Companies & Sectors
Kingfisher employees threaten to disrupt IPL; seek Mallya’s prosecution

The protesting employees have urged RCB players to boycott Mallya’s team. They have also asked the BCCI not to allow RCB to participate in the upcoming IPL

Frustrated over not getting salaries for the last 10 months, Kingfisher Airlines employees on Wednesday asked the government to act against promoter Vijay Mallya and threatened to disrupt Indian Premier League (IPL) matches.

 

“If Gopal Kanda, promoter of MDLR airlines, can be prosecuted for suicide of an employee why can’t the government prosecute Vijay Mallya for suicide of the family member of his employees,” said Santosh Gautam, president of Kingfisher Airlines Maintenance Association.

 

They also threatened to disrupt IPL matches of the Royal Challenger Bangalore (RCB), the team owned by Mallya. “Last time, when Formula 1 race was being organised in New Delhi, afraid of our protests, KFA management paid our salary of one month and assured to pay the dues in instalments but they have failed to keep their promises. This time, we will protest outside the venue wherever RCB team plays their matches,” said S C Mishra, another employee.

 

The protesting employees have urged RCB players to boycott Mallya’s team. They have also asked the BCCI not to allow RCB to participate in the upcoming IPL.

 

The employees asked the government to amend labour laws making non-payment of salaries a criminal offence and said “the Supreme Court should take suo motu cognizance of our matter in specific and in general for overall reforms required for the benefit of working class.”

 

Seeking an early intervention on the issue, the employees have written letters to the president, the prime minister, the chief justice of India, UPA chairperson Sonia Gandhi, civil aviation minister Ajit Singh, the Directorate General of Civil Aviation Arun Mishra.

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Economy & Nation Exclusive
Why Manappuram shares tumbled 30% in just two days?

Manappuram crash testifies what Moneylife has been saying for a very long time—that gold-loan companies are built on extremely shaky and fragile foundation with poor supervision

 
The share price of Manappuram Finance is down nearly 30% in just two days, tanking to Rs24.60 from Rs34.60. It is believed that the company will be expecting huge revenue losses for the current quarter due to declining gold prices. This exactly is the point Moneylife has been highlighting over the years about the gold loan companies. The business model of these companies cannot survive when gold prices are stagnant or when there is repayment stress for consumers due to a variety of reasons including lower growth and higher inflation.
 
Even brokers and financial institutions, who have been bullish on the company earlier, without understanding the fundamentals of gold-loan companies, seem to have woken up. For instance, Merrill Lynch expects the company to touch Rs20 and has downgraded it to “underperform” from “Buy”. Ambit Capital, earlier this year, had rated the company as a “buy” and put a target price of Rs51. Now it has put it under review. Bank of America and Religare have taken a similar stance and put the company under review.
 
 In a regulatory statement, the gold loan company stated, “We expect an under-recovery of revenue on certain gold loan portfolios due to correction in the gold price. This may result in reduction in profit numbers for the 4th quarter ending 31 March 2013.” The episode also prompted resignation of a director, AR Sankaranarayanan who was the chairman of the Remuneration Committee.
 
This is not the first time that Moneylife has pointed out the flaws of gold loan companies. Way back in 2010, we ran an exclusive three-part exposé (Part 1, Part 2 and Part 3) on gold-loan companies where we had written about several flaws in their business model. In our second part of the exposé, we had delved deeply into the numbers and questioned its sources of finance as well as how non-convertible debentures (NCDs) were no different from deposits. 
 
Basically, gold-loan companies are non-banking finance companies (NBFCs), which cannot accept deposits. So where do they get their money from? They have to borrow from elsewhere, such as non-convertible debentures (NCDs) (in lieu of deposits). This is the money, they normally lend out to consumers. But in order to pay back creditors, it needs to lend more and more, so that the interest inflow is greater than the interest outflow and principal. The only way to lend more is to ‘securitise’ the gold received (even though it is not owned by them), lend that to more consumers, and hope gold prices go up (and of course, hope that consumers do not default!). Otherwise, Manappuram will have to put up more collateral.
 
Earlier, in an email, VP Nandkumar, executive chairman of Manappuram, had said, “It is true that receivables arising out of our gold loans are being funded in significant measure by the banks through bilateral assignments. It is also true that we are using the proceeds to further expand our gold loan portfolio. However, the crucial distinction to be made is that every stage of expansion of our gold loan portfolio is accompanied by a proportionate increase in the value of gold that we hold as security against default.”
 
Gold-loan companies do well when gold prices go on one direction—upwards. This is similar to the US sub-prime crisis when banks securitized homes thinking home prices only go upwards. However, there is another side to this story, which has not happened yet when consumers default. In this case, they will have to sell off the gold jewellery, which will lead to lower realisation. This is a double-whammy and sure to put a severe stress on Manappuram’s balance sheet. Under-recovery of revenues would apply on both sides of the equation.
 
