India's Enron & Short-term achievers

Ramalinga Raju of Satyam was searching his saul over a decade and finally decided to speak out his conscious yesterday. The news dragged down India's Sensex 7% and wiped out the Satyam shareholders assets 77%. Satyam was in spotlight for a month ago for their decision to buy Maytas constructions, a company with Raju’s sons have significant stakes, as a case of poor corporate governance. The company did show a tainted image to the market then and that news was followed by World Bank banning Satyam from doing IT outsourcing because of their unacceptable business practices. The biggest looser is India as a country – the institutional investors now will require additional premium for compensating for this kind of risk.

Its quite evident that Raju was totally informed in the fraud game. Most of the reported adjustment was in cash balance and its hardest of all to hide. This also raises concerns about what auditors, Price Waterhouse Coopers, was doing in the process. The independent auditing is supposed to bring the credibility to the financial statements but appears like those practices are compromised. The market instantly named it as ‘Indian Enron’ so are we going to see Price Waterhouse going down soon? Satyam is going to get hurt badly as many of their Furtune 500 clients re-evaluate and decide to walk-off from the deal and most probably sign-up with one of the competitions like Infosys or Tata. The question left is how pervasive this kind of frauds are in India ? If Satyam could do this many others also could. Raju admitted that he was riding a tiger without knowing how to get off not being eaten. Something started as a small discrepancy, a decade ago, now grew into a billion dollar problem. This confession allude to a bigger global business issue- chasing short-term profits.



We see all market punishes the companies with lower quarterly earnings. If the earning doesn’t meet the analyst expectation, the share prices tumble and it seems the stock price is the only yardstick of CEO’s performance. Should the quarterly earning be that important? I think its important that the technology and product based companies are evaluated differently because lot of their future earning depends on the brand establishment and innovation, which takes several quarters of waiting. Analysts in Wall Street hardly know anything in engineering or innovations but so good at making judgments by crunching numbers from the financial statements. So none wants to give out a bad news to the market fearing its going to eat them up. Things would eventually culminate into a point of no return, hurting investors and employees and unrelated everybody else in the market.




Now this is not to justify Satyam's action. There is no justification for billions of shareholders lost wealth . Ever since Satyam was in focus for the bad deal to buy Maytas, Raju's back was on the wall and he knew a confession was better than exposing