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Suspect Balance Sheets

Unless institutional investors stand up, long-term money won’t be a reliable source of capital for deserving businesses

It has been a month since the first hint of trouble surfaced at Satyam. It was on 16th December that the abortive bid to acquire the Rajus' Maytas companies was announced. At the time, the Rajus backed off and it appeared that they had been prevented from getting their hands on the huge pile of cash lying in Satyam's bank accounts. The next day, I wrote an article on ValueResearchOnline.com in which I speculated that there had to be some yet-unrevealed aspect of the story. I wrote that 'It is also logical to speculate that there could be some deeper reason for this desperation'. On December 17th, this sounded like I was jumping to conclusions. Over the next few days I got some decidedly angry emails from fans of Mr. Raju. They strenuously objected to, among other things, my use of the words 'heist' and 'theft' in the article.

On January 7th it turned out that there was, indeed, a deeper reason for the desperation. Again, the day after Mr. Raju's visit to the confessional, I wrote of his the-money-was-never-there line, "This is unlikely to be true. Raju is much more likely to have siphoned off the money." Now, it's beginning to look like the money was there but was pilfered, as reported a few days ago in an exclusive by The Hindustan Times. I'm not claiming any great prescience into tomorrow's news. There were others who came to the same conclusion as I did. I didn't know anything much about Mr. Raju or Satyam or Maytas or this whole affair. At every stage, all I did was to simply assume the worst. So there's a simple (if somewhat alarming) recipe for predicting the course that events will take in the Satyam affair. Just assume that the worst will come true.

Certainly, equity traders are now taking this very view. Remarkably, the investment community has suddenly developed a list of companies with 'suspect' balance sheets whose names (and promoters' exploits) are being discussed semi-openly. Clearly, this information hasn't been discovered by some heroic investigations that analysts have conducted in the days since January 7th. It already existed in the markets. In fact, the equity markets started factoring some of this information into stock prices within minutes (no exaggeration) of Mr. Raju's letter becoming public.

If fairly precise knowledge of suspect balance sheets exists in the markets, then retail investors can do little except vote with their feet. But perhaps institutional investors need to play a better role. This class of investors have never played an active role in India. In the days when all of them were government nominees, this was probably a good thing. About a decade ago, a friend who has been such a nominee on many boards told me that the normal thing at board meetings was to open your mouth only to put cashew nuts in it. Independent directors are now paid enough to buy their own nuts, but figuratively, this is still true.

Unless institutional investors develop a spine, promoters will always be suspect and long-term money will never become a reliable source of capital for businesses that deserve it. Now is the best time to start this process. If the 'suspect balance sheets' are so widely known, then its time for institutional investors to join forces and make an example out of just one or two of them. That'll be enough.