Thursday, January 20, 2011

Lavasa's 'vision' problem-arrogance or reality?

As the SPV for India's first planned city(2nd if you count Sahara's Amby valley which is more residential oriented), Hindustan Construction Company(HCC)'s 65% subsidiary Lavasa has ambitious plans. But their risk factor No 18(page 21 of prospectus available here) is something new to me.
The breadth of our vision may serve to distract management who may be unable to achieve or maintain an essential level of expertise in each segment of our business due to too many competing segmental interests. If our management is unable to achieve or maintain a necessary level of expertise or if we do not realize synergies across our business segments, our results of operations would be adversely impacted. Further, given the diverse nature of our business segments, we may be unable to recruit and retain adequately qualified professionals who may instead opt for companies with narrower strategies, which may hamper the growth of our business operations(emphasis added)
I have respect for the immense vision of Lavasa. After all, building a mainly commercially oriented city, with the hope that every square feet of commercial space will induce 2 square feet, does need courage and vision given the relatively remote location. Still, this does seem like the management wants to fill boilerplate or more worryingly, they anticipate the problem of distraction. That begs the question-if HCC cannot do it, who can?

Is it fair to restrict cross selling for MFIs but not for banks?

Whenever a crisis needs to be analyzed, CA Y.H Malegam invariably plays a role. The microfinance crisis in A.P was no exception, and his committee submitted the report yesterday to the RBI. This report on 'Issues and concerns in the Micro Finance Sector' made the case for restricting other income of MFI as follows
We have observed that some MFIs operate not merely as providers of credit but also provide other services to the borrowers and others.  These services include acting as insurance agents, acting as agents for the suppliers of mobile phones and telecom services, acting as agents for the sale of household products, providing agricultural advisory services etc. While these service can profitably be provided by MFIs along with the supply of credit, there is a risk that given the vulnerable nature of the borrower and his/her inadequate negotiating power, an element of compulsion may creep in unless the provision of these services is regulated.  It is, therefore, necessary that the regulator limit the nature of services which can be provided, as also the income which can be generated from such services, the latter as a percentage of the total income of the MFIs.
This situation is not really different for banks, specially the new private sector ones where a branch manager may often get cross selling targets. The banks often coerce customers for extra services like
  • Taking education loan insurance from that bank's affiliate only(done by SBI)
  • Pushing for investing in MF's from proceeds of matured Fixed deposits etc.
  • Further, banks do levy an insurance administration charge(which the Malegam panel has criticized for MFIs stating that We have also noticed that some MFIs levy an insurance administration charge. We see no reason why such a charge should be levied.  MFIs should recover only the actual cost of insurance.
The RBI does mandate forming separate subsidiaries, arms length dealings etc but does not restrict the total income from such services in any way. Given that the MFI clients do need these services, is it fair to restrict MFIs but not banks.
Takeaway: If the stream of bank scandals/frauds keep growing, can we expect a similar proposal from RBI for banks? Probably not given the clout of the 'Indian Banks Association' but then these are uncertain times.

Tuesday, January 18, 2011

Jupiter Bioscience Ltd_something rotten in the preferential allotment?

While reading the 2009-10 annual report of this company, there was a series of legalese about promoter related share transactions( legalizing earlier allotment, issuing preferential warrants etc). The complicated disclosures did not help in unraveling the chain of events but this is what I figured out
  • Company allotted 27.5 lakh shares @ Rs 146/share(total Rs 40 crore worth shares) in Apr-May'07
  • It then realized that the increased promoter holding would result in an mandatory open offer to other shareholders(as required by SEBI)
  • It then asked the Karnataka HC to cancel part of the shares-but the order 'inadvertently' cancelled the entire allotment
  • Because of this, the promoter holding dipped to 18% creating "block in the minds of the Investors at
    large on account of the nature of the Industry."
  • They then allotted fresh shares to promoters and others from Oct'08-Oct'09 without taking prior approval from BSE
  • When the fact of non approval was realized, the market price had corrected and the minimum price as per SEBI regulations was Rs 90. 
  • While the promoter was willing to accept the new shares(of Oct'08) at the old price, the company magnanimously lowered the price to Rs 90 stating that, "Considering the case being fair and just on the part of the Company towards its promoter, who and his family strived hard for the last 25 years to bring the Company upto this level..."
  • To be fair, Rs 40 crore of the promoter was idling for nearly 3 years on which neither dividends nor interest could be paid. But considering that the mistake was due to the company itself, also that the promoter should not be subscribing shares for quickly selling them, the compensation rationale is doubtful
. The transactions are explained in an opaque manner(another corporate governance red flag)

Friday, January 14, 2011

Time to short MTNL? 3661 crores additional liability may wipeout Mcap of 3316 crores.

