Before I click 'Buy'

One of our readers, has asked me to explain few aspects of investing process. Here follows the question.
[Caveat emptor: Neither the questioner nor I, stake any claim on brevity]


What I want from you is some much much needed thoughts on the following:

1. first of all, how do you get hold of the financial data of the companies and not only for the current year but for atlas a decade. Because without it I dunno how to run the calculations for the intrinsic value !!!!!!!!!!!!!! I want to understand how do you screen your companies? I mean I want to develop a sort of a library mentally about companies I want to get interested in initially my target is 50 companies. But for that I need detailed financial info!
I am constrained because when I look at company data for the last 5 yrs from sites like money control, economic times I notice that almost all the companies have undertaken huge investments compared to their previous years and most run their cashflows into negative! How am I suppose to value them????

2. secondly if you take Buffett’s advice solid companies backed by brands than I like your views that you must have noticed that all the significant FMCG cos. Indian as well as MNCs have shown significant underperformance in the last 4 yrs. My other question is how do you deal with this.

3. Lastly, I want you to guide me to develop significant idea about various companies but also their shooting range i.e. within what range the company becomes a good buy and for that I need two significant things. A) I need financial info about companies and know where to find the info to run a Discounted Cash flow for them. B) I need to have shooting ranges for the companies I am interested in to help me act decisively when the time comes

I like the question because many of the points raised here are the key points in investment strategy and decision making. However, I’ll answer them in the same order as I think about these key points.

Developing the list of companies you track:
The first part of the investment decision making is, deciding your investing horizon in terms of the companies you are actively looking at. This step is important because you can not look at thousands of companies.

One apt analogy for this problem is found in the field of oil exploration. You have got licenses to explore a certain number of exploration blocks. As you know, you can’t scratch the surface and find the oil. You’ve got to dig deep. You start drilling a few holes and gather some data. This data is analyzed and based on the outcome the explorers revise their estimated probability of striking oil. They have to decide whether to quit this well and start digging at another place. If you dig too deep into a small number of wells and fail to find oil in all but a few, your proceeds from whatever little oil you found will not be able to compensate for the cost of drilling. If you drill too many holes, your cost will again be high enough to rule out any returns. It is an optimization problem which can be solved only with experience and analytical rigor.

Many people use the screening approach for this. They do number crunching and find all the companies that fit the criteria of being an excellent business. I never succeeded in such an approach and I don’t recommend it. The financial numbers are scorecards of past performance. They may act like signboards to an excellent opportunity but then most opportunities with visible signboards are already crowded like popular tourist places. You won’t get your money’s worth in popular hill stations (you can take my word on that because I was born in one). To find the beauty of nature, you have to go to places where there are no signboards, no footprints.

You add the valuation criteria to your screening and find supposedly good companies which are undervalued. This approach typically yields many companies which are value traps. It’s hard to have the discipline required to avoid falling into these traps. When you see amazing numbers, you are already half sold to the idea and if you read about business later, you will convince yourself about the business. The net result is that you will ignore the business while focusing on the numbers.

The approach I follow to the screening exercise starts with analysis of the business. Over the past decade, I’ve built a mental library of businesses I admire due to various reasons. They may be market leaders or deeply entrenched businesses in a small niche. In all cases these are the businesses that can ride over couple of years of back to back of recessions. I read about them in papers, magazines and the Internet. I follow the business decisions they make and I analyze the results of those decisions. From time to time, when I hear about exciting things happening in other companies, I explore them and if I like what I see, I add them to my watchlist. My watchlist at any time is very small, around 40. I don’t even scratch the surface of other companies. As an individual investor, I don’t have the resources to do this. Neither does my investment strategy, perfected over the years to suit my needs and resources, require this.

Analysis of business is a very interesting subject. To get some head start on this topic you can read ‘Common Stocks and Uncommon Profits’ [1] and Buffett’s letters to shareholders.

