Corporate scams and business cycles

Sukumar Ranganathan — Wed, 14 Jan 2009 04:36:00 GMT

It isn't surprising that the Satyam Computer Services scam , where the company's founder chairman Ramalinga Raju confessed to having fudged books to the tune of at least Rs 7136 crore, happened now.
India's real estate boom started tapering off towards the middle of last year and if, as one theory goes, the money from Satyam was used to fund associate Maytas Properties' hunger for real estate, the assets acquired are likely to be worth a lot less today.
If, on the contrary, and as Raju says, the money was never there and was simply created to keep corporate raiders at bay and please analysts, then the few good quarters, or few good years where revenue from software services soars aren't going to materialise anytime soon -- not with the recession in the US and Europe.
So, whichever way you look at it, one of two busts has contributed to the Satyam fraud.
That's because a bust is when carefully laid plans of companies, almost always dependant on a huge increase in business or asset prices, goes horribly wrong (or gang aft agley as Burns would have put it). And it's also because a bust is when companies, analysts, and investors start looking closely at numbers.
Remember, Enron, Tyco and WorldCom happened in the wake of the doctcom bust.
So, will more Satyam's emerge?
Maybe. What is certain is that several companies will go through unexpected pain as their long bets on assets such as real estate collapse. These companies will face a significant credit and cash crunch and do anything within their powers and, hopefully, within the limits of the law to raise money. The market probably expects the realty sector to be the most prone to this -- and stories are already beginning to appear about efforts by Unitech and DLF to shore up their finances. Also see this and this on how analysts feel about these companies.
Closer home, April and May, when most companies present their financial results for the year ended March (most Indian companies close their books on March 31) has always been seen as the season of scams. If things stay as they are now, we can safely expect to see a fair share of those this year.

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Corporate scams and business cycles