Chart: Stock Market Volumes at a Low
Since 2007, stock markets have seen highs and lows. India’s GDP has more than doubled. The money supply in the system – total deposits in banks for instance, has nearly tripled. Yet, the growth in volumes in the stock market has, for the most part, not happened.
Note that we’ve gone from about 1,100 securities traded daily to about 1,600, and even with a near 50% increase in numbers, and a jump of Nifty from about 5,000 in 2007 to nearly 6,000 today, volumes remain just around 10,000 cr. per day.
In addition, I believe the top few stocks take a considerable percentage of turnover each day. Essentially, volume of trading has died, and it’s pretty much the low of the trading cycle if you weight money by inflation.
For volumes to return, you need a certain level of euphoria. I think the US is providing the path ahead with a recovery looking to happen, and Europe, as long as it stays together, will be a second level force. Japan’s printing – and more money is initially good for stocks. The only bone in the kabab is China, which seems to be continuously slowing down.
Internally, no one trusts stocks, and it’s getting worse with stocks like Core Education falling 80% in two days, or even public sector stocks like NHPC down nearly 30% in a less than a week. With low volumes even legitimate cases for a fall – like pledged share owners selling shares – will cause a steep drop in price. While the drop in STT from the next financial year will help traders and speculators return, it is quite unlikely without a very positive environment. And that is doubtful until elections next year; but watch for a new high to break all the rules.
The Great Fall of NHPC
I’ve recently had a chance to trade into a few stocks, and one of them was NHPC. Unforunately the stock has crashed beyond imagination, hitting my stop loss at 27 and then 25, and then spiralling down all the way to Rs. 18. It’s back at Rs. 20 now, but the swiftness of the move is surprising.
The rumours are that the company may have to transfer projects to the J&K government, but that is supposedly not true, says their director-finance ABL Srivastava. In the interview they have large receivables from Bihar, J&K and Delhi.
Another rumour is that bear operators have tried to hammer the stock, which has a very low non-promoter holding of about 14%.
Of course the other issue is that the government (the promoter of NHPC) will reduce its stake from 86% to 75%.
The stock had an IPO at Rs. 36 per share in 2009 and has never really gotten back to that level. While my entry was technical (strong new 52 week high with volume around the 26 level) the fundamentals of this company are reasonable. With a serious power crunch and with plants in the himalayas both supply and demand are reasonably assured. Yet, the risk is that the government owned entities that buy power won’t pay, and that the power generation could get too expensive.
Their dividend of Rs. 0.6 to 0.7 per share gives about 3.5% dividend yield. If interest rates drop, this will be an attractive stock to be in. However, I would wait for a recovery in the price back to the 26 levels before jumping in – if there are problems, the price will talk first, and then problems will get visible. The price has talked on the downside, so we’ll have to see where this goes.
However, with a thinly traded stock, one could take a chance on the fact that this was just operator movement – but like most bets, the risk of an uneducated guess is as good as a gamble.
Network18 Trust Gets Big Loan From Company, Won’t Buy More Shares
Network18 has a press release in response to SEBI’s regulation on Employee Trust activitystating that the Network18 Senior Professional Welfare Trust (which is a promoter entity) owns nearly 1.6 crores of Network 18, and will not sell these shares but will no longer buy more shares from the market. (Actual holding: 15,922,729 shares, or 1.52% of capital – severely diluted due to the recent massive buy in by Reliance and the subsequent rights issue)
Remember that SEBI has banned ESOP trusts from buying shares from the stock markets, on Jan 17, 2013.
Remember also that Network 18 has in the past pledged its owned shares in TV18 and IBN18 , so that the trust could borrow money. (To buy Network 18 shares!)
Won’t Buy More Shares
While this is not a stock option scheme based trust, Network18 has decided to listen and not have the trust buy any more shares.
