Gujarat NRE Mineral to file draft IPO prospectus this month

New Delhi: Gujarat NRE Mineral Resources Ltd (GNMRL), the holding company of Gujarat NRE Coke Ltd (GNCL), will file a draft prospectus for an initial share sale offer later this month, which could help it raise up to Rs1,000 crore, reports PTI.

"We will be filing the draft red herring prospectus with the Securities and Exchange Board of India (SEBI) within this month, that is October," Gujarat NRE Coke CMD Arun Kumar Jagatramka told PTI.

While Mr Jagatramka refused to comment on the amount his company aims to raise through the public float, market sources said that the company aims to garner up to Rs1,000 crore from the initial public offering.

GNCL is the flagship entity of the Gujarat NRE group and is a leading producer of met coke in the country. GNMRL holds a controlling stake in GNCL.

The company has roped in merchant banker Anand Rathi to manage the public issue, he said.

According to Mr Jagatramka, the initial public offer (IPO) proceedings would be used to hike the promoters' stake in Gujarat NRE Coke Ltd.

"The money raised by the firm will be pooled in Gujarat NRE Coke," he said.

The issue would see a dilution of 25% stake by the promoters in GNMRL. The promoters hold a 90% in GNMRL and post-IPO, it will come down to 65%.

Gujarat NRE Coke is listed on the Indian bourses.

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Do Indian regulators need a hearing aid?-III

Even as the Sensex scales a 32-month high, thousands of crores are flowing out of equity funds while data from the NSE proves that the Indian equity market is extremely hollow. But regulators are in an ivory tower. In this third and final part of a three-part series, we examine the track record of various portfolio management services

In theory, PMS (portfolio management services) is the ideal solution for affluent people who are willing to pay a good fee to have their money invested in the market by experts. Supposedly smart investors have apparently put Rs30,000 crore in PMS, but returns are another matter altogether.

PMS is offered by asset management companies (AMCs), brokerage firms and niche portfolio managers.

 Of these, AMCs are the worst and attract maximum complaints. But, even here, the field is skewed by the large number of complaints about significant losses incurred by investors in Kotak group's three PMS schemes. Several investors say they have lost as much as 30% to 40% of their principal - a complaint to SEBI has often helped in getting a refund of at least the fees collected by Kotak, despite massive losses.

There are plenty of horror stories about PMS, involving the biggest names in the business. The former chairman of one of India's largest multinationals, who sits on several national and international boards and audit committees, recently told us that "In the five years I am with them, I have earned nothing while the portfolio manager continued to charge me a fee." Kotak executives are now working hard to appease him and have offered to waive their fees. But five years with no returns for a financial expert?

In another case involving the Kotak group which Moneylife has reviewed, someone had invested Rs52 lakh in two Kotak Securities portfolios in January 2007, as on 31st March, the investor had suffered a loss of approximately Rs15 lakh, or 30% of his total investment. In the same period, the benchmark indices, the BSE Mid-cap and BSE 200, were up by 15% and 30%, respectively. At times, the difference between the movement in the broader market and returns earned by PMS was startling. From April 2009 to December of the same year, while the benchmark shot up by 127%, Kotak's Smart Investor Portfolio scheme rose by only 37% - a staggering difference of 90%.

 The SIGMA Equity Portfolio did even worse. From April to December of 2009, the benchmark, the BSE 200, posted 91.2% returns, but the scheme inched up by only 8.7%.

Kotak is among the biggest in the PMS business, managing almost Rs1,000 crore. But it probably attracts the maximum number of complaints. A cardiologist couple, who had invested Rs42 lakh in a PMS with JM Financial in 2007, walked out in early 2009 with half the sum. The karta of an HUF (Hindu Undivided Family) tells us that he invested Rs50 lakh of the family fund and received just Rs31 lakh on redemption - a loss of around Rs19 lakh or 38%. A businessman said he has invested in "several different PMS and lost money in all of them." There seemed to be more bad news than good. In each case, the portfolio manager blamed the investor for the losses, or shrugged them off with the attitude that 'losses happen'. Yet, many PMS were sold on the claim that they would make profits even in a falling market (post-2008) and it is bad times that would "separate the men from the boys."

But all that PMS seemed to do was to separate investors from their money. These investors put money into PMS through hearsay. Could they have done otherwise?

Poor Information

Regulators often advise investors to think, research and then invest. Not many people know that there are three types of portfolio managers, but even if they knew this, what kind of research could they have done when there is no comparative data available? As Moneylife has highlighted for a while now, there is no statutory filing and aggregation of data in the public domain to help investors choose a PMS, based on track record.

However, before handing over money to the investment house, you can ask them to produce three years of performance. The regulation mandates that.

Since the regulator does not mandate frequent, comprehensive and public disclosures, Moneylife decided to poll its readers for some answers. For this survey, we received 122 responses to a fairly simple set of questions. Of these, we have eliminated those who have never invested in a PMS but still chose to respond to the questionnaire. That whittled the sample down to 73. This is a high-quality sample and more reliable than most surveys conducted by leading market research companies for a narrow set of people.The responses were interesting.

For starters, inducement to invest in PMS comes from a variety of sources - financial advisors (a high figure of 32%), friends (26%), brokers (21%) and bankers (18%). As we had guessed, these services have more dissatisfied investors (59%) than happy ones; a majority (63%) say they will not recommend PMS as an investment route to others. But 59% of them did get some returns on their investment - although the high dissatisfaction level suggests that the returns were probably below their expectations. In fact, 30% of the respondents received a return of less than 10%, which is below the inflation level. Of these, 20% got under 8%, which is what a bank fixed deposit would have fetched. Some 41% said their returns were over 10%. And we were not even asking how many of them beat the popular benchmarks like the Sensex. A majority of the respondents (63%) have invested in more than one PMS. Nearly half the investors (48%) have remained invested for over two years. About 12% did not respond to this query.

