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Saturday, January 31, 2009

Warren Buffet's advice for 2009

We begin this New Year with dampened enthusiasm and dented optimism. Our happiness is diluted and our peace is threatened by the financial illness that has infected our families, organizations and nations. Everyone is desperate to find a remedy that will cure their financial illness and help them recover their financial health. They expect the financial experts to provide them with remedies, forgetting the fact that it is these experts who created this financial mess.
 
Every new year, I adopt a couple of old maxims as my beacons to guide my future. This self-prescribed therapy has ensured that with each passing year, I grow wiser and not older.
 
This year, I invite you to tap into the financial wisdom of our elders along with me, and become financially wiser.
 
* Hard work: All hard work bring a profit, but mere talk leads only to poverty.
 
* Laziness: A sleeping lobster is carried away by the water current.
 
* Earnings: Never depend on a single source of income. [At least make your Investments get you second earning]
 
* Spending: If you buy things you don't need, you'll soon sell things you need.
 
* Savings: Don't save what is left after spending; Spend what is left after saving.
 
* Borrowings: The borrower becomes the lender's slave.
 
* Accounting: It's no use carrying an umbrella, if your shoes are leaking.
 
* Auditing: Beware of little expenses; A small leak can sink a large ship.
 
* Risk-taking: Never test the depth of the river with both feet. [ Have an alternate plan ready ]
 
* Investment: Don't put all your eggs in one basket.
 
I'm certain that those who have already been practicing these principles remain financially healthy. I'm equally confident that those who resolve to start practicing these principles will quickly regain their financial health.
 
Let us become wiser and lead a happy, healthy, prosperous and peaceful life.


Saturday, January 24, 2009

Two PwC officials arrested

Development sends shock-waves among CA fraternity

Our Bureau HYDERABAD


THE Andhra Pradesh state police on Saturday arrested two auditors of PricewaterhouseCoopers, Talluri Srinivas and S Gopalakrishnan, on charges of criminal conspiracy and cheating after the alleged falsification of accounts at Satyam Computer Services, said additional director general, criminal investigation department, A Siva Narayana.
    The arrest of the two auditors, for the first time in the history of corporate India, sent shock-waves among the 1,50,000-odd chartered accountants' fraternity here. The two auditors were produced before the magistrate today and the hearings were on till the time of going to the Press. The role of PwC, the statutory auditor for Satyam, came under scrutiny after the software
firm's founder B Ramalinga Raju confessed on January 7 to perpetrating a Rs 7,000-crore financial fraud.
    "We greatly regret that two Price Waterhouse partners have been detained today for further questioning. We do not know the basis for them being detained. Over the last fortnight, the firm has fully cooperated in all inquiries and has provided the documents called for by the Indian authorities. We share the regulators concern in understanding the full extent of the fraud and how it was accomplished. Like everyone else, we were shocked by the massive fraud at Satyam and by the steps undertaken to conceal it. PW-India will continue to cooperate fully with the authorities," said an official statement from PricewaterhouseCoopers. PwC took shelter under the roof of client confidentiality.
Raid on offices too
PwC said it was examining the contents of Raju's confession. The police raided the audit firm's offices and questioned both Srinivas and Gopalakrishnan who had certified the audited financial statements of the firm. The two auditors were, in fact, not partners of PwC but members of Lovelock & Lewes, a member firm of PwC at the time of signing of the accounts in April last year.
    ICAI, an apex body for accountants and a quasi-judicial body, also issued a notice to PwC seeking information on the partners and copies of the accounts of Satyam that were audited by the firm. Later, PwC admitted that the audit was "false and no longer reliable" and withdrew its opinions on Satyam's financial statements. Investigating agencies including the Serious Frauds Investigation Office and SEBI are now probing PwCs role to ascertain if they connived with Raju to doctor the books.
    "We need to wait for the investiga
tions to be completed on the issue. We are really concerned over the developments which have taken place today. This raises serious doubts about the role of auditors and their involvement in the Satyam case. But this an aberration and not a systemic failure," Ved Jain, president of the Institute of Chartered Accountants of India told ET.
    Raju, his brother Rama Raju and chief financial officer Srinivas Vadlamani are in prison now. Srinivas confessed to the police that the statutory auditors (PwC) never pointed out any "deficiencies" during their discussions with him, according to the police.
    PwC had audited around 139 companies in India in the last fiscal. Of this, 97 are listed and 45 are part of BSE 500 Index. A few of these companies including Glenmark Pharma are already reviewing their relationship.
    Some other large companies audited by PwC include Maruti Suzuki, United Breweries, United Spirits, GMR Infra, Piramal Healthcare and Marico.




The Week That Was

L&T hikes stake in Satyam
LARSEN & Toubro (L&T) tripled its stake in Satyam Computer Services to 12% on Friday. This comes on the back of chairman AM Naik's lobbying with the government to facilitate a buyout. An L&T spokesman said the move to buy additional stake in Satyam was aimed at reducing the average cost of acquiring shares and strengthening its position to influence the Satyam board. Earlier, Andhra Pradesh public prosecutor charged that Satyam had inflated employee numbers by about 13,000 and its founder B Ramalinga Raju forged bank statements to dupe auditors and diverted funds from his firm to buy large tracts of land in benami names. The Company Law Board (CLB) had restrained Mr Raju, his brother B Rama Raju and other key Satyam officials from selling or mortgaging their assets without the court's permission.
VODAFONE'S PLEA ON TAX REJECTED
In a decision that could have implications for business deals struck outside the country involving Indian companies, the Supreme Court on Friday refused to entertain a plea by Vodafone, the world's top mobile operator by sales, challenging a tax claim on its $11-billion acquisition of Hutchison Essar. The Apex court has asked the assessing authority of the income-tax department to decide if it had the jurisdiction to claim a $4-billion payout—$1.7 billion tax plus penalty of equal amount and interest—on the deal, the largest by a foreign firm in India, that was executed abroad. In a press statement, Vodafone said that the Supreme Court had permitted it to approach the high court if it was aggrieved by the tax authorities' decision on the matter of jurisdiction.
BIC BUYS 40% IN CELLO PENS
French pen and stationery manufacturer BIC has bought a 40% stake in Mumbai-based stationery products maker Cello Pens for Rs 800 crore ($160 million). As part of the deal, BIC also has the option to increase its stake to 55% in the privately-held Indian firm in 2013. The deal will enable Cello Pens to expand its existing global distribution network and give BIC a foothold in the Rs 2,000-crore Indian stationery market, which is growing at 20% annually.