Getting financial Data:

Gathering financial data is easy for the people who follow only a small number of companies. For aggregate data, there are websites. The stock exchanges, financial portals and company websites have enough data. For example in India, BSE’s site has results for the last 6-7 years. The portals like ICICIDirect have data running for 5 years. The individual company websites may have more data, like financial performance for 10 years. The best place to find accurate data is the annual reports. Most companies give their 10-year data highlighting their growth. It can be a good source of information. For example, Tata Motors’ annual report has the summary of financial data from 1946! Even if you have the 10-year data, you can see a 4- 5-year-old annual report to find the data of the years before that.

The people doing screening of large number of companies need data at one place and in standard format, and they can find it in databases like Reuters. When I used to do number crunching, I used to write software programs to pull data from the net. Even if you don’t know much of programming, you can use tools like Excel which allow web queries to extract data into spreadsheets, and then learn to write some macros to do that operation for multiple companies.

The important part here is to find the accurate data. The splits and bonuses make it difficult to find accurate data. The past data should be comparable to current data. There is no point in comparing when a company has gone though mergers, acquisitions , de-mergers, spin-offs or it has spawned numerous subsidiaries which now account for a significant percentage of revenues. The data you gather requires validation for correctness. Anyone doing significant amount of number crunching should establish procedures to verify the accuracy of data before the analysis. The analysis rarely happens on the data that gets reported. You do not look at sales or profits. You look these parameters in relation to other parameters like networth, average of data from past years, etc. So it can get to be a pretty daunting task for an individual investor. One word of caution, even when you gather base data, do not use the numbers that you can yourself derive from basic set of data. Don’t try to get data for P/E, return on networth because you can yourself calculate it using base figures like profits, sale and basic arithmetic encoded into formulas in a tool like Excel.

Forming the expectations about risks and returns:

This is another interesting part because it decides the asset allocation among various asset classes (fixed returns, stocks and so on). At an individual stock level, the allocation will again depend on the expected returns and risks involved.

I follow a simple approach to it. If I have the money, I see how much return (interest) I can get from the fixed income securities (FDs/Bond). Then I try to see if I have enough opportunities to beat that return without taking significant risk. The allocation to equities varies based on prevailing price levels and the amount of long term capital that you can invest and forget about. You have to look at your own finances before you look at the financials of companies. You have to avoid creating an asset-liability mismatch by investing short term funds on long term assets like equities.

If you don’t suffer from a disease called irrational optimism, it’s easy to form an opinion on risk. You have to be skeptical. Rather than saying, I’ve got a million to invest in stocks you must say: “I‘ve got a million to invest in risk free bonds. Can I make little more by investing in stocks without taking much risk?” You got to have a solid case of higher returns for every small risk you subject yourself to. Let me explain by an example.

What are the chances of the State Bank of India going bankrupt in 10 years? Would the Government of India let the bank fail when it has about one fourth of total deposits and advances of all scheduled commercial banks in India. Write down your answer in probabilities. Now consider this, SBI’s 10-year FD earns 8.5% whereas the yield of a 10-year Indian Govt. bond on Jan 16th, 2009 was 5.61% (I don’t think it’s tax tree). About 3% difference in bond yields for a little bit of extra risk!! This can give you an idea about the extra returns you have to ask to compensate for the risk.

The Sensex went up from on Jan 16th, 1999 to 9323 as of today. This amounts to 10.89% returns (+ dividends) from investing in India’s best 30 companies. If, in the next 10 years, we repeat this performance and the Sensex ends up at 26000, do you think the returns, mere 2% more than SBI FDs are enough to compensate for the risk?

It may well be. The FD returns are taxed whereas there is no tax on long term capital gains. Considering 1.88% dividend, yield of the Sensex, I may beat after-tax FD returns. Of course, if I carefully choose the stocks and do better than Sensex, my returns may be well above the yield from FDs.

This is how you have to think. After analyzing your finances (income, spending, pipeline of big budget purchases, kids’ education, etc.) and the returns available from fixed income securities, you have to analyze the returns that can be expected from the general market. It’s stupid to think of past peaks of markets. After the Harshad Metha scandal, it took 7 years for the Sensex to cross its last peak. After the tech bubble burst, it took 4 years for the Sensex to reach its previous highs and I haven’t yet talked about the Dow Jones in 1929!

