Indian bourses witnessed a strong rally on Tuesday, a day after Republic Day celebrations, and the Sensex surged by an impressive 330 points to close at 9004, while the broader Nifty registered a gain of 93 points to end strongly at 2771.
The market breadth was positive and the rally was led by banking stocks such as SBI, ICICI Bank, HDFC Bank. Although FIIs continued to be the sellers, domestic institutions and mutual funds turned net buyers.
The Reserve Bank of India, in its quarterly monetary policy review, on Tuesday left key rates unchanged and lowered the GDP growth rate projections to 7% from its earlier forecast of 7.5 % in view of recession in the USA and European countries.
The new board of Satyam Computers has appointed Goldman Sachs and Avendus Capital as investment bankers and asserted that the company will not be sold in parts. It has further assured that the employees will get their January salary on schedule.
One of the board members, Mr Manoharan, has stated that the board had no clue as to the motive behind L&T's bid to acquire Satyam, while asserting that the bid will be devised in a fair and transparent manner in consultation with SEBI and the Government.
Following a strong global sentiment, the markets continued to rally on Wednesday as the Sensex closed the session with a gain of 253 points at 9257. Similarly, the Nifty opened on a positive note, rose 78 points to end positively at 2850.
The share price of Satyam Computers on Wednesday surged by 17 per cent to Rs 55 on media reports that L&T might further enhance its stake. Apart from this, there was heavy short covering in this counter as Thursday would be the last day that Satyam shares will be traded in the F& O segment, said market participants.
In a late evening development on Thursday, Mr B.K. Modi, Chairman, Spice Group informed that Spice Innovation is interested in acquiring 51 per cent stake in Satyam.
Explaining the rationale behind the move, he said "they are also in the same line of business. our board had decided to look at Satyam even before the financial fraud came into light."
The benchmark Sensex ended Thursday's session marginally lower by 21 points at 9236 after paring the initial gains.
Similarly the Nifty faced resistance at higher levels and lost 25 points and closed at 2824.
According to data from SEBI, FIIs have been net sellers of equity for $1.2 billion in the month of January. They have been net sellers since January 7.
Apart from the worst fears over the gloabl economic recession, the Satyam episode had dampened FII sentment further, aver market players.
The Sensex on Friday gained 188 points supported by positive global trends and buying by domestic funds in blue-chip stocks to close 9424.24. The Nifty index also rose by 51 points to end firmer at 2874.80.
Saturday, January 31, 2009
Thursday, January 15, 2009
Monday, January 12, 2009
Top honchos' cover puts insurers in a fix
With Satyam (SATYAM.BO : 34.25 10.4) founder and former chairman B Ramalinga Raju along with his brother and former chief financial officer (CFO) behind bars, the insurers are in state of quandary over the claim settlement of the country's largest directors' and officers' liability insurance policy (DandO) in the name of the top management of Satyam Computer Services.
ICICI (ICICIBANK.NS : 434.5 -22.1) Lombard General Insurance, Tata General Insurnace and New India Assurance have designed the Rs 400-crore DandO cover for the Satyam top management, who are being dragged to courts after Raju confessed about a Rs 7,000-crore fraud.
A DandO policy covers the cost of legal expenses of a policy holder in both domestic and overseas operations. Some leading corporates and private sector banks have bought these policies to protect their top management and members of their boards from any act of commission and omission committed in the discharge of their duties.
Two US law firms-Izard Nobel LLP and Vianale and Vianale LLP have also filed class action lawsuits against Satyam on behalf of shareholders of the software services firm's American depository receipts.
"A lawsuit seeking class action status has been filed in the United States district court for the Southern District of New York on behalf of those who purchased the ADRs of Satyam Computer between January 6, 2004 and January 6, 2009," Izard Nobel LLP said in a statement.
Another law firm Vianale and Vianale LLP has also announced that it has filed a class action lawsuit on behalf of purchasers of the American depository shares of Satyam Computer during the class period January 6, 2004 through January 6, 2009.
However, the insurers are now trying to find out the legal sanctity of Raju's confession, as any fraud committed intentionally by the holder of a DandO policy would not be entitled to any claim settlement.
Particularly the insurers are citing the official statement of the capital market regulator, Sebi, which has said that Raju's confession may not have a legal standing to convince a magistrate. Sebi said it needed to have its own investigation before filing complaint against the top management to implicate it.
Speaking to FE, insurers who have provided the DandO policy to Satyam said it would be now a long-drawn process to have any claim settlement under the policy.
In the US, DandO policy is one of the most bought policy by corporates against class action.
ICICI (ICICIBANK.NS : 434.5 -22.1) Lombard General Insurance, Tata General Insurnace and New India Assurance have designed the Rs 400-crore DandO cover for the Satyam top management, who are being dragged to courts after Raju confessed about a Rs 7,000-crore fraud.
A DandO policy covers the cost of legal expenses of a policy holder in both domestic and overseas operations. Some leading corporates and private sector banks have bought these policies to protect their top management and members of their boards from any act of commission and omission committed in the discharge of their duties.
Two US law firms-Izard Nobel LLP and Vianale and Vianale LLP have also filed class action lawsuits against Satyam on behalf of shareholders of the software services firm's American depository receipts.
"A lawsuit seeking class action status has been filed in the United States district court for the Southern District of New York on behalf of those who purchased the ADRs of Satyam Computer between January 6, 2004 and January 6, 2009," Izard Nobel LLP said in a statement.
Another law firm Vianale and Vianale LLP has also announced that it has filed a class action lawsuit on behalf of purchasers of the American depository shares of Satyam Computer during the class period January 6, 2004 through January 6, 2009.
However, the insurers are now trying to find out the legal sanctity of Raju's confession, as any fraud committed intentionally by the holder of a DandO policy would not be entitled to any claim settlement.
