Promoters fudging sales data to boost stock prices

Frauds in the company jungle. Very easy to cheat, hard to discover and even harder to accept. Take the case of this company named Manpasand Beverages. The company was brazen enough to have a board meeting, ducking the independent directors. The sequence of events and the story is too humorous. I do not know what punishment our regulators would mete out. To my mind, jail for the promoters and the CEO is the minimum that is called for.  You can read the story online.

This company already has a wonderful history of statutory auditors resigning, arrest of CEO/CFO for GST violations etc.  

This company did an IPO in 2015 at over `300 per share. And it was pushed aggressively thereafter also by some well-known brokerages even as the frauds were unfolding. Institutions and domestic investors were all swayed by the marketing pitch on the shares. By December 2017, the share price was close to `500! By mid 2018 the auditor quit and then the story unwinded. Even after the auditor exit, some brokerages were putting “buy” recommendations. Of course, we love to blame the credit rating agencies, but we never blame the dishonest brokers who push these shares in to our accounts.

In 2018, a reputed broker predicted that this stock would touch `528.

In December 2016, a brilliant analysis was published in a popular blog —   https://2point2capital.com/blog/index.php/a2016/12/06/the-curious-case-of-manpasand-beverages/.

One would think that this would scare away inv-estors. But no. Our inves-tors do not like to hear bad things when they are buying or owning. Brokerage reports after this also did not put a sell or an avoid.  In fact, the price of this stock went up from around `300 in December 2016 to nearly touch `500 by the end of 2017.

It took a long time for the cookie to crumble. Of course, we cannot blame the honest stock brokers who pushed the stock at you. They are not credit rating agencies. Honesty and accuracy are not expected of/from stock brokers (with apologies to those who may be).

Of course, the buy side institutions (whether FIIs or insurance companies or pension funds) never seem to bother about this. They just point to a credit rating or a broker report and pin the blame on that. I always wonder why those people are paid fancy salaries if all they do is find reports to hang their actions on?

This year is the biggest discovery for the investors that frauds and cheats are common place. And it all boils down to promoter integrity rather than any business issues. Yes, when a business sounds too good to be true, it is important to do our channel checks and find out. If we find nothing, it does not automatically mean that all is well. We are still open to some fraud coming out.

Thus, investment falls in to three broad categories:

i) Where frauds are possible based on promoter background checks;
ii) Where frauds look very unlikely based on promoter background checks; and
iii) Where promoter checks are not easily possible.

If we are classifying our investment activity in to less than one year holding and holding for long term (let us for now assume that we are either traders/investors), then you want to make sure that long term investment goes only in to the first type. The other two types are where you should be prepared to lose all your money.

People sometimes like to think that the stock prices react too much to negative news and buy it immediately on fall, without giving much thought or doing enough homework. This is always a high-risk proposition and often the end is tragic.

Whether you chase a Yes Bank or a Nirav Modi company or a Talwalkar, the chances are high that the stock prices tend to zero. Of course, if there is value in the business, there could be some takers, but when there is a web of deceit (Read about a company named RICOH India Ltd), the chances of salvage value tend to zero.

I have also seen companies crushed by debt which they took on the balance sheet and then siphoned out the money by gold plating assets or by engaging in fictitious acquisitions. If a company borrows money and there is no income to support that debt, the end game is obvious.

The big lesson is that never trust a brokerage report. And do a logic check and some asking round about promoters, employee feedback, vendor feedbacks etc before you make an investment in to a company.

A broker often manufactures a ‘buy’ report because he has to ‘place’ a block of shares of a company from a broker. Or he has to create an ‘exit’ for something he has parked somewhere. Brokers are the Gods of this stock market and no regulator will punish them for selling rotten stuff. There is an old saying- “Wall Street writes the Rules”.

(The writer is a veteran investment adviser. He can be contacted at balakrishnanr@gmail.com)