“…we also believe a fall in gold prices would not automatically result in a rise in default rates. Most of the gold loans are given against household jewellery. However, finance is extended only to the extent of the bullion value of the jewellery less the applicable margin. Since the making charges in jewellery can constitute another 10 to 20% of the value, there is an additional cushion for the lender. Also important is the fact that the average duration of a gold loan is about three months. Keeping these factors in mind, an increase in default rates becomes likely only if the fall in price of gold is both sharp say, of the order of 30% or more and takes place suddenly  over three months or less,” Mr Nandkumar had said.
 
This is not just restricted to Manappuram. We also have been repeatedly writing about the flaws of gold-loan companies’ business model. For more information on this, check the third part of our three-part exposé here.
 
Unfortunately, this went completely unnoticed by financial regulator, Reserve Bank of India (RBI) until last year, 14 months after our exposé. It issued a notice albeit too late, which stated: “Manappuram Finance, Thrissur, Kerala, is not permitted under the Reserve Bank of India Act, 1934, to accept/renew deposits from the public”.  The fact that, in 2010 itself, over 90% of Manappuram's borrowings were secured against the very loan it gives out, which is akin to pyramiding which risks being toppled. And that is exactly what we are seeing now. We had written about this when RBI’s action came too late. Check here to read how and why regulators act too late in interest of our consumers.
 
Earlier this year, again albeit too late, the RBI Working Group headed by KUB Rao also expressed concern on some gold loan NBFCs, which have been raising public deposits surreptitiously through unincorporated bodies. It also said, “Based on the number of complaints received against such companies, it is apparent that the mammoth expansion had taken place at the cost of sound internal controls. Several undesirable features such as poor know your customer (KYC) compliance, poor storage facilities for gold accepted as collateral, increased incidences of frauds and robberies, opaque auction procedures, all pointed towards rising operational risk as well as consumer protection issues in such companies”. 
 
The bottomline is that unless there is stringent regulation and supervision, gold-loan companies will always have a shaky business foundation, which is fraught with too much risk, not only to investors but also to consumers as well. 
 

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COMMENTS

CA PRADEEP AGARWAL

4 years ago

On expected lines, in case want to survive will have to reduce Int. rates so that can recover Interest and principal otherwise can be a gone case

CA PRADEEP AGARWAL

4 years ago

We can see the condition of Gold and the security is totally of Gold-Gold Jewellery, hence it was expected. We have seen big Co's shares tumble

R S Murthy

4 years ago

The company is exclusively engaged in lending money against gold. Their rate of interest is very high.

All most all Banks PSU or Private are lending against gold both for agricultural and non agricultural purposes for a reasonable rate of interest. When this facility is available with banks who or what type of people approach them for loans?

These companys pay huge advertisement charges engaging all leading heroes of the filmland from all most all languages.

These aspects would have suuficiently indicated 'investors beware'. Still we have not taken the signals. What is the use of finding reasons for such debacles. This is just like applying BURNOL after the hands are burnt.

R S Murthy

4 years ago

The company is exclusively engaged in lending money against gold. Their rate of interest is very high.

All most all Banks PSU or Private are lending against gold both for agricultural and non agricultural purposes for a reasonable rate of interest. When this facility is available with banks who or what type of people approach them for loans?

These companys pay huge advertisement charges engaging all leading heroes of the filmland from all most all languages.

These aspects would have suuficiently indicated 'investors beware'. Still we have not taken the signals. What is the use of finding reasons for such debacles. This is just like applying BURNOL after the hands are burnt.

R Balakrishnan

4 years ago

Looks like the co has taken equity investors for a good ride by constantly maintaining that the new LTV would not impact them. Also, the cushion of 'making 'charges cover is a myth. You pay that whilst buying but get zero on it whilst selling. "

CA PRADEEP AGARWAL

4 years ago

Actually, if we look at other shares, the whole scenario is very bleak especially those those managed with very little shareholding.I will like ML to disclose those Co's operating with 5-10% shareholding and their profitability/losses and how much they are taking home as management compensation.

Dayananda Kamath k

4 years ago

it has to happen. when even rbi complimented them for doing yeomen service in financial inclusion the shares of these companies started gaining. but it is strange that even banks started canvassing gold loans when gold rates are at peak.it is actually inviting traps for the bank as well as client. and everybody will have to suffer.

REPLY

CA PRADEEP AGARWAL

In Reply to Dayananda Kamath k 4 years ago

Actually if you look at it there is so much speculation/hoarding in Gold that you cannot believe and all big sharks are in it.

