Sucheta Dalal :Disappearing And Reappearing Act (15 Sep 2003)
Sucheta Dalal

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Disappearing And Reappearing Act (15 Sep 2003)  

Over the last two years, many of India's best-known editors and columnists writing on the fate of have talked about the sorry plight of its stockbroker financiers First Global Stock Finance.

One editor wrote: After ten years of spectacular success, First Global has now shut down. A celebrity columnist from Mumbai said, the Company has had to close most of its 17 offices and is virtually bankrupt. Scores of reports along these very lines spoke of the Kafkaesque persecution of First Global's young, bright and professional owners. And all reports suggested that First Global had been singled out for harassment.

What was peculiarly common to such reports was that the columnists were not business writers; they were neither familiar with nor interested in facts and in a hurry to dismiss all stock market-related charges against First Global (FG) as frivolous or cooked up by an oppressive State. First Global's aggressive posturing and slapping defamation charges against the government, the regulators and journalists (this writer) who questioned their dealings underlined the impression that they were wrongfully persecuted.

And facts such as a 1999-2000 annual inspection report of Global Trust Bank (GTB) by the Reserve bank, which documented highly irregular lending to First Global, were ignored. That a bunch of shadowy investment companies floated by FG obtained clean credit to buy shares of Himachal Futuristic Communications Ltd (HFCL) was never discussed. But more about this later.

Lets first check if FG has really closed down. On September 8, 2003, FG released a research report on HFCL recommending the stock as a strong buy and calling it the biggest turnaround story in India.

The very same HFCL, whose promoter was very thick with Ketan Parekh and for whom First Global did a controversial private placement of $ 135 million in the year 2000.

The cover of the report declares: First Global (UK) Ltd. is a member of London Stock Exchange and is regulated by Financial Services Authority (FSA), UK also, FG Markets, Inc. is a member of NASD and SIPC and is regulated by the Securities & Exchange Commission. The UK operations are located at London while the US outfit is at Poughkeepsie near New York.

That doesnot sound like a company that has shut down; it sounds like a brokerage firm that is doing better than other brokerage firms in India by expanding globally.

How does FG continue to be a member of NASD and the London Stock Exchange? Was the government not as vindictive as was made out? Were the opinion makers used by FG? Or is this about bureaucratic inefficiency tripping up the war of vendetta as well?

Now for the turnaround story of HFCL. On September 2, this paper reported that ICICI Bank had converted its loans to HFCL into equity after a default no matter that First Global report gushes about HFCL gushing free cash flows. ICICI has thus become the single largest shareholder of HFCL with a 12.65 per cent stake. HFCL's promoters reportedly denied that ICICI converted its loan into equity due to a default. They insisted that it was part of a financial restructuring. The Bank has not commented on this claim.

HFCL, which traded at a peak of Rs 2,553 when ramped up by Ketan Parekh, had collapsed to under Rs 11 recently. The promoters were so close to Parekh that they diverted institutional loans to him in a desperate attempt to keep him solvent during the crash of 2000. Yet, First Global makes a super-hyped up pitch for HFCL, calling it a comeback kid that had lost its way and is now set for a major, post-restructuring revival. The stock shot up to Rs 32 in the last week.

If the turnaround story is true and HFCL hasnot defaulted, then ICICI Bank seems to have started a new trend by converting loans to equity in advance of a major turnaround. At a time when interest rates are extremely low and equity values are shooting up in a matter of days and weeks, the bank can be accused of having acted on inside information. After all, the borrowing covenants usually permit banks to convert loans to equity only in the event of a default. Has this changed?

In which case, the market regulator has a new headache. It needs to worry about banks, reputed ones like ICICI included, using inside information to convert debt into equity in anticipation of substantial capital appreciation. This is clearly a case where SEBI and the Reserve Bank need to get some answers from ICICI and put in place checks to ensure that banks donot misuse inside information.

Also remember that this is not the first time First Global is making rosy projections for HFCL. When it was recommending the scrip in 1999-2000, it was also making a $ 135 million private placement for the company, with a hefty profit for itself, through some shady manoeuvres.

The RBI inspection report documented how First Global obtained clean credit from Global Trust Bank (GTB) to surreptitiously buy HFCL stock through investment companies such as Panchal Components and Appliances, First Global Stock Broking, Vitra Trade & Agencies, Top Gear Leasing & Finance, Vruddhi Confinvest India, UD&MD Agencies, Naulakha Financial Services and Mohan Fiscal Services.

It listed 46 instances where a total of Rs 354 crore was released to these investment companies based on oral sanctions. GTB also subscribed to non-convertible debentures of Rs 15 crore each issued by the investment outfits. First Global also got a hefty overdraft of Rs 44.5 crore from GTB to buy HFCL equity. Instead of placing the shares directly with foreign institutions, First Global's investment outfits first bought the stock at 1050 a share and resold it to the foreign institutions at a premium of Rs 10 to Rs 25. The case is still being investigated by the Enforcement Directorate and SEBI.

Since HFCL traded at around 1870 those days, it raised questions about the steep discount at which the $ 135 million private placement was made and to suspicion that the demand itself was manipulated through broker-led hype and market rigging.

Now that we know that First Global is alive and well and still pushing its favourite speculative scrips, may be there will be increased focus on its business dealings.

First Global's promoters are undoubtedly very bright individuals, but then so were all the scamsters who have ever electrified the capital market over centuries.

-- Sucheta Dalal