The scandal prone telecom sector has seen most telco stocks fall. MTNL being mainly a fixed line operator(a declining business) with heavy pension liabilities, the stock price has fallen to Rs 51 and thats why I thought of it as a 'contra buy'. Both the notes to accounts & audit report for 2009-10(available at merely said that Note No.16(a) & (b) regarding the amounts recoverable from DOT/ BSNL are subject to reconciliation and confirmation and in view of various pending disputes regarding each others claims we are unable to comment on the impact of the same on the profitability of the company.

But then I stumbled upon the C&AG audit report on Central Public Sector undertakings covering the 2009-10 reporting year.  And that was a shocker. Summarizing Page 11 & positions as per the audited accounts;-
MNTL- BSNL owes us Rs 1580.11 crores net
BSNL-MNTL owes us Rs 2080.99 crores(net).
There's a difference of 3661.1 crore between these 2 positions. And this does not find a mention in the audit report(to be fair-the auditor does not have access to BSNL's accounts and so must state the bland excuse "we are unable to comment"..

Since 2005-06, C&AG has been trying to get the Govt(DoT) to resolve this dispute between its two PSU's. But the management has not taken any initiative. Given the IPO plans of BSNL(on hold for now), this festering issue is bound to come out and heads will roll. But when will that be? God alone knows.This unfortunate episode highlights the agency problem at PSU's-there is no 'skin in the game' and inaction is not punished. By any token, 5 years is too long a time.

Takeaway: -Why should we care about disputes between 2 Govt cos? MTNL is listed and a F&O stock.If the press highlights this, short sellers could have a bonaza till the Govt clarifies. And given the weak systems of MTNL(as mentioned in its audit reports), it is likelier that its figure is incorrect.

MTNL accuses Tata Communications Ltd(TCL) of Rs 243.55 MM fake ILD charges

While reading the MTNL notes to accounts for 2009-10, Note 30 was really surprising. Companies have commercial disputes but taking it to this level is strange. The amount is small in comparison to the turnover/assets/profits of either company but reflects poorly on TCL's internal controls. This matter was not publicized and even the press has not captured it.To quote the note(emphasis added)
In respect of MS Delhi, a sum of Rs. 243.55 million payable to TCL for ILD charges for the period Oct- 09 to March-10 has not been paid due to heavy spurt in ILD traffic towards M/S TCL. On technical analysis it was found that these calls were made to some dubious and tiny destination. These destinations do not confirm to national numbering plan of the respective countries and are not approved destinations as per approved interconnect agreement. Further these calls has not got physically terminated to the destinations The observations were shared with M/S TCL. M/S TCL has also been advised that the balance which relates to fraudulent calls is not payable and accordingly no provision has been made in the books of accounts. However the above has been shown as part of contingent liability.
If other telcos start auditing their bills from TCL, are we looking at an earnings surprise sometime in the future?

Saturday, January 8, 2011

Companies contributing x% to the exchequer.

An Indian blue chip company proudly totals its tax payments(excise, service tax, customs duty, sales tax) and proudly claims to have contributed a not-so-small chunk of India's GDP. This claim is ironic considering that it was once India's major zero tax company. A blockbuster film and a book not available in India, have accused the company of evading taxes during the 80's. Still, the claim per se is questionable. It is the end consumer who pays indirect taxes. The producer only remits the taxes to the Govt. If there is any measure, it should be
  • Direct taxes paid(income tax/wealth tax etc)
  • Net Indirect tax paid in cash(this would reflect net value addition)
But then, no one reports these things except in the cash flow

Friday, January 7, 2011

The (ab)use of procedure to serve vested interests

Recently, the TOI reported that the Central Government(GOI) had cancelled the proposed All India common medical entrance exam. And why? Because MCI had not taken prior approval as required by the MCI Act 1956. Such a lapse could well have been condoned post facto but despite an expert body(MCI) proposing and the Supreme Court approving, the GOI decided to scrap the notification itself.

Surely, prior approval clause was meant to curb arbitrary/hasty action by autonomous bodies/regulators. But not granting approval in such cases amounts to misuse of the law.

Section 19 of the Prevention of Corruption Act 1988 provides for 'previous sanction' before a Government servant can be prosecuted for corruption. Needless to say, the number of approvals are few and difficult under this  Act also. Delay is the best weapon in the hands of the corrupt.