Independent Directors Resign from Satyam Board ....

Satyam drama has raised issues on corporate governance. Not surprising because the markets only focus on what they want. To us the crux of the issue is the role of Independent Directors. The media has taken-off on the independent directors of Satyam and most of them have resigned. Is the media justified in flaying the independent directors? Are investors right in assuming that Independent Directors will fight for the right thing?

The key is can Independent Directors be "motivated" and "independent" at the same time. If not, aren't the expectations too much from them?

Let's first see why people join the Boards of Companies to become Independent Directors - different people have different reasons - but some of them could be -

• adding to their status
• perks that help you get free business class trips to India.
• hope that they can leverage this position to further their own business
• in some cases, pretty decent income as commission on profits
• relationship / friendship with the promoters

Most of these goals are attained by "joining" and "continuing" to be on the Board. Since they have no financial gains from being on the Board, they really have no serious interest in the Company's affairs. The benefits they were looking for will keep coming to them as long as they are on the Board.

Now let's look at this from the Company's perspective. Why does it want "some people" to be on its Board as Independent Directors. Again many reasons, but some of them could be -

• Compliance requirement to have a minimum percentage of independent directors.
• Eminent members on the Board to increase the Company's stature.
• Professional advice.

The Directors are generally brought on to the Board by Promoters. The Promoters are happy to have people on Board so long as it doesn't cost much for them and they are benefiting from this relationship in some way or the other. And most importantly, as long as they are free to do what they want.

So both, the Directors and the Company, get what they want and do not want to rock the boat.

Bigger companies like Satyam may be following good Board practices (not the same as good Corporate Governance) - proper notices, Agenda, regular meetings, circulation of minutes, etc. Forget good corporate governance; there is a vast majority of companies that don't do any of these basic things.

The Satyam episode is likely to be a wake-up call to all independent directors who have till now assumed that they have nothing to lose. Several questions will come to their minds and make them rethink on their role as an independent director.

• why are they on the Board of the Companies?
• what benefit are they expecting / deriving from these relationships?
• what are the legal responsibilities?
• am I really competent and knowledgeable to help in key decisions that are taken by the Board?
• is it worth being responsible for something on which they have no control?
• is it worth taking the risk of being pursued by ED, ROC, Courts, Police, Media, etc?
• is it worth being hauled up in public or by media for actions of the Board, especially for decisions which they did not like but did not officially record as dissent to keep the good relationship going?

The media, investors and all regulatory authorities are of course right in expecting that Independent Directors will take the right decisions. After all it is their duty and responsibility. So what if they are not benefiting in any way!! Even If they have chosen to do this as a social service, they are still responsible.

ONE CANNOT AVOID RESPONSIBILITY FOR DECISIONS TAKEN AT THE BOARD MEETINGS WHERE THEY WERE PRESENT - THE RIGHT TO DISSENT WAS ALWAYS THERE - AND SO WAS THE RIGHT TO RESIGN.

THE CHOICE IS THEIRS. Most promoters cannot accept dissent and therefore it creates rifts and spoils relationships. After the Satyam episode many independent directors may choose to resign from Boards rather than create unpleasantness in their relationships.

AND IF THEY HAVE SOMETHING SIGNIFICANT TO LOSE, THEN THEY ARE NOT REALLY INDEPENDENT, ARE THEY?

Vivek Bhargava

Just when most people were turning bullish ... the market slides

This is the way of the markets and that's the reason why we believe one should not mistake this for a reversal. The market is still bearish and we are going to retest the lows sometime in next quarter, which is not too far away. Most of the positives are already factored in and therefore one should not become bullish based on them.

In an otherwise dull market, Satyam drama was one of the most intriguing ones from the capital market perspective. What were the Rajus thinking when they decided to use Satyam cash to buy their stakes in group companies? They have been fairly capital market savvy, and so it's hard to believe that they underestimated the market reaction. Perhaps it was personal greed that clouded their judgement. And god knows what their Board and Advisors were doing when this decision was taken unanimously!! It takes several years to build a reputation and very little time to ruin it. A good lesson for the others though!!

The markets are finding it hard to go up from the current levels despite several positive developments. So it is possible that we have seen the peak of this particular rally. Though we will see a bounce but it seems unlikely that we will cross it. We stand by our timeline of 10th January 2009 as a possible turning point where the ongoing rally will reverse. A solid bottom will be formed in the next fall.

Vivek Bhargava

More and more people turning bullish ....

The positive triggers keep coming to negate the effects of dismal news on any front to ensure that hope is kept alive and the markets don't go into a downward spin. In the last week of October we had said that the OCTOBER LOWS WILL HOLD IN NOVEMBER AND DECEMBER and the rally will continue till the second week of January 2009. We are now into the fag end of December and there is no danger of the lows being violated. The breadth has been good and there has been a lot of insider buying at lower levels. We expect this rally to continue upwards till 10th Jan 2009. The higher we go, the more dangerous it will become.

• Liquidity seems to be easing and interest rates are coming down.
• Inflation is going down as demand is evaporating.
• US has bailed out its auto firms for the time being.
• Japan has cut interest rates and is pumping funds to capitalize its banks.
• Indian government is releasing its stimulus package in instalments.
• Oil price has cooled off again despite OPEC production cuts. This is a big plus for the Indian Government because it has taken away the oil subsidy burden off its head for the time being so that it can take care of its other commitments.
• Rupee is appreciating and that is aiding investment flows into the markets.
• Obama is planning on a huge $850 billion stimulus package and also planning efforts to avoid 3 million job cuts.

The earnings for the current quarter will be pretty dismal. The outlook beyond that for the next few quarters is still uncertain and gloomy. This means that we will definitely see another fall, which could test the earlier lows, after the current rally has matured fully by pricing in all the positive news.

