The Corruption Connundrum

As you are reading this piece, the central government would have issued a notification to have a joint panel of members in the anti corruption panel . Due credit should be given to Anna Hazare who with his Gandhian approach ensured that the government could ignore this issue for longer only at its own peril.Even while doing so the government was acting in its own self interest of wanting to be perceived as clean and honest. The reality of course is a completely different matter.

While this was happening, we saw a number of noted personalities coming forward to support the cause unmindful of what the governmental response was going to be. Atleast one can admire their honesty. On the other hand , i saw an interesting piece of news that Narayanmurthy had come out against corruption yesterday , a good 4 days after the movement started and knowing very well that the government was going to give in to the demands of the agitators.One cannot but feel sorry for this kind of opportunistic response from some one who the middle class believes is a shining example of achieving one's dreams despite the system.

Consequently, i had a few questions rankling in my head

a)why did any of the big businesses in this country not come out in support of the movement on day one?Is it that they are the beneficiaries of the distorted system and therefore have been willing or unwilling partners in crime? or is it that most of them have resigned to the fate that corruption is too deep rooted for any public uprising to make a difference?

b)what makes for opportunistic behaviour of people that seeks to turn the spotlight on themselves rather than the issue by annointing themselves as the world's spokesperson about India affairs?

Much as i did ponder about this a few hypotheses came to my mind

1)It is important to remain unattached to take up a cause in this country otherwise the government will launch a careful attack on the individual by forcing disengagement with the systems that you have access to and interests in - be it your family and social system, the financial system and most importantly your fundamental right to own property.

2)Big businesses are bereft of intellectual honesty - they are self serving in their actions .For most , they believe that their silence during such agitations is strong endorsement enough.Only wish some one reminded them "If silence is acquisence then to confront is wise"

3)As a people, our much famous resilience is the reason that we put up with so much muck in the system.Our own value system has denigrated so much that in our heart of hearts we cannot but accept that each one of us has silently encouraged corruption through our acts of commission or omission.

4)The redeeming fact though is that we are quick to identify Heroes and identify with them. Only that sometimes opportunistic and morally corrupt ones betray themselves unbeknownst to themselves and the people.

L and T @Satyam

We are witnessing a rather perplexing event in corporate India- a professionally managed company like L and T increasing its holding in Satyam - a limited liability company with still undetermined liability !
Satyam as an entity is the target of two very definitive claims - one from a customer Upaid which has alleged Intellectual Property Infringement and the other from ADS shareholders by way of a class action suit . The former liability is estimated at USD 1 billion and the latter could be in the region of USD 4 billion. There could be some intelligent guesses that L and T could be making on these numbers and could have revised these liabilities substantially downwards but still one cannot wish them away as if they do not exist.

The key question therefore is what is the Enterprise Value that L and T is ascribing to Satyam and consequentially what is the equity valuation?.Today's closing price of the scrip imputes a market capitalisation of INR 3300 crores. If one adds a conservative liability figure of atleast 2.5 billion USD ( usd 500 million for Upaid + 50 % of the class action liability(while the average settlement to potential investment losses ratio is around 17 % , Satyam is an exception where they would be claimed against for multiple allegations of Misleading statements, Failure to disclose,Insider trading, Improper Accounting,Revenue Recognition,Siphoning Of Funds et al and i believe the figure could be closer to 50% ), then we are valuing Satyam at over 3.2 billion USD.

Therefore is Satyam worth USD 3.2 billion?

Top tier IT firms are getting valued at between 1.8 to 2.2 times revenues and these companies have cash which is up to a good 10% of their market cap. Satyam which has almost nil cash at the moment is expected to have a realistic revenue of 1.8 billion USD for this fiscal. Even if one were to give it a 1.5 revenue multiple (adjusting for its lower operating margins compared to TCS and Infosys), then the EV of Satyam should be in the region of 2..75 Billion USD.So even the optimistic scenario suggests that there is a gap of 0.5 billion USD gap in the valuation assumptions made by L and T. This is of course subject to the caveat of L and T being able to do the open offer at a price not exceeding Rs 50 per share.

The other important Caveat is that the Satyam business remains intact - a very difficult proposition given the current circumstances . As of now there is no guarantee that Onsite salaries would be paid for the next month as the current board has not been successful yet in raising badly needed working capital.Given this scenario one wouldnt be surprised if there is attrition of key resources at crticial customer engagements which would lead to client dissatisfaction and eventual winding down of the business relationship . Unless there is white knight (as of now it seems like L and T )and the white knight moves in with great speed, we can surely see enormous value destruction taking place in a matter of 3-4 weeks.

Therefore it is imperative that L and T comes clean with it gameplan and be quick at that else they could end up at the receiving end of shareholder litigation which could well be avoided. As it is there are more questions than answers and L and T would be well advised to share the "more information"(that A M Naik seems to possess) with their shareholders and public at large!!

