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Home > India > Business > Columnists > Guest Column > A K Bhattacharya

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The dilemma over Satyam's 'bailout'

January 20, 2009

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The Satyam fiasco: Complete coverage

On Monday, January 12, a day after the government announced the constitution of a new three-member board for crisis-ridden Satyam Computer Services [Get Quote], television channels and websites ran reports of Commerce and Industry Minister Kamal Nath indicating the possibility of a government bailout for India's fourth-largest information technology company. The following day, newspapers corroborated these reports. Nath was quoted as saying that the government could extend financial assistance to Satyam if the newly appointed board asked for it.

Purists were justifiably aghast at these statements: A government bailout of a company whose promoter has admitted to committing financial fraud? Presumably with a view to addressing such concerns, the minister also explained why the bailout was under consideration. "The government is looking at all aspects. Many jobs are at stake here," Nath said. There was also the need to save an international brand, it was argued. To be sure, Kamal Nath was not alone in announcing the possibility of a government bailout. Finance ministry officials were also reported to have stated that extending financial support was one of the options under the government's consideration.

Strictly speaking, this did not sound like the government allocating funds from its budget, already under strain due to a rising deficit. But given the manner in which Kamal Nath made that grand announcement, everyone tracking Satyam developments was convinced that a government bailout for Satyam was in the offing. Though not comparable, the US banks, guilty of having exposed themselves to risky assets beyond prudential limits, also got the benefit of a bailout.

In India, one feared, we would now see an extension of that bailout principle with the use of government funds to support a private company whose promoters had cooked up his company's accounts. One even began wondering why so much noise was created over the nationalisation of sick textile mills in the late 1960s. The argument then was that the nationalisation of textile mills would prevent job losses. The same argument was now being used by Kamal Nath to bail out Satyam! Nothing seemed to have changed, except that nobody cried foul.

But quite unexpectedly, the good news came just three days later. On January 15, Economic Affairs Secretary Ashok Chawla said, "The government at this stage is not looking at any direct support or bailout to the company." Endorsing this stance, Corporate Affairs Minister Prem Chand Gupta said the government had no plans for a financial package to bail out Satyam. "The company has not asked for any package, it may not need that," Gupta clarified.

As a result, the moral hazard of extending a bailout package to a company with rogue promoters was averted. But consider what the two statements - one on Monday and the other on Thursday - did to the Satyam stock price.

On Monday, Satyam's stock price surged 45 per cent on reports that there would be a bailout package for the IT company. On Thursday, when it was clarified that there would be no bailout, the Satyam stock price tumbled 33 per cent. Both the rise and the fall in the stock price of Satyam were primarily due to the government's different statements on two different days.

Of course, this is not for the first time that statements made by government functionaries have influenced stock market prices. In the Satyam case, however, the difference is that a minister's statement has fuelled the rise in the stock price of a company. And another minister's statement, annulling what his colleague had said three days ago, has brought about the fall in the stock price of the same company. This was not a small rise or fall in the stock price of a company. The obvious question is: Should the Securities and Exchange Board of India be worried about the Satyam stock price movements spurred by these ministerial statements and look into why it happened, how it could take place and what should be done to prevent a similar thing?

Several other questions arise. Why did Kamal Nath make that statement on the possibility of a bailout package for Satyam? He was not connected with the ministry in charge of the Satyam developments. The minister in charge was Prem Chand Gupta. Or is it that the government's thinking on the Satyam issue has been evolving so rapidly that within three days it required two of its ministers issue contradictory statements?

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