UBS says avoid stocks with governance issues, then recommends DLF, Lanco, RCom
Munira Dongre 16 December 2010

The Zurich-based brokerage urges institutional clients to consider stocks that are high on corporate governance; surprisingly it names such dodgy companies like DLF and Lanco in its list of high conviction ideas

UBS Investment Research believes that India’s structural story continues to be resilient and that the market is seeing a flight from over-owned stocks such as banks on account of various scams and tight liquidity conditions. In a report last week, the brokerage said it expects the Indian economy to grow at a real growth rate of 8% in FY12 after 9% growth in FY11, and that corporate earnings would grow at 16% in FY11 and 21% in FY12. So far so good.

The report talks about how investors should consider stocks that are “high quality, from the corporate governance perspective—like Bharti, Asian Paints, Infosys, TCS and Murugappa group companies; trim exposure in over-owned sectors such as banks; and stay away from names with corporate governance issues, irrespective of how attractive the valuations look.” Still good.

Now comes the whopper. UBS says that its “high conviction” ideas include Bharti Airtel, Lanco Infratech, DLF, Jai Balaji and Murugappa group companies such as Coromandel International & Tube Investments. DLF and Lanco? Are not these names in the list of companies that have a dodgy corporate governance record?

DLF has been in the eye of a storm recently, when the Competition Commission of India (CCI) restrained it from cancelling allotments in two upcoming projects in Gurgaon, after flat-owners approached the anti-monopoly office saying that the company was abusing its dominant position. CCI allowed interim relief to Bellaire Owners’ Association and DLF Park Place Residents’ Welfare Association and restrained the company from creating “third party rights”, which means that it cannot re-sell or transfer the apartments where it has cancelled allotments.

After an outcry by shareholders, in March this year, DLF decided to resolve the conflict of business interest with erstwhile group company DLF Assets, by merging it with a fully-owned subsidiary. But it is still a long way from resolving all shareholder issues, as the debt brought on its books through the merger will remain a big concern until it manages to list the newly-merged arm. It probably plans to list it as a real estate investment trust abroad. From the merger, DLF now has Rs210 billion ($4.6 billion!) of debt on its books.

Lanco Infratech, which is promoted by Lagadapati Rajagopal, Vijaywada member of parliament belonging to the Congress party, has been under a probe for allegedly reworking insurance deals to claim crores of rupees as reimbursement from state government corporations. The company’s political connections are known and it is speculated that it could have bagged a lot of projects because of the cosy relationship Mr Rajagopal enjoyed with late YS Rajashekhar Reddy, former chief minister of Andhra Pradesh. Rajagopal is said to have started his political career on YSR’s padayatras across the state.

Lanco’s power project in Dhenkanal, in West Bengal, is also under a shadow on account of a probe ordered by the district collector into the direct purchase of tenancy land belonging to ayacut area (land served by an irrigation project) despite a ban order in force. In the hawala scam in 2007, G Venkatesh Babu, the then managing director of Lanco Infratech, was held at Hyderabad Airport with a suitcase containing cash amounting to about $90,000.

There are rumours that the company has started a real estate project on land allocated to it for an IT SEZ and that it has claimed duty waivers and tax reductions. There is also talk about shadowy dealings in the cancellation of its bid for the Sasan project and its eventual pullout from the Vizhinjam port project.

The ludicrousness of the recommendations does not end here. In a more recent report (13th December), UBS has put out “six contrarian stock ideas”. In its own words: “Companies whose stock price has taken a beating but UBS analysts are still bullish. While we believe that our six stock ideas offer excellent risk reward at current levels, adverse news flow in the near term may potentially result in further weakness in some of these names.”

The six are DB Realty, IBREL, Pantaloon, Reliance Communications, Reliance Infra, and Welspun Corp. Ramachandran R Nair, chief executive officer of LIC Housing Finance, is said to have showed undue favor to some companies, among them DB Realty, in the bribes-for-loans scam. DB Realty’s name has cropped up in the 2G scam as well. The company has a debt of Rs4 billion on its books, that includes a Rs1.9 billion loan again from LIC Housing Finance. The company has said that it does not have any direct or indirect shareholding in Etisalat DB Telecom (originally Swan Telecom) and that promoters of DB own around 45% in Etisalat DB.

Reliance Communications is being probed in the 2G scam, along with Unitech, Tata Teleservices, Shyam Telelink (now Sistema Shyam Teleservices) and Swan Telecom (now Etisalat DB Telecom), which have sold stakes in their wireless ventures at significant premiums after they were allocated spectrum. RCom had issued a clarification, saying it owned a 10% stake in Swan Telecom until December 2007 but that it didn’t hold a stake in Swan when the license was granted in 2008.


In any case, UBS itself has a scandal-riddled history, particularly involving the Anil Dhirubhai Ambani Group (ADAG). In March 2010, a member of parliament from Uttar Pradesh alleged that ADAG had diverted funds raised through external commercial borrowings (ECBs) and foreign currency convertible bonds (FCCBs) into the stock market, through UBS, and that these funds were allegedly used for large-scale unauthorised trades. (Read: ‘The Swiss banking trail hits the market’, We had also reported that Froriep Renggli, a Zurich-based law firm, had alleged the active connivance of UBS in routing trades in Reliance Energy and Reliance National Resources through its clients’ accounts. (Read: ‘UBS: The Indian Connection’, In another case related to sharing of client information in the market crash of 2004, UBS Securities Asia got away with a minor fine of Rs5 million for refusing to share information.

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife.) 

Arvind Desai
1 decade ago
excellent article. these foreign brokers are all crooks
Ritesh Khandelwal
1 decade ago
I really appreciate your knowledge on this subject and amount of information provided. However would like to also state that purely from a shareholders prespective Lanco Industries has give good returns to its Shareholders.

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