Satyam to Fin Tech: India needs more high-profile arrests and early convictions

This fraud reeks of things better left unsaid. But it pales, as a fraud, in comparison with some of the other things we’ve seen in the stock market

Deepak Shenoy April 10, 2015 09:47:30 IST
Satyam to Fin Tech: India needs more high-profile arrests and early convictions

The case of Satyam has finally been decided.

In December 2008, just after the collapse of Lehman brothers, one of India’s largest outsourcers, Satyam, decided to buy a promoter-run listed firm, Maytas Constructions, which was in the business of real estate. Why would an IT company buy a real estate firm? Good question, and this was being asked by everyone just as the stock price kept falling. As institutions got more antsy, Satyam founder Ramalinga Raju came out with startling statement: he had falsified accounts of the company to show higher profits. The cash balances – which would have occurred as a result of high retained profits – were non-existent, with a hole of over Rs 5,000 crore.

After 6 long years, the courts have finally declared Raju guilty of fraud. Meanwhile the company was taken over by Tech Mahindra and merged into it, with even the central government involved on coordinating the rescue. Raju, though, will now face sentencing.

Satyam to Fin Tech India needs more highprofile arrests and early convictions

Raju in a file photo. Reuters image

This fraud reeks of things better left unsaid. But it pales, as a fraud, in comparison with some of the other things we’ve seen in the stock market.

You might remember all the really big scams, like Harshad Mehta and Ketan Parekh but those were largely driven by traders/brokers, who tried to game the market by unscrupulous financing or by price rigging. This is common even now, and much of it goes unquestioned – even though it has been suggested that this price rigging is used for money laundering.

But there are also company or promoter led frauds. These, too, are a dime a dozen, and often but not often enough, SEBI investigates and finds astounding evidence of promoter collusion, false statements to the media or the lack of proper accounting or reporting standards.

Recently a subsidiary of Financial Technologies (FT), called National Spot Exchange Limited (NSEL) went bust. In August 2012, it suddenly stopped all trading and it was soon discovered that the Rs 5600 crore “scam” involved a massive trading setup where supposedly commodities were supposed to be bought and sold. In reality, all that NSEL was facilitating were “pair trades” – a combination of a buy and a sell a few days later, with an investor pocketing the difference. This money was interest paid by a very small set of “borrowers” who pledged their commodities in exchange for money for a short period, but they rolled it over for more than two years and it turned out they didn’t even have the commodities in the first place. There were just 24 borrowers, and more than 13,000 “investors”.

The scam has seen many revelations, especially about the involvement of the management of Financial Technologies, so much that the government has published a draft note that intends to merge FT with NSEL, thus making the repayment of the money FT’s problem.

In 2009, a company called Pyramid Saimira saw strange behaviour. They announced that SEBI has demanded the promoters make a public offer to buys shares, and the company’s share price went up in anticipation. It turned out the letter was a fraud; a co-promoter, NirmalKotecha colluded with a journalist to release this to the media, and used the resulting price increase to dump his shares.

Raj Rajarathnam, a Sri Lankan born hedge fund manager, used insider information obtained from the then respected Rajat Gupta to buy shares of Goldman Sachs just before a fresh investment gave a big fillip to the company’s shares. Gupta and Rajarathnam are in prison, because the US justice system doesn’t take six years when it can take one.

Insider trading rules, while present in India, are hardly ever enforced. Parties in the know often use information they should not, but there has not been a big case of insider trading at all. Even recently, two Indians were charged of Insider trading in the US when they tried to use privileged information to trade in shares of Cooper Tire, which got an acquisition bid from the Indian listed Apollo tyres. The accused include the husband of Apollo’s lawyer; he had learnt of the deal from his wife.

In India, corporate attempts to stiff shareholders takes other methods too. Merging a promoter company for stock is an often used method to raise promoter stake in a company – and many times, the company being merged isn’t quite worth that much stock, but who will complain? Most institutional investors now are aware of these tactics and threaten to block such mergers, but in many large cases there is little or no opposition.

And then there’s the siphoning out of money by giving lucrative contracts to relatives. A recently listed theme park was found to give salaries of Rs 60 lakh to the daughters of the founder, for design and marketing services; higher wages than even the vice presidents of the company! In such situations it’s very difficult to figure out if someone’s being paid right, or if this is just another mechanism for promoter compensation.

Investors have to be aware of many such concepts, and in too many cases, the fraud comes to “light” after years of a company hogging the limelight. The most respected companies have seen themselves tumble as reports of bad corporate governance tumble in. In some cases, companies have been known to find whistleblowers and attempt to subdue them by all possible means.

An analyst who helped write a report about Indiabulls was put in prison for 15 days, using questionable evidence claiming extortion. Another whistleblower in Bhushan Steel was recently sued by the company of having reported of its tax evasion to authorities; even though the authorities did find that the whistleblower was right and recovered dues and penalties. It’s terrible we allow this kind of harassment to happen, but we do.

We hear of anti-corruption quite often, and it is really time to arrest the spread of fraud in the stock market, especially from the promoters and management of companies. While cases like Satyam help, it has taken six long years, even after the majority of evidence came from the promoter himself in his confession. Such tardy action and delayed justice is hardly a deterrent for the next lot, and SEBI must enforce its regulations more strongly, with more high profile arrests and convictions, if we are to believe that our markets are not full of big, hairy, manipulative scamsters.

Deepak Shenoy has founded Capital Mind, which provides financial market analytics and easy investing concepts to investors in India. He is based in Bangalore and tweets @deepakshenoy.

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