8. How the Trust/agency is proposing to deal with the existing holding (whether to be transferred to the employees, or to be sold in the market for transferring the benefits to the employees, if so, details regarding proposed date of such transfer or sale shall be given) Such date shall not be later than June 30, 2013:The Network18 Trust was created with the objective of generating Wealth and employee
benefits for its large pool of employees over the medium to long-term horizon. In this
respect, the NetworkI8 Trust was duly tabled before the Board of the Issuer and
subsequently, specific approval from the shareholders of the Issuer was also obtained.It was intended that the Network 18 Trust would monetize its holdings and distribute the net profits to its employees based on employee needs and opportunities that arise from time to time. The benefits that accrue in the form of stock appreciation will be shared with employees who stay and grow with the Issuer over several years. Accordingly, at no point in time was it envisaged that the Networkl8 Trust would grant stock options to employees.As set out above, since the Network18 Trust is not formed for granting stock options to
employees, the Networkl8 Trust is not one, which deals in securities of the Issuer as
contemplated in the Circular. Since the Networkl8 Trust does not contemplate granting
options to the employees, the question of aligning the Scheme or the Networkl8 Trust to
the ESOP Guidelines does not arise and the shares held by the Networkl8 Trust cannot be transferred to the employees. These shares will continue to be held by the Network18 Trust for the benefit of the employees.Meanwhile, in keeping with the overall spirit of the Circular, We hereby undertake that we
will suitably amend the Network18 Trust deed in order to prohibit the Networkl8 Trust
from purchasing the Issuer’s shares through secondary market. Additionally, we would like to bring to your notice that the Network18 Trust has not engaged in any secondary market purchases concerning the lssuer’s shares since October 25, 2011.
The trust won’t buy any more, which is a good thing.
I would still question the presence of such a trust – if it’s not a stock option scheme, why should it even exist, and why is it funded by the company?
Network18 Loans More Than 500 crores to Trust in 2011-12
However, it seems that last year Network18 directly provided a loan to the Senior Professional Welfare trust . In the annual report 2012, Network18 has reported that it has not provided any shares as collateral to the trust – meaning that the earlier security (of IBN18 and TV18 shares) was withdrawn.
(Page 153)
Security provided in favour of the lender in connection with the loan to Network 18 Group Senior Professional Welfare Trust - Rs. Nil (Previous year Rs. 2,552,000,000).
Did the trust return the money? Apparently not, since Network18 has directly given this trust a loan now, of over Rs. 500 crores.
With more than Rs. 570 crores due from one entity – the Senior Welfare Professional Trust, which is a promoter linked entity – one has to wonder what happens if this trust can’t return the money.
The Trust Seems To Have Lost Money On Some Shares, At Least
However on the concept of the fund not selling shares, that much should be obvious since the trust seems to have bought shares at prices that are substantially higher than current market value. The last few purchases of shares – as revealed to stock exchanges – seem to have a loss of over Rs. 8.5 crore (85 million) at current market values. (Of course, shares purchased earlier might have a much lower price, which hasn’t been revealed)
Figure: Shares of Network18 bought by Network18 Senior Professional Welfare Trust
Of course, this cannot be conclusive that the trust has lost money but it’s quite likely, that unless the stock recovers from its lows, that the trust will find it difficult to service the loan or the interest cost. Look at the stock chart, from Network18’s owned site moneycontrol.com:
In context, the 574 crores represents about 1/4th of 2012 consolidate revenues (around 2,000 cr.). It would be wise for shareholders to question why this trust continues to be funded by the company, and if they might provision for any potential default.
Disclosure: No positions.
Suckered: Manipulating Expiry Prices, Ruchi Soya Edition
SEBI has just passed an ex-parte interim order (meaning, without hearing the defence of the accused, and potentially more orders to follow) against entities it alleges to have rigged the price of Ruchi Soya, a listed edible oil manufacturer.
Investigations by SEBI seem to show that nine entities – Aventis Biofeeds, Moebius Credit and Capital, Sunmate Trade, Shreyans Credit and Capital, Vision Millennium Exports, Navinya Multitrade, Uni24 Techno Solutions, Betul Minerals and Construction, and Betul Oils and Feeds (all Pvt. Ltd.) – colluded together to manipulate the price on Sep 27, 2012, in order to earn a huge profit in the futures market.
The Idea
First, the concept. Ruchi Soya was being taken out of the "F&O” (Futures and Options) list in September, with all contracts expiring on September 27. All F&O positions would be settled at the closing price of the equity share, in cash, on the expiry date.
Remember that the closing price is the volume weighted average price (VWAP) of the stock in the last half an hour. To read more about how it’s calculated, I’d created a video which is useful here:
So if you take a position in the futures market, and put a huge buy order and a corresponding sell order in the market at a high price, just before the close, you can easily manipulate the “closing” price of the stock and thus, profit from your futures position.
The Evidence
SEBI claims this is exactly what happened. More than Rs. 5 crores were earned by the above entities, by taking the VWAP up by nearly Rs. 7 (or 10%) by co-ordinated buy and sell orders in the last three minutes of trading (3:27 pm to 3:30 pm). In (SEBI’s) pictures with my annotations:
Over 60% of the volume of the day comes in the last three minutes!