Particularly the insurers are citing the official statement of the capital market regulator, Sebi, which has said that Raju's confession may not have a legal standing to convince a magistrate. Sebi said it needed to have its own investigation before filing complaint against the top management to implicate it.
Speaking to FE, insurers who have provided the DandO policy to Satyam said it would be now a long-drawn process to have any claim settlement under the policy.
In the US, DandO policy is one of the most bought policy by corporates against class action.
Three Investor Lessons from the Satyam Scandal
The Satyam (SAY) scandal has provided a stark reminder to many about the dangers of investing. There are, however, diverging trains of thought on what to take away from this. One school says that this goes to show that the rest of the world is not that much unlike America and that an Enron or Madoff scandal can happen anywhere. Underlying this belief seems to be the idea that these sorts of scandals are somewhat random and unpredictable.
A second school of thought says this exposes the dangers of investing abroad and particularly in emerging markets where business culture, auditing standards, accounting rules, regulatory structures, and social customs can differ markedly from the United States. The thought here is that the developing world might not have quite as strong checks to insure accuracy of data reported by businesses and that American investors will inevitably experience a lack of awareness of many issues in any particular nation that might differ from the US.
For my money, I am in the latter school of thought. This is not to suggest that one should completely shy away from investing in the rest of the world and the emerging markets; rather, one needs to be aware of the different risks involved by investing in the international sphere.
There are several reasons why I do not view this scandal as simply India’s version of Enron. Certainly, this event has rocked the Indian markets in the same sense that Enron did the American markets, but that does not mean the scandals are necessarily similar in nature and that this could happen in the United States any time. The nature of the fraud involved is key to me. If one were to examine the fraud cases in the United States, a lot of them involve complex schemes and companies taking advantage of auditors’ lack of knowledge about difficult-to-price assets. While auditors might work in particular industries more than others, they still do not have the expert knowledge of asset classes that one who works in an industry every day might have.
Look at a company like Intel (INTC), for instance, that produces high-tech devices that rapidly depreciate in value. From an auditor’s perspective, it might be difficult to tell the difference between a new chip with high-value and an obsolete chip with virtually no value. These types of situations can create opportunities for fraudsters.
While a lot of facts from the Satyam scandal are still missing and I imagine we will learn more over the coming weeks and months, the one particularly frightening thing about this is the seeming ease with which this fraud was committed. This does not appear to be a case of complicated and difficult-to-value assets vexing auditors. Satyam had a cash balance over $1 Billion and 94% of it was fictitious! Surely, one would think, that auditors should have noticed such a large amount of cash that did not seem to exist. Cash is a much more difficult asset to “fake” or create an illusion of heightened value on than microprocessors, oil supplies, or mortgage-backed securities. How could a massive store of missing cash escape the attention of auditors?
If a company could fake this much cash on its balance sheet without auditors even batting an eyelash, could this mean that any company in India is potentially vulnerable? It’s worthwhile to note that as a publicly-traded company traded on an American exchange, Satyam was subject to US Generally Accepted Accounting Principles (GAAP) and Sarbanes-Oxley. Yet, even this did not protect investors. But why?
There’s a whole host of possible reasons and it’s difficult to say what the truth behind the matter is without all the fact. Some possibilities:
(1) Satyam was audited by Price Waterhouse of Hyderabad, India, which is connected to PricewaterhouseCoopers. It’s not clear to me what sort of people would be brought in to do this audit, however. Obviously, you would need people familiar with US GAAP. Was the auditing staff largely based out of India? Or did PwC bring “experts” over from the United States?
There is potential for problems with either option you choose. Would Indian-educated accountants necessarily be familiar with US GAAP and GAAS on more than a shallow level? Keep in mind, these auditors could possibly only use these standards once per year while auditing Satyam. Perhaps an audit, while theoretically falling under American standards, is carried out more closely to Indian standards in actuality.
If Americans were brought in to examine Satyam, would they necessarily have more than a shallow understanding of Indian business practices, regulations, and cultural customs? Would the Americans be “taking the word” of people at Satyam due to their own lack of expertise?
(2) Another possibility is something about Indian business practices and the regulatory environment make it easy to conceal this type of thing from the view of auditors. As a foreigner, one is simply left guessing about conditions in a particular country. An American operates with a lot of assumptions that are mainly based on their own experiences in America; those assumptions may be completely invalid when carried over to a nation halfway across the globe.
(3) Its also possible that auditors or financial institutions were acting in collusion with Satyam. Thus far, there is no evidence of this, but it can’t be ruled out yet. Ironically, this would probably be the least damning of the options because it would suggest that there was a lack of effective checks involved here and this might be remediable. Though, it still might expose the ease with which such collusion could occur overseas.
These are just a few possibilities. I am sure there are many others and it all cuts into the harsh reality of investing: we are all making decisions based on limited information. The best we can do is maintain awareness of this and seek out investing strategies that minimize the effects of this. With that, I offer these thoughts on investing:
(1) When Investing in Emerging Markets, Be Aware of Heightened Risks from Greater Uncertainty
Personally, I have never analyzed any companies in India and do not have that much knowledge of the Indian market. However, I do examine a number of companies from China. One thing I’ve found is that the financial statements are not necessarily as illuminating as they might be for American companies, even when they are prepared in accordance with US GAAP. This goes back to a previous thought: accountants in foreign nations may not necessarily have that great of an understanding of American standards, culture, and laws. While this is true in an auditing capacity, it’s also true in an in-house capacity. A company may hire accountants who have limited understanding of American standards and culture.
On that note, one thing I’ve personally noticed from examining Chinese solar companies is that the financial statements for some of the companies are extremely difficult to understand and gather important information from. I found myself particularly vexed reading through Yingli Solar’s (YGE) 20-F filing. Due to this, I have shied away from Yingli personally. This does not mean that Yingli is a bad investment --- merely that I made a conscious decision based on a general feeling I got from reading the financial statements that the company might not have totally understood American investors. If this was the case, it was also possible the company did not fully understand American accounting standards. Based on this, I assigned a higher level of risk to Yingli.
