Investor Issues
Kotak Securities asks retail clients to ‘accumulate’ and institutions to ‘reduce’ the same scrip

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: 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:
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.




7 years ago

Similar to this story..recent debacle from Aditya Birla Money..thanks to its head Mr. Vivke Mahajan. Read this artcile :

K.S.S. Holla

7 years ago

sir,.. I am shocked to know that a highly reputated brokerage house like kotak sec, has given twin diffrent calls,for a single scripe to two diffrent type of clients is highly deplorable.. Weather it is a china wall or ratwall, it is the ethical value which is foremost for any business concern in the long run.. From now on investor must double cautious for any advise given by these firm.. Thanks to MONEY LIFE..

Gerard Colaco

7 years ago

We’ve long felt that the only value of stock forecasters is to make fortune tellers look good.
- Warren Buffett


Deepak K Rao

In Reply to Gerard Colaco 7 years ago

Dear Gerard,
Absolutely right. Its great to see your comment on the article.

Deepak K Rao

7 years ago

Those entrapped by the herd instinct are drowned in the deluges of history. But there are always the few who observe, reason, and take precautions, and thus escape the flood.
"Anthony C. Sutton"

The idea that any single individual without extra information or extra market power can beat the market is extraordinarily unlikely. Yet the market is full of people who think they can do it.
"Daniel Kahneman"

If there’re 10,000 people looking at the stocks and trying to pick winners, one in 10,000 is going to score, and that’s all that’s going on.
"Merton Miller"

October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.
"Mark Twain"

Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money from becoming a little.
"Fred Schwed Jr"

The stock market will continue to be essentially what it always was in the past – a place where a big bull market is inevitably followed by a big bear market.
In other words, a place where today’s free lunches are paid for, doubly tomorrow.
"Benjamin Graham"

Wall Street never changes. The pockets change, the suckers change, the stocks change, but Wall Street never changes because human nature never changes.
"Jesse Livermore"

vimal tapadia

7 years ago

I remain a big loser with my large part of life's saving entrusted to them.
They have grossly mismanaged my fund and remain evasive on meeting personally..
I sincerely wish if they could be taught a lesson by reimbursing losses inflicted on a retired person like me..


7 years ago

This is definitely not the first time KSec has done something like this. I am a very regular user of KSec, and I had emailed them a question pointing out to mismatched recommendation in bank stocks in the retail and institutional report a while back. They did not bother to respond. And this Chinese wall principle is a very wrong one -- if thats what you follow then you should make provisions for contradictory views to the same set of clients, right?

I think this calls for SEBI action immediately. Also, if brokerages make recommendations they should be made to declare prop trading positions including those in derivatives market.


7 years ago

Kotak and India infoline are two notorious names in security markets-they are working for interest of Institutions on the loss of retail because INSTITUTIONS are powerful to act against them while retail has no voice to say against them-and watch dog SEBI has no action on them for misguiding and misselling of investors-infact SEBI is doing favour to them by harming MF industry-so they will escape without any punishment-and if these brokerages firms try to escape by saying that there is chinese wall betaween 2 research teams-then they should scrap this concept of chinese wall which is just a tool of hunting rtail clients-


7 years ago

I remember story of a saadhu who used to tell different satta no. to 10 different patrons. He used to get at least one good dinner. Is MOST follows same policy.

Ramkumar K

7 years ago

Congratulations ML. Its a great eye opener for the retail investors and the intraday traders too. Favouring institutional investors at the cost of small investors wealth means cruel huntings are on process by the giant brokers. Retail participants should care of their money of their own.


7 years ago

Misread the targets. The targets are 1250 and 1360. Anyway, these targets are too far away too - less than 10%.


7 years ago

Actually, both the price targets aren't too far away. 1287 and 1360 are just 6% apart.

In either case, the client should understand the upside potential of the scrip is capped and thus look for better opportunities or be prepared to wait for the period of more than 2 years.

I see nothing wrong with these 2 reports differing in their final call.

Even the same analyst may come out with difference earnings estimates on different days. If two different analysts have a price target that is 6% apart, it has to considered normal.


sachin gangwal

In Reply to sachin 7 years ago

Ha, nice way of defending something. All of us know that research firms of brokerage houses are not independent. So if two analysts 'independently" have a 6% price difference .... kind of thing is impossible. In any case organisations should speak with one voice.
This is the same kotak incidentally, which has made a hash of so many investors PMS accounts. Forget returns ... they have huge losses. I have a friend who complained to SEBi after losing a few lakhs of his principal.

I think the two voices are especially serious in a case like Kotak!!! What is SEBI doing?


