The unusual rise in the stock price of Panoramic Universal witnessed some years ago was proof of how Indian stocks can be ramped up brazenly. Now, an investigation has alleged that the company has been involved in money laundering. But the regulators choose to remain silent
In 2007, the sharp rise of Panoramic Universal's stock price automatically short-listed it among Moneylife's list of stocks worth watching.
A look at its website and the assets listed there made us wonder about the very-steep-and-too-fast rise in the price of this tiny Pune-based company. This rang alarm bells about how Indian stocks can be ramped up so brazenly, and over such appreciation within a single year, or even a few months, that can skew the data over a 10-year period.
Moneylife reacted to this by changing our stock picking methodology to exclude tiny companies and those which showed abnormal price rallies. Strangely enough, while we took corrective action, the two national stock exchanges-the first-line regulator-and the Securities and Exchange Board of India (SEBI), which is mandated to protect investors, has remained somnolent.
In fact, Moneylife continues to regularly highlight the many stocks that are ramped up (mainly on the Bombay Stock Exchange, due to legacy issues) in the 'Street Beat' section of the magazine under the headlined 'Unquoted'. But nothing seems to awaken the regulator from its deep slumber or painfully slow investigation.
Panoramic's 'dubious' business claims and involvement in money laundering has been exposed in the latest issue of Tehelka weekly news magazine. The company's chairman, Sudhir Moravekar, is the owner of a Rs1,000 crore empire, spanning hotels, software development, tourism, manufacturing and real estate. The Tehelka special investigation reports that he has hoarded Rs200 crore in US banks between 2005 and 2010.
According to the report, despite being in existence since a long time the company has managed to escape the regulatory scanner. That was till whistleblowers within the company blew the lid off its money-laundering activity, which involved "transferring small amounts of money, almost on a daily basis, against seemingly bogus invoices".
One of the areas that should have raised eyebrows is the company's hotel business which managed to book astonishing profits, when the sector was reeling on account of the global economic recession. The hotel occupancy rates were dismal, but revenues were huge.
Not one, but three employees from the US subsidiary, Panoramic Ace Properties, alleged that the company was involved in massive laundering of money.
The first information about the company's wrongdoings was lodged by Arvind Kumar with the Major Economic Crimes Bureau of Manhattan at New York County District Attorney. After lodging a formal complaint with the US authorities, Mr Kumar resigned from the company. Along with him, two more company employees, Joseph Steele and Carol Brown Surprenant (both US nationals), also put in their papers and set up the Panoramic American Whistle Blowers Protection & Welfare Association.
Suspecting that both Joseph and Carol were conducting enquiries into the company's funds, they were asked to leave, Mr Kumar is quoted as saying by Tehelka.
However, the communication between the whistleblowers and the Manhattan DA suggests that the US authorities weren't keen on detailed investigations, saying that there was no clear US law broken.
In India, Tehelka reports, the company in being investigated by the Central Board of Direct Taxes (CBDT).
A senior income-tax official was quoted in the news report as saying that Rs200 crore might just be a fraction of the total money allegedly laundered by the company over the past 10 years. "It's the whistleblowers from just one subsidiary of the company who have unearthed Rs200 crore laundered against bogus invoices raised in the name of hospitality consultancy. The company runs dozens of such subsidiaries, both in India and abroad. Many subsidiaries had also been shut down and new ones were opened. We are investigating all of them and following the money trail," said the investigator who requested anonymity.
Tehelka also reported that in 1996, Mr Moravekar launched a dubious scheme named the Pancard club, through which he raised a substantial amount of money. This is now also under investigation. The Pancard club scheme promised a stay for seven days in a hotel every year, on the payment of a small subscription fee. But, if a customer chose not to avail of the facility, he would be reimbursed the full annual fee along with some interest.
Surprisingly, the actual source of such huge funds remains to be traced. Whether it is coming from legitimate business or otherwise, has to be ascertained by the investigating authorities.
There is a lot that may not look right with the Chinese economy. Yet the faith that the Chinese government and foreign economists place in Chinese regulations, restrictions and policies remains absolute
Laws are supposed to solve problems. A government perceives some sort of economic or social problem. Then in step the technocrats, the bureaucrats, or the executive, and implements a solution, a regulation, or a policy. There is one problem, unintended consequences. Certain people may not believe that a government decision works for them, so they find a way around it. An excellent example is inflation in China. It is out of control.