I don’t mean to single out Yingli, as it may indeed be a great investment and I have encountered some very smart investors who think highly of the firm, but my thought was that if I was having particular difficulty understanding their disclosures, maybe I should steer clear rather than *assume* that everything was alright.
(2) Different Countries, Different Rules, Different Cultures, Different Education
Every country has its own set of laws and customs. However, most of us are not lawyers. Instead, we gain our understanding of the law through observation. We have a sense that something is not legal. We have a sense of what is acceptable and what is not. Those standards do not necessarily carry over to every nation. This might seem somewhat obvious in a way. What might be less obvious is that people born in another nation might have a completely different way of learning and a completely different education.
This becomes especially important when we are talking about accounting and auditing. Are Russian accountants necessarily well-schooled in American accounting standards? I have no clue how one becomes an accountant in Russia, but I imagine they have their own procedures and their own system of education and that it differs in many respects from the system here in America. If a company in Russia is traded on an American exchange, how does it find the accountants who are to do the American reporting? Are Russian accountants simply given a two-week crash course? Is an American brought over to teach others? Are Americans running the whole operation? As mentioned earlier, no matter which way you look at it, there are a potential host of problems.
The main takeaway here is to simply be aware that other nations operate differently and even abiding by American standards does not necessarily mean that all differences immediately disappear.
(3) Diversify, Diversify, Diversify!
The most important takeaway here is that investing involves a lot of uncertainty. No matter how skilled or knowledgeable you are in finance, accounting, business, or the particularly industry you are looking at, there is always something out there that you did not know about and that you will not anticipate. The best way to deal with this uncertainty is to mitigate the risks by diversifying your portfolio. This is true even if you are investing only in American companies, but I think it’s even more true when investing in emerging markets.
A few parting notes: while I would not necessarily discourage anyone from investing in emerging markets, I will suggest that it might be prudent to have a great deal of reluctance towards investing in India for the near-future. Until we know how the Satyam fraud went undetected by auditors for so many years and until we see some evidence that this is not happening all over India, I would veer away. Naturally, anyone is free to disagree with my assessment.
Finally, a lot of what I have offered here is speculation about what might be happening in overseas companies and auditing firms. If anything is not factual, feel free to inform me. My bigger point here is that sometimes, we don’t know all the facts. All the same, we should seek as many of those facts as we can get.
Disclosures: No position in SAY or any Indian/emerging market ETFs
A second school of thought says this exposes the dangers of investing abroad and particularly in emerging markets where business culture, auditing standards, accounting rules, regulatory structures, and social customs can differ markedly from the United States. The thought here is that the developing world might not have quite as strong checks to insure accuracy of data reported by businesses and that American investors will inevitably experience a lack of awareness of many issues in any particular nation that might differ from the US.
For my money, I am in the latter school of thought. This is not to suggest that one should completely shy away from investing in the rest of the world and the emerging markets; rather, one needs to be aware of the different risks involved by investing in the international sphere.
There are several reasons why I do not view this scandal as simply India’s version of Enron. Certainly, this event has rocked the Indian markets in the same sense that Enron did the American markets, but that does not mean the scandals are necessarily similar in nature and that this could happen in the United States any time. The nature of the fraud involved is key to me. If one were to examine the fraud cases in the United States, a lot of them involve complex schemes and companies taking advantage of auditors’ lack of knowledge about difficult-to-price assets. While auditors might work in particular industries more than others, they still do not have the expert knowledge of asset classes that one who works in an industry every day might have.
Look at a company like Intel (INTC), for instance, that produces high-tech devices that rapidly depreciate in value. From an auditor’s perspective, it might be difficult to tell the difference between a new chip with high-value and an obsolete chip with virtually no value. These types of situations can create opportunities for fraudsters.
While a lot of facts from the Satyam scandal are still missing and I imagine we will learn more over the coming weeks and months, the one particularly frightening thing about this is the seeming ease with which this fraud was committed. This does not appear to be a case of complicated and difficult-to-value assets vexing auditors. Satyam had a cash balance over $1 Billion and 94% of it was fictitious! Surely, one would think, that auditors should have noticed such a large amount of cash that did not seem to exist. Cash is a much more difficult asset to “fake” or create an illusion of heightened value on than microprocessors, oil supplies, or mortgage-backed securities. How could a massive store of missing cash escape the attention of auditors?
If a company could fake this much cash on its balance sheet without auditors even batting an eyelash, could this mean that any company in India is potentially vulnerable? It’s worthwhile to note that as a publicly-traded company traded on an American exchange, Satyam was subject to US Generally Accepted Accounting Principles (GAAP) and Sarbanes-Oxley. Yet, even this did not protect investors. But why?
There’s a whole host of possible reasons and it’s difficult to say what the truth behind the matter is without all the fact. Some possibilities:
(1) Satyam was audited by Price Waterhouse of Hyderabad, India, which is connected to PricewaterhouseCoopers. It’s not clear to me what sort of people would be brought in to do this audit, however. Obviously, you would need people familiar with US GAAP. Was the auditing staff largely based out of India? Or did PwC bring “experts” over from the United States?
There is potential for problems with either option you choose. Would Indian-educated accountants necessarily be familiar with US GAAP and GAAS on more than a shallow level? Keep in mind, these auditors could possibly only use these standards once per year while auditing Satyam. Perhaps an audit, while theoretically falling under American standards, is carried out more closely to Indian standards in actuality.
If Americans were brought in to examine Satyam, would they necessarily have more than a shallow understanding of Indian business practices, regulations, and cultural customs? Would the Americans be “taking the word” of people at Satyam due to their own lack of expertise?
