A Single Bad Apple?

In the days after January 7th, while following media coverage of the Satyam debacle on TV, I observed a general consensus that here was one bad apple that could ruin the good name of the Indian business. People seemed convinced that a fraud on this scale couldn't but be a one-off event. It was something that one malignant mastermind had tried to pull off and succeeded, but this sort of a thing wasn't typical of Indian business.

However, I can't bring myself to agree with this optimistic view. I heard Infosys founder N.R. Narayana Murthy refer to Satyam as 'one bad apple' and said to myself, "How could he possibly know"? In response to this 'one bad apple' meme, I kept thinking of the less-well-known saying, 'There's never just one cockroach in a kitchen'.

The fecund conditions that led to the growth of this bad apple could have given rise to a whole orchard of bad apples which are just about ripe for harvest. In fact, that's what the stock markets seem to think. As soon as the news of Raju's letter spread, the stock markets collapsed and the broad markets were down by about 7 per cent by the evening. However, some parts of the markets (and some specific companies) were singled out for special treatment. The stock prices of real estate companies, in particular, dropped as if Mr. Raju had been the collective chairman of the real estate industry instead of Satyam Computers. While the talking heads were hyperventilating about the possible dire impact on our IT-BPO industry, the stock prices of Infosys, Wipro, TCS were doing just fine. However, the BSE Realty index was down by about 25 per cent for that day.

Anyhow, the likely truth is clear to anyone to who can read between the lines. There's a certain amount of book-cooking that every promoter does. This is proportionately more in small-cap companies and goes down (on a relative basis) as companies grow bigger and come more in the public eye. The mean cooking-to-reality ratio is different in different industries, with different business groups, different parts of the country etc. At least, that's what the market expects. There's a generally accepted normal curve of promoter shenanigans. As companies grow bigger, scams become less significant. Raju's problem is that he went way off the scale for his size of company and his industry. He was a far outlier, sitting all by himself at the distant end of the long tail of this curve of corruption.

Are there are other cases like Raju that still haven't shown up? My guess is that there are. Basically, the Raju story boils down to pilfering huge sums of money to finance real-estate speculation that didn't work out. I know his version is that the money was never there but come on, you don't really believe that, do you? Could there be other cases that conform to this pattern? I'm inclined to say, "How could there not be?"

For a few years, we were in an atmosphere of complete frenzy. For a while it seemed that anyone who wasn't making speculative expansions was stupid. Now, as the bad times take hold, there could be a more Satyams in the pipeline.