The brokerage firm has made contrasting calls on the same scrip on the same day to its retail and institutional clients. The firm washes its hands of the matter citing a ‘Chinese wall’
Brokerage firms worldwide are notorious for making dubious recommendations to their clients. It is well known that when the stock markets are on a roll, most brokerages flow along with the mass market euphoria.
Recommendations to buy outstrip those to sell by a huge margin. The same happens when the markets are in a mess - 'sell' recommendations suddenly become the norm - after stocks have fallen off the cliff. But when they start offering contrasting advice to different sets of clients for the same scrip, it is bewildering, to say the least. And when they attempt to justify their action by waving the archaic and spurious 'Chinese wall' concept, investors should be a worried lot.
Kotak Securities, one such brokerage firm, has come out with two contrasting reports on Container Corporation of India on the same day. The two reports make diametrically opposite recommendations for the private clients on the one hand and institutional clients on the other. But before anyone can stand up and question its analysis, Kotak Securities has washed its hands of the matter. In clear terms, the private client report has mentioned, "Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited."
In essence, what the disclaimer means is that one hand does not know what the other is doing - the two research teams are separated by Chinese walls. Of course, this is not the first time a brokerage firm is making contrasting recommendations and putting its hands up.
Moneylife has previously reported (see: http://www.moneylife.in/article/8/5949.html) on how India Infoline had flashed the Chinese wall concept to explain its contrasting calls on the same scrip (Punj Lloyd) on the same day. As we had said then, this notion of existence of Chinese walls in today's financial system is highly dubious and ironic.
The Chinese wall concept is most commonly utilised in financial institutions with interests in both investment banking and brokerage operations. Its purpose is to provide a separation between the two, while allowing the company to engage in both activities without creating a conflict of interest. This wall is not a physical boundary, but rather an ethical one that financial institutions are expected to observe. But this Chinese wall is very porous, as was proved during the recent crisis in Wall Street, when investment banks went belly up one after the other. Kotak itself has brought this to the fore, a large number of PMS investors of Kotak Securities have suffered severe losses due to gross bungling by Kotak's portfolio managers (see: http://www.moneylife.in/article/8/5372.html).
In the effort to generate brokerage income, the managers eroded the wealth of these investors.
Both the reports, whose copies are with Moneylife, were published on 21 October 2010. In one report, Kotak Securities wanted institutional investors to 'reduce' holdings in Container Corp. It also gave a 12-month target price of Rs1,250 or 3% lower than the then trading price of Rs1,287 as on 26th October. According to Kotak's ratings definitions mentioned in this report, a 'reduce' meant that they expected the stock to underperform the BSE Sensex by 0-10% over the next 12 months.
On the other hand, Kotak's second report, issued on the same date and on the same company for its private client group made a recommendation to 'accumulate' shares of Container Corp with a target price of Rs1,360 as against the then trading price of Rs1,270, translating into an upside potential of 7%. The report fails to mention the time horizon, but it is assumed that all brokerages use 12 months as a standard period for target price.
What is even more shocking is the stark difference in earnings estimates reported for the two groups. The private client report maintains FY11 earnings as is and has introduced FY12 estimates. Meanwhile, the institutional equities report reduced earnings estimate for FY11 as well as for FY12!
Our query to Uday Kotak of the Kotak Mahindra group as to the rationale behind the contrarian calls remained unanswered till the time of writing this report.
Suspension of scrips, or delisting them, punishes investors and helps companies who want to ditch their retail shareholders after raising funds from them
After Moneylife wrote earlier about some 1,500 scrips being in suspended animation, even as the Securities and Exchange Board of India (SEBI) is set to tweak the takeover and delisting rules, intermediaries and investors are writing to protest the lack of action.
Suspension of scrips, or delisting them, punishes investors and helps companies who want to ditch their retail shareholders after raising funds from them. Companies merely need to violate the listing rules by refusing to pay the fees or making correct disclosures. Meanwhile, investors are stuck. They continue to pay the annual depository charges and cannot even close the DP account without transferring the shares; re-materialising them involves a further cost on what could be a worthless share.
An intermediary told Moneylife that, at present, of the 1,537 scrips suspended from trading, just 673 companies account for a combined equity capital of Rs14,119 crore. Virendra Jain of Midas Touch Investors Association says that nearly 800 companies file returns regularly. But, in most cases, investors are clueless.