Bapoo Malcolm

4 years ago

Before someone comments: I am 71 years old and not 43 as appears in my profile!

Problem is I cannot change the numbers.

ML should help out senior citizens who are not computer adept. Jai Ho.

REPLY

CA PRADEEP AGARWAL

In Reply to Bapoo Malcolm 4 years ago

Do compliment on your age I am 56 running 57, since at your age and even my age we are not COMPUTER savy but can do our work, that is a fact though ML can do a lot no doubt about it.

Bal krishna Gupta

4 years ago

I do not agree with the author. Gold loan companies have mark to market soft ware to derisk them from violent fluctuations in gold prices. Even ther wise they have a cushion of 30-35% in the value of loan v/s the value of pledged gold. A mere 5-7% fall in Gold price cannot turn their lives topsy turvy. there seem to be issues at the company level. May be they have given clean loans in the garb of gold loans to reality players or film producers at usurious interest rates which as can be expected have turned bad. Also why they did not act on the M2M trigger in thinking that the decline trend was temporary or there is a bigger and sinister game plan usually resorted to by small and mid cap companies. The insiders dump the shares suddenly at higher prices and buy them back at the suddenly reduced prices making a big kill. This company needs to be investigated with that angle in mind by SEBI and the losses suffered by small investors by criminal insider act need to be compensated by treating the price of the scrip at pre dumping date level. Small investors should be given a window of opportunity of a few days if they want to exit the stock.

As in the case of DCHL this called for forensic audit in the affairs of the company.

Bapoo Malcolm

4 years ago

Read a comment by someone called myth buster. Challenged the moderators to have the "guts" to post his/her message! Good.

Now how about having the 'GUTS', to identify his/herself, rather than hiding behind some pseudonym?

REPLY

Myth Buster

In Reply to Bapoo Malcolm 4 years ago

Dear Sir,

With all due respect, a pseudonym is not only used when one fears being revealed. Having said that, a poor old layman like me needs a veil of Secrecy while taking on a media publisher. Call it cowardice if you want to, it's a free country :)


Bapoo Malcolm

In Reply to Myth Buster 4 years ago

Doubt if Sucheta or more so, Debashish, can or would like to spend time going after you. Then again, if they do, there are lawyers available!

Relax, man. Or should I say, woman. At least give us a hint and narrow down our doubts by 50%.

Suiketu Shah

In Reply to Bapoo Malcolm 4 years ago

Absolutely well said sir.Anyone who doesnot wish to identify himself/herself or with a fake id,shd not be taken seriously.ML is great to post and reply to such people.

Bapoo Malcolm

4 years ago

"There can be no legislation to regulate human greed." This has been my refrain for umpteen years.

When share prices fall, there is a big hullabalou. Public meetings and what have you. Raj Purohits hit the lecture circuits. Why is there no corresponding expression of joy when the prices go through the roof? When shares go north without production to back them up?

There is no such thing as something-for-nothing. 'Free lunches' is a trap. When you talk free markets, there should be no regulation at all. Let people invest and prosper...... or suffer.

In advertising there is a saying, "There is a new generation born every day". There is also a sucker born every minute. Human frailty drives the 'bulls' and people will learn only if they suffer. All your cries, till then, will be voices in the wilderness.

But it's always nice to say, "I said so".

REPLY

CA PRADEEP AGARWAL

In Reply to Bapoo Malcolm 4 years ago

But, as you know money attracts money in the same case, we have to warn innocent investors timely, if greed takes then also it is their affair. You see lots and lots of free advices and paid advices are there for which shares to buy and sell, and further what is T20 being aired by CBN/ZEE Business, so what are they guiding, making public juaris or what.

CA PRADEEP AGARWAL

4 years ago

Really, good work on exposure but would also like that SEBI, speculators plus operators should also be exposed.

CA PRADEEP AGARWAL

4 years ago

There are not one but 100's and 100's of Mannapuram in the offing

REPLY

Bal krishna Gupta

In Reply to CA PRADEEP AGARWAL 4 years ago

Pradeep,

It is ManaPPuram not MaNNapuram!

CA PRADEEP AGARWAL

In Reply to Bal krishna Gupta 4 years ago

agreed

Suiketu Shah

4 years ago

excellent piece warning investors from untrustworhty companies in the Indian stock market.Keep it up moneylife.