And finally, was this very different from normal? It seems so:
Modus Operandi
- Many of these entities placed buy orders at Rs. 64 at around 2:30 pm, and simultaneous sell orders for Rs. 88.20. Others placed just sell orders for Rs. 88. Order quantities were as high as 30 lakh shares (implying a transaction value of between 20 and 27 crore rupees).
- At around 3:37, three minutes before the market closes, the buy orders were moved up to around Rs. 88, and all other sell orders in the market were executed all the way up to Rs. 88 including those of the selling entities involved.
- 62 lakh shares were bought, in total. Of these, nearly 12 lakh shares were traded between these above entities. (The rest were bought from unrelated entities). Most of the rest
- These trades took the VWAP price of Ruchi Soya up by Rs.8.15 according to SEBI.
- The gain wasn’t in these shares – since many weren’t sold. The gain was in the futures market – these entities had already taken long positions of 72 lakh shares which got the Rs. 8.15 benefit – thusearning over 5.86 crores as profit.
This can only be manipulation if the 9 entities are linked. Which they seem to be, considering many have the same address in Nariman point, or that they share directors, and in many cases, have the same phone number. There is definitely a good case.
Entities banned
Pending further investigation, these above entities have been barred from the market immediately. However, this comes around 5 months too late: it’s now Feb 2013.
The Promoter Link?
Ruchi Soya promoters haven’t been named in the SEBI order, but I hope SEBI investigates their link with the “price manipulation” allegations. Betul Oils, one of the “manipulating” entities (alleged) named in the SEBI order, has in the past been accused by the Forward Markets Commission of conspiring together with Ruchi Soya management, and manipulating guar prices, earning part of 1,291 crores of profit.
Ruchi Soya’s promoters have also been accused, in the past, for share manipulation and other controversiesand are supposedly well connected politically. (I’ve written about their steep drop after an IB investigation)
The To-Do
SEBI needs to investigate this thoroughly and, if the parties are found guilty, it must:
a) fine the entities with at least 2x the profits that were made by manipulation; just a ban will not suffice.
b) make such investigations faster through technology. Much of the above could be ascertained through intelligent algorithms.
c) return money to investors who lost on their futures trades, to the extent they did. This would do wonders to confidence in the regulator.
What would be defeating is to have this meander through bureaucracy, and a timid order passed a couple years too late. That would answer partly why retail investors don’t invest in equities – if you can’t even fine or discourage people who manipulate markets, what’s the point investing?
Disclosure: I have never owned or traded in Ruchi Soya, stocks or futures.
Links: Direct Plans Win, Be-Sahara, ESOP Disclosures …
Links for today:
Direct plans garner 56% of new inflows in Jan, says ET. Out of 60,000 cr., of fresh investments, nearly 33,000 cr. has come into direct plans. This should happen, as corporates shift their debt investments into direct plans. Why? Because debt plans are seeing about 0.2% to 0.5% better performance by direct plans, and on a corpus of Rs. 10 crore, that translates to Rs. 2 to 5 lakh per year, a very reasonable sum of money.
Update 19/2/2013: Reader Neerav says Wealth Forum post points out that ET has issued a corrigendum, saying that there was an error in their data, mixing up both direct and regular flows. However, I couldn't find the admission on the ET site, so I'm keeping both the original link and this other post as is.
SEBI has attached assets of Subroto Roy and two Sahara Group companies that were supposed to refund more than 25,000 cr. to investors. After a long supreme court battle, when the SC allowed SEBI full reign to attach assets or bank accounts to recover the money, SEBI has acted and attached everything it knows, including properties, mutual fund holdings, bank accounts and equity holdings. This is a confident sign for governance – now they have to investigate properly and find if Sahara has been involved in fraud as well.
Zee has made a disclosure about what it’s ESOP trust will do – sell off the nearly 11,000 shares it holds. Remember that SEBI has barred ESOP trusts from buying from the market, and has asked for a disclosure of what they will do with existing holdings.
Kingfisher Airlines’ assets may only fetch Rs. 1,500 cr. out of the Rs. 7,500 cr. debt it owes. Oh, well.
Damodaran says $100 bills are hard to come by. A must read, HT @CupLord.
Indiabulls Employee Welfare Trust Dumps All Its Shares. Should SEBI Probe Further?
The Employee Welfare Trust (EWT) of IndiaBulls Financial Services dumped 2.4 crore (24 million) shares of the company in the market, at a price of around Rs. 284 per share.
Some of the shares were bought by:
- Copthall Mauritius: 2.81 million shares.
- HSBC Global Investment Funds, Mauritius: 3.1 million shares
- Merrill Lynch Cap Markets Espana: 3.19 million shares
- Swiss Finance Corporation, Mauritius: 2.49 million shares.
