Experts endorse Satyam stance seeking Sebi waiver

Q: How are you mapping the next few weeks from an equity market perspective?

Wadhwa: The market is range bound and shall continue to remain that way for a while. I know today has been a different day and we have seen a lot of activity in the market, but I don't think it is a consistent pattern. As I said, I am not sure the market has factored in all the global bad news that are still to come in. Therefore, I continue to believe that despite activity on a day here and a day there, you will see relatively low volumes in a range bound market for sometime to come now.

Q: How do you read this whole open offer business for Satyam, where do you stand on that argument of relaxing the date for the offer?

Wadhwa: I actually believe that it is a very sensible request, question is does Sebi regulation empower the Sebi board or the Chairman or whichever authority be within Sebi to make a specific concession like that. I am not fully familiar with the detailed regulation and whether somebody is or is not empowered. But I think the request is a very fair request. I would argue that given the current market situation, the six month period should anyway be dispensed with- just not for Satyam, I would say for everybody else, it will certainly support a lot of M&A activities, it will support promoters making open offer at these prices.

In Satyam's case, I would argue that there is every reason- the events of January in many ways are transformational and if transformational events cannot be accommodated, then I would say that the rigidity of legislation would make the legislation to some extent redundant. So, I fully support granting the concession because let's face it.

What is most important at this point of time from Satyam or Satyam minority shareholders perspective is to make sure that somebody steps in, somebody who has adequate power to be able to be fully leverage the strength of Satyam, as it stands today and if a six month average price is going to be a barrier for somebody stepping in, despite all of the litigation that we hear about, then we must remove that barrier. So, I would strongly support providing the concession.

Q: What do you think about on this debate because the news is just out, do you think they should make that relaxation or not- Sebi?

Shah: I am 100% with what Wadhwa just said. The six-month averaging rule was there for a reason. The reason was that there were concerns about market manipulation that somebody would break his own stock price and then do a open offer, at the current manipulated price. Satyam is an extremely liquid stock, nobody is worrying about market manipulation, as Wadhwa said there has been a transformational event in early January, and you must only use data after Raju's confession to come up with any kind of meaningful average about what Satyam is worth today.

So, I completely agree that it is extremely important that a transaction takes place; it is very fair and reasonable to tell the minority shareholders that the reference price for this transaction will be the average prices over the last one week.

Q: Is it also something better than nothing situation- I mean it is not comparable but in case of Global Trust Bank (GTB)  shareholders were not left with too much, is this sort of something that shareholders should hold out for at whatever price?

Shah: GTB was a more complicated situation because you had a government coming into a bank and very often, when a government rescues a bank the existing shareholders are wiped out and example of that is Bear Stearns, so GTB was a slightly different situation. Here it is a very narrow open offer and the only role of the government is to say that- is there some concern about market manipulation on the stock market, which has happened in the olden days.

So, the 6 month rule was there for a reason but reasonable men should see that you were not in that situation- Satyam is an extremely liquid stock you are not worried about market manipulation, about Satyam and there has been a far reaching set of information that broke only in early January. So, it is completely wrong to average the Satyam price using older data for the stock price. You should just take the latest one week's data and say that is the reference price vis-à-vis which the open offer should be made.

Q: What do you think - is the market overreacting to all these disclosures about promoters having pledged stake or do you think it is something which is quite justifiable - the worry that the market has?

Wadhwa: The market is correctly reacting and may be overreaction is the correct reaction at this point of time and remember all of these disclosures are coming with a background of the Satyam case where the promoter had pledged a lot of stock and then it turned out that was not just a question of pledge but significant amount of manipulation that happened there. It is with that background that Sebi introduced this new legislation on disclosure and although some of the companies had made disclosures, at least part disclosures particularly where they were raising money for global acquisitions, there wasn't adequate focus on it.

So all of a sudden the fact that there is so much of stock pledged out and that given current market situations, if the refinancing cannot happen or the repayment cannot happen, there is a threat as we saw in the case of IL&FS and Satyam - that stock could be sold into the market obviously caused a panic and therefore we are seeing a temporary reaction to this whole pledge issue as more and more companies declare their pledge situations and as markets become more cognizant of the fact that Satyam may have been a exception in terms of the stock being sold out but that's not necessarily going to happen in every other instance. You will see this reaction lesser and lesser as time goes by.

Q: What about the policy? Was it an expected pause or would you read it differently?

Shah: There was a consensus that something was going to happen and nothing happened. I have three interesting comments to make. The first is a technical point on how RBI seems to be analyzing data on inflation, on credit growth and so on. In the credit policy statement, RBI says that on a year-on-year (YoY) basis this is what inflation is, on a YoY basis this is what credit growth is. Now at a time when these things are moving so dramatically, looking at YoY data is really misleading. As an example if we look at the inflation data, on a point-on-point basis - in October, November and December - the inflation of WPI has been -10%, -20% and -20% annualised. It has been quite a profound change in the inflationary conditions. But if you look at YoY, you're averaging 12-months and you get a very different picture.

Similarly for credit growth, if you look at the point-on-point data in November, it shows 4%; in December it shows 7%. But if you take a YoY, you're averaging 12-months and you get a very different picture. So this is my technical point that at a time like this it is really not correct on the part of RBI to use YoY data. They have people inside the organisation, who know how to do seasonal adjustment and do this point-on-point analysis correctly. They should just put them on the job of working on this credit policy.

My second point is on monetary policy. I think that reasonable men will agree that we are looking at inflation of something like zero or negative values in coming months. At a time like this, it does not make sense to have the short rate at something like 4% or slightly higher. So there was a strong case for a rate cut and I don't agree with RBI's decision not to cut the rate.

But the third and the most important point is that all of us know that the monetary policy decisions of RBI have not been reaching out into the economy. They've not been making a difference to the equity and debt capital that is available to firms. Roughly speaking, since September, the policy rate has come down by 500 bps for AAA companies the cost of capital is only come down by 250 bps and for everybody else it is much worse.

Now why is this monetary policy not transmitting out and affecting the economy? The answer is because there are so many mistakes in how we do financial regulation in India. This credit policy was an opportunity to do many things on financial sector reforms which would have removed these rigidities that would have deep bottlenecked the financial system and that would have enabled this monetary policy transmission. We need this very badly. We acutely need this at a time of important global downturn; we need low interest rates to propagate out from the short end where the central bank is playing to the equity and debt capital that is visible all across the system.

So I was really disappointed that RBI has made no move on reforms of the bond market, reforms of the currency market, reforms of the credit market and reforms of banking. There is such a large agenda of work waiting to be done on fixing the financial system.