Should a company whose financial numbers are fictitious be traded on the stock exchange?
Standard financial theory says that the value of a firm depends on the assets it owns and the present value of its future cash flows. Neither of these metrics makes too much sense right now as far as Satyam Computer Services Ltd goes.
Price Waterhouse, the audit firm that was to have finally checked the technology services provider’s annual accounts before they were released to shareholders, admitted on Wednesday that there were too many problems in the Satyam balance sheet. This a week after Satyam’s former chairman B. Ramalinga Raju revealed that he had fudged the company’s books, including its cash balance.
The future seems murky as well. For one, Satyam is now low on cash and will struggle to pay salaries to prevent its employees from voting with their feet. An exodus from the company could limit its ability to service clients. Also, around half its outsourcing contracts are due to be renewed soon and it is quite possible that overseas clients will try to cut their exposure to the tainted company.
In short, there is now a thick fog surrounding Satyam’s financial numbers and its business outlook.
You would not guess that after seeing the manic trading activity in the Satyam stock since the accounting scandal came out into the open. Satyam has been the most heavily traded stock in the market in terms of volumes, even as its price first collapsed and then lurched wildly in the lower range. It is hard to believe that all this activity stems from attempts by traders and investors to price the true value of the company. On the contrary, Satyam has become a punter’s paradise.
Many have made huge profits by buying and selling the share in rapid-fire trading, as we reported in our Tuesday edition. There is no reason to be moralistic about it. Day trading is a legitimate activity—if you have the stomach for it—since it keeps a market liquid.
The more serious possibility is that small investors will get pulled into this speculative whirlpool by tipsters. That is something the regulators need to keep an eye on.
Given all the unknowns, should Satyam stock still be traded? Tell us at firstname.lastname@example.org