Saytam: India’s Enron
There’s a very interesting story on the worlds third largest outsourcing company collapsing because one of it’s founders has admitted to cooking the books for years. According to the article: “50.4 billion rupees, or $1.04 billion, of the 53.6 billion rupees in cash and bank loans the company listed as assets for its second quarter, which ended in September, were nonexistent”. Once again, an “accounting” firm was responsible for auditing this company (Pricewaterhouse Coopers) and they fooled as well.
This problem of cooking a public’s financial books is obviously not unique to India. Many American companies have gotten caught doing this and I must say (as I think I’ve said here before on numerous occasions) — once I started reading books about the collapse of many of these American companies (Enron, Worldcom, Arthur Anderson, etc, etc) — I’ started becoming increasingly skeptical about the veracity (aka the “truthfulness”) of many of these financial statements that are put out by the CEO’s of these companies. And once again, I must say that I am continually shocked, (especially when I read Kenyan business blogs) by bloggers who will attend these AGM meetings or talk about a companies financial health, based almost entirely on what they hear the CEO saying on tv, or the news or in an AGM meeting.
This of course brings me to a point I’ve been trying to make here( for several months now) about many of the companies listed on the Nairobi Stock Exchange — who knows what these CEO’s and founders are really doing with the money? You can come here & throw up all kinds of business jingoism you wish, but unless you have access to that companies bank account, you really don’t know.
Satyam, by all outward appearances, looked like a very succcesful company. They had 53,000 employee’s, they had many large clients like General Electric, Nestle and even the U.S. government, they operated in 66 countries, etc, etc…You see? had someone with inside information come here and said that the company was a fraud, I can see someone replying that it couldn’t be based on the above “statistics” I just listed. I mean, with those stats the company HAS to be sound, right?
So, call me crazy, but I am convinced that they are companies on the NSE that are cooking their numbers and eventually, when a large enough company gets caught, people will soon realize why you can’t trust these media announcements where CEO’s are always telling you about their super profits.
I don’t think the regulatory environment is India is that much worse than the regulatory environment in America. However, I am sure that the regulatory environment in Kenya is much weaker than what you have in either of these two countries and that means, if people can get away with it, they will try to.
Why even bother trying to analyze a company if you’re a mere outsider? If you are like Warren Buffett and have access to the CEO’s, then maybe you have accurate information, but how many people are like Buffett? Almost none.
It’s the headline story in the Times of India.
** Here are instructions on how to read wall street journal articles for free (all the articles!)
another fraud, this time in India, they have happened since time immemorial and will happen again in future – maybe at apple, google, or microsoft
But as a blogger who attend AGM meetings and talks about a companies financial health I fail to see what you are advocating for as sources of information for investment decision making; I, and I’m sure other US, Indian, and Kenyan investors use financial reports (audited by reputable firms), media reports, general observations, market trends to make investment decisions. Uchumi collapsed (I was at their last AGM) and their books were bad – (accumulated losses, weak cash, qualified accounts) , but true. Angry shareholders there wanted the blood of the auditors, instead of the directors, and a few months later it crashed
Bankelele:
I believe in following the price and nothing but the price, but they are many ways to skin a cat.
However, I think these scandals have been increasing lately because of the enormous wealth that taking a company public provides. The NSE is still relatively new and I guess we’ll see how that progresses.
There being no other reliable source of financial information on any company here in Kenya or anywhere else in the world, as an investor (blogger) I’m forced to rely on CEO’s statements and company announcements. It’s imperative that we’ve placed a fiduciary responsibility to the company management and their external auditors to provide the public with accurate financial status of listed companies. creative accounting is a practiced widely practiced even here in our own NSE and as a financial blogger (not a public auditor) i can only analyze the published financial statement and give a very personalized opinion on their status. Surely, you can’t put all your trust on company announcements.
You can only mitigate – but easier said than done. General principle is not to fall in love with a stock: Watch out for cockroaches and bail out as soon as you see one.
Reasoning: One Coackroach usually is a good sign of an infestation (according to… Warren Buffet, who else?)
Example (with benefit of hindsight): The issues at the last Uchumi AGM should have been a clear “bail out signal” to investors.
According to Investopaedia, you must be cold and calculating when dealing with stocks. Control your greed and fear. Do fundamental research and then study the charts. Then make an entry/exit plan and stick to it.
(this is just my opinion – don’t mistake it for advise.)