    economy
    
Inflation inches
    up to 5.6%
THE hardening of food prices on back of the recent truckers' strike brought a halt to the 10-week downward trend in inflation. Wholesale prices for the week ended January 10 inflated by 5.6%. Economists say this is a temporary blip and expect the rate of inflation to fall to near zero in a couple of months. They also expect the Reserve Bank of India (RBI) to cut repo and reverse repo rates to shore up the slowing economy when the central bank reviews its monetary policy on January 27. Inflation in food items touched a 10-year high of 11.64% for the week ended January 10, as more than 5 million Indian truckers went on strike from January 5 for a week, creating a short-age.Vegetables became costlier by almost 19% over the week while prices of fruit and cereals moved up. The fuel price index remained unchanged at negative 1.31%. The manufactured items index also moved up 20 basis points on back of costlier food items.
PC TO FOCUS ON INFRASTRUCTURE
The Planning Commission will focus on infrastructure development for remaining three years of the 11th Plan to fight the economic crisis. It feels such a move will also create new employment opportunities for skilled and semi-skilled workers, many of whom have lost their jobs due to export

slowdown, Planning Commission secretary Subhash Pani said. The Planning Commission's future focus on infrastructure will be in education, irrigation, power and health. It also plans to press ahead to look for newer ways to fund infrastructure for state governments and the Centre.
CERC RAISES RETURN ON EQUITY TO 15.5%
The Central Electricity Regulatory Commission (CERC) has raised return on equity from 14% to 15.5%. As per the new electricity tariff regulation for 2009-2014, RoE will now be pre-tax, for which the base rate would be grossed up via the applicable tax rate for the company. This will, in turn, translate into nearly 23.5% post-tax return on equity against the earlier 21%. CERC has also allowed additional RoE of 0.5%, to those projects which are commissioned on time. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. The new tariff regulations will be implemented from April 1.

technology
AMD to break Intel monopoly

CALIFORNIA-based Advanced Micro Devices (AMD) is poised to break arch rival Intel's virtual monopoly over all major government computer purchases in India that add up to more than Rs 1,900 crore annually, a senior company official said. Till now Centre and state governments have only bought computers loaded with Intel chips. For the first time, governments in Karnataka, Andhra Pradesh and Tamil Nadu have said they are willing to buy computers loaded with either Intel or AMD chips, said AMD India vice president of sales and marketing Ramkumar Subramanian. This would create a level playing field between two of the world's top chip-makers in future IT hardware tenders at a time when governments are expected to buy computers worth nearly Rs 8000 crore in the next four years according to estimates by consultancy IDC.
MILLIONS OF COMPUTERS HIT BY VIRUS
More than nine million computers around the world have been infected by a digital virus in what experts believe is a multi-staged attack. The world leading security experts paint a scary scenario, stressing that they are yet to identify who programmed it and what the next stage will be. Known as Conficker or Downadup, it is spread by a recently discovered Microsoft Windows vulnerability, by guessing network passwords and by hand-carried consumer gadgets like USB keys, the New York Times said on Friday. This could be the worst infection since the Slammer worm exploded through the Internet in January 2003.
IBM, INFY VIE FOR FIDELITY'S IT UNIT
Infosys Technologies and IBM are locked in a battle to acquire the Indian IT captive unit of the world's largest mutual fund company, Fidelity Investments. The deal may involve $150-180 million upfront transaction in return for an assured multi-year outsourcing contract, at least two people involved with the matter said. A senior official at one of the companies bidding for Fidelity's back-office business said, "IBM has offered to pay around $150 million for the unit while Infosys has indicated that it could pay up to $180 million," he said.

    markets
    
Sensex ends week
    on a weak note
THE Bombay Stock Exchange 30-share bellwether fell to close at its nine-week low of 8,674.35 at the week-end, as global negative developments and disappointing quarterly earnings by some key corporates cast a shadow over the market sentiment. The weekly slide was extended to third straight week as the bourses remained under pressure even as investors pinned hopes on Barack Obama, who took over as the 44th US President on Tuesday, January 20. In the week to January 24, the BSE barometer registered a net loss of 649.24 points or 6.96 per cent from last weekend's close, on heavy selling triggered by worries that the global banking sector was in deep trouble after Royal Bank of Scotland on Monday forecast a staggering USD 40 billion losses -- the biggest in the UK corporate history. On the domestic front, India's largest housing finance company HDFC and its third largest software exporter Wipro disappointed the market with their lowerthan-expected third quarter results. The market sentiment was dampened by Planning Commission Deputy Chairman Montek Singh Ahluwalia's statement ruling out out any more stimulus packages for the industry. Quarterly results announced by Reliance Communications, Ranbaxy Laboratories and Reliance Infra also fell short of market expectations. The country's

largest private sector firm Reliance Industries, which has highest weight in the Sensex, recovered part of its initial losses after the company announced nearly 10 per cent fall in its Q3 net profit, as the fall was lower than the analysts forecast. RIL dropped by 5.36 per cent over the week. All thirty shares from the Sensex pack showed marked falls in the week under review. The broader 50-share Nifty of the National Stock Exchange tumbled by 149.90 points or 5.30 per cent to end the week at seven-week low of 2,678.55 from its last weekend's close. The consistent capital outflow and negative activity by domestic institutional investors also were the major cause of concerns for the market. The foreign Institutional Investors pulled out more than 2,268 crore (including Friday's provisional number of Rs 523 crore) from equity during the week. As per the Sebi data, they sold shares worth Rs 3,961.80 crore so far in the month.Realty, Bank and Metal sectors witnessed large-scale sell-off during the week. Losses in these stocks could be gauged by the slide in their indices.
politics
PM undergoes surgery,
    Pranab takes finance
PRIME Minister Manmohan Singh underwent a heart bypass surgery on Saturday following blockages in his arteries. Mr Singh, who had undergone a coronary artery bypass surgery in the UK in 1990 and angioplasty, a few years back, had complained of chest pain on Friday morning and was advised surgery by the team of doctors treating him.During his absence, external affairs minister Pranab Mukherjee will be in
charge of the finance ministry. The Congress leadership, which is anxious to de-emphasise the perception of a 'leadership crisis' is avoiding describing the external minister as a 'stand in' for the prime minister. The instruction issued has merely said that Mr Mukherjee will be handling the finance ministry in the prime minister's absence.
PRANAB KEEPS UP PRESSURE ON PAK
India on Wednesday pointed the accusing finger at Pakistan for sponsoring cross border terrorism and asked the international
community to take measures for disciplining the "recalcitrant state". "Terrorism is not just an act of misguided individuals. Since 9/11 the magnitude, depth and audacity of terror acts, as once again manifested in Mumbai attacks, demonstrate that this is no longer a problem of a state or of a region but of the whole world. This problem becomes more acute when it becomes state sponsored. Recalcitrant states must be brought to discipline by various international measures," external affairs minister Pranab Mukherjee said. His comments come after fresh pressure on Pakistan from the US to act against al-Qaeda and its franchisees.











