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The crash of KS Oils Ltd underlines the perils of how PE funds can also get it very wrong
Private equity (PE) players, who come with billions of dollars of cash, pick up significant stakes in firms and often work with managements to improve performance and exit at a profit. Their stock picking is supposedly based on excellent research of companies, sectors and markets. But it's quite a different experience for these players who happen to step into the Indian corporate sector which is a minefield of poor corporate governance. The recent crash of KS Oils is a classic example.
On 16th August the company's share price crashed by a whopping 32% on the Bombay Stock Exchange (BSE) following months of steady decline. Its biggest lender, Sicom Ltd, sold around 23.84 lakh shares which were pledged by the company.
That same day, Edelweiss Finance and Investment Limited sold around 44.50 lakh shares on the BSE at Rs9.13 a share. Earlier, on 12th August, Sicom had sold 25.78 lakh shares of KS Oils at Rs12.96 on the National Stock Exchange. The company has pledged around 80% of its shares against loans. There are stories doing the rounds that funds have been grossly mismanaged.
KS Oils, whose scrip has plunged by 90% since January 2010, had received investments from some large PE funds. In May 2009, Rajat Gupta-promoted, Asia-focused New Silk Route (NSR) invested around Rs135 crore through preferential equity shares. Also, Citigroup Venture Capital and Baring Private Equity Partners Asia invested Rs49 crore each through subscription to convertible warrants.
Currently, NSR Direct owns a 9.5% stake and Baring has 5% stake in KS Oils, which produces cooking products like mustard oil, rapeseed oil plus others like refined blended oils, vanaspati and also non-edible solvent oil. Baring bought into KS Oils when it acquired 50,000 acres of its palm oil plantations in Indonesia.
The third largest private investor in KS Oils is astute NRI businessman Siva Sankaran, who has an over 8% stake in the company through Siva Ventures. Siva has been the last resort for troubled businessemen. Those who know Siva well believe that he would not be a sitting duck, unlike some other private equity funds, and that he would find a way to get his money back. Siva also has a stake in Ruchi Soya, India's largest soya processing company.
It is most strange that Barings and NSR picked KS Oils from among a host of Indian companies that have comparatively better governance and stable finances.
Moneylife had earlier reported that the Intelligence Bureau in December 2010 noted massive price rigging and insider trading in KS Oils. (IB report available with us.) The company has also been accused of tax evasion. So what did the philanthropic Mr Gupta find attractive about this investment?
Two years back, New Silk's investment in high-profit 9x media group crashed and burned. 9x News was spun off from INX Media, after apparent large-scale mismanagement. It was probably the first case in India where private equity investors asked promoter-shareholders to get out of the management.
In a filling to the Bombay Stock Exchange on Wednesday, KS Oils informed that its chairman Ramesh Chandra Garg has sold 3.05% of his holding. With this sale, Mr Garg's share holding has is now down to 8.23%. Other institutional investors continue to offload shares.
The country’s No.2 software services company faces a lawsuit in the US, filed by a former employee, who has alleged that the company misused B-1 visas to send unskilled employees to do the work of skilled individuals
Infosys Ltd, the country's second largest software services company, with 1,33,560 employees as of March 2011, has said that it has handled all complaints filed by Jack (Jay ) Palmer in complete accordance with its published procedures for whistleblower complaints and in compliance with the law. Mr Palmer, a former employee of Infosys, had filed a lawsuit against the company in the US, alleging a number of misdeeds associated with the company's work for clients in that country.
In an email to Moneylife, Infosys said, "Since filing a lawsuit against the company, Mr Palmer has presented himself as a whistleblower that has been punished and subjected to retaliation for coming forward with his allegations." So far, the company has not retaliated against Mr Palmer.
In a written testimony to the Senate Judiciary Sub Committee on Immigration, Refugees and Border Security, Mr Palmer alleged that Infosys was using US B-1 business visas to send Indian employees for software development, quality assurance and testing for its US-based clients. But the company has said, "Infosys did not have a practice of sending unskilled employees to the United States on B-1 visas to do the work expected of skilled individuals on H-1B visas. There is not, nor was there ever, a policy to use the B-1 visa program to circumvent the H-1B program."
