Saturday, January 17, 2009

Economic Crisis & Satyam Saga : Boon or Bane for India

Confessions of Ramalinga Raju, Chairman, Satyam:

Former chairman Ramalinga Raju has already confessed to having cooked the books, and shown vastly inflated profits and cash.

This confession letter was sent on January 7 to his Board as well as the whole world. The letter came two weeks after an aborted attempt by him and his Board to inject $1.6 billion of Satyam’s cash into a real estate company owned by his family. Investors were upset, and unleashed their fury by selling Satyam stock, destroying several billion dollars of stock value.

Hastily, the company reversed its decision. Subsequently, we learnt that Raju and family had pledged their Satyam shares for huge loans, possibly to make investments in real estate. As the stock market crashed, Satyam shares crashed too.

And since these shares were kept as collateral with lenders, they wanted more collateral from Raju and family. Or just cash. Nothing was forthcoming, and hence lenders were forced to liquidate the collateral (which was already degraded in value).

US Mortgage Crisis: Ripple effect busted many financial institutions:

At this point, somebody probably had a brainwave, that if the IT company’s cash was used, something could be salvaged. The rest of the story is still unfolding. (As Shah Rukh Khan said, “Picture abhi baaki hai” !) . The connection to the subprime crisis is that, were it not for the collapsing stock and mortgage markets in the USA, this Satyam fraud might never have surfaced.

The financial meltdown on Wall Street left many financial institutions with big holes in their pockets. So they sold off their profitable holdings worldwide to recover cash. One “victim” of such a panic sellout was the Indian stock market. Due to herd mentality , even the not-so-badly-hurt financial investors started selling.

And once the selling frenzy got going, there was no stopping . Thus the Sensex fell by 50 per cent. Hence Raju’s pledged collateral also fell steeply. Assuming he had some land parcels to sell and make good the loss of collateral ,that too didn’t help.

Real Estate collapse caused downward spiral:

Land prices, especially speculative real estate, were also collapsing. It is this downward spiral which probably caused Raju to take a desperate step of raiding Satyam’s cash pile. Of course, Raju now claims that Satyam did not have any cash to begin with.

Where did it all go? Does it mean that all that Satyam bravado was hiding a lossmaking business?

Warren Buffet , the legendary stock market investor, has famously said that when the tide recedes, you know who’s been swimming naked. During high tide, everybody seems decent.

Crisis restores credibility of Public sector banks:


Due to the Satyam fiasco, Infosys, a rival company, decided to be extra transparent in its latest quarterly disclosure .

We learn from Infosys that it has Rs 7,419 crore in cash, of which two-thirds is in public sector banks, like State Bank of India, Punjab National Bank, Bank Of Baroda and Syndicate Bank.

SBI alone has more than Rs 2000 crore. An unintended impact of subprime is a renewed belief on the safety of public sector banks.

The great nationwide rush of deposits into public sector banks will help them increase lending to needy sectors.

Even the once reviled concept of priority sector lending is coming back. That’s the euphemism used by many sectors asking for bailouts and subsidised loans.

The Economic Times

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