Tag Archives: GDR fraud

Caveat Emptor: Beware of Fraudlent GDR Issuers

If there was an Aspirational Survey conducted in India, making quick buck in share market would rank at top of the list.  Hordes of grifters, hiding behind corporate veil, take advantage of this rags-to-riches hope of uniformed investor.  People often forget a famous quote uttered decades ago by legendary Fund Manager Peter Lynch:-

 “Although it’s easy to forget sometimes, a share is not a lottery ticket… it’s part-ownership of a business.”

Investors often fall into hideous value-traps, designed by operators in collusion management of not-so ethical companies. While the age old practice of rigging the stock price to generate interest amongst investor community remains intact, the methods are always fine-tuned to keep up with the times.

During 2007-2010 period, GDR issuances had been a favorite method of operators to drive such price rigging rackets and then dumping these penny stock to retail investors.  Investors, which are often been attracted to low multiple penny stocks, in hope of striking the next BIG thing. Such companies garner maximum attention on positive news flow like large fund raising. The rush towards such stock turns out to be near fatal when the news has a foreign angle.

Retail investors who have been tricked into putting their money in such companies have found their entire capital erode with passage of time. Actually the shares issued in foreign markets in form of GDRs are bought by operators in collusion with promoters. A GDR issues generates ample interest in the domestic market. However, these GDRs are gradually converted into shares and sold to retail investors in India.

Research desk @ Anavaran had been warning our subscribers about fraudulent GDR issuers like Avon Corp, Jupiter Biosciences for the past one year. Taking note of excessive price manipulation SEBI banned 7 such companies in September 2010.

  • Asahi Infrastructure & Projects,
  • Avon Corporation,
  • Cals Refineries..
  • CAT Technologies,
  • IKF Technologies,
  • K Sera Sera,
  • Maars Software International

In its order dated 22 September 2011, SEBI stated

“The various aspects of GDR issues, like the large size of the issue vis-à-vis existing size of the issuing company, unimpressive financials of the company, common initial investors, high proportion of cancellation of GDRs repeatedly by a set of FII/sub-accounts, sale in Indian exchanges, most of which are with a constant group of clients, and further off-loading by them, point towards an elaborate scheme to manipulate markets.”

investment fraud alert

Taking these set of characters as the benchmark, Research Desk @ Anavaran has been able to identity scores of GDR issuing companies whose stocks have been converted into common shares and sold to retail investors. Some of the noteworthy are:-

  • Beckons Industries
  • Birla Cotysn
  • Birla Shloka
  • Jupiter Biosciences
  • Southern Ispat & Energy
  • Resurgere Mines
  • Zenith Birla

Promoters of these companies have duped investors by dumping nearly worthless paper stocks at high premium to Indian retail investors. Stock prices of these company are highly manipulative in nature and hence not worthy of investment. We shall be issuing detailed analysis on each of these stocks and revealing more such stocks over the coming days. To stay updated, please subscribe to our newsletter.

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Avon Corp: Caveat Emptor for fixed deposit investors

Weighs less on the trust front hence better left alone

Investors have often been lured to penny stocks trading at low multiples in hope of making a quick buck. Attention towards such companies is at peak when they are able to raise capital, especially from foreign markets. Over the past one year, retail investors who have been tricked into putting their money in such companies have found their entire capital erode with passage of time. Actually the shares issued in foreign markets in form of GDRs are bought by operators in collusion with promoters. A GDR issues generates ample interest in the domestic market. However, these GDRs are gradually converted into shares and sold to retail investors in India.

On 22 September 2011, market regulator SEBI had found 7 companies involved in such malpractices and banned such these companies from raising capital/money from the market.

AVON CORP was amongst the 7 companies banned by SEBI from raising money from the public. However some of our clients had been approached by the company to invest in their fixed deposit. Hence the note.

Rather than going into financial jugglery we thought it would be better if we could chronicle how our opinion on the company was formed.

About the company:

Avon Corp, a manufacturer of personal & industrial weighing scales, was brought to our attention in mid 2010 by one of our clients who was somewhat familiar with the company management and considered them hardworking and trustworthy.