SBI net spurts 37% on income growth

THE country's largest lender, State Bank of India has posted a net profit of Rs 2,478 crore for the quarter ended December 31, 2008, an increase of 37% over the net profit of Rs 1,809 crore in the corresponding period last year. The increase has been on account of a sharp rise in lending margins.
    Analysts expected a big jump in profits and felt gains would follow windfall gains from treasury. As a group, SBI's profit growth was even better with a consolidated net profit of Rs 3,607 crore, up 51% from the corresponding quarter last year. Operating profit for the bank was up 22.5% at Rs 4,482 crore against Rs 3,660 crore.
    "Contrary to market expecta
tion that profits would come from treasury, SBI has reported strong growth in core income (net interest income and fee income). This indicates that the bank was not dependent on treasury income for growth this quarter," Hemindra Hazari, head of equity research at Karvy Stock Broking said. The main driver of the growth in profits for the third quarter was the 35% jump in net income interest (NII). Gainer among Indian banks
AGAINST Rs 4,256 crore last year, SBI's interest margins improved to Rs 5,758 crore in the quarter ended December '08. On the other hand, treasury gains were flat at Rs 674 crore against 644 crore in the corresponding period last year.
    A senior official said the bank would have managed to report a 76% increase in net profit for the quarter had it not made a Rs 750 croreprovision towards meeting liabilities for employees superannuation benefits as prescribed under AS 15.
    Banks were allowed to amortise provisioning for AS 15 over a five-year period. SBI has emerged a gainer among Indian banks following the global financial crisis in October.
    The international credit freeze pushed up demand for loans, which rose 28.5% to Rs 5,10,279 crore. Tight liquidity helped the bank improve its net interest margins to 3.15% from 3.01%.
    Lastly, the flight to safety and high interest rates enabled the
bank grow its deposits by a record 36% to 692,921 crore.
    The bank has witnessed some pressure on bad loans. SBI made a provision of Rs 515 crore for bad loans against Rs 444 crore last year. Gross NPA rose to Rs 13,314 crore from Rs 11,182 crore while net NPA rose to 6,864 crore from Rs 5,610 crore.
    However, as a percentage to total advances, gross NPAs fell to 2.61% from 2.82% while net NPAs stood at 1.36% against 1.44%. Capital adequacy stood at 13.72% under Basel II norms. Bank officials said the write-back of excess depreciation provisions on government securities was to the tune of Rs 513 crore.
    Even after write back SBI has made a net provision of Rs 198 crore. SBI's bond portfolio would have significant hidden profits because of the rise in bond prices. While banks have to make provisions for a fall in market value of government bonds they are not allowed to book profits for any gain. But in case of a rise in market value they can write back excess provisions made earlier.




IPO mkt to boom in second half

India Inc plans to raise Rs 77,500 cr, four times than that garnered in '08

Lisa Mary Thomson & Aman Dhall NEW DELHI


INDIA may be in the throes of a meltdown but slowdown may just be the last word in your thoughts if you look at the initial public offering (IPO) estimates for 2009. And it's not just doubling or tripling, India Inc may actually be gearing up to raise four times the proceeds it collected from the primary market in 2008.
    According to a Thomson Reuters study, India Inc is eyeing to raise as much as Rs 77,500 crore through public issues. This is in sharp contrast to 2008, when IPOs garnered only about Rs 22,000 crore. Even in terms of number of offerings, a growth of 20% is expected in 2009. While only 36 public issues were seen in action in 2008, the number is expected to reach 44 this year. Although India may see heightened activity in the IPO space, it may be dethroned from its second slot in the Asia-Pacific (APAC) region (with respect to IPO volumes). Of the Rs 470,000 crore projected to be raised in the APAC region through 275 issues, China is again poised to lead regional IPO volumes with proceeds of Rs 197,250 crore from 88 offerings. South Korea is, however, expected to take India's second position in the hierarchy with issuances worth Rs 101,500crore from 28 deals.
    But even as India slips into the third place, it is projected to capture over 16% of the IPO market in the APAC region. The most an
ticipated IPOs in India include UTI Asset Management, NHPC, Oil India and RITES. The study says Reliance Telecom's Rs 10,000-crore IPO is the most awaited in India, while in Korea it's Korea Development Bank's Rs 96,500-crore offering.
    Also, the proceeds from the IPOs in the APAC region in 2009 are expected to be thrice the amount collected in 2008. In 2008, IPO volumes in Asia totalled Rs 156,500 crore from 374 issues. This is down 68.3%, the lowest annual volume since 2002.
    Experts say the spurt in number of IPOs this year could be due to delay in offerings in an uncertain market in 2008. Around 83 IPOs, worth Rs 127,500crore, were postponed in Asia in 2008.
    According to Sanjay Aggarwal, executive director at KPMG, "Requirements for capital will be very high in the financial services sector, both for meeting capital adequacy norms for managing existing business as well as for growth. Further, various other sectors such as infrastructure, retail, telecom and power will also need significant amounts of growth capital to manage the growth and expansion even with the reduced growth levels." With Basel II norms expected to come into force in 2009, maintaining adequate capital reserves will become a priority for companies in the financial sector. MNCs seeking to de-list may also come up with rights issues or open offers.
    Ashvin Parekh, national leader of financial services, Ernst & Young expects revival to begin in the second quarter of the financial year 2009-10. "Around October we should see a warming up of economy with PE multiples stabilising," he said.
All depends on secondary market
THERE is, however, a certain section that believes that there will not be large volumes in the IPO traffic in 2009. According to Prithvi Haldea, CMD, Prime Database: "When it comes to IPOs you need to have both issuers and investors. In the current situation, there is no dearth of issuers. The pipeline could even be Rs 300,000cr strong. The fact of the matter is that there are no investors and promoters cannot afford to sell equity so cheap." He also contends that the primary market is a subset of the secondary market and as long as there is volatility or a bearish trend in the secondary market, things will not work well in the primary market. Moreover, there is generally a time lag of at least two to three months between when sentiments improve in the primary and the secondary market. "Even if the secondary market were to improve overnight, it would take time for the effects to pass on to the primary market which indicates that the first quarter of 2009 will be a total write-off in terms of IPOs," adds Haldea. Hence, whether the primary market will improve in the second half of 2009 or not, will totally depend on the kind of activity that is expected in the secondary market. For the moment, even the secondary market doesn't seem to be displaying any signs of a changing tide.
    lisa.thomson@timesgroup.com 


Satyam had Rs 3,319 cr bank FDs till Sept 30


NEW DELHI: As government sleuths dig deep into the Satyam quagmire, they have been able to find some of the missing pieces to this sordid jigsaw

puzzle. Simultaneously , they have also come up with some new revelations that add to the mystery. Here's the latest poser: Was Satyam flush with funds in excess of Rs 3,500 crore till as recently as the Q2 of this fiscal (ending September 30, 2008) and did the company's disgraced former chairman, B Ramalinmga Raju, siphon off the huge deposits in just three months?

Statements from banks, (copies available with TOI) which were also submitted to the company's auditor Pricewaterhouse , show that Satyam had fixed and other short-term deposits totalling around Rs 3,319.17 till September 30, 2008. These deposits, that were further swelled by the approximately Rs 300-crore-odd-plus accrued interest, were with leading banks like BNP Paribas, HSBC, Citibank and HDFC, all of whom confirmed presence of funds in letters to the statutory auditor.

The documents show that Satyam had, in its quarterly audit, given exhaustive details of its FDs to Pricewaterhouse, and these were also validated by confirmations by the banks. The FDs, except for shortterm /margin money deposits, were made for two years and the majority were maturing by January 2 this year, days before the January 7 confessions by Ramalinga Raju.

The documents in the possession of investigators — show that around Rs 800 crore of funds were kept as FD with HSBC along with Rs 95.43 crore in accrued interest in the name of Satyam Computer. In BNP Paribas, deposits were around Rs 468 crore. In Citibank, the FDs were worth Rs 612 crore, while in HDFC, FDs were worth Rs 704 crore. The papers show FDs in ICICI at around Rs 725 crore.