Overall, 11.5 million shares, about half the dumped shares, were bought by the above entities. The stock has fallen 4.7% to 284.
Important Note (15/2/2013):
IndiaBulls (Investor Relations office Mr. Shah) has reverted with clarifications on their EWT structure and the reasons behind the deal. I didn't talk to management before this post - all opinions were made using only publicly available information, linked where necessary. I do not talk to management in general, and I believe that analysts should not get specific disclosure that is not made publicly. However, in this case, I must apologize for not getting the exact quantum of the loan outstanding, the answer to which would have negated the possibility of a loss.
I will write in more detail, but before anyone accuses me of stock manipulation, please note that I have not had any positions in the year before, during, or after this post as of 15/2/2013. Further, since Indiabulls have chased an associate of Veritas with a court case accusing him of demanding money for not releasing a report, let me categorically state that I have never contacted anyone related to Indiabulls about this story.
History
Remember that Veritas, the Canadian research firm, had questioned the role of the EWT with their Indiabulls report. I had then written about the IndiaBulls EWT in particular (Read: Veritas-Indiabulls Fight: The Employee Welfare Trust).
Salient points:
- The EWT got loans of Rs. 900 cr. from Indiabulls, to buy shares from the market.
- At 12% interest.
- The EWT has no other income. Dividends are only 5-7% today.
Thus, the share price needs to go up for the EWT to return the cash – otherwise, options aren’t going to be exercised. This is a huge risk.
Also it amounts to the company buying its own shares in a way – it is lending money to a related entity, that buys its shares.
The quantum of the loan is totally out of whack. 900 cr. could buy more than 3 cr. worth of shares; the outstanding equity option count was way below that (less than 1 cr. shares in existing schemes). However other options in the pool remained unvested.
Also note that SEBI has banned Employee Trusts from buying shares in the market in Jan 2013.
Shareholding Pattern Revelations
I had noted that it was disburbing Indiabulls was not revealing the EWT stake if they did indeed own it. Almost on cue, in the September 2012 shareholding pattern note, they declared the EWT as owning nearly 10% of the company (3 cr. shares).
(Note 15/2/2013: Indiabulls has told me that since the shares were held in trust in employee names, they were small holdings. I don't believe this is maintainable - this would have to exclude all such "pooled" holdings then, like mutual funds or even FIIs. I believe they should have revealed the EWT stake earlier, under any circumstances)
In December the EWT owned 2.48 cr. shares. (The EWT must have sold the difference in between)
The EWT has now declared to the exchange that they own nothing. They had 3.1 crore shares, and have sold all of them between September 14, 2012 and Feb 8, 2013.
Did IndiaBulls lose money lending to the EWT?
(Also see note below)
In their conference calls they have mentioned that the average cost of Indiabulls shares for the EWT was Rs. 175. That would have resulted in a loan of only Rs. 525 cr. to the EWT.
But IndiaBulls has lent a total of Rs. 896 cr. (plus about 109 cr. of interest accrued but not due ) according to their annual report 2011-12. That means the trust needed to pay back over Rs. 1000 cr. eventually.
However, the money they would have realized from the the sale now is a little short of Rs. 900 cr. (Note: it's actually 850 cr. as per their Feb 8, 2013 press release) Even considering that the dividend in the last 12 months has been Rs. 20.5 per share, they would have got just a little more than Rs. 60 cr. in dividend.
All this adds up to Rs. 960 cr. that the EWT has received since March 2012.
With 960 cr. the EWT will not be able to return all the money it owes, as per my calculations. It obviously owes more than 1,000 cr. as of March 2012 – add another nine months of interest at 12% and you find the EWT actually owes around 1090 cr. or so.
The proceeds of the sale plus dividends equals Rs. 960 cr. This is short by around 130 cr. Since the EWT has no more holdings, what happens now? How can the EWT pay any more? Is this a hit that Indiabulls will take?
Note that a Rs. 130 cr. loss is not a huge amount – it would hit their next quarter’s profit by about 25% but it’s one-time in nature.
(Answer 15/2/2013: Indiabulls has revealed that there is NO LOSS to the company. The EWT (it's subsidiary actually) had, it revealed in a press release, returned Rs. 446 cr. in August 2012:
The total amount of loan to the Trust and its subsidiary Ceraon, together with interest thereon, as disclosed in the last Annual Report for FY 2012 stood at 976.17 crore as at 31st March 2012. The Trust held nearly 3.1 cr of IBFSL equity shares, and additionally held shares of other listed group companies.Out of this amount of Rs 976.17 crore collectively owed by the Trust and Ceraon to IBFSL as at 31st March 2012, an amount of Rs 441.16 cr was repaid by Ceraon in August 2012, which was funded by the other Settlor Enities and financial institutions....The Trust has repaid the balance amount of loan outstanding to IBFSL together with up-to-date interest out of the sale proceeds of IBFSL shares. It is further clarified that with this, the entire amount of loan advanced by IBFSL and its
subsidiaries to the Trust and its subsidiary, Ceraon has been repaid in full together with the accrued interest as of date. The loan amount from IBFSL to Trust stands adjusted with full payment of both the Principal and interest amounts in their
entirety.