I have to agree with the other commentators here there most investors do not have any other source of information except for the information provided by the CEOs.
I am convinced that majority of companies cook their books one way or the other. It is very difficult to find fault especially when you (as investor) are getting good returns as in the case of Mardoff clients.
For 2009, I intend to invest short-term and not try to invest in a company for a long period. The only company I can invest in longterm in Kenya is EABL.
http://www.empowerkenya.blogspot.com
Maishanki:
When you talk about business, I actually like your comments. It’s just when you talk about politics that we diverge. I think you’re more philosophical and perhaps even more theoretical than I am. You must have enjoyed philosophy classes in school. For me, sitting through them was like experiencing a slow death.
Kainvestor:
In the west, investors have access to 24hour information on the price of shares and you can buy or sell anytime of the day you want. So, people do have the information. I’d also say that I think the financial media in the west, is very, very, good at keeping up with what these companies are doing. The magazine Barrons had a story on Madoff long before it became public. Also, an investor called Harry Markopolos had warned about Madoff 9 years ago and even filed a case with the SEC. (see link here:Link here:(link here: “http://money.blogdig.net/archives/articles/December2008)
However, I still think the most important aspect of this is the 24hour computerized access to the share prices and the ability to execute trades (in or out) in a matter of minutes from wherever you are in the world.
On Auditing Firms:
There’s a huge conflict of interest with many of these accounting firms. I mean, Saytam hires pricewaterhouse to do an audit and pricewaterhouse will charge saytam a fee for this service. So obviously, pricewaterhouse is not going to say Saytam is broke or else they’ll risk losing their fee! This is another problem with this on going financial crisis — nobody is quite sure how much money or how much debt these companies have because the accounting firms are really not independent. They’re like brokers — they’re just trying to collect their fee’s.
Pricewaterhouse certified that Saytam had $1billion dollars in cash when all they had was $78 million. So, that means that pricewaterhouse didn’t even check the companies bank accounts.
Has anyone here worked for an accounting firm? When you go in to audit a company, what exactly do you do?
On Uchumi:
By the time they were admitting financial problems, the directors (read: Kirubi et al.) had already bailed and cashed out their shares. Does anybody know what exactly happened?
Had you had a computerized price chart, you would have been able to see the price dropping and you would have gotten out. In this case, the directors knew what was happening, they didn’t tell anyone until it was too late and shareholders, who relied on the veracity of the CEO were left holding the debt.
And don’t forget, in America, the shareholders can sue the directors of these companies. Most of the millions of dollars these directors made, will end up either going to lawyers or going towards the settlement of shareholder lawsuits.
The former CEO’s of companies like Enron, Worldcom and Tyco are now sitting behind jail cells.
Madoff will probably spend the rest of his life in jail and his sons will spend the rest of their lives getting sued by all the investors who lost money.
So, yes, you will have companies like microsoft, google and others, whose founders decide that breaking the law is just not worth it, but you still shouldn’t just trust them ad hominem.
Good points raised here about just how much you can believe. Argument is:
We cant all have perfect information.
The guy controlling the info is king
We need to invest
We must listen to the king
What can we do?
Trust but verify (as much as you can)
Follow intuition (shamelessly)
Jump if the story is too good
Pray
KE: Please don’t invest in any firm run by others… simple… I love private enterprise & freedom to choose my destiny…
In fact, why take your salary in ‘cash’ since it is fiat money so… take in in gold or sugar or wheat… or buy commodities asap in exchange for your US$…
Even Jacob was conned into marrying the older/uglier sister… so scams happen all the time… erm, didn’t yahweh’s favorite, David, con/kill Uriah for some action?
Hi Kenyanentrepreneur,
Nice article. You actually made some sense this time. I was starting to doubt you but you have pulled through and regained some credibility. Keep up with that positive trend.
Share, Educate and Empower.
@Cold Tusker… Some basic math lesson:
(Criticism – constructive alternatives) = whining.
Let “Constructive Alternatives” be “X”. In this equation, X is an unknown (you didn’t offer any).
Rearranging the equation to solve for “X” gives us:
(Ciritism – Whining) = constructive alternatives
Therefore, mathematically, it follows that you need to cut down on the whining and come up with some solid/plausible points for debate.
Annonymous:
I don’t know why people keep hating on my articles because I honestly believe that I make sense all the time
but you know what they say? Publish and be damned.