A lot of people are now turning bullish with targets ranging between 12K to 13K. The peak for this rally will be at a point when it almost makes you believe that the bear market is over and a bull market has begun.

So be careful not to get caught in this rally!! It is a bear market rally.

Vivek Bhargava

Market Resilience signals continuation of rebound atleast till 10th Jan .....

On 28th November we had mentioned that the market valuations are attractive and the indices could rebound by 15-20% led by the commodity stocks. That has played out so far with stocks like Sterlite (+26%), SAIL (+17%), Tata Steel (+40%), Reliance(+15%) and Reliance Petroleum (+7%) have moved up significantly. Obviously it han't been a one way upward journey, but still the gains were pretty swift and substantial. The only ones that didn't gain from our list were the aluminium stocks and the reason is that they had already recovered 30% from their October lows. There is quite a bit of steam left and we think these stocks have some more distance to go.

The sensex is now at 9690.07, having risen about 7% since 27th November. Given the market resilience last week and particularly on Friday, we think the market will continue its upward journey atleast for another three weeks. Again it will not be a smooth journey, but in the short term the trend is positive.

There are several positive triggers that can help this upward journey continue:

• Bailout of the US auto majors - Ford, Chrysler and GM.
• Cut in US interest rates by another 0.5% on Tuesday.
• Second stimulus package by the Indian Government.
• Interest rate cuts in India.
• NAV propping by funds at the quarter / year end.
• Chinese government's decision to increase money supply to fight recession, which will give a further boost to commodity prices.
• Appreciation of the rupee to 45 levels as dollar loses value.
• OPEC plan to cut crude production in a bid to push up oil prices (meeting planned on 17th Dec).

There WILL be a lot of action in several midcap stocks, especially those in the F&O space. These stocks can give as much as 30-40 percent returns in the next four weeks.

Every bull market has its share of fraud companies. They somehow declare fantastic results and manage to give the most spectacular returns on the way up. Investors typically chase them on the downturn because they appear to be cheap. These are the ones that do most damage to our portfolios. Fortunately, the bear market filters them out and you have a clean lot at the end of the bear market. Give another four quarters and you will know the difference between the good and bad. Till then stick to companies that are old with proven track record and have size and liquidity.

Good luck!

Vivek Bhargava

DISCLAIMER:The views and opinions expressed here are strictly mine. In addition, my thoughts and opinions change from time to time. I consider this a necessary consequence of having an open mind. I do not undertake responsibility to update all my thoughts and opinions on this page.The information contained herein is from publicly available data or other sources believed to be reliable. I do not represent that the information contained herein is accurate or complete and it should not be relied upon as such. The user assumes the entire risk of any use made of this information.Investors should obtain advice from their own tax, financial, legal, and other advisors and only make investment decisions on the basis of the investor’s own objectives, experience, and resources.No liability whatsoever is accepted for any loss (whether direct, indirect, or consequential) that may arise from any use of the information contained in or derived from this page.

Will the Stimulus package stimulate??

Finally the stimulus package was announced by the government ... 30K cr or around $6B. The size is insignificant when you look at the packages announced by many other countries. RBI has also announced another repo and reverse repo rate cut by 1%. The idea is to make borrowing costs cheaper and also provide some relief to the industry. The thrust is on infrastructure spending, especially on the highways sector. The chances that it will stimulate demand are negligible.

Government spending is always a key factor in coming out of a recession. And how the government does that to make its spending most effective and also keep a check on fiscal deficits is the key challenge. If the government comes in too soon, it will exhaust its war chest before the real problem hits and the only beneficiaries will be the smarter players who can walk out with their money and profits. It would be fool hardy for the government to spend money on infrastructure when the commodity prices are still too high. Despite the correction most commodity prices are still fairly high since a part of the fall has been negated by the depreciation of the rupee. Creating infrastructure at competitive prices is important to maintain India's competitive edge. Doesn't it seem surprising that the benchmark for 1MW was Rs. 4 crore even in the mid nineties. And even after ten years it remains at pretty much the same level despite most costs having gone up quite significantly. No wonder India could never produce power at internationally competitive rates.

This recession actually provides the government an opportunity to adopt technology in a much bigger way than before. Apart from increasing the transparency levels, the bigger benefit will the higher multiplier effect that technology spending generates. The last five years are ample proof of that. The increased prospects of a buoyant economy will raise the prospects of capital inflows for infrastructure. Private sector spending will be far more efficient that government spending. The qualification norms for any type of direct spending should be stringent to ensure that only solid players are given the business opportunity. Otherwise it will mean money spent on nothing .. fuelling only the parallel economy.

The markets have gone up by more than 300 points. This has nothing to do with the stimulus package announced by the government. It's more because of the sharp jump in all Asian markets. We had mentioned about the commodity stocks sometime back. Their price behaviour subsequently has been in line with our expectations. Globally, the markets are looking for an excuse to give a rally. Further downsides will be likely only in the first quarter of next year. Till then a rally of 10-20% at the index level can be expected. The turning point is likely to be around 10-15 Jan 2009.

Vivek Bhargava.

DISCLAIMER: The views and opinions expressed here are strictly mine. In addition, my thoughts and opinions change from time to time. I consider this a necessary consequence of having an open mind. I do not undertake responsibility to update all my thoughts and opinions on this page.

The information contained herein is from publicly available data or other sources believed to be reliable. I do not represent that the information contained herein is accurate or complete and it should not be relied upon as such. The user assumes the entire risk of any use made of this information.

Investors should obtain advice from their own tax, financial, legal, and other advisors and only make investment decisions on the basis of the investor’s own objectives, experience, and resources.

No liability whatsoever is accepted for any loss (whether direct, indirect, or consequential) that may arise from any use of the information contained in or derived from this page.