by Santosh Nair
The company set a price band of Rs 400-410 for the issue, and even before it opened for bidding, raised Rs 125 crore by placing a portion of the issue with anchor investors at Rs 400 a share. But other institutional investors did not show the same enthusiasm, as they felt the issue was overpriced. Even HNIs were not excited about the issue.
A couple of days before the issue opened for bidding GB rang me, calling me for a chat over beer at Geoffrey’s.
‘Are you trying to sell A2Z to me?’ I asked him after we ordered beer.
He grinned. ‘I think we know each other well enough to the point of being able to read each other’s thoughts.’
‘Give me the pitch,’ I said, smiling back.
‘Bhaiyya is convinced this is a great company in the making,’ GB said.
‘I guess that seals the decision. But fund managers don’t seem convinced, and to be frank, neither am I. The company seems to be asking for too much,’ I said.
‘You put too much faith in fund managers’ ability to assess a company’s worth,’ he said.
‘They may not be the final authority on valuation, but neither are they fools. Most of them made good money in the Coal India IPO, and it is not as if we have slipped back into a bear market. Still, they are reluctant to invest, and that says something,’ I said, standing my ground.
‘I won’t push you beyond a point, Lala. But let me put it this way: it will make me happy if you bid for a decent chunk. Besides, don’t forget you have made good money off Bhaiyya’s ideas in the past,’ GB said, sipping his beer. His voice now seemed to have lost some of its amiability.
I could sense his displeasure and tried to make amends quickly.
‘You seem to have taken offence. I never said I would not invest. I just wanted you to convince me,’ I said.
‘I am not offended, Lala. But I cannot help feeling that you are getting a bit carried away by your success. Else you wouldn’t be lecturing me about valuations,’ GB said, and took a swig at his beer.
The unsaid line here was: ‘ . . . else you wouldn’t be lecturing Bhaiyya on valuations.’
The mug covered much of his face, and for a few seconds I could see only his eyes. They seemed cold, and the piercing look gave me the jitters. I am not saying that he was trying to intimidate me, but that look did unsettle me a bit. I thought I was arguing a business point, but GB interpreted that as a sign of arrogance.
I quickly reached across and rested my palm on his elbow as a reconciliatory gesture.
‘Rest assured it is nothing like that, Govindbhai, you know that I would never refuse you,’ I said.
He smiled – a signal that all was forgiven.
‘Glad to know that success has not changed you at all,’ he said, and we both laughed.
The issue just about sailed through, mainly on support from Rakesh’s friends and business associates who had made good money from his investment tips in the past and were convinced that the Rakesh magic would work for A2Z too. The institutional and retail portions of the book were undersubscribed, while the non-institutional portion was subscribed more than three times, helping make up the shortfall.
Still, the shares had a disastrous debut, opening at a discount and never going above the issue price. Rakesh bought 5 lakh shares in the market at Rs 352 apiece, hoping his purchase would attract fresh buyers and arrest the slide in the stock price. The trade did not hurt him, considering he had sold as many shares in the IPO for Rs 400 each. The stock finally ended the day at Rs 329, a good 18 per cent below the issue price.
Promoter Amit Mittal too jumped into the fray, buying close to 9 lakh shares at Rs 336 each. But both Rakesh’s and Mittal’s purchases only ended up providing an exit to investors looking to jump ship. It was widely expected that the stock would fare poorly on listing. The tepid response from institutions and retail during the bidding process meant there was no demand for the stock. As soon as the shares listed, HNIs who had invested using borrowed funds started selling out, and the stock price never recovered from that wave of selling. I was not surprised by the turn of events, and accepted the market’s verdict calmly since my loss was not huge.
The importance of fair pricing of an issue was proved once again in the Punjab & Sind Bank offer. The IPO, which opened for bidding a few days after the A2Z issue closed, got subscribed over 50 times because investors felt it was reasonably priced. The stock, which listed exactly a week after A2Z’s disastrous debut, surged 22 per cent in opening trade. It finally closed at Rs 127, a 6 per cent premium over the issue price of Rs 120.
