The market has settled into a low-range trading
Questions put to the finance minister on the manipulation in the F&O segment have been vaguely answered. Who is the ministry of finance looking to protect?
Rajeev Chandrasekhar, an independent Member of Parliament (MP) in the Rajya Sabha, recently asked a list of questions pertaining to the Futures and Options (F&O) segment to the finance minister. Most of the questions asked were related to the manipulation in the F&O segment. The questions asked were whether several dubious operator-driven stocks have crashed in response to SEBI’s recent decision to change the eligibility norms for the F&O segment. He also asked for the details of any enquiry made regarding dubious and poor quality stocks being added to the F&O segment.
It seems that the finance minister missed the point and replied that the average decline of the 51 stocks in three weeks from 23 July to 13 August “was only around 0.5% which cannot be termed as a crash warranting an enquiry.” But it’s not all the stocks put together that need to be scrutinised. It is individual stocks that crashed by more than 10% that should have fallen under their radar.
In the first week itself (23 July to 27 July) the 51 stocks which were common to both the NSE and the BSE crashed by an average of 5.95% with around 45 stocks in the red. Out of these, as many as 12 stocks had declined by more than 10% within the week. The Nifty remained flat during this period. Even in the period referred to by the finance minister, there were stock like S Kumars Nationwide and BEML which were down by nearly 30% and 20% respectively. And as many as 25 stocks were negative. Yet these stocks were overlooked. If such is the state of affairs in the ministry of finance, one cannot expect much from the exchanges or even the market regulator.
Moneylife has highlighted the brazen manipulation in creating the F&O list several times in the past. Even as the Securities and Exchange Board of India (SEBI) has stepped in to change the eligibility criteria for F&O nobody seems to have gone into what is, on paper, the role and responsibility of the stock exchanges. Indeed, in a supreme irony, while SEBI’s move is designed at checking manipulation by doing away with illiquid stocks, the bourses have either encouraged manipulation or turned a benign eye towards them.
Read our earlier articles on this:
SEBI slams down on F&O manipulation-I: What was NSE’s role all this while?
SEBI slams down on F&O manipulation-II: NSE and BSE as the first line of regulation stand exposed
With debt issues becoming more opaque with each passing day, is it wise enough to invest? The answer lies in the fact that it is good to do some ground work before deciding whether or not to invest
A few days ago, my banker sent me a flyer about a non convertible debenture (NCD) issue from India Infoline. It has a six-year repayment duration and a coupon of 12.75% per annum (p.a.). This being one of the highest coupons available for a financial services company, I was curious. And it also enjoys a double A minus (AA-) rating from CRISIL and ICRA.
A fine print in the first page tells me that it is a "subordinated debt". In essence, on liquidation, there are going to be others in the queue that will have to be paid off in full. My banker did not mention this in his mailer.
'"Subordinated Debt" means an instrument, which is fully paid up, is unsecured and is subordinated to the claims of other creditors and is free from restrictive clauses and is not redeemable at the instance of the holder or without the consent of the supervisory authority of the non-banking financial company'. (From the offer document).
"The NCDs will be in the nature of subordinated debt and hence the claims of the holders thereof will be subordinated to the claims of other secured and other unsecured creditors of our Company. Further, since no charge upon the assets of our Company would be created in connection with the NCDs, in the event of default in connection therewith, the holders of NCDs may not be able to recover their principal amount and/or the interest accrued therein in a timely manner, for the entire value of the NCDs held by them or at all. Accordingly, in such a case, the holders of NCDs may lose all or a part of their investment therein. Further, the payment of interest and the repayment of the principal amount in connection with the NCDs would be subject to the requirements of RBI, which may also require our Company to obtain a prior approval from the RBI in certain circumstances."
(Risk factors, item no 12 in the offer document)
A quick reading makes me very uncomfortable. If the company faces trouble at the point of contractual repayment, I am at the tail end of the queue. Does the above statement mean that even if there is a contractual date, regulatory approval is needed for repayment? This is very confusing and I have no idea about where I would stand, in case I invest.
Now I am curious. Either the interest rate scenario is very bleak or this company can use the money brilliantly well and earn enough returns on it to service interest and repay principal.
My first impression was that this debt has been issued by India Infoline, and the company is into stock broking and distribution of mutual funds, insurance, lending, etc. I find that this issuer is not the same as the listed entity. It is only that brand image has been created to build the same identity. This issuer is a NBFC (non-banking finance company), owned almost entirely by the listed entity. And in turn the issuing company has two subsidiaries-one engaged in housing finance and the other, in mutual funds, insurance, etc.
The issuing company lends money in the form of gold loans, loans against shares, etc.
I was sure that to pay this coupon rate of 12.75% and to cover the costs, and also give a return to the shareholders, the company has to lend aggressively and also recover what it lends. I am not very keen to know about the 'provisioning' that a company does, since it is subjective. I firmly believe that no one speaks the truth.
As the next step, I wanted to see what the shareholders were making, after paying all the lenders their dues and covering all the costs of running this money lending business. Logically, for any business to survive, the business should give a return on shareholder funds that is higher than the cost of borrowing. If not, there would be gradual erosion of shareholders' money.
So, I took the first step. This is what I see:
The numbers set my alarm bells ringing. For five years, the shareholders have got returns that have ranged from two to seven percent per annum! Won’t the shareholders be better off investing the money elsewhere?
The NBFC industry is tightly regulated and capriciousness is a hallmark of the policy. So, the industry is vulnerable to the whims and fancies of the regulators. One of the businesses of this company is “gold loans” and the RBI recently changed the rules. One subsidiary is in distribution of mutual funds and insurance, where there are huge shifts keep happening.
I also fail to understand the issue size. They say Rs250 crore, with a “green shoe” of Rs250 crore. Wonder what the company actually needs now? If they need only Rs250 crore, why raise Rs500 crore? Till they deploy the money, they will presumably earn far lower than what they will pay the debenture holder. Unless they have lined up huge borrowing clients and the entire Rs500 crore can be disbursed in double quick time.
Given the dismal return on shareholder money, I am surprised at the credit rating. Surely, standards have fallen. How can a company that gives its shareholders a return less than a bank deposit, enjoy a high safety rating? Do they know something that we do not? The rating rationale of CRISIL talks about the strength of the group and its market position without giving any comments on the business outlook or specifics about the issuer. It looked like they have banked on the parent company’s strength to give this rating. What if the issuing company ceases to be a subsidiary? Is there any guarantee from the parent company for repayment?
Issues of NBFCs are getting more and more opaque. The investor does not know which entity is borrowing and is not given any time to analyse or reason out. A high decibel marketing campaign combined with a dozen or so bankers associated with it, will bamboozle investors in to coughing up money.
With so many doubts in my mind, I will not put money in the issue, though the coupon rate looks attractive. It takes me back to the wisdom of staying away from anything that looks too good to be true.
(The author can be contacted at [email protected].)