Post this, I believe there are two things that I have mentioned that were wrong:
a) that the loan was still 900 cr + - this was an incorrect assumption, and I was not aware of the 446 cr. returned in August 2012. This was supposedly stated in a conf call, but the transcript I have seems to not have that part of the conversation.
b) If Rs. 446 cr. was already returned in August 2012, this transaction of sale will more than cover any loan given by Indiabulls. There is no question of any loss, in that case.
Please accept my apologies.)
Questions SEBI Must Ask
- Why were there no shareholding pattern revelations about the EWT’s holdings prior to September 2012? They obviously seemed to have held nearly 10% of Indiabulls for a while and none of this seems to have been revealed prior to September 2012. All companies must reveal names of holders >1%, quarterly. However, do note that two purchase transactions by the EWT - one for 1.57 cr. shares and another for 1.1 cr. shares were revealed as part of insider trading laws in October-November 2010. (Note 15/2/2013: Indiabulls has responded that they didn't believe quarterly revelation was necessary since it was about shares held in trust for employees. I believe they must know better - these shares were held by the trust and not assigned to employees, and in any case, you must reveal all large holdings even if in a pool structure)
- The SEBI Notification dated Jan 17, 2013 explicitly demanded that all companies with existing ESOP trusts must put full details of all transactions made by the trust since April 1, 2012 up on the company’s website, within 30 days of the notification. It must probe into Indiabulls if it does not put such details up by Feb 16. (Note 15/2/2013: They have done this)
- Based on the transaction details of the EWT, is it possible to infer that the EWT was trading in the shares of the company? As in, was it only buying, or buying/selling consistently? This is wrong only because it was funded by the company itself. (Note 15/2/2013: The full details of the transactions of the EWT post April 2012 have been revealed and there are only sales. Indiabulls says there has been no buying/selling consistently. I would still request that SEBI check further before 2012 in order to ascertain there was no issue )
The only reason one should probe this is because all shares have now been sold by the EWT, and presumably they have not cancelled any existing stock option plans; that means they intend to only issue new shares to the employees as they vest. Why not keep the shares in the EWT and just not buy any further? Too much interest cost?
Gagan Banga was confident in his conference call that just dividend income would be enough to offset the interest cost for the EWT. However that is not sustainable, I can imagine. But SEBI can’t ask why (there’s no forcing a trust NOT to sell shares) – they can only probe to see if there was fraudulent trading, with an intent to manipulate, or inconsistent with the concept of the ESOP trust.
My Outlook
(Note 15/2/2013: Out of the above, I think SEBI might have a case in asking why shareholding patterns didn't reveal the nearly 10% stake held by the EWT, from Dec 2010 to Jun 2012. However, there is no loss to the EWT or Indiabulls in the above deal - if anything there's a profit of a few hundred crores. Also, there is no evidence that the trust actually traded frequency in the shares of the company, though SEBI can confirm this very fast. )
IndiaBulls finance will soon change its name and become a pure housing finance company. I will avoid buying; given the new float in the market, I presume that the stock will remain under pressure for some time. Secondly, the results have been great, but housing in general will go through tremendous stress in the coming years, and I don’t want to touch a lending business in that area.
I also think that the company is likely to see some sort of SEBI probe. If we are asked why we don’t invest in stocks, as retail public, it is simply because when things like this happen and there is no investigation, we tend to believe the market is rigged in favour of big companies. A change in image can only be brought about by investigation and imposing heavy penalties on big-company defaulters.
Infy Up 17% on "Good" Results. How Good?
Infosys declared results on Friday and the stock went up substantially. It has in fact been the best single day move for the stock and the best result day by far. The 17% move came on the back of what was seen to be excellent results, or at least, for the first time in a while, Infosys looking less negative about its future.
