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Satyam Computers Scam

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ScamSatyam Computers Chairman, B. Ramalinga Raju (on Jan 7,2009), resigned, confessing that he had manipulated the accounts of approx Rs 14100 crores in several forms. The revelation of this scandal shook the worldwide corporate community.

In February 2009, CBI took over the case and throughout the year all charges arising from different phases were later merged into one charge sheet.

On 10 April 2015, B. Ramalinga Raju was convicted with 10 other members.

 

As mentioned in the previous article (read here), here we’ll be discussing what exactly led to the Satyam scam.

Anatomy of the Satyam Scam

Raju, a Havard Graduate, had a really impressive personality and a good character in his circle. Everybody had the utmost faith in him. The administrators of the Board never questioned him about his operations. They were of the view that he might be trusted with everything. Raju, even in his dreams, didn’t foresee that he could get exposed for cooking up his balance sheets worth thousands of crores. The story of Raju also exposes how important the link of politics is for the business.

Role of Government

Ramalinga Raju couldn’t become what he did without the help of govt. Andhra government awarded him with the huge metro rail project in Hyderabad. Determined to form his name as India’s modern Chief Minister, C. Naidu wanted to showcase Hyderabad as a shining symbol of an emerging India. In his endeavor, Naidu sought to use the software Industry to project Hyderabad. That’s precisely where Raju’s utility to Naidu came in. Naidu was so impressed by Raju that he portrayed him to the world because of the icon of the latest Hyderabad and chose the occasion of a visit to the then US President, Clinton to try to so. Raju was also smart enough to pawn the previous President APJ Abdul Kalam in his board for his Emergency Medical Research Institute (EMRI).

Greed got the higher of him. He used every single cent earned to get land. Before 1999, land purchases by Raju were funded by the dividends he earned from Satyam. But as Hyderabad began to develop further, he stepped up his land purchases. To finance the purchases, he started pledging and selling all of his shares which of his families. Since the laws of the land didn’t allow the denizens to accumulate quite 54-acres of land, Raju began purchasing land through his privately held companies. When the law caught him, he had managed to line up 325 companies, owned by his immediate relatives!! And to feature thereto, a major portion was bought as agricultural land, therefore the income was non-taxable!

But why did he need to reveal that he had committed fraud at Satyam?

Was it a guilty conscience? 

Satyam Computer Fraud

Raju wouldn’t have landed during this position if it hadn’t been the recession that hit the Indian market in 2008. It threw him off guard and put halt to all his options. The market was filled with rumors of Satyam suffering from takeover threats. To get rid of such threats, he falsely increased the turnover so that it becomes a costly affair for the corporate making the bid for acquisition to acquire it. He transferred the funds from Satyam by cooking the books to get lands. So now there was an enormous hole within the record. But what if he merged his land and construction company with Satyam? He could then have possibly concealed the fraud. He gave up when he had to abort the merger of Satyam with Mytas Infra since the shareholders weren’t consenting.

How did he mastermind this maze at Satyam Computers?

Invoices
Fake invoices were doctored in lieu of investments from various Shell companies

Keen to project an everlasting bright picture of the firm to the investors, employees, and analysts, Raju manipulated the books such that it appeared a far bigger enterprise than it was. To realize this, they sewed up deals with fictitious clients and had large teams performing on these fictitious projects.

Note, here two things are done. One, fictitious Debtors i.e money receivable from clients is made and fictitious payroll (a.k.a ghost employees) showing payment of salary to them. He introduced 7000 fake invoices into the company’s computing system to record sales that simply didn’t exist. Obviously, over the years, these ghost debtors never paid their bills resulting in an enormous hole in Satyam’s record meaning only Sales increased, Cash didn’t. He further forged the bank statements to draw a mountain of money balance. This thing was possible that the auditors wouldn’t have known a minimum of for a couple of years because seldom do auditors do the Third Party Confirmation (Whereby the auditors confirm balances not by counting on the client produced documents, but by privately following up with banks for the balance, to extend the test reliability).

Summary

The Satyam Scam was all about corporate governance and fraudulent auditing practices alleged in collusion with auditors and chartered accountants. The company misrepresented its accounts to its board, stock exchanges, regulators, investors, and every other stakeholder.

These fraudulent practices misled the market and other stakeholders by lying about the company’s financial health. Even basic facts like revenues, operating profits, interest liabilities, and cash balances were grossly inflated to Project Company’s healthiness.

