Anand Rathi Wealth IPO: Main Income Is from Thinly-regulated Structured Products Plus It Has Governance Issues
Moneylife Digital Team 02 December 2021
Anand Rathi Wealth Ltd (ARWL) is a wealth management firm which is making its initial public offering (IPO) today. In a departure, from our usual IPO analysis, we are stating upfront some information we have obtained about ARWL. The usual IPO analysis follows. According to our sources:
For the past five years, some 65%-70% of revenue of ARWL is from the sale of unlisted, unrated structured products which is currently close to Rs10,500 crore of their assets under management (AUM).
In the previous financial year, the top-line for the company was Rs279 crore, of which its operational revenue from mutual fund (MF) sales was only Rs86.45 crore.
The balance Rs167.89 crore is listed as ‘income from distribution & sale of financial product’. ARWL’s annual report does not mention what these are. According to our sources, these are sale of unlisted, unrated debenture-based structured products designed by Anand Rathi Global Finance Ltd, the non-banking finance company (NBFC) of the group. 
Unlike a majority of the structured products available in the market, Anand Rathi structures are unlisted and unrated debentures with three- and five-year maturities. The performance of the structured products sold by ARWL is linked to the performance of the Nifty 50 index. These Nifty-linked structures have long-dated options (three-year options); the majority of these options are synthetic in nature. To create this kind of a payoff, ARWL employs Nifty Futures which, being a leveraged instrument, has high risks. This exposes the product to the risk of significant draw-downs, as happened during the adverse market conditions of March 2020.
When the going is good, it is fine to use these structured products; but they risky which neither ARWL’s investors, nor the public buying the IPO, may be fully aware of. Here are a couple of old Moneylife articles about the pitfalls of structured products. (High-net worth individualsguinea-pigs of structured productsPoor Structure) These products are virtually unregulated. The Securities and Exchange Board of India (SEBI) gives an approval only for the creation of ISIN (unique identification number) for the securities and the Reserve Bank of India (RBI) only oversees the operations of the NBFC. We have sent a questionnaire to the company but have haven’t heard from them. We will upload their response, as and when we hear from them.
Governance Issues
The Anand Rathi group, of which ARWL is a part, has a history of being accused of financial irregularities. As the president of Bombay Stock Exchange (BSE) in the year 2000, ARWL’s promoter, Anand Rathi, was accused of using his privilege of office to illegally access the BSE's surveillance department to find broker positions and trade, using that information. He was, subsequently, barred from trading by the SEBI on 12 March 2001 for seeking confidential information from a BSE official and using it for trading.
In February 2019, SEBI declared Anand Rathi Commodities Ltd (ARCL), part of the ARWL’s promoter group, as not ‘fit & proper’ to either trade or facilitate trade in commodity derivatives for their suspected involvement in the Rs5,600-crore National Spot Exchange Ltd (NSEL) scam. The firm is currently facing proceedings by SEBI and economic offences wing (EOW) of the Mumbai Police.
ARWL’s statutory auditors have observed that the company may have been operating an NBFC without authorisation from RBI. As part of the consequences for operating as an unregistered entity, the company may be subject to penalty as determined by RBI. Some minority shareholders of AR Digital Wealth Private Limited (ARDWPL), one of ARWL’s subsidiaries, have filed a petition under the Companies Act, 2013, alleging, amongst other things, oppression and mismanagement against ARWL, its subsidiaries and some of its directors.
Issue Details 
ARWL’s flagship private wealth (PW) vertical managed AUM of Rs29,472 crore  as on 31 August 2021. ARWL also acts as a mutual fund distributor, registered with the Association of Mutual Funds in India (AMFI) and it has been ranked amongst the top-3 non-bank mutual fund distributors in India by gross commission earned in FY18-19, FY19-20 and FY20-21. It distributes MF schemes of asset management companies (AMCs) and earns distribution commissions on a trailing basis from these AMCs. ARWL also purchases non-convertible market-linked debentures (MLDs) and offers them to its clients and earns income from these sales.
The PW arm catered to 6,564 active client families (a minimum of Rs50 lakh per client), serviced by a team of 233 relationship managers (RMs) as of 31 August  2021. ARWL is present across 11 cities in India: Mumbai, Bengaluru, Delhi, Gurugram, Hyderabad, Kolkata, Chennai, Pune, Chandigarh, Jodhpur and Noida and it also has a representative office in Dubai.
In addition to PW vertical, ARWL also has two other technology-led business verticals: Digital Wealth (DW) and Omni Financial Advisors (OFA). Its DW vertical is a fintech extension of its PW proposition and addresses the large affluent segment of the market -- group of individuals with financial assets between Rs10 lakh and Rs5 crore, with a wealth solution delivered through a combination of physical and digital channels. On 31 August 2021, the AUM for ARWL’s DW vertical was Rs738 crore with 3,491 clients and 195 client engagement partners. Through the OFA vertical, ARWL provides a technology platform for independent financial advisers (IFAs) to service their clients and grow their business. It was launched in September 2016 and has garnered 5,062 subscribers as of 31 August  2021. These IFAs collectively handle about 1.63 million clients.
ARWL relies on uncomplicated and standardised solutions to serve its clients. This enables it to deliver consistent outcomes and ensures ease of scalability, as the number of clients increases. ARWL targets the high net-worth individuals (HNI) segments for its products. This segment is relatively insulated from economic cycles and shocks. Wealth management is largely a relationship-focused business and the rate of customer attrition is low. About 55% of ARWL’s clients have been associated with it for over three years and represent about 74% of its total PW AUMs. 
Key Financials
ARWL’s net sales have declined at a compounded annual growth rate (CAGR) of -2% from FY18-19 to FY20-21. 
Over the same period, its operating profit has declined at a CAGR of -11% as its operating profit margin (OPM) declined from 38% in FY18-19 to 32% in FY20-21. 
ARWL’s debt:equity ratio has increased from 0.00 in FY18-19 to 0.11 in five months (5M) of FY21-22.
ARWL’s return on equity (RoE) has declined from 48% in FY18-19 to 19% in 5MFY21-22.
Management Analysis
Rakesh Rawal is the executive director and the chief executive officer (CEO) of ARWL. He has been associated with the wealth management business of Anand Rathi group since April 2007. He holds a BTech in Mechanical Engineering from IIT Kanpur and an MMS degree from Jamnalal Bajaj Institute of Management Studies. Prior to joining ARWL, he worked with Deutsche Bank and Hindustan Unilever Ltd.
Proceeds of the Issue
ARWL aims to raise Rs660 crore from the IPO. The entire issue consists of an offer for sale (OFS) and no proceeds will accrue to the company.
At the upper end of the price band of Rs530 to Rs550 per share, ARWL demands a price-to-earnings (P/E) ratio of 51x its FY20-21 earnings and 19x its annualised 5MFY21-22 earnings. Its only listed peer, IIFL Wealth Management Ltd trades at a P/E ratio of 28. ARWL’s structured products and many corporate governance issues will remain a key risk. ARWL is, currently, trading at a grey market premium of Rs125.
(We would have put this article behind a paywall like all IPO analysis but have kept it free in public interest.)
Pradeep Deb
6 months ago
Thank you for going beyond the usual, run-of-the-mill IPO analyses.
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