Understanding the GDR scam

Courtesy - The live Mint


The regulator’s investigations reveal that Pan Asia arranged GDR issues for a few firms in 2009, and in each of these issues the proceeds of the GDR issue were held by European American Investment Bank AG, Austria (Euram Bank).

It’s heartening to note that some of the triggers for the investigation were alerts from Sebi’s Integrated Market Surveillance System (IMSS), which noticed unusually large orders as well as large-scale off-market transactions in a few stocks between January 2009 and May 2010. It sends a vital message to market participants that the regulator is watching. And when this is followed up by thorough investigations, such as in the above-mentioned GDR case and the one related to insider trading in HDFC Mutual Fund, it is sure to cause market participants to think twice before breaking the law.

The GDR case is quite interesting. Sebi has nailed a merchant banking firm, Pan Asia Advisors Ltd, and its founder and owner Arun Panchariya and entities that worked closely with him. The regulator’s investigations reveal that Pan Asia arranged GDR issues for a few firms in 2009, and in each of these issues the proceeds of the GDR issue were held by European American Investment Bank AG, Austria (Euram Bank). Euram is linked to Panchariya. Its website lists one of its two offices as Euram Bank Asia Ltd in Dubai. Sebi discovered this is a joint venture between Euram and Pan Asia, and Panchariya and his brother are directors of Euram Bank Asia.
One of the distinguishing factors of each of the GDR issuances investigated by Sebi was that each was very large in relation to the size of the company. The number of GDRs issued was almost always higher than the existing paid-up capital of these companies. In one case, Asahi Infrastructure and Projects Ltd, the GDR issue was eight times the total equity of the company prior to the GDR issue. Its paid-up equity went up from 37 million shares to 336 million shares after the GDR issue.
Another common feature was that the initial subscribers to these GDR issues almost always the same set of investors. One large investor among them, India Focus Cardinal Fund, is a sub-account of Euram bank AG, which has already been linked to Panchariya. Besides, India Focus and another FII (foreign institutional investor) sub-accounts who initially bought the GDRs, were found to be following a similar pattern with their investments. Not very long after the GDR issuance, they would cancel their GDRs, convert them into Indian shares, and then sell them in the Indian market. Sebi found a large portion of these sales were in the form of synchronized trades with the same set of stock brokers based in India. Even the brokers were found to be connected to Panchariya and his family.
Thus, entities related to Panchariya and Pan Asia formed a whole chain— facilitating the GDR issue, arranging for investors, and then providing an exit for these investors in the Indian markets through a chain of known stock brokers. These brokers would eventually exit their positions by selling the shares in the open market to hapless investors, who would be lured in by the sudden surge in volumes and activity in the stock and on the false impression that the stock must be a decent bet given its large GDR issuance and FII investments. According to one market expert, it’s possible that Euram funded the investments of the GDR subscribers, with a lien on the GDR securities.
The outcome of all this from the GDR issuing company’s perspective is that they can completely avoid the regulatory process and due diligence that is required while raising funds in the Indian market. Issuing GDRs are a much simpler process, especially when they are listed in exchanges such as London Stock Exchange’s Alternative Investment Market. Indian regulators have allowed this since it pertains to securities that are listed in markets outside their jurisdiction and are bought by investors who are not regulated by them.
But as the recent investigations show, some market participants are using this as a loophole. And ironically, it’s Indian investors who end up with the short end of the stick, when these GDRs are quickly converted into Indian shares. In sum, while it’s made to look like an issue of GDRs, in essence it’s an issuance of Indian stock, given the fact that most GDRs are cancelled and converted into shares.
Sebi’s investigations also showed that Pan Asia and allies weren’t the only ones following this modus operandi. Another company it investigated, Cals Refineries Ltd, had a similar GDR issue which wasn’t managed by Pan Asia.
Needless to say, Sebi and the central bank will need to look at plugging these loopholes. As a Mint report in July pointed out, regulators are looking at imposing stringent conditions on Indian companies issuing GDRs. But while doing so, policymakers should be careful that genuine users of overseas equity and equity-linked instruments aren’t turned away. Some of the above-mentioned loopholes can be fixed with just better reporting standards, rather than having to get involved in extensive screening.

