While studying the earlier bear markets behavior in India, i was surprised that this time there is no Big Scandal reported like Harshad Mehatas in 90s and Ketan parekh in 2000s.
But it finally Happened again and now we can say firmly that Indian markets have not really improved.
SEBI chief had been taking lot of credit for the regulation they have been doing and how they keep track of everything. SEBI chief has been getting due credit form various news channels as if depicting his role in SEBI as a great regulator.
But here is the biggest of all scandals.. that also in IT industry and the pride of India. Where would you like to hide ?
Satyam scandal is very different and very thought proviking, its something so difficult to achieve... But let me give you someinteresting points as what were soem regulatory issues that might have contributed.
- IT exporters like satyam have Income Tax Holidays, which is prime contributor to the scandal. If a company is not required ot pay tax on the profit , it will be more then happy to declare High Profit to achieve prestige in the stock markets. It is very easy to cook books to increase or decrease the profit. Actually most of the companies in India declare lower profits to save on Income tax. But for IT companies its opposite. We can now say for surety that atleast 80% of the IT companies are overstating their profits may by by 25 - 50%... so their EPS needs to be revised.
- IT companies also has lot of relaxation related to movement of funds, import duty , Forex currency management, overseas acquitions/listings... all these tools when combined with limited immovable assests and no fixed formula for valuation ... are basic ingrediants to cook frauds. Till now investors had been assuming that IT companies can make good profits so they will not look into fradulent practices.. but this is now cearly broken.
- Overseas work - i am sure Indian regulators have little control over what these companies have been doing overseas and how they have been routing and making use of their funds. (normally they should not be doing this) but as these companies are asking indian shareholders to value their foreign assets..we need to look into them. As most IT companies had great affliations for US captilist principals, its normal to assume that they must have kept large part of their funds abroad and must be reinvesting them there into instruments that are now considered risky. This means that severl IT companie smight have lost large amount of their cash in US markets. Also several companies they might have acquired in USA might be now bankrupt... This raises serious questions on their cash positions...Earlier people has questions mainly on the viability of their indian assets... but now we shall look into viability of their foreign assets..
- It is common for most companies to cook books and i am sure at present several indian corporates are carrying assets that do not exist. in the boom time its common for the companies to show regular consistent profits.. and CFOs are forced to cook books to present the situation agains the claims by CEO that he will makeup for it... When suddenly the markets started crashing CEOs could not makeup anything and planned drastic steps/frauds... and when the market fell further their frauds became visible...
- I think that tata group has been in great fisical mess and there are lot of chances that their group companies must involved in all this.. there has be huge movements of ownerships within group companies and even TCS has been quite actively involved.. Though tatas are capable of covering things up, few mistakes can bring things out.. Satyam was also about to coverup but probably Raju did some big mistakes...
- I also suspect lot of scandalous dealing in financial firms like Indiabulls, ICICI bank is already in picture, Dena bank, Yes bank, ... Almost all Real Estate companies including some Infrastructure companies. Anything that was very very high in boom time has big chances of cook book. But no one in India is going to investigate that and only if some big mistakes happen it will come to light.. The business groups that become expert in managing these things live for long.. others die...
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