08 January, 2009

Raju ban gaya gentleman & wrote a letter

The fiasco that’s Satyam and its takeover of Maytas opened a Pandora’s box of irregularities. It is ironic that this had to happen on Thanksgiving Day.The golden peacock awarded to Satyam for good governance and excellence in corporate practices turned into a turkey.

On 6th Jan 2009 a scandal of mammoth proportions hit Dalal Street. Ramalinga Raju wrote a letter, possibly the most expensive letter/email written in history. It cost more than Rs.7 Billion in investor wealth.

In this letter is an admission by Raju that he defrauded investors and cooked up the balance sheets over several years.

Look at the repercussion

  • 53000 employees on the rolls are left in a state of limbo.
  • Millions of investors lost money as those who had the stock dumped it on the market, individuals, investors, Institutions domestic and foreign and a slide emerged that had a gradient loss of 75%..more will follow
  • The owners which were the Raju family had already liquidated all the stock they owned and resigned.
  • It is a listed stock on the bourses in New York where in all probability class action suits may be filed by the investors. Unfortunately class action suits are civil in nature and not criminal and aim only at recovery of lost wealth. Raju owns nothing in Satyam; I wonder who they shall recover it from.
  • Criminal proceedings will get actioned against the Board of directors, Audit committee of the Board which has independent directors so also the auditors Price Water House Coopers. PwC may morph away into another entity ala Arthur Andersen in the Enron episode.
  • The punishment meted out to people shall vary according to the intensity of the criminal action participated. Whether the action is willful abetment, negligence in due diligence.
  • Multiplicity of the authorities who shall jump in to right the wrong will vary from SEBI, Ministry of Corporate affairs, Institutions like ICAI, Courts of Law for Civil and Criminal in India and abroad, Consumer forums baying for justice and the political bigwigs who may use this platform for their agendas too, shall result in a whole lot of confusion and tremendous delays.
  • The Software Industry in general shall be affected short to medium term as their clients will look at them with a jaundiced eye and so also will the FII's when it comes to investing in India. This shall mean that 2009 when the markets were to recover now looks like a pipe dream.
  • The alacrity with which the other s/w majors distanced themselves saying that they wouldn’t touch Satyam with a bargepole indicates no immediate takeover possibilities till the extent of damage is estimated. The India s/w story is tainted big time.
  • By the time the cases can be assembled in courts may take about 7 years says Somasekhar Sundaresan from JSA a legal firm specializing in corporate affairs. Satish Maneshinde noted Criminal Lawyer suggests a special court be appointed such that proceedings are fast tracked. This too is a period of 3 years and final results not expected before 20 years. Two whole decades from now. The US class action suit maybe faster and they would come about in a year.
  • The Joke is in the punishments meted out if found guilty. SEBI can bar Satyam and its guilty directors from the market for a period found suitable . The lattitude is wide here, Ketan Parekh was sentenced to 14 years out of market. ICAI can debar the practicing auditors and CA's by taking away their license and an individual penalty of R.5 Lakhs. The Courts can at the most in case of fraud under section 420 sentence the perpetrator upto 7 years. Appropriate fines would mean attaching of assets and freezing of bank accounts.And all of this only when the case comes to court and trial is finished which means after 20 years.
  • This is a willful fraud perpetrated over years and without the complicity of all the players may not have been possible.Accounting methodology which allows for changing the manner in which assets are treated and depreciation may be looked at critically. If Satyam does this then surely there would be other companies who use this methodology and practice.
  • Willful fraud cannot be avoided as there cannot be systems planned around it. However what will be agreeable is a justice system which will be quick and non-merciful (refer post below titled Scales of Justice) and hence proves a deterrent for other scamsters.
  • This kind of a fraud is nothing short of financial terrorism as its impact is more serious, slow and the suffering gradual with so many lives getting impacted all at once. Look at the no’s (53000 employees, Lakh’s of common investors, scores of financial institutions, Banks, Government agencies and International investors) involved. Markets not recovering will put us closer to real recession as the credit squeeze will tighten further. Normally my sympathies would not have been with equity shareholders as they understand risk. But here they acted on information that was incorrectly presented and hence this is an unfair price paid by them.

  • The law shall take its course and whether Raju lives and is caught to tell the tale of how he planned this sordid saga remains to be seen. But all of this litter is required to be seen and exposed . Without it no measures can be undertaken and the faith of the investor shaken by the letter shall not be restored. Just by admission and taking the onus doesnt shift the focus away from his brother or other members of his family not named explicitly ( rather they are part of this by omission ). And by typing a heartfelt letter of confession doesnt make Raju a Gentleman either.

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