36
New Year of Little Cheer
Year 2011 began on a sombre note for the stock market bulls. The high-profile arrests in the 2G spectrum scam soured sentiment, sending stock prices crashing. Mid-cap and small-cap shares bore the brunt of the selling fury, and it most cases, promoters were paying for their past sins.
I was approached by a few promoters to help support their stock prices, but I declined, knowing that it was going to a futile effort. Stocks in which promoters had pledged sizeable portions of their holdings were hit the hardest. I got to be hear from industry sources that JC was in his element, busy hammering such stocks. The promoters of three companies – an infrastructure firm belonging to a conglomerate, a realty firm, and a brokerage firm – wrote to the regulator saying their shares were being hammered by a bear cartel, leading to unwarranted destruction of shareholder wealth. One firm personally named JC as the mastermind behind the bear attack.
One evening as I was driving back home, I rang up JC to check what he had to say about the charges against him. I knew he would be savouring the publicity his actions had got him.
‘Promoters are screaming murder and say JC the all-powerful is running their stocks to the ground,’ I said as soon as he answered the call with a gruff ‘hello’.
JC chuckled, and I could visualize the pleased look on his face.
‘Arre no, Lala, market people and the media are just exaggerating. It is true that I am short on these stocks, but my positions are not as huge as everybody is making it out to be. In fact, these promoters are trying to cover their own follies by blaming me,’ he said.
I knew he was not entirely wrong. But I loved to annoy him, and decided to prod further.
‘I heard one of the promoters has sworn to make you cover your positions at twice the price you have short-sold,’ I said.
‘Is it? Which of them? Let them try, I am waiting. Saale @#**$, do you hear any of them ever complaining to SEBI whenever their stocks rise to crazy levels? They never say that bull operators are ramping up their stock prices and that retail investors could get hurt if they buy the shares at those exorbitant prices. But the moment their stock prices fall, they claim that bears are destroying shareholder wealth. Reminds me of a primary school classroom where a student says: “Teacher, this boy is beating me.”
‘As for the brokerage firm promoter, his behaviour is the most appalling. A couple of years ago when I was trading through his firm and hammering other companies’ stocks, he never protested even once that I was destroying shareholder value. Obviously, why would he bother when he was earning good commissions from me? But when I feel his company’s stock is fair game, he goes whining to SEBI.
‘I tell you, Lala, I have been at the receiving end so many times when I have been short on stocks. The promoters gang up with bull operators and manipulate the prices higher. Had they not done that, the prices would have followed their natural course and I would have made good money. But do I complain to SEBI about the promoters’ misdeeds? No, I don’t. I take my medicine like a man, and I don’t understand why they can’t do the same.’
JC had a point, but the promoters too had their reasons for being furious with him. My friends in the market told me JC had a knack for identifying companies where the promoters had pledged the most shares to raise money, and then would start hammering their stocks.
In March 2008, shares of Chennai-based Orchid Chemicals and Pharmaceuticals plun
ged 39 per cent in a single trading session as two NBFCs liquidated the shares that promoter Raghavendra Rao had pledged with them. The stock first started to weaken when the US investment bank Bear Sterns, which was grappling with its own problems in the wake of the sub-prime crisis in its home country, sold Orchid shares. When the stock fell, Rao failed to meet the margin call from his lenders, who began offloading the stock in the market.
The sale of the shares resulted in Rao’s stake in the company falling from 24 per cent to 14 per cent, rendering the company vulnerable to a takeover. Ranbaxy-controlled Solrex used the crash in the share price to pick up a 12 per cent stake in the company, sparking buzz of a hostile takeover. Interestingly, Religare, one of the two NBFCs that had dumped Rao’s shares in the open market, was part of the Ranbaxy group.