Coldtusker:
I am not saying don’t invest. I am saying invest, but follow only the price of the stock and nothing else. Don’t put too much weight in the pronouncements from the management team. However, in order to do this, you’d need to have access to computerized charts that run 24/7 and that allow you to go in and out of trades if the price starts falling.
Do Kenyans have access to this kind of computerized data? If a stock price starts falling, you don’t want to wait for 3 days for your broker to pull you out. Also, with computerized trading, you get to keep your money in your own bank account and just use the broker to transact the trade, thereby avoiding scams like the one’s with Nyagah brokers where client’s money was stolen. I believe the NSE is now trying to introduce such a rule whereby people will stop leaving their money with their brokers.
The other point that we have not touched upon is whether or not this scandal might open up outsourcing opportunities for Kenyan firms in the future. I always used to wonder how these previously owned family companies were able to turn themselves into world conglomerates so quickly. People are now beginning to look at the other outsourcing companies like Wipro and Infosys because they don’t think this is an isolated case.
Remember, I always used to wonder why Kenyans couldn’t do this. Why they couldn’t turn their companies into world conglomerates. I’ve been complaining about Indian outsourcing companies forever. There’s nothing worse than being re-directed to India when you have a customer service question.
So, let us discuss this issue about opportunities for Kenyan outsouring.
Go read the articles about Saytam in the wall street journal, which you can now get for free (if you follow the link I attached above).
Kenyanentrepreneur, they say that mad people believe that everyone else is insane… I am not saying that is the case with you, just that sometimes we need to look inwards for the truth.
Annon:
People who don’t blog don’t understand how it works. A blog is not about you the reader. A blog is really more like a personal diary for the blogger to express his or her viewpoints. If you find them interesting, then you can join in the discussion. If you don’t agree with the viewpoints, you can use the comment section to air your counter points, but expecting a blogger to continuously write about topics that only you might find interesting will never happen.
I’ve told this to my friends who are always trying to tell me how to construct my blog — I have told them to start their own blogs and construct it how they want, but none have done it yet.
You’ll rarely see a blogger telling another blogger what to write on his or her blog because they know what it takes to do it day after day after day. If you’ve never done it, you’ll never quite know.
Anyway, I want to get back to talking about the topic at hand, which involves cooking financial books, outsourcing, India, Kenya, etc, etc
Anon: Puhleeze… get a life… these are comments (& mine was directed at KE) not a thesis or SWOT…
Yes, I had a ’solution’ for KE… don’t trust numbers (& there are good reasons) then don’t invest in ‘others’…
BTW… LOL… you guyz know that I am mega-critic of governments being in business for themselves since corruption, nepotism, inefficiency, etc are the order of the day!
Well… http://www.coldtusker.blogspot.com... turns out that KPC (& its politically connected friend Triton) was to blame for the recent oil/fuel shortages in Kenya but it’s supporters (including most of the Kenyan public) accused the Oil Marketers of ‘hoarding’…
Apparently, KPC was providing false information to many of the other players incl… Oil Marketers, public, KCB, other banks… LOL…
The bad news is the morons in the government are going to establish price controls based on KPC’s deception… and this will lead to additional scams!
coldtusker:
I tried to read the piece in your blog, but you had too many abbreviations and I still have questions about it. So, let me try and break this down and you can tell me if it’s correct or not (and anyone else who has information on this should also comment)
So, Triton borrows money from KCB (bank) so it can buy oil from KPC.
Triton is then supposed to sell this oil to gas stations around the country? yes or no?
However, Triton hasn’t sold the oil they purchased to any gas stations and that’s why there’s a shortage of gas.
Now, KCB, who loaned Triton billions of shillings is wondering how they’ll get their money back since nobody knows what Triton did with the oil. Did they sell it to someone else and if so, does that mean they have the money to repay back the loan? or did they just take the loan money and eat it?
Questions:
1)Why doesn’t KPC sell the oil directly to the gas stations
2)Why don’t the gas stations get their oil directly from their franchisee’s? like exxon, shell or whomever. Why do they have to go through KPC, then triton, then whomever?
And who is the mhindi guy associated with this firm Triton?
Basically, it seems that there was no oil in the first place. Triton and KPC colluded to con KCB.
KPC lied about the existence of the oil. Nothing was ever imported. The chumes were probably shared…
Just my thoughts/opinion based on conjecture. No facts/proof.
