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.
Even as the Sensex scales a 32-month high, thousands of crores are flowing out of equity funds while data from the NSE proves that the Indian equity market is extremely hollow. But regulators are in an ivory tower. In this third and final part of a three-part series, we examine the track record of various portfolio management services
In theory, PMS (portfolio management services) is the ideal solution for affluent people who are willing to pay a good fee to have their money invested in the market by experts. Supposedly smart investors have apparently put Rs30,000 crore in PMS, but returns are another matter altogether.
PMS is offered by asset management companies (AMCs), brokerage firms and niche portfolio managers.
Of these, AMCs are the worst and attract maximum complaints. But, even here, the field is skewed by the large number of complaints about significant losses incurred by investors in Kotak group's three PMS schemes. Several investors say they have lost as much as 30% to 40% of their principal - a complaint to SEBI has often helped in getting a refund of at least the fees collected by Kotak, despite massive losses.
There are plenty of horror stories about PMS, involving the biggest names in the business. The former chairman of one of India's largest multinationals, who sits on several national and international boards and audit committees, recently told us that "In the five years I am with them, I have earned nothing while the portfolio manager continued to charge me a fee." Kotak executives are now working hard to appease him and have offered to waive their fees. But five years with no returns for a financial expert?
In another case involving the Kotak group which Moneylife has reviewed, someone had invested Rs52 lakh in two Kotak Securities portfolios in January 2007, as on 31st March, the investor had suffered a loss of approximately Rs15 lakh, or 30% of his total investment. In the same period, the benchmark indices, the BSE Mid-cap and BSE 200, were up by 15% and 30%, respectively. At times, the difference between the movement in the broader market and returns earned by PMS was startling. From April 2009 to December of the same year, while the benchmark shot up by 127%, Kotak's Smart Investor Portfolio scheme rose by only 37% - a staggering difference of 90%.
The SIGMA Equity Portfolio did even worse. From April to December of 2009, the benchmark, the BSE 200, posted 91.2% returns, but the scheme inched up by only 8.7%.
Kotak is among the biggest in the PMS business, managing almost Rs1,000 crore. But it probably attracts the maximum number of complaints. A cardiologist couple, who had invested Rs42 lakh in a PMS with JM Financial in 2007, walked out in early 2009 with half the sum. The karta of an HUF (Hindu Undivided Family) tells us that he invested Rs50 lakh of the family fund and received just Rs31 lakh on redemption - a loss of around Rs19 lakh or 38%. A businessman said he has invested in "several different PMS and lost money in all of them." There seemed to be more bad news than good. In each case, the portfolio manager blamed the investor for the losses, or shrugged them off with the attitude that 'losses happen'. Yet, many PMS were sold on the claim that they would make profits even in a falling market (post-2008) and it is bad times that would "separate the men from the boys."
But all that PMS seemed to do was to separate investors from their money. These investors put money into PMS through hearsay. Could they have done otherwise?
Regulators often advise investors to think, research and then invest. Not many people know that there are three types of portfolio managers, but even if they knew this, what kind of research could they have done when there is no comparative data available? As Moneylife has highlighted for a while now, there is no statutory filing and aggregation of data in the public domain to help investors choose a PMS, based on track record.
However, before handing over money to the investment house, you can ask them to produce three years of performance. The regulation mandates that.
Since the regulator does not mandate frequent, comprehensive and public disclosures, Moneylife decided to poll its readers for some answers. For this survey, we received 122 responses to a fairly simple set of questions. Of these, we have eliminated those who have never invested in a PMS but still chose to respond to the questionnaire. That whittled the sample down to 73. This is a high-quality sample and more reliable than most surveys conducted by leading market research companies for a narrow set of people.The responses were interesting.
For starters, inducement to invest in PMS comes from a variety of sources - financial advisors (a high figure of 32%), friends (26%), brokers (21%) and bankers (18%). As we had guessed, these services have more dissatisfied investors (59%) than happy ones; a majority (63%) say they will not recommend PMS as an investment route to others. But 59% of them did get some returns on their investment - although the high dissatisfaction level suggests that the returns were probably below their expectations. In fact, 30% of the respondents received a return of less than 10%, which is below the inflation level. Of these, 20% got under 8%, which is what a bank fixed deposit would have fetched. Some 41% said their returns were over 10%. And we were not even asking how many of them beat the popular benchmarks like the Sensex. A majority of the respondents (63%) have invested in more than one PMS. Nearly half the investors (48%) have remained invested for over two years. About 12% did not respond to this query.
The survey showed that there is low awareness about costs, charges, churning of portfolios or related-party transactions. This was evident from the number of investors who simply could not respond to questions on these issues. For instance, 29% of the people did not respond to the question of returns earned, but a high 60% felt that the losses in their portfolio were due to bad stock selection. A third of the respondents couldn't say if their portfolio was churned excessively.
Only 3% of our respondents had filed a complaint with the regulator about the manner in which a PMS was run. This number is hard to analyse because it is unclear if they did not complain because they thought it was pointless, or just chose to vote with their feet. The findings suggest that all is not lost for the industry and, if the regulator puts in place a robust reporting system and some much-needed checks and balances, there would be plenty of takers for well-managed portfolio management schemes.
Snake Oil Sales Pitch
The common complaint against the performance of these schemes is that they raked up losses and churned portfolios aggressively; the stock selection was poor and some did not return even the entire principal. How are investors lured to get into PMS? Is there mis-selling involved? If so, when will the market regulator wake up and review the PMS sales literature?
What lures most investors mainly is unbridled and unregulated boastful and, sometimes, false claims. If JM Financial's executives told a doctor that the money-management skills would 'separate the men from the boys' in a downturn, a portfolio manager boasted about the firm's ability to predict trends and to hedge against risk. Another investor writes that he attended a fancy presentation by a brokerage firm which claimed 95% accuracy in stock selection. He says, "I find it difficult to digest the claim, unless you have inside information. And you cannot have inside information on all the stocks."
Apparently, these exclusive meetings at five-star venues are selling not only PMS, but also investment in poorly regulated sectors such as real estate. The sales literature of Kotak runs as follows: "Portfolio Management from Kotak Securities comes as an answer for those who would like to grow exponentially on the crest of the stock market, with the backing of an expert." The only exponential growth seems to be in the losses that they have made. Kotak claims that "to understand the dynamics of various asset classes and investment options we use the best talent in the industry to come up with cutting-edge products." This looks like pure snake oil. Investors will find it hard to understand how the 'best talent in the industry' could make absurd judgement calls to lose a large chunk of capital in 2009-2010, a period that has been hugely rewarding for investors.
In its sales brochure, Kotak states that its portfolio managers have an average experience of over nine years in the equity markets and it boasts of a research team with an average experience of five years. With such talent and experience, the Kotak team seems to be following two simple rules that take retail investors to ruin; One, 'buy high and sell low', and two, 'chase market momentum too late'.
No wonder, some sensible distributors don't sell PMS. Last year, Brijesh Dalmia, founder, Dalmia Advisory Services, told us, "I do not like PMS and I do not sell them. PMS is sold as a customised product, but in reality it is not. Costs are very high as compared with other investment options. The taxation is not suitable for customers. Besides, the investor has no control on the churning part by the fund house or the fund manager." Mr Dalmia added, "PMSs are operated with no fixed fee structure and capping on expenses on churning. This is obviously not in the interest of the client. In the last couple of years, I have not seen any PMS which has beaten the benchmark index of any diversified equity fund. Of course, PMS will be promoted by the distributors and financial advisors because of the high commission offered by the fund houses which range anywhere between 2%-4%."