The survey showed that there is low awareness about costs, charges, churning of portfolios or related-party transactions. This was evident from the number of investors who simply could not respond to questions on these issues. For instance, 29% of the people did not respond to the question of returns earned, but a high 60% felt that the losses in their portfolio were due to bad stock selection. A third of the respondents couldn't say if their portfolio was churned excessively.

Only 3% of our respondents had filed a complaint with the regulator about the manner in which a PMS was run. This number is hard to analyse because it is unclear if they did not complain because they thought it was pointless, or just chose to vote with their feet. The findings suggest that all is not lost for the industry and, if the regulator puts in place a robust reporting system and some much-needed checks and balances, there would be plenty of takers for well-managed portfolio management schemes.

Snake Oil Sales Pitch

The common complaint against the performance of these schemes is that they raked up losses and churned portfolios aggressively; the stock selection was poor and some did not return even the entire principal. How are investors lured to get into PMS? Is there mis-selling involved? If so, when will the market regulator wake up and review the PMS sales literature?

What lures most investors mainly is unbridled and unregulated boastful and, sometimes, false claims. If JM Financial's executives told a doctor that the money-management skills would 'separate the men from the boys' in a downturn, a portfolio manager boasted about the firm's ability to predict trends and to hedge against risk. Another investor writes that he attended a fancy presentation by a brokerage firm which claimed 95% accuracy in stock selection. He says, "I find it difficult to digest the claim, unless you have inside information. And you cannot have inside information on all the stocks."

Apparently, these exclusive meetings at five-star venues are selling not only PMS, but also investment in poorly regulated sectors such as real estate. The sales literature of Kotak runs as follows: "Portfolio Management from Kotak Securities comes as an answer for those who would like to grow exponentially on the crest of the stock market, with the backing of an expert." The only exponential growth seems to be in the losses that they have made. Kotak claims that "to understand the dynamics of various asset classes and investment options we use the best talent in the industry to come up with cutting-edge products." This looks like pure snake oil. Investors will find it hard to understand how the 'best talent in the industry' could make absurd judgement calls to lose a large chunk of capital in 2009-2010, a period that has been hugely rewarding for investors.

In its sales brochure, Kotak states that its portfolio managers have an average experience of over nine years in the equity markets and it boasts of a research team with an average experience of five years. With such talent and experience, the Kotak team seems to be following two simple rules that take retail investors to ruin; One, 'buy high and sell low', and two, 'chase market momentum too late'.

No wonder, some sensible distributors don't sell PMS. Last year, Brijesh Dalmia, founder, Dalmia Advisory Services, told us, "I do not like PMS and I do not sell them. PMS is sold as a customised product, but in reality it is not. Costs are very high as compared with other investment options. The taxation is not suitable for customers. Besides, the investor has no control on the churning part by the fund house or the fund manager." Mr Dalmia added, "PMSs are operated with no fixed fee structure and capping on expenses on churning. This is obviously not in the interest of the client. In the last couple of years, I have not seen any PMS which has beaten the benchmark index of any diversified equity fund. Of course, PMS will be promoted by the distributors and financial advisors because of the high commission offered by the fund houses which range anywhere between 2%-4%."

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Western investors look east to real estate markets

Dubai: Investors looking to park funds in commercial real estate are likely to increasing turn their attention to emerging economies in the Middle East, South East Asia and Asia-Pacific, reports PTI quoting an expert.

"Commercial real estate is completely and perfectly correlated one-to-one to the broader economy. The macro economic climate and the health of the financial system are the two driving forces that dominate real estate value," said Ethan Penner, president of CB Richard Ellis (CBRE) Capital and executive managing director of CBRE Investors, Asia and Asia Pacific.

Ethan Penner, who was speaking at the Cityscape Global Real Estate Investment and Development conference here on Monday, said many investors erroneously believe that real estate as an asset class offers diversification away from stocks and bonds.

The Cityscape Global conference, which is taking place at the Dubai World Trade Centre, has attracted some of the leading minds from the international and regional real estate industry.

Mr Penner said that real estate professionals cannot and do not create tenants out of thin air and only a growing economy can generate sustainable demand for space.

To get ahead of the herd, an investor should understand and anticipate macro-economic change.

"Real estate, more than any other asset class, is dependent on debt. It would be unheard of for a corporation to have 60%-80% of its capital structure in debt, even 40% debt would be considered high risk. In real estate, however, this is commonplace," Mr Penner said.

"The average is 70% and frequently, it can exceed 80% or even 90%, so when the debt capital markets catch a cold, real estate is invariably in trouble," he added.

This year, Cityscape has attracted over 180 exhibitors and participants from more than a 100 different countries and 30,000 visitors are expected at the four-day show.

Mr Penner's forecast for growth in developed economies was equally sobering. "The best case scenario would be average growth of up to 1%, reminiscent of the way the Japanese economy has performed over the last twenty years," he said.

Cityscape Global group director Chris Speller said: "Naturally, with emerging markets unhindered by unsustainable levels of debt and with healthy growing economies, the future of real estate looks bright. The obvious danger is that these markets once again become overheated, but Asian economies have learnt from previous economic crises, authorities are putting regulation in place to avoid future property bubbles," added Mr Speller.

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