About the abbreviations… I try to provide full ‘names’ but generally if you have been following the saga you would be familiar…
1) KPC is supposed to be a mere ‘conduit/bridge/storage firm’. The oil is imported through the Oil Tender System (OTS) & the firms who participate are mainly Oil Marketers. It is the OMs who sell to the individual gas stations.
2) Under the OTS, one firm imports the oil on behalf of the entire industry (rules formulated by the Ministry of Energy & not fully supported by the private OMs)
The imports are stored at KPC’s depots. 70% of all product has to be processed at Kenya Petroleum Refineries Ltd (government rules/law). KPRL is an inefficient refiner & adds an additional KShs 3/- to the cost.
The product is always owned by the financier until it is paid for…
KPC on instructions of the financier releases product to the OMs. The OMs then sell it.
KPC performed the last step… without getting KCB’s approval. Or KPC claimed to have received product that was never delivered by Triton… so either way… fraud!
coldtusker:
Okay. Very good explanation.
I don’t understand (or it doesn’t make sense to me) why the product (i.e. the oil) is held by the financier (in this case KCB bank).
KCB lends Triton the money. This then creates a contractual obligation between KCB and Triton, whereby, Triton will be required to repay the loan amount back based on the stipulations of whatever they agreed to within that loan contract.
So, if I am KCB bank, why would I care whether Triton actually buys the oil or not? That shouldn’t be my problem because I am simply a banker. All I want is to make sure that Triton pays back the loan I gave them, plus interest. Whether they sell oil or banana’s is irrelevant to me (as long as the loan gets paid back).
However, prior to KCB bank giving out a loan to Triton, they would have had to perform some due diligence. i.e. find out if Triton has other assets, which they can attach and sell off, if Triton is unable to pay back the loan. It appears like KCB did not perform this due diligence because Triton appears to be a dummy corporation with no real assets (physical or otherwise) that KCB can now attach in order to recover this loan money. Who owns Triton? Who are they?
I guess I don’t see the point of having oil marketers. Let KPC do it all — let them store and distribute the oil to gas stations. Why can’t the do that? And just eliminate these OM’s altogether.
If you want to become filthy, stinky rich in Kenya, become the minister of energy. That’s where Biwott made his billions.
See more on my blog. There is some new stuff I have posted… unlike Kenyan journalists, I – an unpaid blogger – have developed contacts & spending my own cash chasing down the truth!
Technically, the fuel belongs to Triton BUT the fuel acts as collateral for KCB’s loan. If Triton defaults, then KCB ‘owns’ the product. When Triton defaulted, KCB went to ‘collect’ the product… and there was no product! Thus they did what you describe except the fuel was ’stolen’…
Triton is owned/backed by politicians.
KCB thought they would have the product/fuel to fall back on as collateral regardless of the rest of Triton’s finances. The ‘fraud’ is what did them in. KPC was not supposed to release the fuel to Triton without KCB’s approval coz there was a collateral management agreement between KCB & KPC. You are missing this point.
Biwott: Yes…
OMs are needed otherwise you have a monopoly. KPC running all the functions would be a disaster. What you are advocating is a means to enrich a few… The solution is to privatize ALL the players from KPRL, KPC, etc…
coldtusker:
I’m getting the point about the fraud on KPC and Triton’s part. However, what I am asking is this: could the fraud have been mitigated had KCB done it’s due diligence.
In other words, was it wise for KCB to rely SOLELY on the product (“oil”) as it’s only source of collateral? Shouldn’t KCB have checked to see whether Triton had other physical assets or even cash reserves, which KCB could attach, in case the oil deal did not pan out?
From what you are saying here, it appears like Triton was really a dummy corporation set up entirely to fleece money. Does it have other assets? what’s it prior business record? i.e. has it sold oil before? who owns it and do the owners have assets?
When you say OM’s are needed otherwise you have a monopoly, isn’t Triton an OM monopoly anyway? I mean, is it a surprise that it’s the only OM that got the exclusive contract to distribute the oil?
Isn’t the solution to tell gas stations owners to get their oil from their franchisee’s? so, if you own a gas station that sells EXxon, make Exxon responsible for getting the oil to your gas station. And let exxon build it’s own storage containers and do everything else. That way, you completely disband KPC, OM’s and everyone else — doing this would make that industry totally private.
