Sucheta Dalal :Does T-to-T Hurt Investors? (13 Oct 2003)
Sucheta Dalal

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Does T-to-T Hurt Investors? (13 Oct 2003)  

A few weeks ago, when the Securities and Exchange Board of India and the stock exchanges decided to shift several scrips to the trade-to-trade (T-to-T) segment as a surveillance measure, two cases were filed in the Bombay High Court. One by Bellary Steel and Alloys and another by an ‘investor’ of Himachal Futuristic Communications Limited (HFCL).

T-to-T transactions are like spot deals where the delivery of shares and payment of money has to occur the same day. This acts as a deterrent to manipulators but should not stop genuine investors from buying.

The two companies, involved directly or indirectly in the litigation are interesting. Bellary Steel was shifted to the T-to-T segment along with 555 scrips and missed much of the buoyancy experienced by steel stocks, triggered by a turnaround in the industry’s performance and prospects.

HFCL was recommended as a “strong buy” and “a genuine, true-blue turnaround” at Rs 27.8 (on September 5) by none other than Shankar Sharma of Tehelka and First Global notoriety. Its shift to T-to-T on September 23 (with 8 other scrips) stalled the dream run that was probably planned for the scrip. And brokers, who had built up a hefty, off-market positions, panicked at the regulators’ decision and the price dropped sharply when they unloaded their holdings. On September 25, the scrip was down to Rs 18.7 and First Global issued an update ‘reiterating the strong buy recommendation’. But clearly, nobody was buying.

A couple of days later, Bellary Steel and the HFCL ‘investor’ moved court. But, having filed the writs, neither litigant seems to be in a hurry to get a court hearing. Nevertheless, it is interesting to juxtapose the two plaints with documented information about the companies.

Both Bellary Steel and HFCL’s investor allege that the decision to shift the stocks to T-to-T was biased, illegal, arbitrary and against natural justice. They both make the case that ordinary investors will be hurt by the action. The fact is, investors lost maximum value when the HFCL stock dropped from its ramped up peak of Rs 2553 in the bull run of 2000, down to a miserable Rs 15.65 at the Bombay Stock Exchange (BSE) on Friday (with 44,31,000 shares traded). In Bellary Steel, investors lost money thanks to its long saga of gross mismanagement. It traded at Rs 1.78 on the BSE last Friday with a volume of 3,48,700 shares. Its recent peak, before the shift to T-to-T was Rs 7.64 on August 19. It is a little curious that these petitioners talk of investors losing value now and blame it on the bourses.

The issue before the courts is whether stock exchanges had indeed acted in a biased, random and arbitrary manner, or, whether their decision was based on an objective set of criteria.

Bellary Steel has also made the case that its listing agreement with the BSE is a contract that binds the bourse into listing the shares in a particular segment and that it cannot unilaterally make a change.

The court will decide on this contention and will probably examine whether exchanges can be effective regulators under such circumstances. But we can look at the past performance of these companies that are so agitated on behalf of investors.

Bellary was one of the two companies, along with Malvika Steel of the Vinay Rai group, where Industrial Development Bank of India (IDBI) and other financial institutions initiated steps to remove the promoters from management. That was in the year 2000-01 and Managing Director S Madhav was in charge. The institutions then ordered a special investigative audit through the Bangalore based firm of Shantamurthy and Co, which confirmed large-scale misuse of funds and huge financial problems.

The audit revealed that the company had regularly transferred working capital funds without board consent to a set of associate companies. It wrote off debts to the tune of Rs 53.64 crore, allegedly to avoid questions; indulged in providing shady ‘accommodation’ entries and offered money transfer facilities by buying goods from one Usha Group company(Usha India) and selling it to another (Malvika Steel) at a loss. Moreover, the number of banks and finance companies that have filed cases for recovery or for cheque bouncing (section 138 of the Negotiable Instruments Act) against the company read like a Who’s Who of the banking and finance industry. The biggest of these is a recovery case filed by Karnataka State Finance Corporation.

Bellary Steel’s petition in the T-to-T case however claims that the company has “nominees of IDBI and IIBI on its board, which itself speaks about the credibility and responsibility of the company”. In August this year, the company also made news in connection with allegations of kidnapping of the executive of an associate company who alleged that he was being forced to sign away some financial documents.

The main plank of Ashok Upadhyay of Pacific Corporate Services, the HFCL investor who has sued the stock exchanges, is a long and detailed letter written by HFCL to the stock exchanges, which is attached to the plaint. The letter says that shifting the shares to T-to-T “will act as a blot on the company’s image”. But the blot on HFCL’s image has occurred many times. First during the Sukh Ram scandal and more recently, in the year 2000, when its promoters flaunted their closeness to scamster Ketan Parekh. Then again, when it borrowed money from Unit Trust of India (and other institutions) and instantly transferred it to Parekh in a futile attempt to bail him out after the stock bubble created by him had burst.

The blot also occurred when HFCL’s share price fell so precipitously that investors and institutions are still holding that baby. The petitioner makes no reference to all this. Instead, he points to the fact that HFCL’s Global Depository Receipt’s (GDRs) are traded on the London Stock Exchange as indication of its market standing. However, the bulk of the GDRs, issued at a 19 per cent discount to the domestic market, were converted into underlying shares within weeks of the issue. Also, the promoters’ official holding in HFCL is itself down to a little over five per cent.

Despite this colourful background, Bellary Steel and a HFCL sympathiser have gone to court. The outcome of the litigation will decide how effectively bourses can act to protect investor interest and to prevent manipulation. Either way, a decision is possible only if the petitioners follow up their case and stay in the fight until the court decides the issue.

-- Sucheta Dalal