FAIRFIELD ATLAS - A GROWING MNC ASSOCIATE

Many of the investors are interested to invest in MNC Companies mainly because of higher level of corporate governance and better professional business approach.But price of most  MNC stocks are ruling at higher level and  beyond reach of an average retail investor.Still there is some exceptions like Fairfield Atlas.Fairfield Atlas Ltd. is a subsidiary of U S based  Fairfield Manufacturing Co.Switzerland based Oerlikon Group is the ultimate parent of Fairfield. Automobile and Industrial Transmission Gear is  the main product of the company and it also producing planetary gear boxes and planetary sub-assemblies and input adapters.Its plants are located near Kolhapur in Maharastra.Fairfield  is a priority supplier to well known companies like M&M,John Deere, SAME, KAMCO, TAFE, TELCON ..etc . With the strong support of the parent ,Fairfield  is generating almost 60 % of its income through exports and  foreign companies like GKN,TMA..etc.are its customers.Even in a tough time in overseas markets , Fairfield is displaying satisfactory performance.Concentration in off road equipments like tractors and other agricultural machines ,heavy engineering equipments..etc  may be a reason for this out performance.In order to reduce the cost of production, parent company is now more interested to source products from India.This is visible in the latest financials of Fairfield Atlas.What catching our attention at this point of time is the good performance of the company at this particular time.This is really a tough time for any engineering company which is deriving  majority of Income from US market.But Fairfields performance is good even now and revival in overseas market will really help the company to perform even better.For the June  qtr company posted a turnover of Rs.50 Cr v/s Rs.34 Cr and a net profit of Rs.3.70 Cr v/s Rs.2.5 Cr In the last FY company posted a net profit of Rs.18 Cr on sale of Rs.163 Cr and the EPS were Rs.6.45. Foreign promoter is holding close to 84 % stake in this company. Considering the strong marketing and financial support of the parent company Fairfield is a good low priced  MNC stock to BUY for investors with long term view which is currently trading at Rs.69/-

TATA CHEMICALS - EVENT UPDATES

Links to  two latest  developments  connected with TATA CHEMICALS

Link  1

Link 2

A Good BUY for long term

PITTI LAMINATION - INCREASING PROMOTER INTEREST

This company started its operations in 1987 at Hyderabad .Pitti Lamination  manufacturing Electric laminationsused in Motors and alternators.Pitti also in the field of Press tools, Progressive tools Jigs, Fixtures ..etc.Company having strong business alliances with world renowned companies like GE,Alstom,ABB..etc.After few dull years , by extensive marketing efforts company back to growth path.In June quarter Company posted a turnover of Rs.98 Cr v/s Rs.45 Cr and a net profit of Rs.6 Cr v/s Rs.1.7 Cr .EPS in June quarter alone is above Rs.4.Company is projecting a net profit of Rs.19 Cr and Rs.26 Cr for the next two years.Recently promoters hiked their stake from 40% to 60 % which is also a positive point to note.At current market price of Rs.42 ,company is trading at very low P/E .If the promoters can achieve atleat part of the projected turnover and profitability there is enough scope for appreciation from current level.CMP is Rs. 42.50/-