(2) Another possibility is something about Indian business practices and the regulatory environment make it easy to conceal this type of thing from the view of auditors. As a foreigner, one is simply left guessing about conditions in a particular country. An American operates with a lot of assumptions that are mainly based on their own experiences in America; those assumptions may be completely invalid when carried over to a nation halfway across the globe.
(3) Its also possible that auditors or financial institutions were acting in collusion with Satyam. Thus far, there is no evidence of this, but it can’t be ruled out yet. Ironically, this would probably be the least damning of the options because it would suggest that there was a lack of effective checks involved here and this might be remediable. Though, it still might expose the ease with which such collusion could occur overseas.
These are just a few possibilities. I am sure there are many others and it all cuts into the harsh reality of investing: we are all making decisions based on limited information. The best we can do is maintain awareness of this and seek out investing strategies that minimize the effects of this. With that, I offer these thoughts on investing:
(1) When Investing in Emerging Markets, Be Aware of Heightened Risks from Greater Uncertainty
Personally, I have never analyzed any companies in India and do not have that much knowledge of the Indian market. However, I do examine a number of companies from China. One thing I’ve found is that the financial statements are not necessarily as illuminating as they might be for American companies, even when they are prepared in accordance with US GAAP. This goes back to a previous thought: accountants in foreign nations may not necessarily have that great of an understanding of American standards, culture, and laws. While this is true in an auditing capacity, it’s also true in an in-house capacity. A company may hire accountants who have limited understanding of American standards and culture.
On that note, one thing I’ve personally noticed from examining Chinese solar companies is that the financial statements for some of the companies are extremely difficult to understand and gather important information from. I found myself particularly vexed reading through Yingli Solar’s (YGE) 20-F filing. Due to this, I have shied away from Yingli personally. This does not mean that Yingli is a bad investment --- merely that I made a conscious decision based on a general feeling I got from reading the financial statements that the company might not have totally understood American investors. If this was the case, it was also possible the company did not fully understand American accounting standards. Based on this, I assigned a higher level of risk to Yingli.
I don’t mean to single out Yingli, as it may indeed be a great investment and I have encountered some very smart investors who think highly of the firm, but my thought was that if I was having particular difficulty understanding their disclosures, maybe I should steer clear rather than *assume* that everything was alright.
(2) Different Countries, Different Rules, Different Cultures, Different Education
Every country has its own set of laws and customs. However, most of us are not lawyers. Instead, we gain our understanding of the law through observation. We have a sense that something is not legal. We have a sense of what is acceptable and what is not. Those standards do not necessarily carry over to every nation. This might seem somewhat obvious in a way. What might be less obvious is that people born in another nation might have a completely different way of learning and a completely different education.
This becomes especially important when we are talking about accounting and auditing. Are Russian accountants necessarily well-schooled in American accounting standards? I have no clue how one becomes an accountant in Russia, but I imagine they have their own procedures and their own system of education and that it differs in many respects from the system here in America. If a company in Russia is traded on an American exchange, how does it find the accountants who are to do the American reporting? Are Russian accountants simply given a two-week crash course? Is an American brought over to teach others? Are Americans running the whole operation? As mentioned earlier, no matter which way you look at it, there are a potential host of problems.
The main takeaway here is to simply be aware that other nations operate differently and even abiding by American standards does not necessarily mean that all differences immediately disappear.
(3) Diversify, Diversify, Diversify!
The most important takeaway here is that investing involves a lot of uncertainty. No matter how skilled or knowledgeable you are in finance, accounting, business, or the particularly industry you are looking at, there is always something out there that you did not know about and that you will not anticipate. The best way to deal with this uncertainty is to mitigate the risks by diversifying your portfolio. This is true even if you are investing only in American companies, but I think it’s even more true when investing in emerging markets.
A few parting notes: while I would not necessarily discourage anyone from investing in emerging markets, I will suggest that it might be prudent to have a great deal of reluctance towards investing in India for the near-future. Until we know how the Satyam fraud went undetected by auditors for so many years and until we see some evidence that this is not happening all over India, I would veer away. Naturally, anyone is free to disagree with my assessment.
Finally, a lot of what I have offered here is speculation about what might be happening in overseas companies and auditing firms. If anything is not factual, feel free to inform me. My bigger point here is that sometimes, we don’t know all the facts. All the same, we should seek as many of those facts as we can get.
Disclosures: No position in SAY or any Indian/emerging market ETFs
Thursday, January 8, 2009
MFs get extra-cautious after Satyam fracas
MUMBAI: The crisis over Satyam has left the mutual fund industry in the wilderness as to what extra precautionary measures can be taken to judge
the quality of a management while investing. Anticipating similar like fiasco in the future too, MFs plan to be more vigilant in scrutinising balance sheets.
Terming the incident as ‘detrimental to Indian Inc’ industry players are keeping close watch on all Satyam related developments, especially with respect to auditors and bankers of the company. “Auditor’s role is very crucial in this entire saga. We would like to hear from PwC as well as from all the bankers of the company. Their views will put more light into it. Based on that, we shall strengthen our efforts in judging corporate governance of a company,” said Waqar Naqvi, chief executive, Taurus Asset Management.
The balance sheet of Satyam carries inflated cash and bank balances of Rs. 5,361 crore as against Rs.5,040 crore and accrued interest of Rs.376 crore which is non-existent. Industry players express their helplessness over it. Said N K Garg, CEO, Sahara Mutual Fund, “It is not feasible for industry players to cross-check with every banker of a company about the cash in hand or any other item like accrued interest.”
However, Garg added, “it is not enough for MF investors to check only two pages of a balance sheet to draw a conclusion about a company. One will have to go through the schedules and notes of accounts mentioned with the balance sheet. Corporate governance gets 52% of the total scores in asset management in our house.”
As on 31 December, 2008, HDFC Growth and HDFC Equity had Satyam investment of 1.95% and 2.64% to their NAVs. Birla Sun Life Equity had 2.75%. Three schemes of UTI AMC and two schemes of Franklin Templeton had also holdings between 1.75% and 8%. As on November, 2008; Reliance Advantage fund and Reliance RSF had 1.19% and 2.83% respectively.
