WHAT WE MUST LEARN FROM SATYAM SCAM

In some ways, the tax-free status of IT companies may have allowed the Satyam promoter to cook up numbers in the company balance sheet. Had the company being paying tax at the regular rate, inflating revenues and profits would have been that much more difficult, as tax payments mean real cash outgo. Indeed, when corporate accounts come under a cloud, investors should look at at tax payments and dividends, both of which entail cash outflow from the company, as a source of comfort about the sanctity of accounts. The IT sector was given a 10 year tax holiday. The benefit was to end in March, 2009, but the govt. has extended it by one year.

However, in 2007-08, they were brought under Mininimum Alternate Tax ( MAT ) and now have to pay a minimum 12% tax on their book profits. Before MAT was imposed, Satyam paid a tax only about Rs 650 crore in the 5 years to 2006-07 on cumulative pre-tax profits of over Rs. 5,000 crore. Over the same period it distributed cumulative dividends, including dividend distribution tax, of about Rs. 950 crore. These cash payments are small given the company's profits. Seeing these low visible payments, the promoters may have been tempted to fudge accounts.

The Satyam episode shows even cash balances can be manipulated. It is easier to verify these than revenues and profits. There is a need for greater attention to, and detailing of, cash-flow statements of companies. It would perhaps be better to simlify the way the cash-flow statements is presented and made part of of the quarterly disclosures. This would atleast make investors aware that cash-flow of companies also needs to be appreciated while making investment decisions. The govt. may also want to reconsider its decision to give tax exemptions under the SEZ scheme. A MAT imposition on units located in SEZ's may act as some detterent to those tempted to manipulate accounts. Of course, a trail of cash payments in no way rules out a fraud totally, but it should provide some additional comfort to stakeholders. In fact, it is for this reason that, other things being equal, dividend paying companies tend to command a premium in mature stock markets.

It should also be mandatory that minimum 2 auditors should check the companies accounts, to safeguard the interests of the stakeholders.

A punishment for such a fraud, should be a life sentence for the promoters, which will be a big detterent for other companies, if they want to follow Raju.

I am sure, lot of things are waiting to be unfolded in coming times and we shall know of many such companies who fudge accounts to cheat the investors. In these kind of frauds, besides life imprisonment, their houses and personal movable and immovable propereties also need to be attached, to give a lesson to these corporates, not to take innocent investors for a ride.