TATA CHEMICALS LTD - A MUST BUY

Tata Chemicals is a familiar company for Indian Investors.Considering the potential of Agriculture related sectors worldwide , this company deserves a position in the portfolio of any investor. Company is a leading manufacturer of  Fertilisers and Soda Ash even in a global level.Through several acquisitions company has grown many fold in  recent years. Company is also selling Iodised salt in different brand names like "TATA SALT','I-shakti''TOPP SALT'..etc.In the Fertiliser sector TCL manufacturing and selling Urea,Single super phosphates,Di-ammonium phosphate,Nitrogen phosphorous potassium complexes..etc The sharp rise in fertiliser prices in recent times is expected to help the company to post improved realisation in this sector.Company also having a joint venture with Ireland based Total Produce . Total Produce is the third largest fruit and vegetable distribution company in the world and Europe’s largest fresh produce provider.Through this joint venture company - named 'Khet Se '- Company offering fresh fruits and vegetables.As a brand extention , Tata Chemicals recently started selling pulses like chana, toor, urad and moong under the brand name I- Shakti.Along with its subsidiary Rallis India , Company is initiating a campaign called 'Grow More Pulses' as a knowledge sharing platform for farmers.Company's another initiative is  'The Tata Kisan Sansar'which is a network of about  nearly 700 farmer resource centers that caters to more than 3.5 million farmers in 22000 villages in the northern and eastern part of India.Since it is not a micro cap and  lot of reports are easily available about this company, I am not explaining much on this,but I feels this is the company from TATA group having maximum potential to grow in the next 10 year period.One should include it in your portfolio at CMP of Rs.328 and add more in any dip.

AVANTI FEEDS LTD - CHANGING FORTUNES

Most  of the industries are moving through cycles.Sometimes the length of a cycle is short lived and sometimes it lasts long. We have seen this in IT,Real estate ,Infrastructure ..etc in  recent past.About ten years back aquaculture was a hot industry and many companies from this sector came out with IPO's and listed in stock exchanges.But few years later fortunes of this industry faded and many of the listed companies vanished .Even in a tough time which extends for many years, very few companies managed to survive and ultimately emerge as winners when the entire industry turned around ( Survival of the fittest itself) .I strongly feels Aquaculture/Sea food and allied products is one such industry which is going to start the next up move after a long down trend which lasts more than 5 years.Changing the variety of shrimp , introducing value added products, finding new geographical areas to export ..etc helping  to re capture the past glory of Indian Sea food exports.Being investors in stock market , now our options are very limited in this sector.As I mentioned above there were many listed companies in this sector  about 10 years back.But now there is only three remains with any operations in this field. Out of these three companies Avanti feeds having integrated facilities and better financials.This Hyderabad based company having facilities to manufacture prawn and fish feed and  also in processing and exporting of shrimp.Avanti is jointly promoted and having technical and marketing alliances with worlds largest sea food processing company - Thai Union Frozen Products.TUF holds about 15% of the total equity of the company.Citing the revival in the industry  company is now expanding its operations into Gujrat, Maharastra and Goa for white shrimp farming. Being a producer of feed for entire aquaculture sector ,company will enjoy the benefits of the expansion of other aquaculture ventures.For the last quarter ended June Avanti posted a turnover of Rs.113 Cr V/s Rs.49 Cr and a net profit of Rs.5.4 Cr v/s a loss of Rs.68 lac. EPS for the first quarter is Rs.6.7. After a gap of 3 years ,company declared a dividend of 10 % for last FY. Indian promoter is hiking his stake in the past few quarters. MPEDA is projecting very good growth for this sector in the coming years.In addition to this ,sharp depreciation of Indian Rupee will surely help exporting companies to post improved margins . The other  two listed companies from this space are  Waterbase and Uniroyal marine exports. Considering the nature of operations,marketing and technical tie-up,new initiatives,financial position..etc, Avanti is the best among them.This scrip is traded both in NSE and BSE around Rs.68/- .Medium to long term investors may consider @ CMP or lower level.