In China the government's economic policies have a great deal of street cred. After all, didn't China use its control over the banking system to avoid a major recession that crippled the West? Haven't they successfully engineered constant, rapid, often double-digit growth? According to the Financial Times, economists think that China can do it again. "Most economists expect inflation to peak this month and begin to ease in the second half of the year as Beijing's tightening policies take effect." Many economists also expected the central bank's rate increase in July to be its last for the year. In June, Chinese premier Wen Jiabao encouraged these views by declaring victory over inflation. Mr Wen wrote that "China has made capping price rises the priority of macro-economic regulation and introduced a host of targeted policies. These have worked."
It seems that 'most economists' have a lot of patience as well as almost religious belief in China's ability to control its economy. Sadly, the Chinese government first started 'tightening' in February of 2010. As part of its tightening programme it has raised reserve ratio requirements four times in 2011 and interest rates five times since October 2010. But it hasn't stopped inflation.
Consumer price inflation has been rising since the middle of 20l0. It reached a 34-month high of 5.5 % and then topped that in June, when it rose to 6.4%. This is the highest inflation rate since June 2008, when CPI hit 7.1 %. The only thing that stopped inflation then was a global meltdown. Even the headline number might be too low. Food prices rose 14.4 % from a year earlier in June, exacerbated by a 57 % increase in the price of pork.
Like prices, growth shows no sign of slowing. The Chinese economy did dip to a 9.5% growth in the most recent quarter, but industrial production has increased 15.1% since May. Retail sales in June are up 17.7% and real estate is still booming despite efforts to control it. Housing sales in June rose 31 % from May and China's largest developer, Vanke Co, reported that sales had increased 79 % this year.
To slow this torrid growth in prices, the Chinese have resorted to restrictions and controls rather than the market. They required sellers of pork, rice, noodles, cooking oil and other staples to ask permission before raising their prices. They even fined the international consumer goods firm Unilever, for announcing planned price rises.
The problem with these mandates is that they don't work. The Chinese, like Wall Street banks, are past masters at getting around regulations. According to the People's Bank of China, of the 14.27 trillion yuan of new credit extended in 2010, about 41.5 % came from other non-bank channels. Just published figures reveal that local government debt had soared to $1.7 trillion, or about 27 % of the nation's gross domestic product. To get around restrictions on lending, local governments created 6,576 local government investment vehicles, which are not included on the state-owned banks' balance sheets along with other off-balance sheet dodges like entrusted loans.
So despite the tightening efforts, China's banks succeeded in extending 633.9 billion yuan ($98 billion) of loans last month, which represents an increase of 14.9 % from May. The money supply is also out of control. M2 growth rate rose to a three-month high of 15.9 % in June, accelerating from 15.1 % from May, which according to a local economist was "unexplainable". A Credit Suisse report states that Chinese credit growth has reached a critical level, which in other countries has signaled a sudden downturn.
One thing that the Chinese could do to tame inflation would be to subject the yuan to market forces, but they have no intention of doing so. Instead they have to print yuan to buy all the foreign exchange streaming into the country. As its foreign reserves rise to unsustainable levels, so does its rate of inflation.
The off-balance sheet lending spree has created another mountain of bad loans that may be as high as $400 billion. A Fitch ratings gauge suggests that China faces a 60% risk of a banking crisis by mid-2013.
And yet the faith that the Chinese government and foreign economists place in Chinese regulations, restrictions and policies remains absolute. China simply cannot have either a hard landing or hyper inflation and that's the law.
(The writer is president of Emerging Market Strategies and can be contacted at email@example.com or firstname.lastname@example.org.)
Bombay Stock Exchange describes it as a technical glitch. But it is not the first time this has happened and there is no explanation from the stock exchange or the market regulator why the so-called glitch keeps happening repeatedly
We have seen this happen before and it happened yet again on Friday morning. In early trade today, there was a rush of odd trades by a few brokers that jammed the trading system on the Bombay Stock Exchange (BSE), disallowing most others from carrying out any trades. Within the first five minutes of pre-market trade itself, many brokers found it almost impossible to connect to the system and even when they did so, it took more than five minutes to register trades and many trades were not registered even then.
Still, some wild swings in prices of certain blue-chip stocks were visible on the screens. For example, the Reliance Industries (RIL) stock opened with a huge jump at Rs1,015 and trade within a range of nearly three hundred rupees within the short time. The stock ended the day at about Rs873.
Similarly, ICICI Bank and HDFC Bank also opened significantly higher and traded within a wide range of Rs1,282 and Rs1,050 and Rs607 and Rs500 respectively. At the end of the day today these stocks closed at Rs1,060 and Rs509 respectively.
It was the same for such other prominent shares like Infosys, TCS, Hero Honda, SAIL and BHEL. The table below will give a better picture of the unexplainably wild prices.