Let's do a quick note about the results, as usual, in graphs. Quarterly revenues went up beyond Rs. 10,000 cr. for the first time,
Revenues have gone up nearly 6% QoQ, and about 10% YoY. I'm not very sure of how the accounting has been done, but for partially completed fixed price projects and invoiced-but-not-yet-paid contracts they consider the end-quarter exchange rate to convert the outstanding earnings into rupees. The RBI rates for the rupee to the dollar were:
Sep 30, 2012: 52.6970
Dec 31, 2012: 54.7773
The rupee stumbled about 3.95%, which has perhaps contributed substantially to the gain in revenues. (Note though that Infy has around 30-40% of revenues hedged, but the hedge losses may not be recorded in "revenues" necessarily)
P/E and EPS Growth
A more generic view of the growth is here:
While the P/E seems to have got back up to 16.64 due to the stock price jump, earnings growth has reversed direction. Not only is the December quarter EPS marginally lower than the same quarter in the previous year (meaning "no growth"), even the TTM EPS growth - which was about 29% in the last quarter and come to 20% (most of which, again, is the rupee depreciation).
Employees
The area of concern is in the slowing of headcount growth.
At a 150,000+ employee count, the growth in number of employees is an abysmal 1.21% this quarter. (Net Addition = New employees minus attrition as a % of total employee count). Since the utilization is just getting worse every quarter, lower employee growth + stagnant productivity = either higher billing rates or a better dollar-rupee ratio.
Billing rates have actually come down marginally from last year or are stagnant ($4500 to 4800 per month for offshore work, $12500=$12900 p.m. for onsite work). So the increase in revenues is not really due to higher productivity or more employee headcount - it is a small tweak in billing rates, accompanied with a great rupee-dollar equation. Not very confidence inspiring, for a company who doesn't really do innovative work or use the leverage associated with product companies like Google or Apple.
Geographically Speaking
Infosys is becoming slowly lesser and lesser dependent on the US. Even work from India is getting lesser. Cognizant and TCS seem to be really competing in the US. Europe is decent due to a quasi recovery that will go back to dismal times once the usual suspects of PIIGS repeat their demands.
My Take
I'm not interested in Infy as a stock to buy. I just like doing these graphs. Stock's not a buy for me, and with the strength, not a sell either. At this stage this company needs to trade at a P/E of 10-12, given its prospects and lack of innovation. However the technicals might still show a buy beyond 3,100, if it goes there.
Of Kingfisher and Mallya’s Pot of Gold
There is tremendous outrage that Vijay Mallya, the flamboyant chief of the ailing Kingfisher Airlines hasdonated 3 kilograms of gold to a temple, while the airline has not paid salaries to its employees for nearly a year and owes over 8,000 cr. ($1.5 bn) to various creditors.
I don't defend Mallya - while his surname and mine might suggest a relationship, let me state unequivocally that it is limited to beer - my liking and his manufacturing of it. But I'd like to take the discourse to a different level - away from knee-jerk outrage and to a more deeper and constructive debate about the real issues this situation throws up.
But First, Misplaced Outrage
The outrage is about why Mallya is donating gold while his airline's employees or lenders suffer. See a particularly vitriolic take by Swaminathan Aiyar:
How can a man who owes enormous sums to employees and creditors be free to throw gold around like small change? If there were any justice, surely the gold and golden doors should be seized from the temples and handed over to the employees and creditors. Surely they should have first right to Mallya's assets.
Surely they should not. First, Mallya doesn't owe employees anything. Kingfisher Airlines does. Mallya is at best a partial owner, and is also possibly an employee of the airline. Anyone with a share is an owner of the company - does that mean they all should fish into their own pockets and pay all employees their salaries? Obviously not. The company is different from the individual; this is the basic concept of limited liability, that individual owners of shares are not liable for the debt of the company as a whole. That means that any individual shareholder has no liability for debts that the company has - if this was not so, none of us would be buying any shares in stock markets.
That Mallya was a "controlling shareholder" has no impact on limited liability. You might think, he runs the company, shouldn't he be responsible for the debt? The answer is: no. If there are profits made, the profits are shared across all shareholders (dividend, or valuation or whatever). Mallya will draw a salary and a bonus (if he's an employee). So why should he take the responsibility for the downside when he has to share the upside with shareholders? (If you think that he will embezzle money or siphon out any profits, please go to the "Fraud" section of this post) Same with employee salaries; the company is responsible, not Mallya. HT Atul Karmarkar for excellent links on both Indian law and the earliest UK judgement on the topic.
Let's also take a look at the ownership pattern of KFA. Promoters own just 36% of shares, almost all of which are pledged against loans taken. This itself is strange but normal in India - taking promoter shares as collateral for loans given to the company. If you consider the "Company is not Mallya" premise, then all collateral should have been owned by the company; but Mallya's shares are not company property. However, let this go. Promoter shareholding has come down from 60%+ in March 2011, due to exercise of pledges by lenders.
