Satyam scam casts shadow on market

Mumbai: Large foreign investors will call the shots on how Indian shares will perform in the near term after the nation's biggest corporate fraud rocked the markets last week, raising questions about corporate governance and jolting confidence in company accounts.

Although many foreign fund managers put up a brave face, saying the Satyam Computer Services scandal was not a reflection of corporate India, there was unease beneath the surface and concerns that more companies may come under the scanner.

"Clearly, trust has taken a beating," said equity trader Rasesh Shah. "It'll take a long time to rebuild confidence and for investors to feel comfortable."

Late on Friday the chairman of Satyam, B. Ramalinga Raju, and managing director B. Rama Raju, both also founders of the Hyderabad-based outsourcing firm, were arrested, almost two days after the former had confessed to a massive fudging of accounts over many years to inflate profits.

The government also sacked the board of Satyam and said it would appoint 10 directors soon and hold a meeting within seven days.

"I do not think the government's move to supercede the Satyam board will have any significant impact on the market," Vallabh Bhanshali, chairman of Enam Securities, told the Economic Times. "The stock price has already fallen so sharply that not much scope is left for further damage."

In a stunning revelation, the chairman said in an emailed letter to the regulator and stock exchanges on Wednesday the September quarter profit was probably just Rs610 million (Dh46.61 million) instead of the Rs6.49 billion the company had released earlier, indicating an incredibly low operating margin of three per cent against the industry norm of 15-30 per cent.

Both the chairman and the managing director resigned after the announcement and sent the company's stocks into a freefall and caused a slide in the broader market.

Satyam, India's fourth largest outsourcer with some 50,000 employees, had been at the receiving end of investor anger since mid-December when its board that included such luminaries as Pentium founder Vinod Dham and Harvard Prof Krishna Palepu decided to acquire two construction firms controlled by Satyam's promoters.

The company's market value plunged to about $300 million by week's close from $7 billion as recently as June last year, with a barrage of lawsuits in the US from angry investors there further threatening to undermine the once blue-chip firm.

The stock slumped as low as Rs11.50, the lowest in 11 years, before ending at Rs23.85.

The scandal had an immediate impact on foreign portfolio flows. After buying a net $241 million of shares in the first four trading sessions of 2009, the foreign institutional investors dumped $262 million in one day when the fraud became known on Wednesday.

It was a big setback for the market that had showed signs of revival after tumbling more than half in 2008, with the authorities unveiling a series of hefty rate cuts and economic incentive packages to boost growth.

"It's like a double whammy," Bhushan said. "People are going to take the numbers with a pinch of salt."

There will be exceptions, however. Infosys Technologies Ltd has an impeccable record of corporate governance and some analysts believe it could gain as top clients of Satyam seek better companies.

Infosys is also expected to set the direction for the market when it releases quarterly earnings and guidance for the March quarter on Tuesday. The company has traditionally been conservative with its forecast.

Annual inflation fell below six per cent in late December, data showed on Friday, for the first time in 10 months and less than half the 12.9 per cent in early August.

The government has said it is considering another cut in the prices of petrol, diesel and liquefied petroleum gas used for cooking, probably in the coming weeks.

Analysts said this would accelerate the falling trend and take inflation towards two per cent by March, a prospect which could further enable more rate cuts.

The writer is a journalist based in India