Among the scrips that investors say they are clueless about are: Assambrook Ltd which was suspended on 3 July 2008 where around 8,000 investors, who hold 64% of the equity, are affected. While tea companies are doing well, shareholders of Assambrook are stuck with illiquid stock even though the shares were trading at Rs15 when it was suspended. Two others are: Delhi-based Talbros Engineering and Cochin-based Vysali Pharmaceuticals.
Interestingly, investors have repeatedly taken up this issue with CB Bhave, even when he headed the National Securities Depository Ltd (NSDL), but have not made much headway. One reason may be that most of these scrips are listed on the (older) Bombay Stock Exchange (BSE), whose turnover has steadily shrunk over the past 15 years to just under 4% of the total market, even though it has more than 3,000-odd shares listed on it with negligible trading. Clearly, it is unfair, and expensive, for the BSE to bear the cross for legacy issues. The regulator needs to step in on behalf of investors and make investor protection funds available to pursue these companies, initiate action against directors (one committee had suggested barring them from the boards of all companies) and file winding-up proceedings against the companies. Meanwhile, several investors and intermediaries have innovative ideas to revive trading in these scrips, if only the regulator would listen. One suggestion sent to Moneylife is to transfer these shares to one of the 20 defunct regional bourses which can provide an over-the-counter (OTC) platform to trade the shares and give them liquidity. These would be like the bulletin boards or pink-sheet exchanges that exist abroad, with lower regulatory requirements. Clearly, this and other suggestions need to be examined by the regulator to find a solution.
Brokerage firm Aditya Birla Money’s fancy scheme for the rich incurred heavy losses amid wrong bets. It has required intervention from the very top to set things right
In the high stakes game of wealth management, where revenue generation usually takes precedence over client welfare, all it takes is a few overzealous people to run a portfolio to the ground. Aditya Birla Money, a financial services firm, discovered this the hard way recently, when a fancy scheme tailored for individuals with deep pockets ran into heavy losses apparently due to wrong and slipshod bets. However, Moneylife learns through informed sources that Kumar Mangalam Birla personally intervened to ensure there were no losses to the investors.
The scheme, Options Maxima, involved trading in equity options where fund managers either short sold Nifty and bought options or did it the other way, a person familiar with the development told Moneylife. The scheme promised returns of around 1%-1.5% every month based on the arbitrage opportunities through this activity, which ensured what was considered a very fair 12%-15% return annually. The managers, however, made wrong calls on the movement of the index and stocks.
Narrating this incident, our source told us, "They (Aditya Birla Money) used to run something called Options Maxima involving covered calls where one short sells Nifty and buys options or the other way around, whereby there is a small arbitrage opportunity. Every month it offered 1%-1.5%, translating into annual returns of 12%-15%. It was aggressively marketed as a risk-free investment in various presentations. Suddenly in September when the market went up this manager based out of Chennai short sold Nifty and bought options, resulting in a huge loss."
The resulting losses supposedly amounting to a sizeable sum of nearly Rs100 crore caused panic in the company. Sources say that Kumar Mangalam Birla personally inspected the books of the company at its office and was there very late into the night. We have learnt that the Birla group has written cheques to make good the losses through a private group entity. But such a blunder could not go unpunished. The buck had stopped at Kanwar Vivek, managing director of Aditya Birla Money, who apparently put in his papers. Pankaj Razdan, deputy chief executive, financial services, Aditya Birla Group had roped in Mr Vivek a while ago. We have now learnt that this incident has also put Mr Razdan under considerable pressure. However, company sources deny any talks of him leaving the company.
An Aditya Birla Group spokesperson declined to reveal more details regarding this sensitive issue as the listed company is slated to come out with its quarterly performance figures early next week. However he did mention that most of the reports in the media were purely speculation, including the estimates of the loss incurred by the scheme. "As a company policy, we do not comment on speculation," said the spokesperson.
At a time when the group is intent on making significant strides in several of its new-generation businesses, Mr Birla would surely like to put this incident behind him. Financial services forms a big part of the group's plans and has contributed 37% to the FY 2009-10 consolidated revenue of Aditya Birla Nuvo, the holding company. Mr Birla is infusing more cash into businesses like financial services and telecom through Nuvo and enhancing his own stake in the process. Aditya Birla Financial Services is, in fact, intent on launching banking services provided the Reserve Bank of India (RBI) gives it a banking license.