However, all those stakes have been brought down substantially in view of recent developments in Satyam. Most of the MFs offloaded their stake booking the loss to minimum possible extent when the scrip was traded at 3 digit figures on Wednesday in a losing streak. Fund houses refuse to be quoted on Satyam exposure.
Mentioned Sanjay Sinha, chief executive officer, DBS Cholamandalam Asset Management, “for investments, there is no ready formula to counter such situation. In determining the quality of management we do every needful exercise. Going ahead, there could see many such cases of deliberate frauds.”
In a probable solution to mitigate the risk of investment in such unprecedented fraud case, Anoop Bhaskar, head – equity, UTI Asset Management, presents a case. He said, “It is great learning experience for all of us as it is the first Indian company involved in a fraud of this magnitude. We need to concentrate more on diversification of portfolios. If fund managers restrict a particular company investment to the tune of 2-3 per cent investment, the loss gets limited.”
Going through the annals of ENRON and Worldcom, fund managers are not surprised over Satyam but are scouting for ways to put more focus on corporate governance.
the quality of a management while investing. Anticipating similar like fiasco in the future too, MFs plan to be more vigilant in scrutinising balance sheets.
Terming the incident as ‘detrimental to Indian Inc’ industry players are keeping close watch on all Satyam related developments, especially with respect to auditors and bankers of the company. “Auditor’s role is very crucial in this entire saga. We would like to hear from PwC as well as from all the bankers of the company. Their views will put more light into it. Based on that, we shall strengthen our efforts in judging corporate governance of a company,” said Waqar Naqvi, chief executive, Taurus Asset Management.
The balance sheet of Satyam carries inflated cash and bank balances of Rs. 5,361 crore as against Rs.5,040 crore and accrued interest of Rs.376 crore which is non-existent. Industry players express their helplessness over it. Said N K Garg, CEO, Sahara Mutual Fund, “It is not feasible for industry players to cross-check with every banker of a company about the cash in hand or any other item like accrued interest.”
However, Garg added, “it is not enough for MF investors to check only two pages of a balance sheet to draw a conclusion about a company. One will have to go through the schedules and notes of accounts mentioned with the balance sheet. Corporate governance gets 52% of the total scores in asset management in our house.”
As on 31 December, 2008, HDFC Growth and HDFC Equity had Satyam investment of 1.95% and 2.64% to their NAVs. Birla Sun Life Equity had 2.75%. Three schemes of UTI AMC and two schemes of Franklin Templeton had also holdings between 1.75% and 8%. As on November, 2008; Reliance Advantage fund and Reliance RSF had 1.19% and 2.83% respectively.
However, all those stakes have been brought down substantially in view of recent developments in Satyam. Most of the MFs offloaded their stake booking the loss to minimum possible extent when the scrip was traded at 3 digit figures on Wednesday in a losing streak. Fund houses refuse to be quoted on Satyam exposure.
Mentioned Sanjay Sinha, chief executive officer, DBS Cholamandalam Asset Management, “for investments, there is no ready formula to counter such situation. In determining the quality of management we do every needful exercise. Going ahead, there could see many such cases of deliberate frauds.”
In a probable solution to mitigate the risk of investment in such unprecedented fraud case, Anoop Bhaskar, head – equity, UTI Asset Management, presents a case. He said, “It is great learning experience for all of us as it is the first Indian company involved in a fraud of this magnitude. We need to concentrate more on diversification of portfolios. If fund managers restrict a particular company investment to the tune of 2-3 per cent investment, the loss gets limited.”
Going through the annals of ENRON and Worldcom, fund managers are not surprised over Satyam but are scouting for ways to put more focus on corporate governance.
Satyam's Valuation-CLSA
Hi,
Satyam's Founder and Chairman Ramalinga Raju has quit. In a letter to the Board and exchanges, he has admitted that:
Satyam over-stated cash assets: Rs50.4bn out of Rs53.6bn cash assets are "inflated or non-existent"
Satyam over-stated revenues: In Sep quarter, revenues were reported as Rs27bn whereas revenues were actually Rs21.12bn
Satyam over-stated operating profits: Real operating profits in Sep08 quarter were 3% of revenues, which were stated as 24% of revenues.
Satyam also has under-stated liabilities - more details in the attached release sent to the exchanges.
Satyam is now India's Enron. Recent chatter on value emerging in the Satyam stock based on cash per share has been rendered irrelevant. The independence of the Board was already in question, now the auditors' (PwC) complicity in what seems to be a multi-year mis-statement of financials will also be explored.
An embarrassing and shocking episode for Indian corporate governance continues to unravel, surprising all at every step. Legal measures may follow, and introspection too, by regulators, corporates, auditors, and of course, by analysts like us. The 10th January Board meeting now becomes irrelevant. When there is no cash, how can there be a buy back? And where did the cash go? Only an investigation can tell.
So much for the "moral outrage", which is the easy way out. Is there any way Satyam can be valued now? What about 50,000+ employees (is the count of employees real?), and hundreds of customers (the large ones are real for sure); and what about UPaid which had filed a forgery litigation against Satyam?
Book value becomes meaningless, with cash out and asset/debtors unknown or uncertain. A different approach could be that the business, or SOME PART OF THE BUSINESS, is real
M Cap per employee for Indian IT majors = $100-120k
Assume a 70% discount for Satyam
Assume Satyam DOES NOT have 50k+ employees but only 30k in reality
Satyam could be valued at = $120k x 0.3 x 30000 = $900m
Remove still unknown (yet to be disclosed) liabilities of $300m (assumed). Value becomes $600m or about Rs40 per share
Based on the declared real EPS for Sep quarter, and a 8x multiple, price could be Rs25 per share.
