Moneycontrol » News » Markets » Expert & FII Outlook

Fraud to take Satyam stock to Rs 10: Shankar Sharma

Published on Wed, Jan 07, 2009 at 11:54 | Source : CNBC-TV18

Updated at Thu, Jan 08, 2009 at 21:21

Like this story, share it with millions of investors on M3

Share on Tumblr

ALSO READ

Nifty

BSE | NSE 25/05/12

Are Mutual Funds betting on Nifty?

Ramalinga Raju, Chairman of Satyam resigned from the Satyam board on January 7. In a letter to the Satyam board, Raju admited that the IT major's balance sheet has an inflated cash and bank balance of Rs 5,040 crore.

Appalled at the recent development market experts react and question the integrity of the auditors of the company.

Shankar Sharma of First Global said Ramalinga Raju's confession to the fraud in Satyam's books would have a huge impact on FII and FDI sentiment in India. "An emerging market has to be more careful. If a scam occurs in the US, that's the US and it has a lot more levy to get away with scandals but in emerging markets it needs to be levied otherwise it's very easy to point fingers at India or China."

He expects the stock to go down to Rs 10-30 levels. Trading must not be stopped and investors must be given an opportunity to exit the stock, he said

About the auditors, Sharma said that he has never been a fan of the 'big four' auditors and feels they could be clearly fooled. "Satyam on paper would be a take over candidate but in this kind of environment I don't think any suitor will turn up very quickly because ultimately you need to get an audit done. The big four can make mistakes, a lot more than a local home grown audit firm because those guys really known the in-outs of business. Here you have few guys in nice cotton shirts and ties and they can be fooled and we have clearly seen."

Sharma feels the market may fall about 500 points or probably more but said this fall would be temporary. However, this issue has severely dented confidence in the markets, he said.

Raamdeo Agrawal, Director and Co-founder, Motilal Oswal Securities feels that it is likely that the cost of operations will be significantly higher. He said that there would have been a gap in operating margins. Most important thing is to save clients interest now and government should do everything to protect investor interest, he added.

Nirmal Jain of India Infoline said he was shocked by Ramalinga Raju's confession on Satyam and hopes it gets over as soon as possible. "This is one company on which we had done an expose in 2001, where there was some subsidiary company in which sales were transferred. Most people don't change their stripes and this one indication in year 2001 was also an indicator that these promoters are unscrupulous in that way."

However, Jain is not worried about the impact of the Satyam scam on the overall FII or FDI confidence. He said that global scams have not affected their markets. "I am not particularly worried about the confidence of the economy or Indian corporates in general because this is a one off case."

Rashesh Shah of Edelweiss said the Satyam fraud is very shocking. "I don't think in corporate India we have seen something like this. So, there will be a permanent backlash. This seems to be a disease that is a lot more prevalent in India or else it will like what happened after the first Satyam episode. A couple of weeks ago when they announced the Maytas deal and then called it off, the stock fell 30%, but it didn't impact other IT stocks in the market as a whole. So, we are all hoping as of now that this is just isolated case and the disease is not all over corporate India. I am hoping it won't be a permanent backlash but a short-term one."

Sandeep Parekh form IIM Ahmedabad said that he had been listening to many other issues and so is not really shocked with Satyam. He said that somebody would have to acquire the company for operations to carry on with its current form

"It will have a massive impact. It would not jus be Securities and Exchange Board of India (SEBI) action that follows but there will also be international investigations. The Securities and Exchange Commission (SEC) which has a corporation agreement with Sebi will also crack down. The foreign exchange where the American Depository Receipts (ADR) is listed, will take action. So it is going to get pretty hot."

Parekh believes Ramalinga Raju may have to face criminal prosecution of upto 10 years and penalty of Rs 25 crore. There will be several criminal action that will be followed; may last for many years, he said. "Beside stock prices the consequences will last for a long time."

KN Vaidyanathan, CEO, Alchemy Capital Management, said one must now focus on damage control as the ramifications of this incidence is beyond just the Satyam stock or Satyam company. "There are ramifications to the employees and clients of Satyam. There are ramifications to outsourcing IT industry, Indian economy, and therefore Indian markets."

He feels the government needs to do three things in the immediate-, short- to medium-term. "The government has an opportunity to step right in under couple of sections of the Companies Act, which empowers them to kind of come in as an executive. The immediate is to bring an NSG commando equivalent who will come in as the CEO from the outside. You need to bring up a person of stature who can create confidence with clients and employees to conduct business as usual. Second, reconstituting the board. The CEO should be mandated to do within about three-months or so by bringing on all investors. The first two steps will give hope and someone may consider coming in and investing in this company - may be takeover or management buyout - whatever it is, if they see things happening to restore faith and credibility in the business. Third, is slightly shorter to medium-term is revisiting this subject of corporate governance in India."

SP Tulisan of sptulsian.com feels the auditors of Satyam balance sheet could not be given a clean chit either. There seems to be clubbing of personal affairs with the company affairs. "Overseas investors or even the domestic investors will be concerned and maybe minutely examining the profitability of all the IT companies especially the midcap and smallcap would more be diligently watch by them."

Portfolio Manager, PN Vijay too expressed his shock at the news. He said that over the last few years India had set up corporate governance and very strict auditing norms. "It's a shame that corporate governance has broken down here, auditors have been assigning balance sheets blindly without verifying whether the asset exists, so it's a very sad story unfortunately."

Kanwaljeet Saluja, Asso Dir, Kotak Sec said, "What has happened is a complete shocker. In the past we had issues around the way Satyam was managing cash and have asked specific questions to the management as well. We could never comprehend the magnitude of the problem." He believes the only way forward now would be a distress sale. He added that people will have to evaluate some of the contracts and the assets of the company carefully before any further decision is taken.