Customer Relationship Management

Satyam's CEO has written a mea culpa letter to the regulatory authorities indicating a fraud of epic proportions that included inflated cash balance, fake earnings and more. He said, the scheme reached "simply unmanageable proportions" and he was left in a position "like riding a tiger, not knowing how to get off without being eaten." CNBC referred to it as the "Indian Enron" on air today.

This will cast a long shadow on not just Indian IT companies but on all Indian companies, and perhaps other emerging market companies in general.

The sad reality is that this company is not alone. I suspect worse frauds by other Indian companies in the "Tier-2" category. Even Tier 1 companies like Reliance, DLF and Unitech appear to have used tricks to inflate assets. By way of example, a lot of companies in India bought land in villages (at very low prices) and as real estate value went up, they showed value of "land banks" as assets on their books. Reliance, the largest Indian company, earlier last year had an IPO for Reliance Power - a company with virtually no assets but plans to build several power plants. The Reliance Power IPO was a classic dot-com era style offering - there was very little there except a shell company with ambitions.

Expect to see more of this from India, and perhaps other places.

Glass Half Full

But all is not lost. On the positive side:

• This makes companies like Infosys and Wipro even more valuable. They are truly well managed and ethical compaines. For years, Wipro and Infosys have had to live with potholes and hostility from local governments because they refused to bribe local politicians.
• India has a process and regulatory system that while not perfect, still exists. I don't expect similar companies in China to do a mea culpa. It will be interesting to see how Indian regulatory bodies deal with this.

Finally, it was my fear of bubbles and inflated balance sheets that made me write this post on Indian Bubble - my most popular post ever. The myth of a billion consumers waiting to buy condos and mobile phones can be laid to rest for now. India is a huge economy for many opportunities but it has not repealed the laws of gravity - everything that goes up too fast must come down.