Also Read
 → PSU banks may agree to lend $100 million to Satyam
 → L&T ups the ante, hikes Satyam stake to 12%
 → Court turns down SEBI's plea to question Raju
 → TCS, Infy see slip in staff utilisation


According to official sources, Pricewaterhouse was presented by this exhaustive list of FDs as well as other short term/margin money deposits by Satyam's erstwhile top brass during the quick audit after July-September quarter), with 'original' supporting bank papers.

The margin money deposits were those that the company kept in banks against the guarantees it gave for Satyam. Importantly, they were confirmed by the banks in letters to Pricewaterhouse, which effectively means that the auditor had independently confirmed their veracity. TOI has copies, though these could not be individually confirmed with the banks.

And, while these confirmations seemingly clear the auditor of any major negligence in its audit process, why did Pricewaterhouse say in a statement a few days ago that its report on Satyam should not be relied upon? A company statement, however, had clarified that it was contingent on the auditor to issue such a clarification regarding an audit if a management admits to a fraud. This is because audits are based on financial statements and books of records produced by the company management.

Sources say that the list of the FD accounts at September end and their disappearance by December-end points to many possibilities. Firstly, it means that the company was flush with huge funds by the end of the second quarter. The guesswork then is that Raju used the three interim months to clean out accounts, though there is no consensus on the modus operandi. '' A possible theory for the missing cash in this case could be that Raju raised cash in lieu of these FDs and diverted the money on their maturity to these lenders," the sources said.

However, one more possibility could be that the erstwhile management forged all these papers, including the independent confirmation receipts of the banks, completely fooling the auditors and the investors at large.

CID traces Raju's secret den in Hyderabad


HYDERABAD: Tainted Satyam Computer Services founder B Ramalinga Raju maintained a secret den in the up-market Somajiguda area of the city to use

it as a back office for all his secretive dealings, according to a source in the police department.

"Raju used this place for fudging certificates and documents related to employees and bank statements and for operating accounts. The Crime Investigation Department (CID) gathered this information from Satyam's former CFO Srinivas Vadlamani during interrogation. This led us to flat no. 507 in an apartment named Gulrej in Somajiguda," said the police source.

On Wednesday night, a special CID team headed by inspector general of police (Economic Offences Wing) VSK Kaumudi broke the apartment's doors and seized several documents related to the Satyam scam. The documents are understood to contain vital information on how funds from Satyam were diverted to purchase land in fake names. The CID team has seized documents providing information on land purchases in Visakhapatnam, Hyderabad and the financial dealings of the Rajus in other countries, from this apartment.

Sources said the apartment was for the exclusive use of Ramalinga Raju and his brother Rama Raju, and was accessed only by a limited number of their family members. The CID search operation continued till after mid-night Wednesday. Two other flats belonging to Raju relatives were also searched.

While one of them is opposite flat no. 507 in Gulrej apartment, the other is in Pet Bashirabad. The police raided these flats after extracting information related to Prasad Raju, son of the youngest Raju brother B Surayanarayana Raju.

Sunday, January 18, 2009

Citibank, BNP Paribas asked to rescue Satyam

Amarchand & Mangaldas and Suresh A Shroff named legal advisors

Our Bureau HYDERABAD

THE NEW board tasked with saving a tottering Satyam Computer Services from collapse on Saturday named legal firms to defend it from lawsuits, appointed an internal auditor and set up an audit panel but reported little progress on tying up the cash it desperately needs to keep the company running.
    The six-member government-appointed board, which is continuing with its search for a new chief executive and a chief financial officer (CFO), will meet every week until the key posts are filled, a Satyam statement said.
    The board is in talks with banks and financial institutions to secure the cash it needs to pay salaries to over 50,000 employees by the end of this month and meet other operational expenses.
    "We talked to the existing bankers — Citibank and BNP Paribas — and requested them to understand the situation, provide additional funding and give them (Satyam) more time to repay loans," Deepak Parekh, HDFC Chairman and a member of the Satyam board, told ET.
    The board, whose nearly sevenhour meeting on Saturday was chaired by Mr Parekh, also set up a threemember audit panel to provide updates on the financials of Satyam, which is mired in a Rs 7,000-crore financial fraud that its founder B Ramalinga Raju has admitted to.
    "We took stock of various funding
options, including raising loans from banks. A final view will be taken on Friday. Scheduling vendor payments was also discussed," said another board member.
    The audit panel would be steered by T N Manoharan, former president of the Institute of Chartered Accounts of India, and have C Achuthan, former Sebi official, and S B Mainak, LIC exofficial, as members.
    Former Nasscom president Kiran Karnik and Confederation of Indian Industry secretary-general Tarun Das will be the other members of the board.
    "We (the panel) will be giving regular updates on the financial situa
tion of the company to the board," Mr Manoharan said.
    Amarchand & Mangaldas and Suresh A Shroff & Co will be the board's legal advisers and Chennai-based Brahmayya & Co the internal auditors of Satyam.
    The search for a CEO and CFO continues amidst reports that a Satyam insider may be offered the jobs in the interests of maintaining continuity at the software firm.
    "We have received a large number of resumes for the posts and we will take a decision as early as possible," Mr Achuthan said. Heads of six business units made a detailed presentation to the board and were asked to "lead their respective operations seamlessly," the statement said.
    Members of the board are in touch with key customers to prevent them from defecting to rival software providers and the directors have not "heard of deliveries being impacted in any way." "The board expressed that they have been in conversation with customers, who in turn have expressed their continued support, which is a very encouraging sign."
    Stripped of its cash, Satyam is fighting for survival and faces lawsuits with the potential liabilities of billions of dollars if it loses the legal battles. Two class action lawsuits have been filed in the US after Mr Raju confessed to doctoring the company's books. It is also entangled in a $1 billion legal tussle with UK-based mobile services payment company U-paid.