KE – You would need to understand some other factors behind this saga. The Indian guy has personal ambitions of becoming one of the richest persons in the world and this is where the greed factor comes into play. Triton has on several occasions won bids to import fuel for Kengen’s diesel generators, as such the government ensures that it gets preferential treatment at KPC’s storage facilities even though Triton owns (owned before going belly up) just about 0.39% of the fuel stations in the country.
Storage is pegged on how much assets a company has so this essentially means that Shell would get more storage than Engen or even Triton, but here Triton had more than these other companies. The Indian guy in question saw an opportunity in the preferential treatment his company gets and decided to bring in lots of oil when the price of oil started going up.
He got lots of cash and bout fuel when oil was trading at $100 and going up. Naturally oil was hotcake at the time and no financier would have doubted mad profits getting raked at the time.
Triton took over most of the storage facility at KPC and decided to hoard the stocks as speculations took over that oil would continue going up, other importers couldn’t get storage and their products had to be anchored in the high seas as storage facilities were sourced, but none were coming in. Supplies dwindled, fuel prices in Kenya continued going up, Triton was getting richer each day but alas, in came Lehman Brothers, AIG etc and the global economy took a beating. The SUV’s and other Guzzlers were put in garages and bikes took over. The Chinese started to lack buyers for their products, their industries closed. Oil was no longer in demand, prices dipped. Triton was left with stocks bought at $100+ but could not sell at more than $45. Triton filed for bankruptcy, the director fled in what he says was a move to realign his company’s financial position in regards to recovering losses made.
The impact of this greed, for many months we continued paying exorbitant prices for a commodity that was supposed to have been trading even lower. A company went down, a director is now living without peace and always looking over his shoulders, investment opportunities dwindle, privatization is now at a brink. The recession is almost catching up with Kenya despite of the resilience that’s been lurking around, jobs have been lost. What’s more, we have another Indian behind a major scandal. This and my recent personal experience with an Indian driver who caused a snarl up on one city road and comes out cursing plus the other many of his kind who never want to give way in traffic yet expect preferential treatment has made the almost dead soul of little racism in me come out from flat-lining, yeah, the soul is getting a pulse now.
Pochantas:
So, you are saying that Triton bought some oil? But KPC is saying they didn’t.
What other Indian is this who is behind another major scandal?
Who was that Indian cursing at and did the Kenyans curse back? I don’t understand why Kenyans still put up with their arrogance.
Pocahontas: Using your driving one experience to vilify ‘Indians’ is silly at best.
I face matatus who overtake onto oncoming traffic, who stop in the MIDDLE of the road blocking both ways, who pick up passengers anywhere, who run red lights, etc
Since I also use matatus, it seems that they are mostly kikuyus… so those damn kikuyus… right? Tar the whole bunch, si?
In the USA, isn’t that the stereo-typing is about? A ‘gangsta-rapper’ is an African-American & all AAs are now thugs? BTW, it turns out the gangsta-rapper behind the scenes is a smart, savvy businessman!
KE: Puhleeze… we have kept up with kikuyu arrogance for 50 years. kenyatta screwed up the real good guys including Joseph Murumbi. Also kenyatta (& cronies) killed Pio Gama Pinto.
Watch ‘The Making of the Nation’ where kikuyu politicians ganged up & killed (literally) off any politician from other tribes including Mhindis. Even JM Kariuki was not spared coz he went to Tom Mboya’s funeral.
KE:
Triton bought fuel, hoarded it expecting to reap profits then prices took a turn, realising that losses would be made, fraud ensued to try and cut down on losses as fast as possible, but the quick sales were not enough, so what cuts, the director grows wings and the company goes down.
The other Indians were Kamlesh Pattni and Ketan Somaia.
CT:
In the tier of bad drivers on Kenyan roads, matatus come first followed by buses then trucks then pickups. Indians form the next class. An Indian guy will always want to cut in on others(read black) because he feels more superior. You never see a white driver behaving like the way the Indians do. In any case, if I ever come to a junction and there’s someone who wants some way, I will always stop for anyone other than the category of drivers I stated earlier with less hate for a pickup driver than the others, ohh Rav4 drivers are also slowly becoming a menace.
Anyway, I challenge you to observe the courtesy (if any) displayed by Indian drivers and compare that with any other driver that is not driving a matatu, bus or truck. Infact if anything, some truck drivers behave even better than many Indian drivers do.