Minority shareholders are once again at the receiving end after the company sells off its business to a multinational; auditors sign off on the accounts despite several glaring irregularities in the books. What is really going on?
Laffans Petrochemicals (Laffans) is an example where investors lose, even after taking care to invest in a profitable company with good prospects. Laffans has never made a loss in all its years of existence, but the shareholders have still been left high and dry with no returns and a dodgy sell-off of its core business. Here is what happened.
The Bombay Stock Exchange (BSE) listed Laffans has had a nearly spotless record of profitability since 1994, barring two (1998 and 2012) years. But although it earned a profit, there is no record of dividends being ever distributed at all. Interestingly, it wasn’t until 2012, the year it made a loss, that some dubious accounting practices was discovered, but the auditor, Shekhar Gupta, of SM Kapoor & Co did not see fit to qualify the accounts.
On 2 April 2011, Laffans Petrochemicals sold off its manufacturing unit at Panoli to the Huntsman Performance Products (India) Pvt Ltd, a multinational corporation, following a court order of 11 March 2011 and discontinued operations since then. This bland disclosure in the 2012 annual report sealed the fate of the investment of hundreds of small shareholders. A corporate disclosure to the BSE merely says: “Under the terms of the sale, 140 people at the Ankleshwar site and 25 people from the Mumbai and other regional commercial sites will join Huntsman.” No talk about the value of the deal or the consideration that Laffans received.
That’s not all. While the business ceased to function, investors have written to Moneylife pointing out that a series of costs continued to be debited to the company. For instance, Rs26.81 lakh was debited towards “carriage inwards” when there were no purchases. Another Rs94.11 lakh debited to “repairs and maintenance others” when there should have been nothing to repair—what is worse, when the factory was fully in operation in 2011, the spending on repairs was Rs9.19 lakh.
That’s not all. Out of the blue, the company acquired creditors to whom it owes Rs8.48 crore (up from just Rs5.19 lakh). Who are these people/entities? There is no explanation to shareholders.
Under “management discussion” in the 2012 annual report, it is mentioned that the company makes money through commissions and interest. It has Rs45.55 lakh in mutual fund investments, mostly in fixed maturity plans (FMP) of one year duration. These investments are classified as “non current investments” or short terms. One of these investments amounting to Rs1.25 crore was invested in a company called “California Infotech.com Pvt Ltd”. Shareholders have written to say that there is no record of this company on the MCA21 portal. The auditors have found nothing fishy about this too.
Laffans Petrochemicals is quoting at Rs9.81 in the Periodic Call Auction System (PCAS) window on the BSE. Yet, the value of its “non-current investments” alone is roughly Rs56.94 per share! In effect, its current market capitalisation is LESS than its “non current investments”! In other words, the company is sitting on a pile of cash while the minority shareholders are helplessly watching their wealth disappear via dubious accounting and can do nothing about it. Laffans made a loss in 2012 after selling off a key business- this is only the second time since 1994 that it has reported a loss.
Finally, according to a BSE disclosure, on 4th April 2011, it said: “Laffans Petrochemicals will continue as a supply chain partner for Huntsman and will also look for other complimentary opportunities in the chemical industry. Laffans is already evaluating setting up a fatty anime project, a basic raw material for the agro and FMCG industry. The project site is yet to be decided but this could be in Gujarat or Malaysia. The project would be fully funded by Laffans.”
If this is how companies treat their minority investors, is it any wonder that millions of retail investors shun the capital market today?