperformed, Infosys underperformed, Hindustan Lever underperformed, ITC underperformed. Everything that worked for the whole year was actually the wrong place to be in. And everything that was a disaster all year was the right place to be in. So, Tata Motors was absolutely the wrong stock to own all year but the best stock to own in the last one month. So, it becomes a rally only in theory. How do you go and play a rally like this? Nobody in his right senses is going to buy Tata Motors when you see the December numbers, or for that matter a steel company or infrastructure company knowing the state of affairs in the economy? But that is exactly the kind of stock you should have been buying in order to justify having played the rally. So, it is a rally in theory. In practice it is almost impossible to go and play these kinds of rallies. No fund manager will bet his job in going and buying companies with very poor numbers merely because it is going to go up 30-40%.
Q: I’ll bring you back to the point which you started the show with. The complete mysterious way and the tone of the letter which Ramalinga Raju sent out because it came as a bombshell to many people and Mr. Desai summed it up very articulately saying there could be some subterfuge and may be Ramalinga Raju was acting under pressure from certain quarters to ring fence others. Do you agree that there is something about the letter which sounds a bit strange and it is not just a complete confession but might have been triggered off by some other circumstances which we cannot put a finger on today?
Sharma: To be honest with you and I heard you say on this show that it sounded like a suicide note. That was exactly what I thought when I first read it. The way he has distanced his family members from this, the way he has distanced his other colleagues – he has completely distanced it in every sense of the word. It is a very strange letter. It is almost as if the guy is sitting there and saying – okay, I cannot handle the disgrace and the pressure any more and write this and I go – that was the real message that I was getting when I was reading this letter. I don’t know what the real reasons were for this and what was going through his mind. The tone and tenor of the letter is really like a suicide note – it is not just a confessional. He has distanced his family members and that’s very important – bear that in mind.
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