The promoters can be referred to as primary culprits, although it’s almost impossible to misrepresent such facts without the involvement of the auditors and a few exec board members. Independent directors, it seems, were kept within the dark about the particular books of accounts.

Reference: Case study of India’s Enron, KIMEP University & Hindustan Times.

 

Corporate Actions – Does it affect my Stock Price?

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Corporate Action

Overview

Corporate actions are the decisions taken up by a company or an entity that often results in a change in its stock price. There are many sorts of corporate actions that an entity can prefer to initiate. An honest understanding of these corporate actions gives a transparent picture of the company’s financial health, and also to work out whether to buy or sell a specific stock.

Now, that we have briefly discussed the general stock market terms (read here). Here, we’ll be looking into the five most significant corporate actions and their impact on stock prices.
A corporate action is initiated by the company’s board of directors post-approval of its shareholders. 

1 – Dividends

DividendDividends are paid by the corporate to its shareholders to distribute the profits made by it during the year on a per-share basis. For instance, last fiscal year, Coal India had declared a dividend of Rs.13.1 per share. The dividend paid is expressed as a percentage of the face value.

In the above case, the face value of Coal India was Rs.10/- and therefore the dividend paid was Rs.13.1/- hence the dividend payout is 131% (131/10).

It is not mandatory to disburse the dividends each year. If the company feels that rather than paying dividends to shareholders they are at an advantage utilizing this cash to fund a new project for a far better future, they can do so. Besides, the dividends don’t need to be paid from the profits alone. If a company has made a loss during the year but it holds a healthy cash reserve, then it can still pay dividends from its cash reserves.

Sometimes distributing the dividends could also be the simplest way forward for the corporate. When the growth opportunities for the company have exhausted and also the company holds excess cash, it would add up for the entity to reward its shareholders thereby repaying the trust the shareholders hold within the company.

The decision to pay a dividend is taken within the Annual General Meeting (AGM) during which the administrators of the corporate meet. The dividends aren’t paid right after the announcement. This is often because the shares are traded throughout the year and it might be difficult to spot who gets the dividend and who doesn’t, the subsequent timeline would assist you understand the dividend cycle.

Dividend Declaration Date

This is the date when the Annual General Meeting (AGM) takes place and the company’s board approves the dividend value & its issue.

Record Date

 The date when the company decides to review the shareholders’ list to mention all the eligible shareholders for the dividend. Usually, the time difference between the declaration date and the record date is a minimum of 30 days.

Ex-Date

The ex-date is normally set two business days before the record date. Only shareholders who own the shares before the ex-date are entitled to get the dividend. So for all practical purposes if you want to be entitled to get dividends you need to ensure that you buy the stocks before this date.

Dividend Payout Date

This is the day on which the dividends are paid out to all the listed shareholders as per the company’s record.

Cum Dividend

The shares are said to be cum dividend till the ex-dividend date.
When the stock goes ex-dividend, usually the price drops up to the value of dividends paid. For example, if Coal India (trading at Rs. 135) has declared a dividend of Rs.13, on the ex-dividend date the stock price will drop to the extent of dividend paid, and as in this case, the price of Coal India will drop down up to Rs.122.
The reason behind this drop is because the amount paid out by the company no longer belongs to it.
Dividends can be paid anytime during the fiscal year. If it’s paid within the financial year it is known as interim dividend. However, If the dividend is paid at the end of the year it is termed as a final dividend.

2 – Bonus Issue

Personal FinanceA bonus issue is a kind of share dividend, allocated by the company to reward its shareholders. The bonus shares are issued out of the company’s reserves. These are bonus shares that the shareholders receive against quantity shares currently held by them. These allotments come in a fixed ratio such as 1:1, 3:1, etc.

If the ratio is 3:1, the existing shareholders get 3 additional stocks for every 1 share held at no additional cost. So if a shareholder owns 10 shares then he will be issued an additional 30 shares, so his total holding will now be 40 shares. When the bonus shares are issued, the number of shares the shareholder holds increases but the overall value of investment remains the same.

Similar to the dividend there is a bonus announcement date, ex-bonus date, and record date.
Corporates issue bonus shares to encourage retail participation, especially when the price per
share of a company is very high and it becomes tough for new investors to buy individual shares. By issuing bonus shares, the number of outstanding shares increases, but the value of each share reduces as discussed above but the Face value of each share remains the same.