Nine jewels shine despite stock market volatility

Five cos deliver double-digit returns over one year

Aman Dhall NEW DELHI


THEY ARE the crash performers of Indian stock market. Even as the Indian equities market almost halved in value since touching an all-time high on January 10, 2008, there were nine stocks among India's top 500 companies which delivered gains to their shareholders over a period of one year.
    While there are three stocks each from defensive sectors, pharmaceuticals and fast moving consumer goods, which figure among the nine jewels or navratnas of Dalal Street, there are some odd ones too. A company engaged in the industrial gases business, an oil lubricant firm and a two-wheeler manufacturer were the other shining stars during the darkest hour in the Indian stock market history, reveals a research by SundayET.
    The analysis captures the performance of BSE index, BSE-500 stocks from January 10, 2008, to January 9, 2009. For starters, BSE-500 index represents nearly 93% of the total market capitalisation on BSE and covers 20 major industries of the economy.
    Overall, while five companies posted double-digit returns, there were four firms which offered single-digit returns. There is a huge difference of 48% in returns between the first and the second best performer on D-Street.
    Here's a look at dream portfolio of any investor in 2008. Cadila Healthcare, one of the five largest drug makers in India, is the winner by a long way in the top performers roll, delivering a whopping return of almost 65% to its shareholders. Hero Honda Motors is next on the list with returns of nearly 17%.
    India's leading FMCG companies, Hindus
tan Unilever and Godrej Consumer Products rank third and fourth, respectively, in the major gainers' line up. The stocks gave returns of 15.27% and 12. 44%, respectively, to their investors.
    BOC India, the arm of BOC Group, which is the second largest industrial gases company in the world, is fifth in the star line-up. The stock posted returns of over 12% during the above mentioned period.
    The next four slots were occupied by Castrol India (6.62%), Glaxosmithkline Pharmaceuticals (4.04%), Sun Pharma Industries (3.50%) and Nestle India (2.18%). A total of 21 stocks figure in the hall of shame. These stocks struggled for support on the bourses.
Realty big loser
THESE 21 stocks saw their valuations dropping by more than 90% during the said period. A closer look at poor performers discloses that more than half of these companies hail from the real estate sector.
    Orbit Corporation, a Mumbaibased real estate firm, and Asian Electronics, a company involved in design and manufacturing of energy conservation products, topped the worst performers' chart. Both of them witnessed a decline of nearly 95% in their valuations.
    Other real estate firms to feature in the major losers' list included Puravankara Projects (-90.14%), Sobha Developers (-90.69%), I V R Prime Urban Developers (-90.84%), Parsvnath Developers (-91.63%), Prajay Engineers Syndicate (-92.48%), Ansal Properties and Infrastructure (-92.65%), Ganesh Housing Corporation (-92.74%), Unitech (-93.06%), Lok Housing and Constructions (- 3.13%) and Jai Corporation (-4.04%).
    aman.dhall@timesgroup.com 


Thursday, January 15, 2009

Sebi to review books of sensex, nifty companies

Stung by the Satyam affair, market regulator Sebi on Friday announced that the financial statements of all the companies included in the sensex and nifty will be reviewed by another auditor after they are audited by their respective statutory auditors. "Such a review would be in relation to the last quarterly results and last audited annual financial results,'' a Sebi statement said. Some listed companies which are not included in nifty and sensex and selected on a random basis will also come under this scrutiny, the regulator said.
    Sebi will have a panel of auditors to take up this exercise. The first of such exercise will be taken up after the publication of October-December quarterly results and is likely to be completed by end-February.

    The decisions were proposed in a meeting of the Sebi Committee on Disclosures and Accounting (SCODA) and the regulator had accepted the recommendations of the committee.
    Sebi's decision on peer re
view comes close on the heels of Satyam's chairman Ramalinga Raju disclosing financial frauds amounting to over Rs 7,000 crore, spanning several years.
    BSE's sensex includes 30 blue chip stocks while NSE's nifty has 50 blue chips, with a large number of stocks included in both the indices. The list includes heavyweights from the public and the private sectors like Reliance Industries, some ADAG and Tata group companies, Infosys, ONGC, NTPC, Bharti Airtel, SBI and HUL.

    Till Friday, Satyam too was included in both the leading indices but the bourses have removed it from these two and all other indices, effective Monday. On Friday, BSE and NSE also announced that they would remove the stock from being traded in the derivatives segments as well, effective January 30.
    On its part, Sebi has already ordered a probe into the market dealings of Satyam and a team of officials from the regulator is already in Hyderabad looking into Satyam's books.






Longer ring finger predicts financial success

Washington: The length of a man's ring finger may predict his success as a financial trader. Researchers at the University of Cambridge in England report that men with longer ring fingers, compared to their index fingers, tended to be more successful in the frantic high-frequency trading in the London financial district.

    Indeed, the impact of biology on success was about equal to years of experience at the job, the team led by physiologist John Coates reports in Monday's edition of Proceedings of the National Academy of Sciences.
    The same ring-to-index finger ratio has previously been associated with success in competitive sports such as soccer and basketball, the researchers noted.
    The length ratio between those two fingers is determined during the development of the fetus and the relatively longer ring finger indicates greater exposure to the male hormone androgen, the researchers noted.
    Previous studies have found that such exposure can lead to increased confidence, risk prefer
ences, search persistence, heightened vigilance and quickened reaction times.
    In the new study, the researchers measured the right hands of 44 male stock traders who were engaged in a type of trade that involved rapid decision-making and quick physical reactions.
    Over 20 months those with longer ring fingers compared to their index fingers made 11 times more money than those with the shortest ring fingers. Over the same time the most experienced traders made about 9 times more
than the least experienced ones.
    Looking only at experienced traders, the long-ring-finger folks earned 5 times more than those with short ring fingers.
    While the finger ratio, showing fetal exposure to male hormones, appears to signal likely success in high-actively trading that calls for risk-taking and quick reactions, it may not indicate people who would do well at other sorts of financial activities, the researchers said. Some traders require additional skills on dealing with clients and sales workers. AP

SIZE DOES MATTER


Raju’s hasty arrest stalled probe: Sebi

'Mkt Watchdog Better Armed Than Police To Question Him'

Hyderabad: Pradyumana Kumar Reddy, lawyer of the Securities and Exchange Board of India (Sebi), on Wednesday stirred a hornet's nest by saying that the judicial custody of disgraced Satyam Computer promoter B Ramalinga Raju was delaying the market regulator's probe into the case.
    Reddy's statement fuelled the rumours already doing the rounds, with many alleging that Raju was arrested in haste

to prevent/delay his interrogation by Sebi. It's being pointed out that it is Sebi, rather than the local police, which has the expertise required to carry out investigations.
    Reddy told TOI that Sebi's general manager Sunil Kumar, appointed as the investigating authority in the case, landed in Hyderabad on January 8, within 24 hours of Raju's confession of a Rs 7,000 crore fraud. While Sebi had issued summons to Raju to appear in Satyam's office on January 9 at 4.30 pm, he refrained from attending in person and had his lawyer S Bharat Kumar represent him.
    The same night, Raju was arrested. "If the investigating authority could have recorded his statement on January 9, it would have been able to submit the same at the earliest to the executive director,'' Reddy said.
    The application seeking permission to record Raju's statement was filed by Sebi on January 12, on the same day when his bail application was filed by his lawyer and the police sought his judicial custody. Sebi's plea will come up for hearing on January 16 along with his bail plea.

REBOOTING SATYAM
    
KPMG and Deloitte appointed auditors to help Satyam board with reworking of financial statements
    Pricewaterhouse informs board that its audit of the company's financials could be ''inaccurate and unreliable'' in view of financial irregularities disclosed by Raju
    New directors say Satyam still a viable organisation that can make profit soon. But ensuring working capital is an immediate concern
    Govt likely to appoint more directors to Satyam board within 2 days. Strong buzz that former Hindustan Lever chief Ashok Ganguly may be one of the choices
RoC raids Satyam office, CFO quizzed
Hyderabad: The Registrar of Companies (RoC) on Wednesday raided Satyam's Mayfair office in Secunderabad even as personnel from the Serious Fraud Investigation Office (SFIO) swooped down on the company's corporate office in
the city.
    Significantly, Ramakrishna G, the assistant of Satyam's former CFO Srinivas Vadlamani, was questioned again by both SFIO and Sebi officials on Wednesday. He had been let off by the cops after interrogation. TNN

Taking money from the govt will send a wrong signal. Our only concern is to keep the show going and hold on to the clients and workers
Kiran Karnik TO TOI



Wednesday, January 14, 2009

Satyam probe turns to role of banks in fraud


New Delhi: The probe into the Satyam scam has turned the spotlight on banks as investigators and its newly appointed auditors verify the company's numerous accounts. The government is trying to ascertain how much cash actually exists in Satyam's accounts, whether the bank certificates presented to auditors were forged, and whether bank employees colluded with company officials.