Satyam's Founder and Chairman Ramalinga Raju has quit. In a letter to the Board and exchanges, he has admitted that:
Satyam over-stated cash assets: Rs50.4bn out of Rs53.6bn cash assets are "inflated or non-existent"
Satyam over-stated revenues: In Sep quarter, revenues were reported as Rs27bn whereas revenues were actually Rs21.12bn
Satyam over-stated operating profits: Real operating profits in Sep08 quarter were 3% of revenues, which were stated as 24% of revenues.
Satyam also has under-stated liabilities - more details in the attached release sent to the exchanges.
Satyam is now India's Enron. Recent chatter on value emerging in the Satyam stock based on cash per share has been rendered irrelevant. The independence of the Board was already in question, now the auditors' (PwC) complicity in what seems to be a multi-year mis-statement of financials will also be explored.
An embarrassing and shocking episode for Indian corporate governance continues to unravel, surprising all at every step. Legal measures may follow, and introspection too, by regulators, corporates, auditors, and of course, by analysts like us. The 10th January Board meeting now becomes irrelevant. When there is no cash, how can there be a buy back? And where did the cash go? Only an investigation can tell.
So much for the "moral outrage", which is the easy way out. Is there any way Satyam can be valued now? What about 50,000+ employees (is the count of employees real?), and hundreds of customers (the large ones are real for sure); and what about UPaid which had filed a forgery litigation against Satyam?
Book value becomes meaningless, with cash out and asset/debtors unknown or uncertain. A different approach could be that the business, or SOME PART OF THE BUSINESS, is real
M Cap per employee for Indian IT majors = $100-120k
Assume a 70% discount for Satyam
Assume Satyam DOES NOT have 50k+ employees but only 30k in reality
Satyam could be valued at = $120k x 0.3 x 30000 = $900m
Remove still unknown (yet to be disclosed) liabilities of $300m (assumed). Value becomes $600m or about Rs40 per share
Based on the declared real EPS for Sep quarter, and a 8x multiple, price could be Rs25 per share.
Monday, January 5, 2009
Year Of The Bond
2009 shall be the year of The Bond (market). Bonds have already started off the upward journey on the face of lackadaisical interest in equities and a speculative opportunity arising out of yields going up significantly in the past few months. Expected downgrades and fears of default had pushed up bond yields to high levels in the past few months. Added was fact that they yield on the benchmark 10 year Gsec paper, had climbed to a high of 9.5% in late July 08.
A bond or fixed income security is an instrument issued by a borrower with a certain interest rate (referred to as coupon rate), and a fixed maturity. Bonds are thus fixed obligations to return principal and make fixed tenor payments of interest to the holder of the bond. Long duration (more than one year) Bonds issued by the Government are often referred to as G-Secs or Gilts. Gilts are supposed to be the safest instruments and carry zero credit risk. Bonds are often tradable securities which gives rise to an opportunity to benefit from the change in prices of these bonds.
Bonds and fixed income securities are sensitive to various factors. Interest rates prevailing in the economy, risk premiums attached to different securities, often measured by their credit rating, and factors affecting demand and supply of bonds decide bond prices. Some other factors like liquidity risk also play a part. Lets consider how each of these affects bond prices.
Interest Rate Risk: Bond prices are inversely related to the interest rates prevailing in the economy. Lets consider a scenario where you make a FD with a bank at 8% pa for 5 years. After 6 months you realize that deposit rates have risen to 10%. A rational investor would break the old FD and tell the bank to make a new one at 10%. Now suppose instead of a bank FD you were really holding a tradable bond, with interest rates going up to 10% the 8% bond has become less attractive. This would reflect in the price of the bond, which would fall to a price so that the 8% coupon would work out to a yield of 10%. Thus the new price would be 8%/X = 10%. The new price thus would be Rs 80 representing a fall of Rs 20 from the original price of Rs 100. The same logic would apply if the interest rates fall, bonds carrying a higher rate become more attractive and their price would go up to come in line with the higher yields prevalent in the bond market.
Credit Risk: This simply put is the risk of default on the borrowings. Bonds issued by companies not perceived to be very safe would be issued at a lower price, thus making the yield attractive to investors. A Rs 100 bond with a coupon of 8% thus may be issued at Rs 96 thus making the yield 12% to the investor. Now if the outlook on this company falls further ie suppose its bonds are downgraded by the rating agencies, the prices would fall further (and yields would rise), thus resulting in a loss for the investor. Similarly the reverse would happen if there is a upgrade in the rating of the bond. Credit risk is sometimes reflected in the spread between government bonds and bonds issued by companies. So a widening yield spread between the benchmark 10 year G-Sec and AAA Corporate paper means that generally the markets believe there is a significant credit risk in corporates bonds.
Liquidity Risk: Bonds are traded in the secondary market which is not very deep. While G-Secs are actively traded securities, PSU and corporate securities are sometimes not actively traded. Liquidity risk represents the risk arising out of not being able to sell these securities when required. The holder of a bond may thus be forced to liquidate the security at a discount leading to a loss.
Some other factors affect the demand and supply of bonds and thus their prices. Fresh government borrowing represented by a higher supply of government bonds, changes in SLR ratio of banks, which is the percentage of deposits of banks that has to be held in Government securities and the speculative interest in bonds are some other factors affecting prices.
The last few moths of 2008 saw major volatility in the bond markets. In July 2008 the benchmark 10 year G-Sec (8.24% GOI, 2018) yield rose to a 9.5% in the face of rising interest rates in the economy. As the government’s focus shifts from controlling inflation by increasing interest rates to one of growth orientation marked by reducing interest rates, bond yields started falling. The 10 year G-Sec yield thus started it’s downward journey and reached a low of 5.44% in December returning huge profits to holders of these bonds.