3 – Stock Split

Personal Finance

The word stock split sounds weird but it happens regularly in the stock market. What this means is quite obvious – the stocks that you hold gets split based on its FV.

When a stock split is declared by the company, the number of shares held by the shareholder increases but the investment value/market capitalization remains the same similar to the bonus issue. The only difference between the two (bonus & split) is the Face value. Suppose the stock’s face value is Rs.2, and there is a 1:1 stock split then the face value will change to Rs.1. If you own 1 stock before split you would now own 2 stocks post-split.

Similar to the bonus issue, a stock split is also to encourage more retail participation by reducing
the price value per share.

4 – Rights Issue

The idea behind a rights issue is to raise fresh capital investment. However, instead of going public, the company reaches to its existing shareholders. In simple terms, the rights issue can be understood as a second IPO but for selected individuals i.e existing shareholders.

The rights issue could indicate a promising new development in the company. The shareholders can subscribe to such rights issues in the proportion of their shareholding. For example, 1:2 rights issue means for every 2 shares held by the shareholder, 1 additional share can be subscribed. It can be worth to state that the new shares under the rights issue will be issued at a discounted price than its then-current value in the markets.

However, as a caution – The investor should not be swayed by the discount offered but they should look beyond that. The rights issue is different from the bonus issue as one pays money to acquire shares. Hence the shareholder should subscribe only if he or she is completely convinced regarding the company’s future. Also, if the market price is below the subscription price/right issue price it is wiser to buy stock from the open market.

5- Buyback of shares

AgreementA buyback is a process for a company to invest in itself by buying its shares from other investors in the market. Buyback reduces the number of outstanding stocks in the market. However, share buyback is also an important technique of corporate restructuring.

There could be many reasons why companies choose to buy back:
1. Improve profitability per share.
2. To amalgamate their stake in the company
3. To prevent other companies from taking over control.
4. To show promoters confidence about their entity.
5. To support the declining share price.
In any case, if a company announces a buyback, it signals the company’s confidence in itself. Hence it usually has a positive impact on the share price.

Recession – Aftermath of Financial Crisis?

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Recession

As the world has changed in the last few months with the breakout of COVID-19 few terms like recession & depression are bouncing back into our ears. On 28th March 2020, IMF chief Kristalina Georgieva said- “We have entered recession” owing to the successive lockdowns in different countries leading to a sharp decline in demand and supply of goods, companies are forced to cut down their expenses in form of job layoffs. It’s Just a decade since we heard about Recession but do we really remember how at all it occurred.

As briefly mentioned in the stock market overview (read here) here we will discuss the great recession of 2007.

The Great Recession (2007-09)

Triggered in the U.S. by the financial crisis of 2007–08 and quickly spread to other countries also. Commencing in late 2007 and lasting till mid-2009, it had been the longest and deepest economic decline in many countries, since the Great Depression (1929 –1939).

A severe contraction of liquidity in global financial markets began in 2007 due to the booming U.S. housing bubble. From 2001 successive reduction within the prime rates (the rate of interest charged by the banks from their “prime,” or low-risk, clientele) had enabled banks to issue mortgage loans to many of their customers due to lower interest rates, who normally wouldn’t have qualified for them, and subsequent purchases greatly increased new housing demand, driving land market even higher.

When interest rates began increasing again in 2005, demand for housing reduced causing a steep decline in the housing sector. Partly owing to high-interest rates, most borrowers who held adjustable-rate mortgages (ARMs), couldn’t afford their loan repayments. Nor could they save themselves by borrowing against the increased value of their estate or by selling it at a profit. (Indeed, many borrowers, found themselves in a soup, i.e they owed more on their mortgage loans than their actual property worth).Since, the number of foreclosures increased, banks stopped lending to such customers, which further led to reduced demand and costs.

What led to interbank credit freeze?

As the subprime mortgage market collapsed, many banks found themselves in distress. A good portion of their assets comprised of subprime loans or bonds created out of them alongside less-risky sorts of consumer debt (mortgage-backed security aka MBS i.e bundle of home loans bought from banks that issued them). Since, subprime loans in any given MBS were difficult to trace, even for the institution that owned them, banks began to doubt each other’s creditworthiness, resulting in an interbank credit freeze. This impaired the power of banks to increase credit even to financially healthy consumers, including businesses. Consequently, businesses were trying to scale back their expenses and investments, resulting in widespread job losses. This was further reducing their product demand, as most of the consumers were now unemployed or had reduced purchasing power.