Satyam has claimed deposits of nearly Rs 180 crore for the year ended March 2008 in international branches of several global banks. These include Banco do Brasil, BNP Paribas, Citibank, Citibank International, China Merchants Bank, Dresdner Bank, HSBC Bank, Kookmin Bank, KSB Bank, Mitsui Sumitomo Bank, UBS, UniCredit Banca, United Bank, Wachovia Bank and Woori Bank.

The company has stated that another Rs 3,308.41 crore had been parked in long-term fixed deposits. Although the break-up of these investments is not available, Satyam has listed Bank of Baroda, BNP Paribas, Citibank, HDFC Bank, HSBC and ICICI Bank as it principal bankers.

When it comes to its current account details with foreign banks, Satyam's annual report not only lists the opening balance for the financial year against each account held, but also the maximum balance during the year. Interestingly, the company showed a balance of Rs 1,166.89 crore in various current accounts that earn zero interest, which caught the attention of government investigators and regulators. B Ramalinga Raju, former chairman of Satyam, had said that the company had Rs 5,040 crore in non-existent cash and bank balances on its books.

Meanwhile, Satyam's new board on Wednesday appointed KPMG and Deloitte as its new auditors to assist in the restatement of accounts, while previous bookkeeper Price Waterhouse said its audit of company has now been rendered "unreliable" after Raju's admission of fraud. According to Deepanker Sanwalka, a partner and national head of forensic services at KPMG, companies often include cheques in hand and remittances in transit to inflate cash balances. Another way is to forge bank statements to show fictitious reconciliation statements, he said.

The transactions pf Satyam's hundreds of accounts with some 50 banks and would be probed to determine whether any bank officials colluding with the company. "If employees of any bank connived with officials of Satyam, it is the responsibility of the bank to take action. It is highly unlikely that the banks themselves colluded with Satyam in this fraud. But if so, action can be taken under the Banking Regulation Act, 1949," a source closely tracking the banking regulator said.

At a meeting with senior Cabinet ministers on Tuesday, Prime Minister Manmohan Singh discussed Satyam's liquidity position. "The idea is to pore over each transaction the company has had with banks and verify the authenticity of each bank certificate," an official in the know said. The official said it would take around two weeks to arrive at a preliminary assessment of bank balances. Satyam shares pared early gains of 8.8% on the BSE on Wednesday to end down 4.2% at Rs 29.95.



Thursday, January 8, 2009

Satyam:A day after Raju’s disclosures

DAMAGE CONTROL: CO FAILS TO CLEAR THE AIR

THE BITTER TRUTH

A day after Raju's disclosures, interim CEO Ram Mynampati said Satyam is dealing with a crisis of "unimaginable proportions". And with the doubts piling up, the govt and regulators stepped up the pressure
Cash-starved co running against time

Our Bureaus HYDERABAD/MUMBAI



    THE team tasked with saving Satyam Computer Services on Thursday said the company is in desperate need of cash, but provided few details about how much emergency money is needed, or how it plans to get the funds.
    Interim CEO Ram Mynampati, the head of the crisis management team, said strenuous efforts are being made to prevent clients and staff from deserting the company and ascertain its exact financial status.
    "Today, I do not know if we have money to pay salaries for January. I will know shortly. We will need some assistance and are trying to get an assessment of assets and receivables," Mr Mynampati said.

    An investment banker is also due to be appointed to finalise strategic options, including a merger or outright sale. But with Satyam facing class-action lawsuits in the US, it is not clear how many takers there will be for the company.
    The absence of any buyer means that the Satyam saga could continue for a while, with its concomitant fallout on the image of Corporate India. "Satyam is a company listed on the US exchanges, with US clients and sub
ject to the jurisdiction of US regulators. It would be wrong and misleading to describe it as a purely Indian scandal," said the CEO of a major Indian company who requested anonymity.
    One possible buyer could be L&T, the country's largest engineering company. A source close to L&T said the government should take steps to restore confidence in the employees and clients of Satyam. These steps may include appointment of a select group of persons in the interim board to access the liabilities, fix them and then, hand the company over to a competent IT firm. "But Satyam should not be given to one of the top three IT companies. In that case, it will lose its identity," he said.
    "We will examine the matter if shareholders of Satyam approach us," said a senior L&T executive, who asked not to be named.