KAVERI SEED COMPANY - BUY

I know , this company need no introduction to my regular readers .We are discussing about it from a level of Rs.272/- and now it is trading around Rs.470/- near to its all time high of Rs.494/-. Why it is again after a rise of about 70% ?. It is not only because of the robust result in first quarter  but due to some additional reasons too.Kaveri Seed Company  posted a turnover of Rs.Rs.241 Cr  v/s Rs.148 Cr , net profit of Rs.47 Cr   v/s Rs.31 Cr and an EPS of Rs.34.5 v/s Rs.23 in the latest June quarter compared with the same period last year.The latest news is that- the first phase of company's mega Olericulture project is nearing completion.This 100 Cr project is set up with  the technical collaboration of world leader in green house technology - Netaphim of Israel - on a turn key basis and the production from this facility is only meant for exports.This is the only listed company taking some serious steps in this field at a time of mounting food inflation pressure worldwide.In addition to this , now company is exploring opportunities in Ethiopia, Tanzania and Uganda for olericulture projects where land is available at cheap rate.Company's R&D is recently expanded and it is working on developing new variety of seeds.Indian Council for Agriculture Research recently accepted company's new variety seed KMH-3712 for using in various northern states which will help the company to ensure a pan India presence .Other new varieties KPH - 216,KPH -199 ,KPH - 272 and KPH -37 are entered to the next stage of evaluation by ICAR. These paddy varieties are expected to clear the final stage and hit the market soon.Company's R & D efforts are now more vibrant than ever and it is very important for an industry like this.There is lot of controversy about the use of BT seeds.But it is a fact , to tackle the serious situation in food production some compromises are necessary.Any decision to permit BT technology in vegetables will change the fortunes of companies like Kaveri.Considering the entry barrier of the industry and tedious process from R&D to  commercialization ( about 5 to 7 years for a new variety), all well accepted seed companies will be in a sweet spot in the years to come.Even if the management of Kaveri Seed is a bit media shy and believing only in their business and not in dialogues ,I strongly feels investors will ultimately realise the potential of this  company and the sector itself will re rate in not so distant future.Hence I reiterate a BUY on  KSCL @ CMP of Rs.470/- for long term investors.

For old posting on this company ,Click HERE

'ONAM' WISHES

A VERY HAPPY AND PROSPEROUS 'ONAM' WISHES TO ALL MY READERS

LOTUS CHOCOLATE - A POTENTIAL TAKE OVER TARGET

Lotus Chocolate company is one of the very few listed players from Confectionery segment.This Hyderabad based company is jointly promoted by Mr. N Vijayaraghavan and well known southern film artist T Sharada in 1988.Lotus' manufacturing plant is located in Medak district of Andhra Pradesh with technical and consultancy support from Chocolate Confectionery Consultancy, U.K and Plantek (M) SDN BHD of Malaysia . Company producing various types of chocolates and related products for the retail sector and some cocoa based products  for bulk users.Even this company started commercial production in 1992 , it could not show any notable performance for a long time. Company changed hands more than once from the original promoters .In 2008 ,Hyderabad based ,Puzzolana Group took over this company .Currently company is selling its retail products in different brands - Chuckles ,Superr Carr, On & On,High 5,Kajoos,Gobble,Milky Punch,Maltys,Tango,Eclairs ..etc. Its industrial products includes Cocoa Mass,Cocoa Powder,Cocoa Butter,Chocolate Chocotreats ,Plain Chocopaste ,Ice Cream Coverings ,Drinking Chocolate Powder Chocolate Sauce and Chocolate Decoratives. Company's retail products are now selling only in south and central India due to limited marketing network. After a long time , now this company is showing some signs of improvement.Now company is planning to set up a pan India marketing network and increase its offerings by adding new brands.In the latest June quarter , Lotus posted  a turnover of Rs.14.60 Cr v/s Rs.9.75 Cr and a net profit of Rs22 Lac v/s a loss of Rs 54 lac.It is a fact that , there is some accumulated loss in its balance sheet.But ,Since  many MNC confectionery makers are planning to enter in India  ,with  a good manufacturing capacity and some existing brands - Lotus may turn as a take over target.After the open offer by the current promoters @ Rs.16/- , they bought its shares from open market even above Rs.40/- to further hike their stake.At current market price of Rs.26/- it is a scrip to watch.

Check out how to buy shares of top companies from around the world sitting in India

 COURTESY : Economic Times.