What probably saved Orchid was Ranbaxy itself selling out to Japan-based Daiichi Sankyo in August 2008. Solrex retained its stake in Orchid for a while, but gradually exited the stock over the next couple of years.
Rao may have been lucky to retain control of his company after coming within a hair’s breadth of losing it, but Vijay Kantilal Sheth of Great Offshore, an offshore oilfield services firm, was not as fortunate. In May 2009, he earned the dubious distinction of becoming the first Indian promoter in India to cede control of his company as a result of his inability to repay the loans he had taken by pledging his shares.
Sheth had pledged his entire holding of roughly 15 per cent in the company with Bharati Shipyard. With the market in a bear grip, Great Offshore crashed from around Rs 545 in September 2008 to Rs 206 by early March 2009. Bharati Shipyard asked Sheth for additional collateral or part prepayment of the loan, both of which he could not meet, and ended up losing control of his firm.
37
Fudging and Pledging
Following the Satyam Computer accounting fraud, SEBI made it mandatory for companies to disclose the quantum of shares pledged by promoters. Understandably, promoters did not want the details of their share pledges to be made public as their stocks would become vulnerable to attacks by bear operators.
And howsoever strict the disclosure norms on pledged shares, they could be circumvented by promoters to some extent. For instance, promoters routinely hold shares in benami accounts, which are invisible to stock exchanges, investors and regulators. These accounts are maintained for a variety of reasons. In a rising market, the promoter could make money by selling shares in bulk from these accounts to fund houses. In a falling market, the promoter could buy shares of his company and store them in this account to stabilize the stock price.
Depending on their requirements, promoters pledged their shares with financiers, usually NBFCs, but at times with overseas investors too. Sometimes, what appears on paper as equity investments by lesser-known FIIs in many mid-cap companies are, in fact, structured share-pledge deals. The promoter transfers shares from his benami accounts to the FII’s account and gets a loan against it. The promoter pays interest to this FII, either in the domestic or overseas market, as may be the arrangement. The advantage of this arrangement is that the promoter does not have to report to the stock exchanges that he has pledged his shares.
Bears are forever sniffing around for stocks where the promoters have pledged a substantial portion of their holdings and are using the money to ramp up their stock price.
Some promoters delayed reporting the pledge transaction to the exchanges by a few days so as to keep bears guessing about the price at which the shares were pledged. But operators like JC had their own informal information network to sniff out the price. This could be through somebody at the broking firm through which the promoter operated his stock, or somebody at the NBFC from which the promoter borrowed money. Once the price was known, it became easier to smash the stock price.
Still, share prices tend to revert to their fundamental value at some point. Just as a bull operator or a bull cartel cannot keep the price of a stock permanently high, bears cannot keep the prices depressed forever. Good quality stocks quickly find buyers in the event of a steep fall. If a stock takes a long time to recover from a bear attack, it is a good indication that the original price was inflated. I must add here that when the overall mood is bearish, share prices can stay subdued for longer than usual.
The bruising decline in stock prices had taken the swagger out of many a promoter, and SEBI too was giving them cause for sleepless nights. In mid-January, Reliance ADAG chairman Anil Ambani and four directors of the group paid Rs 50 crore to SEBI under a consent deal to settle a case of violation of FII regulations and overseas debt norms. This was the highest consent fee paid by any corporate group to SEBI so far. In the course of investigating a couple of suspicious P-note transactions by two FIIs, the regulator came across evidence that the funds raised by R-ADAG firms (later merged with Reliance Power) through external commercial borrowings and foreign currency convertible bonds were being invested in the Indian stock market. Under the consent deal, R-ADAG firms Reliance Infra and Reliance Natural Resources were barred from accessing the capital market for two years.
