Veritas says Indiabulls is ‘bilking’ investors; Indiabulls files police complaint
Moneylife Digital Team 08 August 2012

While Veritas has asked investors to sell stocks of Indiabulls group, the company has filed a police complaint against the research firm for publishing false and factually incorrect data

Veritas, an independent Canadian research firm in its latest report on the Indiabulls group said that the disclosures at Indiabulls Real Estate (IBREL) and Indiabulls Power Ltd (IBPOW) are unreliable and the “sole purpose of IBREL is to bilk institutional and retail investors for the benefit of select insiders”. 
Indiabulls, while refuting the allegations and data published in the report, said it has filed a police complaint against the authors of this report for publishing false and factually incorrect data to create sensation and entice people for benefitting through trading and for the sole purpose of selling their research reports for money.
Veritas, in the report said, “The controlling shareholders (CS) are running the organisation as a piggybank, while proclaiming propriety and espousing credibility. The association of reputed institutions, individuals and organisations with the company is vexing to say the least.”
“Not only do we believe that the merger of Indiabulls Infrastructure Development (IIDL) with IBPOW is a means of transferring value from the public shareholders of IBPOW to a select few, but also that any boost to net worth of IBPOW claimed by management post-merger is unverifiable,” the report said.
It says, “In allotting equity to FIM and Hexagram Investments Pvt Ltd (Hexagram), IIDL’s fair value was established at Rs123 crore—allotment date of 12 May 2011 for 4.16 crore shares at a price of Rs10 per share aggregating Rs41.64 crore—compared to the merger-ascribed fair value of Rs1,050 crore to IIDL by management, prior to its amalgamation with IBPOW. How can the fair value of a questionable entity, IIDL, increase by a multiple of 8.45x in less than 10 months post-allocation of equity to FIM and Hexagram should be explained by management.”
Indiabulls said, “Pursuant to shareholders agreement on 26 January 2007, IIDL received Rs447 crore as investment from KARRICK and FIM for 12.25% stake. The investment in IIDL was not made in less than one year as alleged in the Veritas Report, but was made five and a half years back by the investor as disclosed on the stock exchanges and in the annual reports of last five years.”
“Pre merger, IIDL had a net worth of Rs1,045 crore. IIDL and IBPOW underwent a merger through a court process where IIDL shareholders were issued 41.54 crore shares of IBPOW which mathematically equals to shareholders of IIDL receiving shares at Rs25.15 per share of IBPOW and IBPOW enhancing its networth by Rs1,045 crore by way of merger of IIDL. When the merger was announced the share price of IBPOW was much lower than Rs25.15 and as on date it is Rs12.80. Before merger of IIDL, shareholding of IBREL (through IIPL) in IBPOW was 53.20%. Post merger of IIDL, shareholding of IBREL and through IIPL in IBPOW actually increased to 53.97%,” the company said.
“The CS of IBREL own 29.25% in the company, split in the ratio of 50:25:25. We believe that in order to profit at the expense of the shareholders of IBREL, IBPOW and Indiabulls Properties Investment Trust (IPIT), management has promoted two flow-through entities, namely IIC (IIC) and IINFC (IINFC). IINFC is a 100% subsidiary of IIC. The ownership of IIC is split between CS in the same proportion as their equity ownership in IBREL,” Veritas said.
Veritas said, from a standing start in FY10, IIC and IINFC reported cumulative revenues and profits over two years of Rs1,000 crore and Rs131 crore, respectively. For FY11, collectively IIC and IINFC reported revenues of Rs961 crore and EBITDA of Rs184 crore, at a margin of 19.2%. Since IIC and IINFC are primarily engaged by IBPOW, IBREL, IPIT and other Indiabulls group entities, it implies that project costs at IBREL, IBPOW and IPIT are inflated by the same amount, it said.
“Therefore, while public shareholders of the company suffered an erosion of 18% in the value of the stock price in FY11, the CS enriched themselves via profit after tax of Rs125 crore reported by IIC and IINFC combined. During FY12, IBREL’s stock declined an additional 51.5%. FY12 results for IIC and IINFC are unavailable, but one can safely assume that the profitability of the CS companies went up. Clearly, the Indiabulls dream is only for select insiders,” Veritas said.
According to the Canadian research firm, IIC and IINFC also serve as a conduit for the controlling shareholders to redirect funds via loans and advances from IBREL and IBPOW into other privately owned entities, which then subscribe to warrants and/or buy shares of Indiabulls Financial Services, (IBULL), IBREL and, IBPOW from the open market, thereby boosting the stake of the CS in the public entities. “Moreover, given that warrants amounting to Rs582 crore in IBREL and IBPOW have been forfeited by management since FY08, some of the loans and advances to these entities routed through IIC and IINFC are a write-off, thereby calling into question the recoverability of loans and advances on the books of IBREL and IBPOW,” it said.    
Veritas said, “During FY12, IBULL recognized Rs120 crore of income on its profit and loss (P&L) for a loan extended to the groups Employee Welfare Trust (EWT). From an economic perspective, EWT is unable and incapable of servicing the loan, given that it is a passive entity that draws income purely via dividends on the shares it holds. For FY12, IBULL declared a dividend of Rs13 per share, which implies income of Rs34.84 crore for the EWT based on its ownership in IBULL shares, while the interest due on the loan was Rs120 crore for the year.”
Refuting the allegations, Indiabulls said, “EWT is being levied interest at 12% per annum and the total interest income is Rs99 crore and not Rs120 crore. More importantly the net interest income (NII) is Rs18 crore given that IBFSL has cost of funds of 10.1% for FY12. Rs18 crore is less than 1% of the NII of Rs1,866 crore earned by the company in FY12.”
“In our opinion, basic errors on factual data are intentional on part of Veritas. We understand that Veritas reports are sold for money and are not free and unbiased reports. The heavy bias for creating sensationalism for personal profiteering is the reason behind their gross headline errors such as time frame of IIDL investor shareholding getting reduced to less than one year from actual five and a half years. As well as alleging that shareholding of IBREL in IBPOW through IIDL merger reducing from 62.34% to 52.54%, whereas in reality the shareholding of IBREL in IBPOW through IIDL merger actually increased from 53.20% to 53.97%.. We firmly believe that this is not an oversight but an intentional act for profiteering,” Indiabulls said.
The company said, that casting aspersions on decisions of the high court approving the merger of IIDL and IBPOW after the shareholders approved for the same, tantamounts to contempt of court. “The company has taken this malafide report which has been published for the sole purpose of personal gains very seriously and is approaching various investigating agencies to take the subject matter to its logical conclusion.” 
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