Promoters in KFA's case is again, not just Mallya. The 32% owned by them are like this:
Shareholder
|
Shares
|
% of co
|
United Breweries (Holding) Ltd
|
19,76,33,555
|
24.44
|
Kingfisher Finvest India Ltd
|
6,34,78,570
|
7.85
|
Dr Vijay Mallya
|
1,51,17,321
|
1.87
|
UB Overseas Ltd
|
1,35,63,180
|
1.68
|
Total
|
28,97,92,626
|
35.83
|
The biggest owner is UB Holdings, which is a listed company and has only 50% owned by the Mallya gang. Financial institutions own 15% of KFA already, and if they convert the promoter shareholding into their name, will own about 45% of it. They can do that and take ownership of the company - what will we do then, go to the SBI chairman and demand that he sells his car to pay airline employee salaries?
This kind of moral outrage is silly. Mallya's gold is Mallya's gold, not an entitlement of shareholders or employees. It might be a property of the lenders, who for some strange reason, have chosen not to exercise their rights.
Fraud or not?
Seething in anger are those that think that Mallya obtained his gold fraudulently by using KFA money. While I can't comment about how he obtained gold, let's be a little practical. Mallya runs a very successful liquor business, selling beer and whiskey and lots of other forms of alcohol. This is a ridiculously profitable business. This is also a very cash-generating business - as in, it can easily generate "black" money. If he is the sort, then the airline would be pretty much last on his list of businesses to get such money from - liquor is far easier to take money from. So if people are angry, it should be shareholders of the liquor businesses, not the airlines.
Secondly, there isn't a single "suit filed" case in CIBIL with the name of Mallya or Kingfisher Airlines, which now reports all suit-filed cases for defaulters of Rs. 1 crore and above. Does this mean banks don't consider that Mallya has frauded them? Does this mean they won't even file a case - forget getting a judgement - just put the darn papers that cobble together even a coherent case of fraudulent behaviour by Mallya?
I'm hoping the answer is that banks are to blame. (Read the next section) If there is fraud, and Mallya is responsible, then he should be booked. And that gold taken away. But someone affected must at least file a case, otherwise it leaves us wondering if there was provable fraud at all.
Remember that Mallya will still be in trouble for not paying employee taxes (TDS), not paying into their retirement/provision fund accounts, for a bounced cheque, and for any tax violations. These are not covered in limited liability. And there may be civil penalties if they are found, for instance, that Mallya didn't pay taxes to cover for private travel, as it seems the promoters of Sintex are now accused of.
If there's fraud, and Mallya perpetrated it, we have to prove it. "I am sure he did it" is not an answer. The accusations that Mallya is a Rajya Sabha MP and used his influence to limit cases is, after a point, not believable. Or that he used it to destroy Air India - that airline would have died even if people did normal business (it gets ridiculous benefits from the government/AAI, who have attempted to even out the game).
The Fault of the Bankers
Bankers have supposedly demanded a personal guarantee from Vijay Mallya. And not just the public sector banks, this includes big private sector lenders as well. Why are they not invoking this guarantee? Why are they not seizing properties that he owns? After all, letting it linger any further will make Mallya sell his assets and take away the money, no?
I'm beginning to feel there is no personal guarantee at all. Certain assets that Mallya owns were mortgaged, like his house in Goa, or the office in Mumbai. But he's not been personally held liable - it goes to show, even from the shareholding patterns of his companies, where none of his personal shares are pledged to a financial institution.
If there is a personal guarantee, we must blame the bankers for not invoking it. We must be seriously outraged that the banks - which include SBI, Bank of Baroda, Bank of India and IDBI bank among others - are not seizing and selling any assets that exist, a right they have through the SARFAESI act.
And was this not evident? Auditors have noted that KFA can't really claim deferred taxes as an asset (which is near 4,000 crores!), and they have not provisioned for a tax claim where the primary ruling is against them (500 cr.). Further, some elements they call "loans" are essentially payments for leases where there is some dispute with the counterparty - money they can't expect to come back. Given this the realizable net worth of the company is substantially below the loan balances banks have, which should have triggered alarm bells nearly a year ago.
We don't see any outrage against bankers, and let us not have them get away with inane statements like "political influence". Bankers that take our deposits and whose shares we own are answerable to us, not only to their political bosses. We should even be furious with the RBI who have not come down heavily on the lack of legwork of the bankers.