Myth Buster

4 years ago

MoneyLife has been wailing about 'financial pyramiding' by gold loan companies for quite a while now. From their repeated whining Incan gather either one of two things; they do not have the basic understanding of how finance works, or they have some kind of a hidden agenda against GL companies. Any financial institution has to borrow money in order to lend to customers. For banks they do this through deposits/NCDs/CPs etc, for non-bank entities this is done through NCDs/Securitization/CPs/Short-term Loans/WC Loans etc. All financial institutions borrow in order to lend. It is foolish to expect them to lend solely from their reserves. One another form of borrowing is 'securitization'. I don't want to get into the specifics of that, but the author clearly has not taken the effort to study the balance sheets if the GL companies, because as in date, the GL companies have little or NIL securitization portfolio. To call borrowing by financial institutions for onward lending a 'financial pyramid' is being naive.

The author also repeatedly claims that the foundations of GL companies are 'shaky'. I would like to ask them to bring out specifics on why they feel so? Have they done an indepth internal study? Management interviews? Doing a superficial study doesn't act as a substitute.

Lastly, just because one of the players in the industry had to write back interest income, does not mean the health if the whole SECTOR is questionable. Some players in the industry were aggressive in lending wrt LTV and interest provisioning. It is the reversal if that aggressiveness that you are seeing now.

I hope the moderators have the guts to put up my comment.

REPLY

Sucheta Dalal

In Reply to Myth Buster 4 years ago

Mythbuster has clearly not read the report in full. It is not just Moneylife that claimed that foundations of gold loan companies are shaky, but the RBI acted on it too.... much later.

Also, common sense would tell you that if we were "Pro" gold loan companies, like the rest of the media, we would have been happy beneficiaries of their huge advertising blitz for the past many years.
A genuine reader or subscriber of Moneylife would appreciate the sacrifice. So one can only draw obvious conclusions about the reason for your fury at this article!

Myth Buster

In Reply to Sucheta Dalal 4 years ago

Ms Dalal, please don't twist facts to your convenience. RBI did not act on the shaky foundations, they had only released a circular for capping LTV. Nowhere in their circulars did they mention that the 'Foundations are Shaky'. As for the other circulars they are mostly hygiene measures, like increased KYC etc. I urge you to shed your bias towards this industry, just because you or your 'analysts' cannot wrap your head around the concept of Gold Loans. As for the KUb Rao report, I suggest you read it carefully, Mr. Rao has very explicitly mentioned that GL co's are an inherent part ofnour financial system, and plays an enabling role for bringing 1000s of tons of gold to the productive part of the economy.

I am someone who very closely monitors the gold loan industry, and I have seen none of the other media/publishing houses disparage the GL co's as much as MoneyLife.

Also, its funny to see that you were not able to counter ANY of my questions that I had asked you in the earlier comment.

As for my common sense, it tells me that it would be fair to assume that Moneylife Magazine has a vendetta against Gold Loan companies BECAUSE they refuse to put advertisements in the magazine.

Sucheta Dalal

In Reply to Myth Buster 4 years ago

Hey I did not even attempt to answer your questions. I dont want to. You are an affected insider. You are having your say.
End of story. Our webmaster only responds when this turns into spam or begins to mislead readers.

Rakesh

In Reply to Myth Buster 4 years ago

A brilliant piece of work by unbiased and independent Monelife. Manappuram is a big advertiser and so you won't find this kind of hardnosed analysis elsewhere.

SEBI wants to colour mutual funds based on risk profile

A blue colour coded box would indicate low risk, yellow would signify a medium risk, while brown would represent schemes with high risk associated with the mutual fund scheme

 
Market regulator Securities and Exchange Board of India (SEBI) has issued a framework on “product labelling” with colour coding for mutual funds (MF) with an aim to help investors assess risk associated with the schemes.
 
SEBI said these guidelines would be implemented from 1 July 2013, for all existing and forthcoming MF schemes.
 
According to the guidelines, product labels carrying details about the schemes need to be disclosed on front page of the MF's initial offering application forms. A blue colour coded box would indicate low risk, yellow would signify a medium risk, while brown would represent schemes with high risk.
 
SEBI said, “In order to address the issue of mis-selling, a committee was set up to examine the system of product labelling that would provide investors an easy understanding of the kind of product/scheme they are investing in and its suitability to them”.
 
The labels would include details about the nature of schemes likely to create wealth or provide regular income in an indicative time horizon such as short, medium and long term.
 
Moreover, mutual funds would have to state a brief about the investment objective in a single sentence followed by kind of product in which investor is investing (equity or debt).
 
As per the guidelines, mutual funds would also have to include a disclaimer that “investors should consult their financial advisers if they are not clear about the suitability of the product”.
 
SEBI said that the product label has to be placed in proximity to the caption of the scheme in the initial offering—key information memorandum (KIM) and scheme information documents (SIDs)—and common applications so that they are prominently visible to investors.
 

User

COMMENTS

Rajhans

4 years ago

Yes very good step.So people can easily understand the risk,but remember the principal in ratings Mf as followed by Crisil & other govt bodies.

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