A company managed by known and assumingly trustworthy people, trading a low PE of around 2-3x and growing over 50% was an ideal mutlibagger candidate.

The client asked us to go through the stock and provide our opinion. While initially lured by the strong financial, we soon discovered an increasing cash hole in the company and hence rated the stock an AVOID. Our reply, dated 19 Sept 2010, was as follows:

Hi

Finally got hold of Avon Corp Annual Report this weekend. Just trying to document my thoughts on the company so i don’t loose thread at later date:

 

Positives:

 

  • The company is trading at PBV of ~0.5x (80cr, Rs13 per share).
  • It has net cash of 14 cr as against market cap of 36 cr.
  • Net Current assets- Debt=90-22=68. Another mouthwatering proposition.
  • Impressed by growth over last 5 years…..5x sales and 10x revenues.
  • Also impressed with future prospects due to its strong and cost effective product line………expecting ballpark sales to reach Rs400 cr by 2015, at current net margin of 10% that gives 40cr profit.

 

 

But i guess you know all this and the reason i am writing at almost midnight is the following:

 

Constant dilution in equity: While pat increase from 1 cr to 11 over last 5 years, EPS halved largely due to increase in equity base, raising doubts on management’s intentions.

 

While profits surged the company’s operating CF has always been negative, not a sign of viable business

 

Also the management issued GDRS (4.8cr shares, pre GDR it was 1.65cr) at Rs.10 effective cappig the upside over the medium term. Now without the GDR the company would have at EPS of ~6. Not sure why the issue was at such low valuation, PE of less than 2.

 

So either business is not in such good shape as PNL points and the promoters need cash to hide the operational efficiencies. The alternative is a sinister one, the promoters  are issuing shares to themselves thru proxies at throwaway prices and taking minority shareholders for the ride.

 

 

As luck would have it the company’s price rose more than 50% after our AVOID rating, but we kept our faith. Soon, the so called “foreign investors” started converting their GDRs into shares and offloading them in Indian markets. The share price tanked from 52 week high of 11 to 4 by August end prompting us to issue the following note on 24 August 2011:

Was going through the shareholding pattern of Avon Corp. Relating to the GDR issue of last year, it seems all have been converted into shares and sold to retail investors. This further raises my apprehensions on the company’s management. I believe the company had not received cash from the GDR issue. Most likely the promoters had issued GDR to themselves which they sold to public making a clean gain of nearly Rs50Cr.  

 

Not considering it an investment worthy stock anymore.  

This time fortune favoured and SEBI banned Avon Corp and its promoters from accessing capital market on 22 September 2011 largely for the same reasons that raised our doubts on the company.

However to our surprise, some of our clients have informed that they have been approached by Avon Corp for making investment in their fixed deposit. Given our analysis, the company’s past track record and SEBI’s ban we believe it would be prudent and pragmatic to stay away from making any investment in the company.


Jupiter Biosciences- A fraudecutical

Based on our analysis, we are convinced that Jupiter Biosciences has duped investors by issuing GDR and is not worth consideration as investment. Its similar to the 7 companies that were banned by SEBI in August 2011.

 

Please find below some jottings on our company that strengthens our case:

  • The company’s profit fell drastically in 1Q 11 and 2Q 11.
  • Promoters hold less than 5% in the company creating ample scope for fraud.
  • The company had issued GDR @ Rs90 last year which were converted into shares and subsequently sold to retail investors at less than issue price.
  • We remain convinced that the company had not received cash from the GDR issue. Most likely the promoters in collusion with operator had rigged share price before GDR issue. These GDRs were eventually converted into shares and then sold to public making a clean gain of over Rs150Cr.
  • Its company secretary resigned in June 2011 giving further boost to the fraud theory.
  • The only positive company had was its long track record of paying dividends, but even that was reduced this year.

Thus we foresee fraud in GDR issue in the the company and doesn’t consider fit for investment purpose.  There might be operator driven spurts in the stock but we don’t have prowess to predict such short term movements.