"We take very seriously our obligations under the law and specifically our responsibilities to comply with the immigration laws and visa requirements in all the jurisdictions where we have clients. We have made changes in our policies regarding immigration and visa requirements and we will continue to improve such policies as necessary to maintain the absolute best practices for compliance," the company stated.
According to Mr Palmer's testimony on CIO.com, Infosys published "dos" and "don'ts" for the invitation letters it began to require before initiating the process of applying for a B-1 visa for an employee. The "dos" and "don'ts" advised employees to avoid titles such as "programmer" or "analyst" in favour of titles such as "project leader" to indicate that the purpose of the visit was akin to "business discussions", "meetings" or "training" rather than "implementation", "testing", "consulting" or anything that "sounds like work".
However, the company said, the percentage of its employees using B-1 visas to travel to the US was miniscule at any given point of time. "All employees (using) B-1 visa (to) travel to the US involves, at any point in time, a fraction (less than 2%) of the total US travel by Infosys employees. This neither minimizes nor changes our commitment to best practices in our visa program or our commitment to comply, at all events, with the law and the visa requirements of the US," the company said.
Mr Palmer also alleged that Infosys employees travelling to the US on business visas were required to obtain debit cards and the company made direct payments in rupees from India to these debit cards. However, the company said due to the ongoing litigation, it cannot go into more details at this time.
CCI order sparks off debate over problems of property buyers as well as issues that affect developers
Property buyers will welcome the decision by the Competition Commission of India to (CCI) punish DLF, the country's leading realty firm, with a fine of Rs630 crore for abusing its dominant market position, to engage in unlawful activities in disregard of consumer interest.
If this order over the company's Belaire project in Gurgaon has surprised the market, there could be more shocks in store for the industry as the CCI is reported to be also investigating complaints with regard to at least three other projects by DLF, and if the company is found guilty it would have to pay further penalties amounting to Rs900 crore.
Some 10 other cases involving other real estate players are also pending before the CCI, and this highlights the need to correct the loopholes in the system. "The decision will act as a deterrent for developers, who usually have the upper hand in the bargain," said an analyst.
Echoing the sentiment, an industry representative said, "The decision implies that the builders can no longer take customers for granted."
However, some developers are already questioning the authority of the CCI in this matter. "I never knew such a body existed in the first place," said a Mumbai-based developer. "I am not sure what it has to do with the realty sector."
Former CCI chief Vinod Dhall's statement in a television interview also suggests that the CCI has acted as a proxy for a real estate regulator. "The absence of a regulator is a vacuum and you can say that the Competition Commission, sort of, has stepped in to fill an existing vacuum. It is possible that there may be more such applications filed in CCI, but it also has to be wary and should not allow itself to be converted or treated as a consumer court."
Other experts have raised doubts about the capability of a real estate regulator to be fair. One industry representative said there is no guarantee that the regulator will not abuse his position or succumb to industry pressure.
The issue of delays that developers have to face must also be carefully looked into, industry representatives say. Developers complain that getting approvals often takes years, which pushes up costs and consequently the prices.
"Sometimes, delays happen due to things that are beyond the developer's control, and he may also have to make some structural changes," says Pankaj Kapoor, managing director, Liases Foras. "In that case, he must be provided with guidelines. But if the developer starts selling before getting necessary approvals or sits on the project after getting all necessary clearances, he must be fined."
CCI found that DLF had registered bookings for flats between August and November 2006, whereas the application for approval was submitted in December, and the clearance was obtained only in April 2007.
Instances of violation of customer rights are rampant, and home buyers across the country will identify with the buyers in the DLF case. But while in the DLF case customers can approach the Competition Appellate Tribunal to seek compensation from the builder, in most such cases, customers usually have to pursue their complaints before consumer courts, where they have to go through a lengthy process and they may not always be successful.
"What we need is transparency," Mr Kapoor, says. "We already have laws, and if government makes all the records and documents-from land records to project completion certificates-available to the public to see, a lot of ills will disappear. But they don't want to, because the officials themselves benefit from the opaque mechanism."
In the absence of other methods of grievance redressal, the best and the most effective thing that a customer can do is to read the contract carefully before signing it. "It is a tiresome thing to do, but the contract tells you exactly what you have been handed over," a property lawyer pointed out. "Many future complications can be avoided, and one can challenge the developer if there is an unfair clause, and can even negotiate with him on the spot. Once the contract is signed, one can always approach the court, but it is a long and exhausting process."