The year 2009 also holds promise for the bond market. Lack of interest in equities would make it difficult to raise fresh capital from equities. Corporates would be forced to look at the debt market for their needs. Mutual Funds would become active and there are signs already, as the retail investor look towards options other than equity. My opinion is that the rally has only just begun and would continue to hold promise for better part of next year. What may not happen in a hurry is the yield contraction between corporate and government paper. There seems to be a wide spread opinion that all may not be well in the corporate bond market and some defaults are likely in the next quarter. Although the current spreads seem to have factored in the risk, actual defaults may further dampen spirits leading to a further expansion in spreads. While later in the year the fears may subside, the spread contraction theory may take a little while to take off. Personally I would prefer bond funds that hold government and PSU paper only.
A bond or fixed income security is an instrument issued by a borrower with a certain interest rate (referred to as coupon rate), and a fixed maturity. Bonds are thus fixed obligations to return principal and make fixed tenor payments of interest to the holder of the bond. Long duration (more than one year) Bonds issued by the Government are often referred to as G-Secs or Gilts. Gilts are supposed to be the safest instruments and carry zero credit risk. Bonds are often tradable securities which gives rise to an opportunity to benefit from the change in prices of these bonds.
Bonds and fixed income securities are sensitive to various factors. Interest rates prevailing in the economy, risk premiums attached to different securities, often measured by their credit rating, and factors affecting demand and supply of bonds decide bond prices. Some other factors like liquidity risk also play a part. Lets consider how each of these affects bond prices.
Interest Rate Risk: Bond prices are inversely related to the interest rates prevailing in the economy. Lets consider a scenario where you make a FD with a bank at 8% pa for 5 years. After 6 months you realize that deposit rates have risen to 10%. A rational investor would break the old FD and tell the bank to make a new one at 10%. Now suppose instead of a bank FD you were really holding a tradable bond, with interest rates going up to 10% the 8% bond has become less attractive. This would reflect in the price of the bond, which would fall to a price so that the 8% coupon would work out to a yield of 10%. Thus the new price would be 8%/X = 10%. The new price thus would be Rs 80 representing a fall of Rs 20 from the original price of Rs 100. The same logic would apply if the interest rates fall, bonds carrying a higher rate become more attractive and their price would go up to come in line with the higher yields prevalent in the bond market.
Credit Risk: This simply put is the risk of default on the borrowings. Bonds issued by companies not perceived to be very safe would be issued at a lower price, thus making the yield attractive to investors. A Rs 100 bond with a coupon of 8% thus may be issued at Rs 96 thus making the yield 12% to the investor. Now if the outlook on this company falls further ie suppose its bonds are downgraded by the rating agencies, the prices would fall further (and yields would rise), thus resulting in a loss for the investor. Similarly the reverse would happen if there is a upgrade in the rating of the bond. Credit risk is sometimes reflected in the spread between government bonds and bonds issued by companies. So a widening yield spread between the benchmark 10 year G-Sec and AAA Corporate paper means that generally the markets believe there is a significant credit risk in corporates bonds.
Liquidity Risk: Bonds are traded in the secondary market which is not very deep. While G-Secs are actively traded securities, PSU and corporate securities are sometimes not actively traded. Liquidity risk represents the risk arising out of not being able to sell these securities when required. The holder of a bond may thus be forced to liquidate the security at a discount leading to a loss.
Some other factors affect the demand and supply of bonds and thus their prices. Fresh government borrowing represented by a higher supply of government bonds, changes in SLR ratio of banks, which is the percentage of deposits of banks that has to be held in Government securities and the speculative interest in bonds are some other factors affecting prices.
The last few moths of 2008 saw major volatility in the bond markets. In July 2008 the benchmark 10 year G-Sec (8.24% GOI, 2018) yield rose to a 9.5% in the face of rising interest rates in the economy. As the government’s focus shifts from controlling inflation by increasing interest rates to one of growth orientation marked by reducing interest rates, bond yields started falling. The 10 year G-Sec yield thus started it’s downward journey and reached a low of 5.44% in December returning huge profits to holders of these bonds.
The year 2009 also holds promise for the bond market. Lack of interest in equities would make it difficult to raise fresh capital from equities. Corporates would be forced to look at the debt market for their needs. Mutual Funds would become active and there are signs already, as the retail investor look towards options other than equity. My opinion is that the rally has only just begun and would continue to hold promise for better part of next year. What may not happen in a hurry is the yield contraction between corporate and government paper. There seems to be a wide spread opinion that all may not be well in the corporate bond market and some defaults are likely in the next quarter. Although the current spreads seem to have factored in the risk, actual defaults may further dampen spirits leading to a further expansion in spreads. While later in the year the fears may subside, the spread contraction theory may take a little while to take off. Personally I would prefer bond funds that hold government and PSU paper only.
Friday, January 2, 2009
Lesson From 2008
A long and terrible year has come to an end. For mutual fund investors, this has easily been the worst year ever. This is hardly surprising given the way stock prices have collapsed across the board.
The mainstream equity category of diversified equity funds halved investors' money, falling an average of 55 per cent during the year. This 55 per cent loss represents more than Rs 60,000 crore of losses for investors who had invested in diversified equity funds.
This was actually slightly worse than the two large-cap indices, the Sensex and the Nifty which are both down about 53 per cent during the period. This is unusual-the average diversified equity fund generally beat the indices by a wide margin.
The depth of the collapse in 2008 has led to a certain fatalism among fund investors. People have just thrown up their hands, figuratively speaking, and abandoned any attempt at looking more deeply into what went wrong and what went right. Or at least, what went more wrong and what went less wrong. The 55 per cent is merely the average of the funds. There's rather a large range hidden within this. The worst fund is down about 80 per cent and the best one just about 35 per cent. The 80 per cent is not really an extreme case-in all there are eight funds that are down by more 70 per cent. At the other end of the performance continuum, there are about 10 funds that fell 45 per cent or less. This is not a small difference. If you started the year with Rs 20 lakh, the worst fund would have reduced it to Rs 4 lakh and the best one would have reduced it to about Rs 13 lakh.