The portfolios of even prestigious banks and investment firms were discovered to be fictional. They supported nearly worthless assets, most of those institutions applied for the govt. bailouts soughing mergers with healthier firms or declared themselves bankrupt (including Lehman Brothers, a 4th largest investment bank in the U.S. on Sep.15, 2008).

How it affected other businesses?

Other major businesses whose products are generally bundled with consumer loans were also suffering substantial losses. The car companies General Motors and Chrysler, for instance, filed for bankruptcy in 2009. They were obliged to accept partial government ownership through bailout programs. The buyer confidence within the economy was reasonably reduced. This led most Americans to curtail their expenses in anticipation of tough times ahead. The trend that further affected business sentiments. of these factors together extended a deep recession within the U.S. From the recession starting in December 2007 to its end in June 2009, the Country’s GDP declined by 4.3 percent. Unemployment increased from 5 percent to 9.5 percent, peaking to 10 percent by October 2009.

Job losses resulted in increased Poverty

Lakhs of individuals lost their homes, jobs, and savings. The poverty within the U.S. increased, from 12.5 percent in 2007 to quite 15 percent in 2010. However, a greater increase in poverty was deterred by federal legislation, the 2009 American Recovery and Reinvestment Act (ARRA).

They infused funds to make and preserve jobs and other safety programs. Enormous capital was lost as U.S. stock prices—represented by the S&P 500 which fell nearly to 43 percent of its value between 2007 and 2009 (by 2013 the S&P recovered this loss, and soon exceeded the 2007 peak). Altogether, between late 2007 and early 2009, Americans lost an estimated $16 trillion in net worth.

Households headed by younger adults, particularly by individuals born within the 1980s, lost the major chunk of the wealth compared to what had been accumulated by earlier generations of similar age groups & took the longest time to recover. A number of them still hadn’t recovered even a decade after the recession peak. In 2010 wealth of a median household headed by an individual born within the 1980s was nearly 25 percent below what earlier generations of an equivalent age bracket had accumulated. The shortfall increased to 41 percent in 2013 and remained above 34 percent as late as 2016. Those sets of young adults were termed as “lost generation”. Due to the good Recession, this set was poorer than earlier generations for the remaining life.

And then it spread to other parts of the world

The financial crisis gradually spread from the U.S. to other countries. Even in western Europe, where several major banks had invested profoundly in the American MBS recession was imminent. Most industrialized nations experienced economic slowdowns of varying severity and lots of responded with stimulus packages like ARRA. Some countries were suffering from serious political aftermaths due to recession. Iceland was one of them, where the govt collapsed, and later the country’s three largest banks were nationalized. Altogether the countries suffering from the Great Recession, recovery was slow and uneven. The broader social consequences of the downturn like lower fertility rates, historically high levels of student debt, and diminished job prospects among young adults remained for several years.

It took almost 2 years for countries to recover from the last recession. This time the magnitude of the recession seems worse. Let’s hope economies recover better compared to the last one before we fall into the trap of the Great Depression.

Check out our outlook on Indian stock market crash in 2020 in the video (in Hindi) below

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Stock Market – Is it your Cup of Tea?

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Stock Market

“Stock market”, “Share bazaar” etc are the terms that many people are familiar with. However, most individuals remain unfamiliar with terms such as “stock”, “buying and selling a stock”, “stock trading chart,” and “bull or bear grip”.

Even the term “stock market” confuses them. Let alone the subject of those who are not having financial expertise. People scratch their heads whenever they hear their neighbors complain about the low prices of shares listed on the market or if a coworker suddenly gets a huge profit from their stock market investment. Many people fail to understand that if these listed companies play the “stock game” correctly, the stock price can lead to a business boom or bankruptcy. Simply put, the stocks represent the assets and profits of the company. If the company makes a profit, the value is often distributed annually among the shareholders in the form of dividends or reflects in terms of the share price.

Stock market defined

The stock market – also known as the “stock exchange” – is a financial institution comprising of stocks and other securities of a licensed broker trade company – including privately traded securities – that are approved by SEBI (Security and Exchange Board of India) & traded by the exchange. Brokers buy and sell stocks based on the needs and requirements of the people and/or companies they represent.