It’s important to have a certain expectation on long term results from equities in general because most people won’t be able to do better than the leading indices. History has enough empirical evidence for that. This guesstimate goes into deciding what percentage of your networth you may allocate to the equities. Only then must you think about individual stocks.

Evaluating the stocks

With roughly the same thinking, as described above, you can analyze the allocation of your funds to one stock vs. another. It’s not possible to figure out the target levels to where the stock can reach but it’s possible to find levels where the risks from the investments are outweighed by the possibilities of returns.

It’s not necessary to do a full blown discounted cashflow analysis. You need to understand the business dynamics and form a rough idea of the profitability levels and expected growth. Too many people fall into the trap of focusing too much on numbers and flashy models. Intelligence, qualification in finance, and number of years of experience with investment companies positively correlate to your likelihood of falling into this trap. I can teach investing to a small town illiterate businessman and I can learn a lot about business from him but it’s very difficult for me to talk to ‘educated’ people because they are not willing to give up their models which don’t work. To me, they offer the same amusement that a person, who builds and sells abacus[2], will get when he sees the adults who refuse to outgrow the abacus (I earn my living by building analytical modeling and decisioning software applications).

John Maynard Keynes has said: “It’s better to be roughly accurate than precisely wrong.” In all complex systems which are beyond the grasp of precise modeling and numerical analysis, you’ve got to remember this.

When you know your calculations are, at best, intelligent guesses, you would leave a margin of safety. If the price falls below your estimated value, your margin of safety increases. After a certain point you’ve got to say, “Well, I can come out a winner on this one”, and invest. You would analyze the situation over time as more information becomes available and the margin of safety changes. You can make additional investments if the need be or even exit at a loss if you come across something you had not considered while making the decision. Over the years, this process will get hardwired and you will not do the calculations, just the way while driving, once you are good at it, you don’t calculate the speed at which you can take a sharp turn. You just do it. Once you’ve gained enough success, confidence, skills and experience, there will be times where the odds are such that you can go all-in[3].

Thanks for a long question because it reduces the guilt of giving a long explanation that I’m so used to.

On the specific query on the underperformance of FMCG companies – the 4-year period is a short one. The rise in commodity prices has worked against them while the producers of both agri and other commodities have gained, which makes the show look disappointing. However, these are stable businesses which won’t go bust in recession unlike many other commodity players. They won’t crumble under loans like indebted companies. These won’t report huge losses due to defaults like financial companies. These businesses earn hard cash, the most precious commodity at today’s date. The problem is that the metrics about returns are available on demands but there is no metric available which describes the risk. The beta[4] of the stock is the biggest bullshit of finance. So, I think you shouldn’t focus too much on underperformance in the last 4 years. Having said that, I haven’t found too many attractive FMCG companies in India and I would say that you need to imbibe the essence of what Buffett has said rather than trying to achieve the same results as his spectacular FMCG bets. He himself has done much more than that.

That ends my answer..



  1. Common Stocks and Uncommon Profits: A book by Phillip Fisher.

Buffett once said that his investing is 85% Graham and 15% Fisher. When you read the book you will see a clear impression of Fisher’s ideas in Buffett’s investing style.

My review of the book

  1. Abacus: An abacus, made of a bamboo frame with beads sliding on wire, is a calculating tool used primarily in parts of Asia for performing arithmetic processes. You can do various arithmetic operations including square roots, cube roots, etc.

  1. All-in: An all-in move in poker is where you bet all your chips in one single move. If an opponent calls and wins, you are out. All-in should be done only when you are dead sure about your win (due to strong cards or your belief that everyone else will fold). It’s an expert move but very popular in the depiction of the game in movies. That’s why those who are novice at poker foolishly go all-in at the drop of a hat.

In investing too, the inexperienced investors play huge gambles turning a blind eye to the odds stacked against them.

4. Beta: A mathematical measure of the sensitivity of rates of return on a portfolio or a given stock compared with rates of return on the market as a whole. A beta of 1.0 indicates that an asset closely follows the market; a beta greater than 1.0 indicates greater volatility than the market. In effect, if the perception of investors about the value of stock is always wrong, it will have lower beta than a stock where the market is sometimes right and the valuation models will assign lower risk to such stock. That explains the ‘bullshit’ part

Introduction to January Issue

“I don’t think that all of that [the image of the Indian IT industry] will be
destroyed because there is one bad apple, just because there is one Satyam.”