THE BIG QUESTIONS
QCan we trust Ram Mynampati ?
The interim CEO and other senior officials were all part of a team headed by B Ramalinga Raju. They are yet to file a complaint and question PwC, despite Mr Raju's confession. Somewhere there's an uncanny similarity with another Hyderabad company — the now defunct Global Trust Bank — where the boss stepped down and his lieutenants managed the show.
QWho can take action
against Raju?
Separate teams from Sebi and the Registrar of Companies are investigating Satyam. Sebi is also probing PwC's role. But no criminal proceedings have been initiated till Thursday evening. Sebi and DCA are yet to file a complaint with the Andhra police while complaints by investors bodies can take a long time in India.
QHow long can Satyam
stay afloat ?
Unless a strategic partner steps in, Satyam will find it difficult to persuade banks to keep working capital and credit lines open. In Mynampati's words, Satyam's "cash on hand position is not very encouraging." While the buzz is that L&T may put in a bid, any company would wait for a clearer picture to emerge and may be wary because of the prospect of class-action lawsuits.
QWhat are financial
institutions doing?
FIs with equity holdings in Satyam are in touch with the regulators and central ministries to push through the appointment of 2-3 new independent directors. Some of the leading technocrats, former IT professionals, lawyers and CAs are being sounded out. FIs would like to call the shots in the constitution of the new board.
L&T could play white knight if asked by govt
    THE list of Satyam shareholders include JP Morgan, Lazard, Citigroup, ICICI Prudential and LIC. Diversified L&T has a presence in the software business through its wholly-owned arm, L&T Infotech. "L&T will take a call when a right proposal comes in. We have not been yet approached by anyone," he added.
    It is learnt that a few investment bankers have approached L&T with proposals that it should consider taking over Satyam. L&T is now the largest shareholder in Satyam with a 4% stake, overtaking the promoters' 2.34% shareholding. L&T started buying into Satyam towards end-December and reportedly began picking up the stock at Rs 145.
    An investment banker said L&T is well-positioned to play the role of a white knight if it is asked to do so by the government. He said the issue was whether L&T would wish to acquire a company whose liabilities, including legal ones in the US, may be substantial. L&T may be interested if the company was available without its liabilities, he added. It was unclear how such a situation could arise. Satyam also faces a $1-billion claim from Upaid, a UK-based payment mobile services payment company, over allegations of fraud.
    At the press conference on Thursday, Satyam officials said an exercise is underway to assess the accuracy of the statements made by former chairman B Ramalinga Raju and an independent audit is being contemplated.
    The new Satyam boss revealed that CFO Srinivas Vadlamani had quit on Thursday, but that his resignation has not been accepted and the issue will be discussed at the board meeting on January 10.
    An interim CFO from within the company will be appointed, he said, adding that a restatement of accounts is a possibility.
    "We are legally bound to declare our third
quarter results by the end of this month. Once we get our arms around reality, we will take a decision on this."
    Mr Raju resigned in disgrace on Wednesday after admitting that the company's accounts had been fudged, amounting to a hole of at least Rs 7,000 crore in its balance sheet.
    But the crisis management team was evasive about both Mr Raju and Mr Vadlamani, seen as the main architects of the financial fraud.
    Mr Mynampati was contradictory in his statements about Mr Vadlamani. First he said the CFO was not attending office because of personal reasons and would report to work next week. A few minutes later he revealed that the CFO had indeed submitted his resignation earlier in the day.
    In an explanation to why the company was not initiating criminal action against Mr Raju, he said there were other, more pressing
priorities. Mr Mynampati said key employees of Satyam were in a conference call with Mr Raju soon after his admission of guilt but did not know about his whereabouts.
    Meanwhile, the company's much-criticised auditor PricewaterhouseCoopers has still not been removed and there has been no further contact with the firm, Mr Mynampati said.
    But an investigation team from market regulator Sebi has been quizzing officials at Satyam and the audit firm and scrutinising documents. "Mr Raju can face up to 10 years in prison and be fined up to Rs 25 crore. We have ordered an inquiry into the violation of corporate governance at Satyam," a Sebi official said.
    Mr Mynampati claimed he had no knowledge of the fraud at Satyam and said the company would cooperate fully with investigating agencies.
    AS Murthy, a member of the crisis team, tried to convince reporters that the company actually had over 50,000 staff and that the headcount, like the accounts, were not fictional. The company had 53,000 staff at the end of September and he estimated that there were some 2,000 less employees now.
    The Andhra Pradesh government ruled out providing funds to bail out Satyam, and a top official said on condition of anonymity that there was no discussion at all about what to do to salvage the IT firm, or save the thousands of jobs that depend on the company.
    Also on Thursday, Mendu Rammohan Rao, the man who chaired the controversial December 16 board meeting that approved the acquisitions of two companies linked to Mr Raju's family, stepped down as dean of the Indian School of Business saying his "continued concern and preoccupation with the evolving developments (at Satyam) were impacting his role as the ISB dean."



Wednesday, January 7, 2009

Truth about Satyam: rise and fall of Ramalinga Raju

Satyam means truth, but Raju, who resigned as chairman on Wednesday, owned up to creating a tissue of lies

Bangalore: Byrraju Ramalinga Raju, 54, chairman of Satyam Computer Services Ltd and lover of science fiction works by Isaac Asimov and Arthur C. Clarke, will be remembered in Indian business history—not the way he would have wanted, as a successful software entrepreneur, but as the perpetrator of the country's biggest corporate fraud, one that saw his company resort to fiction to burnish its performance.

It used to be said that Hyderabad had two major landmarks: the Charminar and Ramalinga Raju, who created the company, Satyam Computer Services. Satyam means truth, but Raju, who resigned as chairman on Wednesday, owned up to creating a tissue of lies.
Ramalinga Raju belongs to a family of farmers from Bhimavaram near the Andhra Pradesh city of Vijayawada. His father, Satyanaryana, helped create the family fortune in a small way, shifting in the early 1960s to Hyderabad and starting a textile business even as he bought more land for farming. Ramalinga Raju has in the past said that it was his father who inspired him to start Satyam.
Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Ramalinga Raju recently told Business Today magazine that after returning from the US with a master's in business administration (MBA) degree from Ohio University, "I had all the enthusiasm and passion to do something…of being an entrepreneur. A friend told me about a part-time teaching opportunity at the Administrative Staff College of India. This really appealed to me. But, in late 1977, over dinner one night, my father told me: It is always important to stay focused and to avoid distractions."
Ramalinga Raju chose to enter the relatively new business of providing software services to international customers from India. Satyam, launched in 1987, started offering such services initially onsite to tractor maker John Deere and Co. In 1991, the company raised money through a share sale and listed on the Bombay Stock Exchange.
It was in 1994 that Satyam got its big break when it allied with Dun and Bradstreet Corp. The partnership was short-lived, but by the time it ended, Satyam was well on its way to growth.
What separated Satyam from rivals such as a Tata Consultancy Services Ltd or an Infosys Technologies Ltd was Raju's preference for executives and associates who spoke the same language he did: Telugu.
"For Raju, family, caste and those who could speak Telugu came first. I am not saying he was not a professional, but other things being equal, he would look at things in that order," said a former employee of Satyam Infoway Ltd, the Internet firm Raju eventually sold to a non-resident Indian entrepreneur, Raju Vegesna.
Raju's brother Rama Raju was managing director of Satyam and till 2000, his brother-in-law Chinta Srinivasa Raju used to head a key division.
"At one point of time there were so many Rajus (in the company) that it would be difficult to identify who was who," said an executive at a software firm, who did not want to be identified.
Raju's food preferences were also local—he preferred spicy Andhra food, though he admitted to this writer once that he also liked hot Thai food.
Diversified interests
Raju was always keen on other businesses, and the controversy over Satyam's attempt to buy two Maytas companies wasn't the first such he faced.
In 1998, the publicly listed Satyam Computer Services had to declare that it would not invest in Satyam Constructions Ltd, a family-owned company, after news reports to that effect roused investor ire. Satyam had also floated a clutch of companies, including one for the Internet (Satyam Infoway) and to address large customers (Satyam Enterprises). At various points of time, these were either merged back into the parent or spun off and sold.
In 2000, at the height of the dot-com bubble, Satyam Infoway paid Rs500 crore to Rajesh Jain-owned IndiaWorld, which was essentially a clutch of websites. In 2001, Satyam Computer Services listed on the New York Stock Exchange (Satyam Infoway did so on Nasdaq in 1999).
With the real estate sector booming, the Rajus re-entered the business. Maytas Properties Ltd (Maytas is a palindrome for Satyam) and Maytas Infra Ltd were looked after by Raju's sons Teja Raju and Rama Raju. Maytas Infra even won the Hyderabad Metro rail project. Satyam, however, had to cope with tough competition and a tougher business environment. The company also had to meet analyst and investor expectations.
In a letter to Satyam's board on Wednesday, Raju confessed to having cooked the company's books and overstated revenue and profits. He added that Rs5,040 crore of the cash that is supposed to be on Satyam's books simply doesn't exist.
Srini Raju, who stepped down as executive director of Satyam in 2000, said Raju's revelations came as a surprise to him. He now runs Peepul Capital Llc., which has $325 million (Rs1,580 crore) of funds under management. He also runs news channels in several languages under the TV9 brand.
"I am shocked and yet to digest what has happened," Srini Raju said. "Satyam Computer is one of the iconic companies of Indian software industry and fudging of accounts by such a company will have a very high impact on the industry as a whole."
Raju must have known this as his letter indicates. His letter refers to "the tremendous burden on my conscience" and likens Satyam's descent into financial purgatory to "riding a tiger".
C.R. Sukumar contributed to this story.