7 years ago

thx ML for the observation!
readers like wud hv missed altogether!

yr report confirms that many of the Big names are actually unreliable! in fact,
we have no other means to know this except by the vigilant website like the ML.


7 years ago

is this not goldman sacha way where the us regulatory authorities are taking ACTION BUT in india companies as wll as brokerage houses go scot free and sebi/bse/nse are merely mute spectators and are afrais of taking ction i have many such incidents , uco, vijaya, united banks even gave wrong figures of eps both in annual reports and quarterly by not deducting prorata dividend of PNCPS from the profits before arriving at eps, the auditors of these three need to be hauled up for the serious lapse and not allowed to do banks audit. there are cases where there is a blatant violation of accounting norms and regulatory authorities failed to take action

vikas batra

7 years ago

it is a very clear trading strategy, if it goes up one type of client is satisfied and if it goes down then other is satisfied, try it kotak is not the one only one even all players who come on tv do the same thing, asking viewers to buy and asking their rivate clients to sell that and vice versa. so that they should remain in business

s k kataria

7 years ago

Congratulations for the wakeup call and cautioning about the brokerage.What does SEBI do in such matters.Could you please elaborate



vikas batra

In Reply to s k kataria 7 years ago

sebi is again barking dog of brokers, as it has tried to put mutual funds in their arena and was trying to do for infrastructure bonds to be demated, so that their baby is promoted and will not say word about various irregulariries happening in the market.
i complained about one and still to get a reply, its been five months

The reality in the coal pit: Did investors in Coal India mine the right facts?

Though Coal India is sitting on the largest coal reserves in the world, the dark reality is that much of its mines are located in mafia-infested land, where smuggling is the norm, not an exception

As foreign investors poured billions of dollars into the initial public offering (IPO) of Coal India Ltd (CIL), they have chosen to ignore one important fact which can blow up in the future - coal, which generates more than 70% of electricity in the country, is not only being used for India's growth but also for generating illicit income for mafias, local politicians and the Maoists - the single greatest threat to the country's internal security.

"Naxal activities are mostly concentrated in the coal belts of Jharkhand and West Bengal and it is affecting production of coal in India," former MP and trade union leader Jibon Roy told Moneylife. In effect, India's most productive mines are situated in the Maoist and mafia-dominated central and eastern parts of India - Jharkhand, Chhattisgarh, Orissa, Andhra Pradesh and West Bengal.

The Dhanbad, Jharia and Raniganj areas, where mines are operated by Bharat Coking Coal Limited (BCCL) and Eastern Coalfields (ECL), both CIL subsidiaries - are heavily affected by illegal mining. BCCL and ECL have been perpetually loss-making subsidiaries and have been referred to the Board for Industrial and Financial Reconstruction as sick companies in need of restructuring.

Mr Roy has earlier been quoted as saying that at least 10,000 mafia groups are active in coal-producing belts, mostly in CIL collieries, and plunder around five-six million tonnes of coal (worth more than Rs420 crore) every year. According to another report, about 7,20,000 tonnes of coal is smuggled every year in Jharkhand by organised syndicates of the coal mafia.

Facts like these have been ignored by institutional investors and analysts in their assumption that CIL is just another large coal company with valuations that should match and even exceed that of other large coal companies such as Peabody Energy.

The reality in the coal pit is different, according to Mr Roy. "Mafia gangs have been active in the coal industry for many years and these gangs can not work without (the) help of Maoists. If you go to the interior parts of Jharkhand, you can see thousands of cycles employed by the mafia to move coal from one place to another, and these areas are controlled by the Naxalites," said Mr Roy. "In India, about 60% of coal production is done by contractors and these contractors are easily targeted by the Naxalites," added Mr Roy.

"There are thousands of mafia groups that are active in pilferage of coal in these states. They (Naxalites and the mafia) have acquired land and abandoned mines," said Mr Roy. "These groups (the mafia) collect coal from productive mines and excavate coal from abandoned mines and bureaucrats, police and criminals are involved in the act."

The gangs, equipped with the latest weapons, are effectively active at various stages such as excavation, washing, loading and transportation of coal. Often, due to inadequate security measures and by threatening local authorities, coal trucks are diverted to other destinations by the mafia. Transporting coal over railway tracks is also not safe as fencings or walls are easily breached by these militants.

"I have seen coal-loading trucks being diverted from one place to another place under the protection of the police," added Mr Roy.

It is also reported that large amounts of coal are pilfered at Benaras-Mughalsarai and Andal yards. Local trains along the Korea-Rewa, Anadal-Sainthia, Dhanbad-Ranchi, Dhanbad-Hazaribagh, Asansol-Gaya and Asansol-Patna routes have been regularly used for pilferage of coal.