Narayana Murthy, (On Satyam)

“There's never just one cockroach in the kitchen.”
Warren Buffett, 2007 (On Freddie Mac’s accounting manipulations).

Buffett and Murthy, two accomplished individuals who have a carved a place of their own on the minds of billions of people. When they speak something, we know “this guy is not cheating us”.

But today, when I put their statements – made at different times – about corporate scandals, I am forced to pick just one as correct one. I can be accused of my partiality to my role model but I believe Warren Buffett has hit the bull’s eye. He is talking from the perspective of investors whereas Mr. Murthy is talking as a promoter and it is quite natural for him to wish that the Satyam scandal won’t affect his company. I wish he were right but he has no way of knowing how many cockroaches are crawling in the neighboring kitchens.

This issue of Unfair Value is hitting the cyberspace at a tumultuous time. There are cockroaches everywhere. The 7 billion dollar fraud involving Societe Generale, a string of subprime related bankruptcies and multi-billion write offs amounting to trillions of dollars, the 50 billion dollar lost to the ponzi scheme of Bernard Madoff, we have had enough last year. Then suddenly we saw a roach in our midst.

Why shouldn’t the investors be jittery? It’s true that if the business is down or the economy is down, there are always few smart individuals who make bold investment decisions and go on to make big money. Yet, the crisis of confidence affects the most resilient among us. Investing in stocks is becoming like gambling in a casino which is rigged. There is not a name big enough to be trusted. We have seen them all – City, HSBC, Merrill Lynch, Lehman Brothers (since 1850), Bear Sterns (since 1923)…There is an endless list of big names that we have seen falling to dust or being sold off in a fire sale.

Indian IT industry is not and has never been a gold standard of integrity or excellence which many people think. In my Investing career, I’ve rarely invested in Indian IT companies and that too in small quantities and for short periods. Warren Buffett hasn’t invested in IT because he says he doesn’t understand the business but for me, the reason is different - I know many uncomfortable facts about the business because I work in this industry.

Why should the people in IT Industry be surprised by over-stated cash in Satyam’s account? The career of more than half of the tech employees starts with a fake resume which claim the skills or experience they don’t have or overstate it. Even after scanning and filtering one out of twenty resumes, you, as hirer, are faced with an interview that makes you scream within the confines of your skull.
If you ask a history graduate in an interview “Did Napoleon win the battle of Austerlitz against Hitler?” and he says “I guess Hitler won that”. You probe him “Are you sure?” and he nods his head while saying “No, no, now I remember, it was Napoleon”. You smile and say. “Thanks a lot. Nice meeting you”.
Anyone who has hired ‘talent’ in any IT company will know that what is written above is a funny but accurate description of typical interviews.(another variation is that the interviewer himself doesn’t know and he hires the history graduate based on his ‘it was Napoleon’ answer. The question paper was made by doing google search)

When a prospective customer asks these companies if they have an expertise in a XYZ technology, they tell them “Yes, we have a Center of Excellence in XYZ technology and more than 100 resources with expertise in it”. When the customer asks about “How much time it will take to get the Visa”, they are told “X number of resources already have a Visa”. Right after the call with the customer, the employees are told to “Google search on XYZ technology, read the tutorials and I want you to attend the next call….and yes, bring your passport tomorrow, we have to apply for L1 Visa”. In the next call the poor techie is introduced as an expert. He is a small guy. He does small scandal. Raju was chairman. He did a big scandal. If you hold shares of Indian IT companies, you won’t like the sound of these words but there is more truth in them than the glossy annual reports of these companies. My personal interests are aligned to success of Indian IT industry and I want it to avoid charting the course of its own downfall.

I’m hearing shoddy analysis that other IT companies will get more business when clients run away from Satyam to Infy, Wipro and TCS. They are wrong. Skeletons have just started peeking out of closet. They will be out fully, sooner than later.

The investors will be better of believing Buffett because in the worst case you will be less aggressive in your investments and in the best case you can sit in your living room and watch the news of another corporate scandal while popping popcorn.

