Satyam Computer Services Ltd, India’s leading software services company disclosed today that its balance sheets were inflated to the tune of Rs 7000 Cr (Approx $ 1.25 bn). The revelations were shocking, as the company serves one third of the Global Fortune 500 companies across the world, including General Electric, General Motors and others. Satyam is regarded as a top IT company in India and is one of the big 4 Indian companies alongside of Infosys, Wipro and TCS. The company operates in 66 countries, employing 55,000 across its software development centers.
The revelations are the culmination of a series of murky steps that the management has been desperately attempting over the past few days. It tried to cover up the non existent assets by acquiring Mayatas Infrastructure, an entity promoted by the same management team. The stock started sliding from Rs 400 (Approx $10) on these attempts. The stock has been beaten badly in the market as the news about the happenings started to come out. Finally, Chairman & CEO Ramalinga Raju , made a statement that the account books have been cooked over the past few quarters. Satyam’s stock was plummeted on the bourses. It ended the day at Rs 41 (Less than a $1)
The National Stock Exchange of India (NSE) has removed Satyam from its Index NIFTY. The Bombay Stick Exchange may follow the suit. NYSE has stopped trading the stock today.
As the news is coming out, most of the institutional investors exited the stock. Aberdeen has quit the counter, Morgan Stanely sold off its holdings. As the bigger fool theory of stock markets say, the greedy retail investors (the fools) bought the scrip from these institutional investors, with a hope that there will be a bigger fool who will buy the stock from them. While we can not rule out the theory that some PE or Indian fund house might be accruing the stock on lows, I tend to believe that the retail investors have put in their hard earned money in this counter today. 90% of the people that I spoke to today have entered the counter from Rs 85 to Rs 32.
Now, nobody will compensate the fools for their greed. But the regulator has to step in to ensure that there will not be any more fraud for the retail investor. I suggest some measures for the same.
Firstly, as the markets open day after tomorrow, the retail investors may flock to sell off their exposure and that may lead to more pain to all. The trading in this counter must be stopped till some clarity is brought in.
Next, Satyam is not an isolated event. The erosion of investors’ wealth in counters like Unitech and other companies have to be probed by the regulator. There should be stricter laws to prevent major loss to retail investor
Then there is the need to strengthen the focus on corporate governance. Readers may be shocked to know that the Satyam fraud has happened under the supervision of great Board of Directors that has names like Rama Mohan Rao (Dean of Indian School of Business – ISB) and Krishna Palepu (Ross Graham Walker Professor of Business Administration and Senior Associate Dean for International Development, at the Harvard Business School). It is a shame that these independent directors are not aware of what happened there.
Finally, it’s the responsibility of the Indian Government to make sure that this one off incident does not damage its image. IT exports have been fueling the growth in this country and the government and the regulator/NASSCOM has to take all the steps to keep the India Inc image intact. As a step towards that, the Ministry of Company Affairs can merge Satyam with companies like Infosys, which have impeccable record of corporate governance. Or another option could be to break the failed company into multiple entities that can be merged with the Top 3 IT companies of India – Infosys, Wipro, TCS. The merge can be done based on capabilities or geography or customer base. This will save the 55,000 employees of Satyam.
Till such a move happens, my heart felt condolences to all those who lost their hard earned money in this counter today.