Satyam Accounting Scandal Erodes Confidence in India Equities

By Pooja Thakur

Jan. 8 (Bloomberg) -- The accounting scandal that caused Satyam Computer Services Ltd. to collapse yesterday is shaking investor confidence in Indian stocks, putting an end to the market’s best start since 2000.

“How did they manage to conceal a fraud of such magnitude even from the auditors?” said Greg Kuhnert, a London-based fund manager at Investec Asset Management Ltd., which manages about $10 billion and sold its 0.15 percent stake in Satyam last month. “That to me is a huge concern and is making me very nervous about the situation in India now.”

India’s Sensex index tumbled 7.3 percent yesterday, led by a 78 percent plunge in Satyam, after Chairman Ramalinga Raju said profits at the company had been inflated for years and then resigned. Satyam American depositary receipts fell $8.42, or 90 percent, to 93 cents before the opening of the New York Stock Exchange, which then halted trading in the stock.

Just six weeks after Franklin Templeton Investments’ Mark Mobius said the world’s second-fastest growing major economy would overcome the Mumbai terrorist attacks and prosper, his company said the Satyam scandal will weigh on investors.

“This unfortunate development will be a short-term negative for market sentiment,” Sukumar Rajah, chief investment officer of equity in India at Franklin Templeton Investments, which manages $4 billion of assets in the country, said in an e-mail.

Still, by forcing regulators to improve oversight, the incident “should be a long term positive,” Rajah said.

‘Horrifying’

India’s markets regulator C.B. Bhave said the Satyam disclosure was of “horrifying magnitude.” The Securities & Exchange Board of India ordered a probe into trading in Satyam shares, according to the regulator’s Web site.

“We are verifying all the facts,” Prem Chand Gupta, India’s minister for company affairs, said in New Delhi yesterday. “Once we complete our investigation, we will take appropriate action,” he said, adding that “there will be no leniency.”

Satyam, which means “truth” in Sanskrit, shook the market after the Sensex had rebounded 7 percent in the first four days of the year and global investors turned net buyers of Indian shares. The index plunged 52 percent in 2008 and investors pulled a record $13.1 billion from the market last year, according to the nation’s stock market regulator.

Cheap Stocks

Developing-nation stocks are trading near their cheapest levels in a decade after the global economic slowdown and a slump in commodity prices sent the MSCI Emerging Markets Index down 54 percent in 2008. In comparison, the MSCI World Index dropped 42 percent. Shares in the MSCI emerging-markets index trade at 8.8 times reported earnings, while developed shares fetch 11.5 times profit. Sensex companies trade at 9.5 times earnings.

Aberdeen Asset Management Asia Ltd., Satyam’s largest institutional investor as of September, said its investment outlook for India hasn’t changed. Funds run by Aberdeen own at least 5.12 percent of Satyam, according the Hyderabad-based company’s filings for the quarter ended Sept. 31.

“People will grow a bit more dispassionate, but you can say the same for the U.S. and elsewhere,” said Hugh Young, managing director at Aberdeen’s Asian unit, which manages $37.3 billion. “India has great companies that do the right things. Hopefully this is a one off.” He declined to say how many Satyam shares Aberdeen holds, or whether any were sold recently.

India’s $1.2 trillion economy may grow 7 percent in the year ending March 31, the slowest pace since 2003, according to government forecasts. The economy may expand at close to that rate in the next fiscal year as the global recession cuts exports and domestic demand wanes, Junior Industry Minister Ashwani Kumar said in New Delhi yesterday.

Concern

The Satyam scandal is spurring concern that India’s corporate governance is inadequate days before the earnings reporting season starts. Infosys Technologies Ltd., the country’s second-largest software services provider, will report its financial results for the quarter ended Dec. 31 on Jan. 13.

PricewaterhouseCoopers LLP, Satyam’s auditor, declined to comment on the scandal, according to an e-mail from the New York- based firm’s public relations adviser Edelman.

“It may take a while to restore the lost confidence,” Rahul Chadha, head of Indian equities in Hong Kong for Mirae Asset Global Investment, which oversees $39 billion. India “was attractive primarily on account of quality of managements and robust business models,” Chadha said.

To contact the reporters on this story: Pooja Thakur in Mumbai at pthakur@bloomberg.net