Directors and Officers Liability Coverage For Satyam

There have been some ill researched news items doing the rounds in leading financial dailies as well as business television regarding the purported USD 75 million dollar D and O insurance cover that Satyam has in force.Here is a quick primer on how a typical D and O policy will behave in the given circumstances:
a)While the basic coverage intent is to protect the personal fortunes of the Directors/Officers of Satyam on account of any deriliction of duty, almost all D and O policies will pay up only for Civil wrongs. Therefore if there is any Criminal Liability , then Directors/ Officers can kiss the policy goodbye. The only good news is that there could be a"Final Adjudication " clause which would allow the for the advancement of all legal costs and expenses till such time the criminal liability is finally awarded by the courts. Once such Liability is confirmed then the insured would have to pay back the insurers all such amounts advanced.
b)There is a seperate section in the policy which will pay up on behalf of the company if there are securities claims made by shareholders. This is normally called side C of the policy .We are already seeing class action suits being filed by ADS holders in the US for the reference period 2005 to Jan 2009. The claimed amounts on account of erosion in maket capitalisation would potentially be upward of 4 billion USD.
c)Any insurance policy is incepted basis a proposal(application) form containing specific information provided by the Company . In this case the insurers would be well within their rights to rescind coverage to the specific Director/ Officer (in this case most likely the CFO )who made these misrepresentations in the insurance application.Normal Policy language would allow for the "innocent assured" clause by which such of those Directors/ Officers who did not have prior knowledge of the happenings in Satyam would still have protection under the policy
d)Finally , if there is a "Order of Payments" Clause, then the hierarchy of payments to be made between Side C claims on the Company and the Payments to made to the individual Directors/Officers can be clearly established. Else the total policy amounts would have to shared on a proportional basis between the 2 different claim heads.One needs to check if there is a" Bankruptcy " clause in the policy which would then define which of the claimants have first recourse under the policy.

Satyam - More than what meets the eye!

The sordid saga at Satyam Computers begs a few questions to which we need answers to understand the complete puzzle in its entirety.
a) Raju has conveniently misled the public into believing that the last quarter profitability of just 3% of operating margin, is all that the company used to make over the last few years. Given the size and scale of Satyam's operations, it would not be unreasonable to assume that possibly, until a couple of quarters back, the company would have definitely been generating a 13-15% operating margin albeit on a reduced revenue base. Therefore to assume that all of the inflated 5040 cr of cash was all along never existent even partially, would be nothing but naïve thinking. Therefore, to put forth a hypothesis that cash that was generated in the past was actually siphoned out without adjusting the cash balances downwards, is by no means stretching one's imagination too far. Obviously, one would need a detailed inspection of the company's books over the last few years to ascertain the same.
b) The interim CEO, while one would like to believe, has the best interests of 'stakeholders' in mind, still seems to be getting his instructions from Raju. What else can a reasonable mind conclude if the recommendations made by Raju in his farewell letter are enforced to the T, in a matter of couple of hours, without any change whatsoever? So quite obviously, his writ still seems to run the company. Why else would the Satyam management, even after 36 hours, not file a police complaint against Raju and his brother? Where else would you find the president of a global company who directly manages more than 50% of its revenues, be unable to smell a rat when the difference in the reported operating margins vis-à-vis actual is over 700%, the difference between reported revenues vis-à-vis actual is over 25%? It also appears that the current interim CEO was the key executive responsible for the now infamous World Bank engagement. Maybe he is referring to Raju when he referring to the stakeholders!
c) One would also like to understand as to how a clutch of five bankers decided to lend close to$ 50 mn to the company when they believed that the company had a cash pile of over a billion dollars. So what was the money lent for, against what security and what was their understanding of which bank was holding what amount of cash across fixed deposits or current accounts? If this is the way bankers go about exercising diligence and providing credit to borrowers, then surely our financial system has still not learnt its lessons.
d) If Raju, as he claims, had pledged his shares and arranged 1200 crs for the company, who was servicing these loans, and if it is the company, then how was this being accounted for?
e) Since one of the ultimate beneficiaries of the siphoned out funds could have been Maytas properties, there is an urgent need for one to undertake a due diligence of all Maytas' assets and its true sources of funding-both equity and debt.

All in all, while Raju is trying to paint a picture of a do-gooder who slipped just once and therefore had no option but to slip again and again, all in the interest of the company, it is quite obvious that he has robbed the average shareholder on the street to unjustly enrich himself and his family. While one hopes that the guilty are brought to book, there is this lurking fear that what we have seen is just the tip of the iceberg. The fact that the Hyderabad police has still not issued an arrest warrant for Raju confirms the vexatious link between business and politics in our country. Ladies and gentlemen, the show is not over, it has just begun.