Tuesday, January 6, 2009

Why India Won't Rebound Soon

By VEN RAM

India's stock market may look attractive after its massive slide, but there's probably more pain to come. A host of economic and political challenges could keep a new bull market at bay for more than a year.

FOR THOSE TEMPTED TO WADE INTO THE INDIAN STOCK MARKET with a view to making a quick killing after its massive slide, consider the advice that Punch magazine once gave a person who was about to marry: Don't.

Although India's benchmark Sensex has fallen about 55% from its peak a year ago, the market is still not attractive as a short-term investment. November's terror attacks in Mumbai aren't even the half of it: The Indian economy, valuation issues and broad political uncertainty all argue for real caution.

[india taj]
Reuters/Arko Datta
Mumbai's Taj Hotel smolders after November's attacks.

"Even as absolute valuations have corrected, India's relative valuations remain rich," says Ridham Desai, India Strategist at Morgan Stanley. The market's price-to-earnings multiple, based on expected earnings for the next 12 months, is 60% higher than that of emerging markets as a group. And its price-to-book ratio is a whopping 72% higher.

India fares no better on the dividend-yield front. The roughly 2% dividend yield on the Sensex pales in comparison to what is available in some of the more advanced economies. The dividend yield for the Australian market, for example, is an eye-popping 6.5%, while most other regional markets offer yields well north of 5%.

Seshadri Sen, Associate Director, Research and India strategist at Macquarie Capital Securities, says that even though the Indian markets are trading at just nine times forward earnings, investors need to exercise caution in interpreting that multiple.

"With all the earnings cuts that we have seen from companies, what appears cheap may not be so," he says. "We are seeing a fairly sharp slowdown in the economy, but it remains to be seen whether the markets have discounted all the bad news that is in store."

JUST HOW FAR THE INDIAN MARKET got ahead of itself in recent years is borne out by comparing the total market capitalization with gross domestic product. In May of 2007, India's market capitalization overtook its GDP; by January 2008, it had climbed to a frenzied 180% of GDP. In comparison, the ratio for the U.S. market at the height of the dot-com boom was 131%. The ratio for Japan at the peak of the market was 150%.

Those heady days for the Indian market seem distant now. In July the market-cap ratio dropped below 100%, indicating saner valuations. But the market's considerable fall since July doesn't make a persuasive case for a quick return of faith. Any investor betting that the market will go right back up in the short term is essentially saying that there will be an India equities bubble all over again.

While the Indian economy, whose output is now around $1 trillion, looks likely to do well over the next two decades or so, GDP would have to more than double for market capitalization to return to its past glory without valuations being caught in bubble territory. And a doubling of output would likely require at least 10 years of growth, assuming the economy keeps growing at a 7.2% clip.

[india chart]
Passage to Losses: The market fell some 55% in 2008.

It also pays to bear in mind that the Japanese equity markets have yet to recapture the orgiastic exuberance that once caused that country's market capitalization to outstrip GDP. Indeed, Japan's Nikkei index is now roughly at a fourth of the peak set nearly 20 years ago.

One of the biggest reasons for the surge in the Indian equity markets was the inflow of funds from foreign institutional investors. But that luck hasn't held in the current bear market: Foreigners have pulled $20 billion from the market since the start of 2008, according to provisional data issued by the Bombay Stock Exchange.

In its 24 years, the Sensex, now at 9,647, has held above 7,000 only for the three-and-a-half years starting in June 2005. The index's mammoth 200% gains between 2005 and early 2008 are perhaps never to be repeated again. Even Warren Buffett would have trouble coming up with returns like that.

A new bull market, Morgan Stanley's Desai argues, is at least 15 months away. "Even if we assume that the market has hit its bottom, previous bear markets show that the market almost always tests the previous low before a new bull market gets underway," he says. "This process of retesting took between 15 and 24 months in the previous three bear markets."

He says the Sensex will probably end 2009 at 8,559, down 11% from now -- and it could fall as much as 34%. In a bullish scenario, Morgan Stanley says, the market could climb about 30%.

FROM AN ECONOMIC PERSPECTIVE, Citigroup contends that India is more vulnerable than many of its regional peers when it comes to external financing. The country's current-account deficit and its debt repayments amount to a significant 18% of its foreign-exchange reserves, hurting the outlook for the currency, Citigroup says. An emaciated rupee -- which has lost around 20% so far this year -- leaves those Indian firms that have borrowed overseas more vulnerable to a downturn.

Says Rajeev Malik, head of India and Association of Southeast Asian Nations, or Asean, economics at Macquarie: "The [Indian] government has squandered a great opportunity in recent years to undertake reforms from a position of strength stemming from strong growth and increased interest in the country from global investors...India today is experiencing a crisis that is a milder version of what the rest of Asia experienced in 1997: an unanticipated and sudden reversal in the multi-year surge in global capital inflows that causes currency collapse and depresses domestic demand."

He expects India's GDP growth to slow to a seven-year low of 6% in 2009-10. Consequently, the rupee is likely to remain under pressure and weaken from around INR49 against the U.S. dollar now to INR52 by March, but recover thereafter, he says.

There are also geopolitical reasons that don't favor an entry into the Indian market at the moment. For one thing, the country goes to the polls before May to choose a federal government. Most political commentators agree that voters are disenchanted with the current Congress-led coalition, but the other major contender -- the Bharatiya Janata Party -- seems direly in need of a credible leader at the national level. What's more, Pakistan's current economic crisis, though largely unconnected to India, is likely to make fund managers jittery about the entire South Asian region.

SO WHAT DO YOU DO if you still want to get some exposure to the India growth story? Picking cheap individual American depositary receipts of Indian companies may be the way to go.

The Bottom Line:

A new bull market in India may be at least 15 months away, thanks to a host of economic and political challenges.

Infosys (ticker: INFY), which has a reputation for being one of India's best-managed and most transparent companies, has an undemanding P/E of 11 and a dividend yield of almost 2%. The infotech consulting and software services firm has a cash balance of $1.9 billion, zero debt and a return on equity of 36%. And its cash is held in bank deposits, with absolutely no exposure to mutual funds.

Another stock that appears to offer a decent risk-reward proposition is ICICI Bank (IBN). The stock, which traded around $75 at the height of the India bubble, is now around $18. That is basically where it was trading in 2004, before the India fever caught on. At its current price, the stock is trading at a modest trailing P/E of 14 and an attractive dividend yield of 2.8%.

Shares of the country's largest private-sector bank have taken a beating because of concerns about its international business. With 26% of its loan book coming from overseas, investors are rightly worried about problems that might creep up amid the current credit crisis. The bank has slowed credit growth and is seeking to preserve capital, but worsening global credit-market sentiment might lead to larger-than-expected losses on its international investment book.

If the bank can successfully cope with the crisis, its current share price should provide a good entry point for those with a long-term investment horizon, perhaps five years or longer. Right now, that's about the only way to look at any investment in India.


VEN RAM is a Singapore-based assistant new editor for Dow Jones Newswires.

 

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