Educomp Solutions Limited Managing Director Shantanu Prakash’s paper wealth has gone down by about a thousand crore rupees but, if he’s lucky, the media-cum-bear attack on the company’s stock won’t have any permanent impact on his business. Within days of press reports alleging the company had, like Satyam, fudged its accounts and overstated the number of employees, well-known brokerages like CLSA and Merrill Lynch put out ‘buy’ recommendations on the education company’s stock indicating they didn’t believe the stories.
Since the company has suffered a clear image problem, it will work the investor and media circuit for a while (‘Sorry, Mr Principal, I can’t meet you since I’ve got to meet Mr Editor’!); it’ll also do the usual things required to fix the optics. It’s hired Grant Thornton as an internal auditor and plans to hire one of the Big 4 auditing firms — though why anyone would think a Big 4 audit would be more thorough than your neighbourhood auditor after Andersen/Price Waterhouse (Enron/Satyam), and so many more, is curious. So for a long while, you won’t hear of ‘education services firm Educomp’ but will hear of ‘controversial education services firm Educomp’.
Fixing Educomp’s image is Educomp’s problem. Our problem is to figure out how to ensure bull/bear cartels don’t use the media/government to affect share prices of target companies. The Pioneer newspaper story, which set the Educomp stories rolling on January 20, presumably got its first set of information from the unsigned note handed out by a PR person to several journalists including this columnist around four weeks ago. Most ignored the allegations of siphoning off funds since it was impossible to prove or disprove this on the basis of the papers provided. Some of the other allegations looked downright stupid.
Divide the company’s wage bill (Rs 34 crore in 2007-08) by the total number of staffers (3,955) and you’ll get an average monthly salary of Rs 7,100 — this, the note said, was way below the IT industry’s minimum salary of Rs 40,000 for a graduate (believe that if you will!). So, the allegation was, the company had overstated the number of workers it had — a trip to any of Delhi’s private schools which uses Educomp’s Smart Class would make it clear the Educomp coordinator gets roughly Rs 7,000-8,000; it’s half this in the government schools. (The Pioneer, after its investigation, thought the IT comparison was ridiculous and so its story said the company had understated its wages by around half to declare higher profits!) Other charges included the company raising funds abroad and just keeping this money parked in an account with SBI’s London branch — but, under RBI rules, you have to keep the funds overseas till there is a need for those funds here.
Allegations of siphoning off require pretty detailed analysis of accounts — why do you think the Serious Frauds Investigation Office hasn’t been able to close the Satyam case already? So this is the call the media has to take. How does it deal with such allegations, made all the time, by the way, about some of India’s top corporates? Does it keep digging till there’s some concrete point/evidence or does it take the easy way out, as did several newspapers and television channels? They took the note and got Shantanu Prakash to react to them — so the story which was, till then, confined to a low-circulation daily newspaper, suddenly became a national one. On the face of it, the newspapers/TV can’t be faulted since they gave Prakash full opportunity to give his side of the story. But look at it this way — if you get an unsigned note with no proof saying a man has murdered his daughter, and then carry a story saying he’s denying murdering his daughter, doesn’t his reputation get tarnished?
Now look at the impact of all this. On January 19, the day before the Pioneer story appeared in print, there was a sudden jump of 67 per cent in the number of Educomp shares sold in the forward market and the difference in future and spot prices rose to a whopping 10 per cent. One can argue that, given the number of email/faxes/phone-calls made, it’s pretty easy to know that a newspaper is working on a story, even predict the rough timing of its publication. What do you make of events after this?
After a few days of the story, things start settling down again — open interest positions start falling, as do trading volumes in the forward market and the difference between prices in the cash and forward market. On February 2, however, Corporate Affairs Minister PC Gupta makes a statement on TV in the evening saying Educomp’s accounts will be probed under Section 209 of the Companies Act. Books of various companies are inspected all the time. Why announce it? On January 30 as well as February 2, volumes in the forward market once again surge, as do open interest positions and the difference between spot and forward prices. So somehow those in the market knew the ministry was going to order an inspection — by the way, the company has still not got any notice on this!
Since Educomp has complained to Sebi, presumably an investigation is under way. But if the investigation is to take forever, what purpose does it serve and how do we ensure other Educomps don’t happen? The answer seems to be unambiguous: There’s nothing we can do; life’s unfair, live with it!