Of course, the above numbers apply only to the worst-case investors-those who made their entire investment a year ago. Hopefully, there are many mutual fund investors out there who have imbibed the correct mantra and have been around for a longer-term. Such investors will appreciate the fruits of choosing good funds better. Over the past three years, the best funds would have grown your 20 lakhs to between Rs 25 lakh and Rs 28 lakh while the worst ones would have shrunk that amount to around Rs 10-12 lakh.
The best part of the story is that differentiation between the better and the worse is as predicted. Funds that were more aggressive, that dabbled more in smaller companies and took more concentrated bets are the worst performers. In fact, the three worst funds of 2008 were in the top five in 2007. This slide from the very top to the very bottom is not unexpected. It holds an old, well-worn but fundamental lesson-mutual funds that do the very best in bull runs fall suddenly and sharply when the good times turn to bad. It's an inevitable side-effect of how equity fund managers generate excessive returns during bubbles.
In many ways, the real surprise of 2008 was how debt funds fared. Debt funds are supposed to be stable and conservative so these surprises came as a shock to their investors. While I've discussed debt funds in detail in past weeks, it must be pointed out that the crises faced by these funds during 2008 fall into two categories. Interest rate changes, while unexpected, are very much part of the game and will remain so. But the liquidity freeze in October and November was a structural problem that is unlikely to happen again.
All in all, 2008 may have been a terrible year, but given what happened in the underlying markets, it did follow a pattern. Moreover, it was a year that clearly points the way forward for fund managers and investors.
The mainstream equity category of diversified equity funds halved investors' money, falling an average of 55 per cent during the year. This 55 per cent loss represents more than Rs 60,000 crore of losses for investors who had invested in diversified equity funds.
This was actually slightly worse than the two large-cap indices, the Sensex and the Nifty which are both down about 53 per cent during the period. This is unusual-the average diversified equity fund generally beat the indices by a wide margin.
The depth of the collapse in 2008 has led to a certain fatalism among fund investors. People have just thrown up their hands, figuratively speaking, and abandoned any attempt at looking more deeply into what went wrong and what went right. Or at least, what went more wrong and what went less wrong. The 55 per cent is merely the average of the funds. There's rather a large range hidden within this. The worst fund is down about 80 per cent and the best one just about 35 per cent. The 80 per cent is not really an extreme case-in all there are eight funds that are down by more 70 per cent. At the other end of the performance continuum, there are about 10 funds that fell 45 per cent or less. This is not a small difference. If you started the year with Rs 20 lakh, the worst fund would have reduced it to Rs 4 lakh and the best one would have reduced it to about Rs 13 lakh.
Of course, the above numbers apply only to the worst-case investors-those who made their entire investment a year ago. Hopefully, there are many mutual fund investors out there who have imbibed the correct mantra and have been around for a longer-term. Such investors will appreciate the fruits of choosing good funds better. Over the past three years, the best funds would have grown your 20 lakhs to between Rs 25 lakh and Rs 28 lakh while the worst ones would have shrunk that amount to around Rs 10-12 lakh.
The best part of the story is that differentiation between the better and the worse is as predicted. Funds that were more aggressive, that dabbled more in smaller companies and took more concentrated bets are the worst performers. In fact, the three worst funds of 2008 were in the top five in 2007. This slide from the very top to the very bottom is not unexpected. It holds an old, well-worn but fundamental lesson-mutual funds that do the very best in bull runs fall suddenly and sharply when the good times turn to bad. It's an inevitable side-effect of how equity fund managers generate excessive returns during bubbles.
In many ways, the real surprise of 2008 was how debt funds fared. Debt funds are supposed to be stable and conservative so these surprises came as a shock to their investors. While I've discussed debt funds in detail in past weeks, it must be pointed out that the crises faced by these funds during 2008 fall into two categories. Interest rate changes, while unexpected, are very much part of the game and will remain so. But the liquidity freeze in October and November was a structural problem that is unlikely to happen again.
All in all, 2008 may have been a terrible year, but given what happened in the underlying markets, it did follow a pattern. Moreover, it was a year that clearly points the way forward for fund managers and investors.
AUMs back on track after 2 mths as big houses shore up funds
After witnessing two months redemption pressure and an erosion in assets under management (AUM), the Indian mutual fund (MF) industry seems to be clawing back on track. The AUM numbers released by the Association of Mutual Funds in India (Amfi) indicates that there has been an overall growth with larger players shoring up the numbers. Top fund houses like Reliance Mutual Fund, ICICI (ICICIBANK.NS) Prudential, Tata and SBI (SBIN.NS) Mutual fund have registered decent growth in their Asset under Management (AUM) for the month of December 2008. Country s top fund Reliance Mutual Fund registered a growth of Rs 2,392.24 crores or 3.53 and its AUM stood at Rs 70,208.10 crores compared to Rs 67,815.86 crores in the month of November. According to numbers disclosed by 22 of the 37 fund houses the overall AUM has increased by 4.67% in December over the previous month. Waqar Naqvi, chief executive, Tauras Mutual Fund said, The fund houses having exposure in the equity market have gained their AUM in the month of December, 2008 as the over all market has gone up by 10% during the month. The equity market has gone up positively in the December. Some of the fund houses have also gained their AUM with the inflow of money into their liquid funds. It can be mentioned that in the month of December the benchmark index, the 30-share Sensex (^BSESN) of Bombay Stock Exchange (BSE) gained 1,063 points or 12.03%. ICICI Prudential MF s AUM for the month of December stood at Rs 41,877.51 crores, increase by Rs 4,821.84 crores or 13.01%. While there are several fund houses which continued to face the heat of global meltdown. Edelweiss MF saw dip in their AUM at Rs 77.21 crores in December compared to Rs 164.79 crores in November a decrease of Rs 87.57 crores or 53.14%.
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