Happy New Year to all readers. May you stay miles away from all scandals.

Bah, Bah, Black Sheep

American comedian Bill Cosby had once said: “Women don't want to hear what you think. Women want to hear what they think – in a deeper voice”.

Let me reserve my opinion on the truth of this statement and ask a simple question.
Do you think we, as investors, have our own contribution in the making of corporate scandals like Enron and our very own Satyam? Puzzled? Think about your reaction to the news of your company posting a 15% decline in profits or to the news of production cuts? Think about your preference for a company that’s always in the news for good reasons. Think about your apathy to a nondescript business consistently making good returns far away from any metro.

I have reasons to believe that investors of this empowered world, (where information is available on fingertips; sliced, diced, cooked and served hot) are creating enough incentive for the people to indulge into actions that start with an intention to please these very investors and end up cheating them.

We want perennial growth. We want quick bucks. We want the toplines and bottomlines to keep rising in a predictable manner so that we can create our chimerical world to justify our mistakenly high opinion of an otherwise ordinary business.

Wait a moment and look at the following graph.
The graph has 3 lines and each line has a linear trendline along with it. The line on the top is the GDP of US for the last 7 years. It’s a smooth line because GDP is an aggregate number. For a matured economy like the US, it may rise about 4% in the best case and may fall few percentage points in a recession. The number R2 (R squared) is a statistical indication of how neatly the trendline fits the graph. If R2 is equal to one, then the trend line perfectly fits with the .

The other two lines are quarterly revenue and profit numbers of a NASDAQ listed Indian IT company for the last 7 years. Note how smooth the lines are. It’s still OK for revenues to show a consistent pattern but profits!! Such smoothness is more becoming to a lie than to the profits of a business.

We are not robbed by scoundrels. We ask for it. We keep the companies showing such consistent performance, in very high esteem. We give them fancy valuations. We keep saying that these companies are making the country proud. We bestow the leaders of these companies with award after award.

They give us the numbers we want. We invest our money in them believing in what we wanted to hear. It’s that simple. Bill Cosby will soon expand his quote to include us investors.

Before you jump on to conclusions let me clarify, the company whose revenues and profits are depicted in the graph is NOT Satyam. It is Infosys, the darling of Indian investors.

I’m not saying these numbers are incorrect, and I sincerely hope they are correct to the second digit of decimal but at same time I maintain that they leave me wondering ‘how’.

I’m not the once-burned-twice-shy skeptical investor. IT is my profession. In the past 12 years, I’ve worked in top IT companies including Wipro and HCL Technologies. I know how customers allocate their IT budgets, and I know how the workloads vary throughout the year. What I don’t get is how these IT companies come out with numbers as smooth as we have gotten used to seeing.

It’s time we all woke up to the truth that the ‘smoothening’ of profits has become a standard practice. The companies do it because we are unwilling to let go of our fascination with Q-on-Q growth. We are unwilling to believe the managements, who refuse to give earnings guidance and admit that they have no visibility to the future earnings.

Smoothening of earnings is such a widespread phenomenon that it gets special mention in the owner’s manual of Berkshire Hathaway, signed by none other than Warren Buffett.
“At Berkshire you will find no ‘big bath’ accounting maneuvers or restructuring. And we won’t ‘smooth’ quarterly or annual results: If earnings figures are lumpy when they reach headquarters, they will be lumpy when they reach you.”

The investors, in general, are better off being a Devil’s advocate than god fearing individuals whom the managements can hand out whatever crap they want. I want them to question the people who are handling their money. I want them to ask uncomfortable questions which cast doubt on people whose integrity has been proven beyond doubt. If they are worth the esteem we bestow upon them, they won’t mind our questions.

I want to ask Mr. Narayan Murthy why is he sitting on top of the pile of cash on which he is making less returns than I do in Fixed Deposits. I want to ask Mr. Ramadorai why he has invested Rs 2,505 Crores in mutual funds which gave just 104.27 Crores in dividends. I want to ask him why does the list of his mutual funds investments run into 11 pages and contain names of asset management companies whose Fixed maturity Plans came into light due to their investments in real estate sector (these investments being way beyond their mandate). Does he really know that the money the investors have entrusted him isn’t making its way into speculative bets? Can he assure investors TCS won’t play the lender of last resort if the finances of Tata Motors come under strain? Can Mr. Ajim Premji explain why Wipro’s balance sheet shows 4,485 Crore debt when it has 3,927 Crores in cash and cash equivalents earning less that what they are paying on debt?