Despite the government claims that adequate action is being taken to stop illegal mining, the situation is becoming grave. As many mines are located in interior and isolated areas, routine inspections are not conducted by law-enforcement agencies. "The government is also not capable of protecting these mines," added Mr Roy.

Illegal coal mining has now become a major threat facing the nation. Along with stealing coal, some groups are also active in stealing explosives, which sources say is supplied to Naxalites. In May, the CID arrested a man with 150 gelatine sticks, used to make improvised explosive devices (IEDs) by Maoists, and an equal number of detonators. The CID claimed that the man was part of a racket that smuggled explosives from Eastern Coalfields' magazine depots and was used to supply gelatine sticks and detonators to the Maoists.

"Explosives of coal companies are targeted by the Naxalites and the mafia," confirmed Mr Roy. There is no record of stolen gelatine sticks and detonators over the years, alleges Mr Roy. Casual workers transport the gelatine sticks to collieries on cycles and vans, and pilferage often takes place at that time.

Not only organised gangs but women and children also take part in stealing of coal. Many poor people can be seen digging old mines and carrying bags of coal on their cycles.

Citing unnamed police officials, Tata Energy Research Institute's Journal of Resource, Environment and Development said that illegal mining can never be stopped entirely and some policemen receive regular payments from illegal mine operators. Mine managers also appear to be fully aware of the exact locations of large illegal operations, but overlook the practice, added the report. The illegal coal is sold at lower rates in the local market.

To restrain illegal mining, the government is trying to fill up holes of mines with stones and debris and seal off access to abandoned mines.
But tunnels are dug and the coal faces are exposed for illegal operations. Frequent accidents resulting in deaths also do not prevent people from continuing these operations.

Even though coal-producing and consuming companies are gaining mammoth profits every year, the socio-economic condition of the people living in these areas is still very poor - this incites them to pilfer coal.

However, politicians are keen to take benefit from rich coal deposits. In October 2009, Madhu Koda, former chief minister of Jharkhand, was charged with laundering money estimated at over Rs4,000 crore - a whopping 20% of the state's revenues - during his short two-year tenure at the helm.



Aakash Desai

7 years ago

Very good article. Looks at the other side of the coin.


7 years ago

nothing to comment on.
Things are cristal clear from several decades.
mafias, naxals, police, politicians, people ...whom to blaim?
all have played a significant role for the destruction of the future generation.


7 years ago

'mafia' is the right description.

however, it difficult to define who the 'mafia' is?

after reading the media, one may well conclude that even the owners of cil may fall under the category!

its a sad commentary on our own sense of nationhood and one is forced to think if we really deserved the much touted 'azadi' .



In Reply to maryseven 7 years ago

Feel like the only RISE in the slogan INDIA SHINNING & RISING is " CORRUPTION".


In Reply to Manav 7 years ago

very true, sir!

SEBI to tighten disclosure norms for biz between related cos

New Delhi: Market regulator Securities and Exchange Board of India (SEBI) today indicated that it could tighten the disclosure norms for transactions between related companies, reports PTI.

"There is a scope for improvement...," SEBI chief CB Bhave said when asked if the measures taken by the market regulator so far with respect to disclosure of related party transactions were enough.

Related party transactions typically involve deals between group companies, companies involved in joint ventures or between a holding company and subsidiaries.

Since the value of the transactions between related parties or associate enterprises may be doctored to avoid or reduce tax liabilities, it becomes imperative for the revenue authorities responsible for collecting both direct and indirect taxes to have principles in place for valuation of such transactions.

Speaking to newsmen here, Mr Bhave also said there is no proposal as yet to separate the offices of the chairman and managing director in listed companies as prescribed in the voluntary corporate governance guidelines issued by the corporate affairs ministry in December last year.

"They (the MCA's corporate governance guidelines) are voluntary. Even now, Clause 49 (of SEBI's Listing Agreement) says chairman and managing director is the same... At this stage, we are not contemplating any change," he said.

Mr Bhave was attending the Organisation for Economic Cooperation and Development (OECD) Asian Roundtable on Corporate Governance organised by the Institute of Company Secretaries of India (ICSI).

"If disclosure was the only answer, then we would have no problem... We need to look at the whole framework more broadly. So, looking at the whole process, including these related party transactions, how are they discussed, how they are approved, how they are monitored... so this is very important. All stakeholders will have to sit together to resolve this problem," OECD senior policy analyst Fianna Jesover said.

The OECD has also come up with a 'Guide on Fighting Abusive Related Party Transactions in Asia' and has identified the area as one of the biggest corporate governance challenges on the Asian business landscape.


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