No corporate group now seemed beyond the reach of SEBI, which in its early days had been ridiculed with uncharitable monikers such as ‘paper tiger’ or ‘toothless watchdog’. In July, SEBI dealt another blow to the market players to keep them on the straight and narrow, this time busting the business model of many broking firms that thrived on helping clients evade income tax.
These brokers would charge 5-6 per cent commission for providing fictitious profits/losses to their clients. This was not a bad deal for tax evaders who could still save 25 per cent after paying the commission. For brokerages, this was a far more lucrative business than plain vanilla broking services, which earned them only 0.01-0.25 per cent per trade.
The brokerages used to do this by shuffling the shares between client accounts at the end of the day’s trading. Sometimes, when there are too many transactions to be executed, brokers mistakenly enter orders in the wrong client’s account. The stock exchanges allowed brokers to rectify such errors by shifting the shares to the correct client account. Over a period of time, brokers began to misuse this concession, shifting trades from one account to another to help clients either evade tax or launder unaccounted money.
SEBI and the tax authorities soon got wind of the game being played, and a penalty was imposed if the proportion of wrong account trades exceeded 5 per cent of the total monthly turnover of the broker. The new rule benefited many individual investors who were otherwise being shortchanged by unscrupulous ‘relationship managers’. Many HNIs who subscribed to portfolio management services of broking firms would grant brokers a ‘power of attorney’ to trade in their accounts and generate profits. The relationship manager, in connivance with the branch head, would sometimes shift some of the profitable trades to another account, and under-declare the profits to the clients. Once the new rule came into effect, the number of ‘wrong’ client code trades fell dramatically, and tax evaders had to look for another route to dodge the taxman. September fetched another rap on the knuckles for promoters and investors looking to game the system at the expense of small investors. SEBI pulled up seven Indian companies and a handful of ‘foreign institutional investors’ for trying to manipulate stock prices through GDR issues. GDRs are similar to shares, except that they can only be issued and traded in overseas markets. But the foreign investors holding GDRs can surrender them to the company and request to be issued shares of an equivalent value that can be traded in India. This process is known as ‘conversion of GDRs into shares’. From the time the Indian market was thrown open to FIIs in the early 1990s, there was always a premium attached to stocks in which overseas investors had a sizeable stake. The modus operandi for stock manipulation through GDRs went like this: Shady companies would announce GDRs, which shady FIIs would subscribe to. There were operators in Dubai who specialized in such services and had dummy FII accounts, which had subscribed to the GDR issue. The money that the FIIs invested in the GDRs would
belong to the promoter himself, and had been taken out of India and parked in tax havens before it was routed to the FIIs through a series of spurious transactions.
The FIIs who had subscribed to the issues would convert the GDRs into the underlying shares within a couple of months, and sell them to a group of entities related to the GDR-issuing companies. The money that the FIIs got through this sale would be transferred back to the promoters’ overseas accounts through another series of deceptive transactions. The FIIs would get an 8-10 per cent commission for lending their names for the transaction.
Back in India, the front entities would artificially boost volumes in the stock, attracting retail investors. Once there was sufficient retail interest in the stock, the front entities would slowly offload their holdings. The GDR manipulation by Indian promoters came as no surprise to me since I had been hearing about such activities for a while now.
The GDR route was a good way to legitimize money stashed abroad, and to make some easy gains too in the bargain. More cases of sham GDRs would surface in the coming months. But proving the charges was the toughest part for SEBI, even if it was easy to identify instances of suspicious dealings.
In 2013, SEBI would lift the ban on the Mavi Investment Fund, saying it could not decisively establish the charge against the fund that it had aided the promoters of companies that issued sham GDRs. SEBI had tried to investigate the beneficial owners of the Mavi Investment Fund, but was unable to make much progress as the fund gave sketchy responses to SEBI’s queries. Mavi’s defence was that its investors were banks and financial institutions. And since these institutional investors in turn had a large number of investors who kept changing on a day-to-day basis, it was impossible to get information related to the beneficial owners.