Look at this cash pile and remember that this is not a capital intensive business.

CompanyCash & bank balancesInterest earnedReturns on cashdividend payout ratio





40.8% *











All amounts are in Rs Crores
* considering special dividend

Let me be utterly skeptical and state this:

If the proof of the pudding is in eating, the proof of the earned profits is in dividends.

These companies definitely represent the pinnacle of success achieved by Indian companies in a globalized world but they need to do enough to win the trust of investors. The Satyam scandal cannot be wished away by the phrase ‘just one bad apple’ which Narayan Murthi used. The people who have lost money want something to be done.

The saddest part is that everyone in the industry is more inclined to adopt bad practices than better ones. If one company does something stupid, others follow suit. If Infosys gives stock options, everyone else will. If Infosys doesn’t account for their cost in the profit loss statement, others won’t either. If Infosys follows a policy of retention of earned cash, Satyam will use it as an example. The good companies will sure use the cash to earn better returns (I hope) than what the investors would have earned themselves but the dishonest managements will siphon it off; overconfident and ambitious managements will splurge it on acquisitions, the overoptimistic ones will invest it in stocks and the foolish ones will burn it sooner or later.

The euphemism used for this is: ‘standard industry practice’. I don’t know to what extent it can be attributed to coincidence, but many times I find that the ratios closely followed by the analysts are tantalizingly similar across all IT companies. You will have roughly same attrition rates, and the same % of people on the bench. I’m not making it up. Look at the following table for example.

CompanyNet Current AssetsdebtorsLoans &advancesRevenueDebtor days



















All amounts are in Rs Crores
#consolidated accounts of march 2008

For the Indian IT companies, the working capital requirement has been surprisingly high. It is reflected in the high debtor position along with high loans and advances. Although you arrive at net current assets by subtracting current liabilities from current assets, you must know that these two items do not have same chance of going bad. As a strong company, Infosys will always pay off its liabilities but some of its clients, perhaps those hit by subprime crisis, may not settle the dues. Some of its subdiaries may not pay back the loans. Hence these figures are always looked at with suspicion. The metric used to analyze this is debtor days which is the average number of days it takes a company to receive payment from its debtor. Somehow the entire industry has a figure of 72 point something. Raises my eyebrows!

Don’t be alarmed. With Infosys, there is very little likelihood of the action replay of the Satyam saga. But we investors have to change to protect our interest. We have to be like hawks, who
can rip apart the colorful annual report. Who can stand up in the AGM and start singing in a voice loud enough to shut the mouths

Bah, bah, black sheep,
Have you any wool?
Yes, merry have I,
Three bags full;
One for my master,
One for my dame,
But none for the little boy
Who cries in the lane.

Raju ban gaya Gentleman!!

The winters are always interesting. Right since the childhood days when we used to have 3 month long winter vacation, with absolutely nothing to do but lazily crack peanuts under warm sun, winters hold special charm for me. This year tough, the winters were looking dreary with non stop talk of recession, layoffs and terrorism, the same stories recounted ad-nauseam.

Then came the sequel of “Raju ban gaya Gentleman”. Gosh! We have so much to talk now. The sequel is better. It has two Rajus now. B Rama Raju and B Ramalinga Raju. The common thing in them..the initials B. R. which say it all, Bloody Rascals.

And what a climax. The best resignation letter I have ever seen. Bollywood must learn how to write dialogues from him.

Its starts with “It is with deep regret and tremendous burden that I am carrying on my conscience…”. Conscience?? Great. Even crooks have conscience. I didn’t know that.
Then he goes on writing the gory details of his evil deeds in a tones that is becoming of serial killers who enjoys shocking the investigators by giving minutest details of his ghastly crime. The criminals relive the experience and they enjoy it.