The Need for a Bankruptcy Law
India needs a corporate bankruptcy law. Corporates today can't declare insolvency. There is no bankruptcy protection like there is in the US. A company can't just die. If it owns a factory license and has lived for five years, it can apply to the Board of Industrial and Financial Reconstruction (BIFR). Or, any company can apply to get their debt restructured, a method that Kingfisher took in 2010 (when lenders converted some of their debt to shares at nearly 64 rupees per share)
But a company can't demand protection from creditors. There is only "winding up" which means a full liquidation, and that is not desirable because it leaves a lot of things in limbo (distressed asset sales are usually at a big discount). A better option is to partially liquidate, and free the company from the rest of the debt, with enough to help it revive itself. This is how many US airlines have come back from what seemed like certain death.
Let's look at what others have to say
- Bloomberg on why a bankruptcy law makes sense
- IFMR's history of corporate insolvency options
- LiveMint on why a Chapter 11 type of law is good
Banks may oppose such a law because they will fear that everyone will just declare bankruptcy instead of paying back loans. However they should realize that the time and cost of an insolvency (sometimes upto 10 years) is a huge problem as it slows things down for everyone without any real hope for recovery of any money. The best thing would be to provide for a write-off of debt - after whatever can be recovered without completely killing the company. This may be subject to abuse but there needs to be proper investigation for any attempt to defraud banks by falsely declaring bankruptcy (including putting directors in jail). Followed up with proper enforcement.
The lack of a bankruptcy law now means that airport authorities are refusing to let plane leasing companies repossess their planes, on the pretext that KFA hasn't paid up airport dues. This has then resulted in such plane leasing companies refusing to lease planes to other Indian companies. At least in a situation of insolvency, such liabilities become clear, even if disadvantageous to some.
Was Bad Management to blame?
Being a bad manager, or losing business, is not illegal. If you were to believe the kaipullai story, everything Mallya did was sinister, including breathing. But get this:
- We all loved the TVs and the great service the airline gave us, for a fraction of what it used to cost. Salaries, fuel costs, airport charges etc. were all up, but these guys competed at the 1K-BLR-TO-BOM rates. To be the last man standing was perhaps the goal, but this strategy inevitably requires at least one man to not stand.
- They have nearly no assets. They lease their airlines. They rent their offices. They have huge salary costs. This means there's really nothing they own. So what, if anything, can banks own as collateral? Soft items like "landing rights" and "parking bays" are stuff that can easily go away. Contrary to popular thinking, they don't own the Formula1 team or the football team or anything else (and didn't pay for it either). They are technically insolvent, but we have seen "technically insolvent" being fixed with more liquidity - think of AIG or much of the US banking system.
- Asking money from SBI doesn't mean he's stealing taxpayer money. Even a debt restructure, with a partial write-off, is not stealing. This happens all the time, and I'm sure the sum total of other write-offs - including businessmen, personal loans and other stuff - will substantially outnumber anything Mallya has done. Yet, this is not stealing. (Unless it's something called a "wilful" default - that is, not repaying when you really can. Kingfisher doesn't qualify)
- Costs were too high to even meet revenues. If you're going to be all uppity about that, please also note that the Bansals of Flipkart are going through this right now. Don't give me jazz that they're not the same thing - everyone's flying on easily flowing money (equity or debt).
- Only Air India's mismanagement is responsible for the failure of Air India. Not Mallya or Kingfisher. If you hate their influence, please save your outrage for political bosses.
- Did Mallya abuse his position as Kingfisher chief and use planes for personal use, or divert the money elsewhere? If so, let's indict him for fraud. But as I've said earlier, I doubt this is a significant amount.
I'm sure if you investigate you will find both management mistakes and bad luck. But that's not a big deal.
Channeling Outrage
We love our sound bites, but just because something fits well in a few characters, it doesn't mean it is correct. Outraging against Mallya because he donated Gold is the wrong thing to do, and we should know better. To attempt to defend this outrage by saying "one should take responsibility for his actions" is hiding behind a weak understanding of how businesses need to work. Your company's managers are simply that - managers. Unless you can prove fraud, it is outrageous to assume that your manager's wealth belongs to the company.
Our outrage should be at the lack of a proper bankruptcy law, and at the lack of investigation and enforcement of existing laws.
This has been a long post. I've been writing for two days. But I don't feel like copy editing it down to 1000 words. Because this requires a long, detailed rant. I repeat myself often and to some of you, this might sound disrespectful of your time and intelligence. For that I am sorry.
By the way, I do not support the donating of gold to any temple. It is, for the most part, a waste of good money, and I would be quite happy if the government introduced a temple-gold tax. But I also support the right of any human being to do something that is not illegal, however stupid it might seem.
So let Mallya donate his gold, and let's focus on changing the playing field.
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