There are two types of market:

  • Primary stock market

    Trading of Initial public offering (IPO) and other brand new issues by sellers and buyers.

  • Secondary stock market

    For trading of stocks in the market by buyers and sellers

General stock market Vocabulary

The stock market “lingo” is not something to confuse with. To understand stock market trends, you need to be able to learn some of the commonly used terms. You should assess stock market technical charts or understand the fundamentals behind the listed stock. By taking the initiative to learn the basics of the stock market, you will turn into a knowledgeable investor and be able to make good stock trading decisions or build a long term corpus in form of Stocks which may be liquidated at individual discretion.

 Let’s take a look at some terms, which will help you understand the most in the stock market:

Stock Price

This is the price for which an individual decides to buy or to sell a stock. Factors that directly affect stock prices are the position and performance of the stock issuing company. Another term related to the stock /share price is a market capitalization – or simply market cap – which multiplies the share price by the number of shares. Other factors affecting stock/share prices include current performance, expansion, and future growth of the associated firm/company. In simple terms. If a company is performing poorly in the stock market, its share price declines.

Conversely, if these companies are performing well, you will see stock prices rise in value. Eg – Satyam Computers a listed company on the stock exchange, due to its poor performance and scam is no more available to trade on the stock exchange and burned big holes in investor’s pockets back in 2009 (Read More about rise and fall of Satyam Computers here).

On the other hand stocks/shares of companies like Infosys, TCS have created immense wealth for investors since their listing.

Technical Chart of a script

Reading the stock market charts

Also known as technical charts, these charts and quotes provide the current state of performance of the stock in the market. These stock changes are reflected as “day-to-day” or “intra-day” depending on the business or market sentiments of that particular day. There is no compulsion that one need not be strong in the technical analysis if he/she can understand market Fundamentals or sentiments.

52-week high and low

This includes stock data over 52 weeks (symbolic for 1 year). On the reporting date, you will be able to see the shares with the lowest and highest prices during these 52 weeks.

Ticker symbol

Each company trading on the stock market is assigned an abbreviation or a specific letter. These ticker symbols are used so that all companies are easily listed on the ticker tape. All major stock exchanges in India – such as the Bombay Stock Exchange, National Stock Exchange, and SENSEX – restrict ticker symbols to only 1 to 4 characters (similar to heraldic symbols on British exchanges). All new firms register their symbols, which are distinct from the existing symbols of other firms. Examples of ticker symbols include VEDL for Vedanta Ltd. and M&M for Mahindra & Mahindra Ltd.

Dividend Per Share and Dividend Yield

In the stock market, a company issues dividends (Read about this and other corporate actions and their impact here) if description columns are filled with both of these titles. You can calculate the dividend yield by dividing the annual dividend by the current price per share. This dividend yield means that the shareholder has a liquid (cash) return on the price invested per share/stock.

Price to Earnings Ratio or P / E Ratio

Dividing the latest stock price by the average earnings per share for the last 4 quarters gives a PE ratio. In simple terms, if the PE ratio of a company is 15 then considering the performance/earnings of the company remains the same, at the current price the company will be able to break even the investment in 15 years.

Trading volume

selling and buying transactions that occur during the day.

Net change

the difference in stock prices since the last trading session. The net change enables you to see the direction where the stock price is heading – with a plus (green) symbol in a positive direction while a minus(red) symbol in a negative direction.

Bull and Bear in stock market
Greed and Fear representation in terms of Bull and Bear

Bull and Bear

“bull” and “bear” are economic indicators for the stock market. When the value of shares increases, you have a bull market. It is an indicator of the good health of the economy. In a bull market, investors can stand to gain substantial profits from selling the stocks with them. Conversely, bear markets signal an economic decline so that investors need to sell their stock before prices fall. During a bear market, a lot of investors and businesses lose little if they have not depreciated rapidly before buying good shares and selling those shares. Example- The Great recession 2007-09 (read here) was a bear market and change in central government back in 2014 lead to a change in investor sentiments followed by a sudden spur of buying i.e Bull Market.

As a thumb rule, as Warren Buffet says “Be Fearful When Others Are Greedy”. Here Fear means bear and greed represents a bull.

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