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FIIs wary of India Inc's numbers

Priya Nadkarni in Mumbai | January 13, 2009 12:57 IST

Stung by the fraud in India's fourth largest IT services firm, Satyam [Get Quote] Computers Services, foreign institutional investors  are now asking brokerages to run forensic accounting checks on the numbers reported by major companies.

Major brokerages were quick to suspend coverage on the Satyam stock, citing that current financials of the company could not be relied upon, soon after news of the fraud broke.

FIIs, who are clients of these brokerages, are now demanding stricter checks on reported numbers.

"In the last one week or so, there have been distinct changes in what FIIs want. They are asking for intense forensic accounting checks as well as to check independently on what the management is saying. Analysts need to check industry sources, ex-members of the staff and other channels to verify their estimates.

"We would expect Indian stockbrokers to react to changing requirements of their foreign clients," said Saurabh Mukherjea, head of equities at UK-based equity research house Noble group, which provides research to several leading FIIs, which invest in India.

Forensic accounting involves the integration of accounting, auditing and investigative skills. Forensic accountants sniff out fraud and criminal transactions in banks, corporate entities or from any other organisation's financial records.

While there are more than 600 certified forensic accountants in India, the recent scam has led to a huge upsurge of interest in forensic accountants.

"Most of these forensic accountants work for the 100-odd multi national companies. A lot of them have seen some good assignments in the last week," said Mayur Joshi, director of India Forensic consultancy services, a Pune-based consultancy organisation engaged in fraud examination and forensic accounting in India.

Incidentally, India Forensic has also submitted a proposal to the Securities and Exchange Board of India, Nasscom as well as the Serious Fraud Investigation Office through which members of India Forensic can be empanelled with the regulators.

Major FIIs such as Fidelity Management and Research, Morgan Stanley Mauritius Co as well as Aberdeen Asset Managers had dumped Satyam shares in the market as soon as chairman and founder Ramalinga Raju had submitted his resignation and admitted that he had falsified the accounts of the company.

The other stocks that have seen sharp drops since then include companies that are known for their unsavoury corporate governance practices and bad accounting standards.

Interestingly, major domestic and foreign brokerages had upgraded the stock of Satyam or upped their revenue, earnings and earnings per share after the company called off the deal to acquire Maytas Infrastructure and Properties on December 17.

Even as late as January 7, ABN Amro upgraded the Satyam stock from 'strong sell' to 'strong buy'.

"Leading market analysts in Western countries champion the cause of minority shareholders by writing forcefully about adverse corporate governance practices.

However, in India, analysts are too scared to speak out against managements because they fear they may be denied management access," said Mukherjea.


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