The phenomenal success of the iPhone and iPad has surprised even Apple Inc. The company sold over 20 million iPhones and more than 9 million iPads in the previous quarter. When Apple declared its quarterly results in July, its shares had jumped to a 52-week high of $400.

Profit booking and the exit of CEO Steve Jobs have pulled down the stock by about 8% to $370. However, analysts are bullish about the company's prospects. The consensus 12-month target is $500. Some even believe that Apple shares could rise by 65% to $607. Wouldn't you want to invest in this success story?

The good news is that you can. Just as you can buy shares of Indian companies with the click of a mouse, you can pick up foreign stocks while sitting in India. We are talking about becoming shareholders of some of the biggest and most profitable corporate giants around the world.

Before we come to the nitty-gritty of how to go about it, let's discuss why an investor should consider putting his money in overseas markets. 

WHY INVEST ABROAD

It's often argued that the domestic markets have so much to offer that investors should not look beyond India's boundaries. True, India is still among the fastest growing economies of the world and presents plenty of investing opportunities.

But even the most die-hard proponents of emerging markets will tell you that the party won't last forever. Hansi Mehrotra, India business head, Mercer, believes that other emerging markets can also deliver equally good returns. "The Indian market is quite volatile. By investing overseas, Indian investors can have a smoother ride," she says.

Past returns show that no single market can remain among the top wealth creators for more than a couple of years at a stretch. The crown for the best performing market changes heads every year or .

So, if the Indian economy sputters and dips, the investors who have some exposure to other markets would be cushioned against the downfall. Even during boom times, there might be some economies growing at a much faster clip than ours. Says Arvind Bansal, vice-president & head, multi-manager investments, ING Investment Management India: "Global investing helps in diversification, which lowers the risk and, in some cases, may even enhance the returns."

The diversification is multipronged because you are investing in a different country and with a different currency. "Diversifying across currencies and asset classes is important for all investors, especially given the wide range of investment opportunities available overseas," says Jaya Prakash K, head of products, Franklin Templeton Investments.

Each country or region enjoys a distinct advantage in terms of resources or abilities that give it an edge over others. The Indian economy, even though abundant in natural resources, does not offer many of these opportunities.

For instance, it has limited scope for oil exploration or even gold mining. However, by investing in different overseas markets, an Indian investor can gain exposure to a variety of such themes-technological innovations in the US, bountiful commodity reserves in Brazil or the rich mining fields in Australia.

You can take part in the growth of some of the booming economies and also benefit from the more stable developed economies.

B Gopkumar, head, broking, Kotak Securities, says, "The interest among Indian investors for foreign equities is slowly picking up because they see it as a way to diversify across various geographies." If you have surplus money, here's how you can get a slice of the global pie.  

BUYING STOCKS DIRECTLY

If you are a seasoned investor with a high risk appetite, you can invest in foreign stocks directly. For this, you need to open a trading account with a local broker who offers this facility. Many Indian brokerages have provided this window for domestic investors through tie-ups with foreign trading partners. The Indian broker only acts as the intermediary in this process; the actual buying and selling is done by the foreign broker licensed to trade in that market. Currently, this service is offered by brokerages such as ICICIDirect, Kotak Securities and India Infoline.

Register with any of these brokerages for availing of this facility. You will need to fill out an application form and fulfil the Know Your Customer (KYC) formalities. There is a nominal fee for this access to the global markets. At the time of filling the application, you have to choose the currency in which you want to settle your transactions. When you trade, the broker converts this currency into the relevant one.

Your application will be forwarded to the foreign partner of the brokerage house. Once your details are registered, you will be provided with a client identity and bank account details (to which funds are to be remitted). Next, fill out the A2 form (available at your bank branch), which allows you to remit funds to the concerned bank account. Once the foreign broker receives the funds, your trading platform will be activated, after which you can start trading. 

HOW TO TRADE

When you are registered, trading in shares is only slightly more complicated than investing through domestic stock exchanges. Before placing your order with the broker, you need to ensure that you have sufficient funds in your overseas account. You can send money via wire transfer, which usually takes 2-3 days.