In the first part, he makes every attempt to shock you. Look at the use of brackets!!
For the September quarter(Q2) we reported a revenue of Rs 2,700 crore and an operating margin of Rs 649 crore(24 per cent of revenue) as against the actual revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore (3 per cent of revenues). This has resulted in artificial cash and bank balances going up by Rs 588 crore in Q2 alone.”

Mr Raju, We know how to calculate margins if the figures are correct. You don’t have to do that favor on us.

Then he seems to paint a picture which will make you feel sorry for him.

Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in the takeover, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten.
The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas' investors were convinced that this is a good divestment opportunity and a strategic fit.
One Satyam's problem was solved, it was hoped that Maytas' payments can be delayed. But that was not to be

So sad...really. God should have been kinder and given him rewards for his frantic efforts.
Then he goes on to present a list of facts which should be titled “Lies, damn lies!”

1. No, we didn’t sell any shares.
2. We tried to keep operations afloat by putting our own money.
3. We didn’t take even one rupee from all this.
4. None of the board members, top management or family members knew it.

Here he acts as a hero. A fallen one but hero none the less. He takes all the blame, he claims all the glory of hiding a stinking pile of shit in the board room from everyone. He pronounces his senior management leaders ‘Not Guilty’, he names his successor, he charts the course and then like a true leader he offers his head.

“I am now prepared to subject myself to the laws of the land and face the consequences thereof"

Let me borrow the phrase from the Queen of Hearts’ of ‘Alice in the wonderland’ and shout
‘Off with his head!'

The 5 billion dollars of market capitalization that has evaporated right under our eyes will never come back. Fifty thousand jobs may go and never come back but yes, we can make it an example of this case by giving most severe punishment to everyone involved. Enron’s Kenneth Lay was given 20-30 years in prison. We need something similar to be done to ensure that people have enough negative incentive to think twice before doing such a thing. We have to revoke the license of PWC. What good can come out of posting security guards at the gate who are either blind or turn a blind eye?

As for the independent directors, I’ll quote Upton Sinclair “Its difficult to get a man to understand something when his salary depends on his not understanding it

There is a learning for all the investors. When shit hits the ceiling fan, duck for cover. Get out of a tainted company at the first sign of trouble. Value investing is not about finding gems in gutter.
I’m most disappointed with the role of financial institutions in this whole affair. How is it that a person holding just 5% stake became the nemesis for a company. Why is it that the institutional investors who together hold majority stake in company have no power to stop such a thing from happening? A bigger matter of concern is the fact that after the aborted attempt at Maytas acquisition, many institutional investors were still OK with Raju continuing in the board. As an ET Intelligence report suggest atleast 5 mutual funds increased their stake in Satyam by more than 50% of their existing holding. What were they doing by investing the public money after they had seen what the management is capable of.

InstitutionShares (Nov-08)Shares (Dec-08)Increase
HDFC MF5,519,84610,595,34391.9%
Sundaram paribas477,5125,814,9071117.8%
Tata MF35,014298,864753.6%
Taurus MF45,85975,23664.1%

The Enron episode changed many things is US. We have to act now. It is a fact that crooks always find new ways to cheat and people find new ways to lose money but atleast we can avoid being true to Mulla Nasiruddin’s definition of a man….’A man is a donkey that falls twice in the same ditch’

Indian IT sector has had too many shady companies to keep our faith intact. Out of the most traded stocks of 1999-2000, a third have already gone bankrupt, another half have become junk stocks due to scams (Pentafour, DSQ, Himachal Futuristic, Silverline, Hinduja TMT) and only few big names have emerged. Satyam, till last month was counted among big names and now joins the junk stock club.

The Satyam story also brings into limelight the issue of loads of cash the IT companies are sitting on. Such a large pile is an open invitation to fraud or misplaced corporate adventurism in acquisitions that destroy value.

What has happened so far is just the beginning. We can only pray that this unfortunate episode becomes a triggered for much needed laws to enforce good corporate governance practices.


Raju's resignation letter Blog Search Engine blog catalog EatonWeb Blog Directory Bloggapedia, Blog Directory - Find It! Blog Directory Directory of Investing Blogs Blog Listings Superblog Directory