Once you have remitted the funds, you can log in to your broker's trading portal and place the buy order for the scrip. Keep in mind that you have to choose the stock as well as the exchange where it is listed. Unlike in domestic equity trading, the shares are not credited to your demat account but held in a pool account with a custodian. When selling the shares, you have to follow the same procedure. The funds will be remitted to your bank account within 48 hours after completing a bank transfer request.

Through this route, you can easily create your own portfolio of foreign stocks by choosing among the prominent blue chips or any promising upstarts. 

WHERE TO INVEST

Now that you know how to invest abroad, find out which are the most lucrative destinations. While it is easy to grasp the benefits of diversifying abroad, finding the right opportunities is a tough task. You have to do a lot more homework than if you were investing in Indian equities. You need to understand the country's socio-economic set-up, the regulatory environment and the political factors at work, besides the macro-economic situation. Only then will you be able to make an informed choice. Says Huzaifa Husain, head of equities, AIG Investments: "Different regions offer different sets of challenges. One would need to keep in mind that each economy is unique in its own way and may, therefore, behave differently in various market conditions."

If you are investing directly in foreign stocks, you need to have a deep understanding of the market situation abroad as well as the business dynamics of the company you are investing in. Ideally, spread your risk by investing across geographies and themes. Mehrotra feels that investors should look at their portfolios from a long-term (more than 10 years) perspective and consider a strategic asset allocation that includes a meaningful (20-30%) allocation to overseas assets, such as developed market equities, emerging market equities, global REITs, and global infrastructure.

Says Amit Shah, executive director, IIFL Private Wealth Management: "As India is perceived to be an anti-commodity market, regions such as Brazil, Russia and Australia, which are rich in agricultural commodities and mineral resources, can be attractive investment opportunities for Indian investors." In order to capture the potential of some of these markets, investors can put some money in funds focused on individual economies or particular regions such as Latin America or Asia. ING Latin America Equity Fund, HSBC Brazil Fund, Mirae Asset China Advantage Fund, etc, belong to this category.

Jaya Prakash K feels emerging markets are still attractive destinations, despite the turbulence in global markets. "In the recent turmoil, emerging markets, especially those in Asia, have displayed resilience and posted stronger gains. These economies are likely to retain the positive growth momentum in the years to come," he says. On the other hand, you could also consider investing in commodity or sector-related global funds, which would give exposure to specific themes across geographies. DSP BlackRock World Energy Fund, ING Global Real Estate Fund and DWS Global Agribusiness Offshore Fund belong to this category.

However, given the instability in the global markets, some experts feel that it would be prudent for Indian investors to abstain from rushing in to invest abroad. Says Shah: "For now, it may be a wise decision to wait and observe the movement of various indices, rather than time the market and allow it to stabilise before making any investment in foreign equities." 

WHAT ARE THE RISKS?

Investing abroad comes with its own set of risks and challenges. The biggest is the exchange rate risk. Since you transact in a foreign currency, you are exposed to fluctuations in the exchange rate. If the currency of the country in which you invest depreciates, your returns will be eroded. This is because you would get a lesser amount (in rupee terms) in your hand once the foreign currency is converted back to rupee. To negate this eroding impact, you need to make sure that your investment earns a higher return.

Monitoring the investments is another tough task. Given the difference in time zones, it is not easy for an investor to move in and out of their positions quickly. One needs to monitor and track one's holdings more carefully while investing abroad. This means staying up to date with the happenings in the global marketplace and gauging its impact on your investments. This is a must if you are investing in stocks on your own, not through mutual funds.

Another important thing to keep in mind is the tax treatment while investing overseas. Your gains are not taxed at the same rate as the profits from domestic equities. The same is true if you are investing in global funds. Equity funds which invest more than 35% of their corpus in foreign equities are not eligible for exemption from long-term capital gains or the lower tax on short-term gains.