Sucheta Dalal :Circuit Breakers
Sucheta Dalal

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Circuit Breakers  

June 3, 2008

Exclusive news, the stories behind the headlines and the truth between the lines Edited by SUCHETA DALAL

Circuit Breakers

In early April, when MoneyLIFE interviewed CB Bhave, chairman of the Securities and Exchange Board of India (SEBI), one of our questions was about his decision to remove first-day price bands after stocks are listed or re-listed. That decision was based primarily on the English Indian Clays (EIC) case, which MoneyLIFE had followed with some persistence. EIC’s stock had dived from Rs1,690 on 12th February, to Rs187.95 on 13th February because of a misunderstanding about the basis of deciding the base value to resume trading in the demerged scrip. With a circuit filter at 5%, investors suffered the consequences of the goof-up, not to mention the panic at the suddenly diminished value of their investment. While the Bombay Stock Exchange (BSE) was unconcerned, SEBI decided to act and raised the circuit filter to 20%, accelerating the pace at which the scrip attained its correct valuation. Soon after, SEBI changed the rules and eliminated first-day price filters. Was that the answer? We asked Mr Bhave: In the past, we have noticed massive price manipulation at the time of re-listing. Will the removal of price bands encourage manipulators?

His answer was that in the past “the base price (for re-listing) was being fixed on the basis of a merchant banker’s certificate and, in future, we could have a situation where there is a dispute over the correctness of the certificate itself. So I feel that it is better to investigate those one or two cases where there may be a price manipulation and relieve 90% of the market from the need of a certificate. We will observe whether that works.”

In the last week of May, the stunning ramp-up of two newly re-listed stocks puts matters to test. KGN Industries, which soared to Rs55,000 on 19th May after re-listing at Rs72 after a seven-year gap on that very day. Since that did not provoke immediate regulatory action by BSE or SEBI, another scrip, Sylph Technologies, flared to Rs800 the next day before closing at Rs200 (its last traded price was 80 paise). The sheer brazenness of the ramp-up has actually turned the spotlight on the regulator. SEBI will have to crack down on the manipulation and hand out exemplary punishment very quickly to signal zero tolerance for such effrontery. Otherwise, Mr Bhave may find it easier to do what his predecessor did and impose first-day filters -- even if they hamper proper price discovery-- rather than take on the responsibility and burden of catching the culprits.

SVPCL Goes to Apex Court

In the same interview, we asked Mr Bhave about the fate of two companies, Shyam Tele and SVPCL, whose shares were denied listing by the stock exchanges as well as SEBI after a corporate action after in-principle permission to list had already been granted. The refusal of listing permission affects companies far less than it affects investors; and both have moved court against SEBI’s order to refund investors’ money. But investors have neither received the money nor an explanation for their predicament. Many investors have written to MoneyLIFE seeking answers; some have sent us electronic documentation of their dogged effort to get responses from the stock exchanges, the regulator, the company and its Registrar & Transfer Agents -- nobody thought it fit to respond meaningfully to their queries. We asked Mr Bhave what his position was.

In April, he had just taken charge as chairman and said he would “call for details and examine the issue”. Meanwhile SEBI had ordered SVPCL (a Hyderabad-based printer and stationery manufacturer) to return investors’ money with interest. Last heard, the company had approached the Securities Appellate Tribunal (SAT), which also dismissed its appeal. Now, the company has approached the Supreme Court, which has issued a notice to the regulator but has not stayed its order. So the 10,000-odd investors affected by the non-listing will continue to wait. SVPCL’s petition before the apex court has raised a key issue -- the sanctity of in-principle approvals by the bourses and the ‘acknowledgement’ by SEBI (a euphemism for issue clearance) to permit companies to raise public money. In SVPCL’s case, SEBI has apparently examined the documents and asked for modification of some disclosures before issuing the acknowledgement card. We have a question. If the worst cases of market manipulation and anti-investor behaviour can get away with a piffling penalty after filing consent terms, then what is so horribly wrong with SVPCL and Shyam Tele that cannot be resolved with the regulator’s intervention, although it affects tens of thousands of investors? And if the actions or omissions of these companies are beyond redemption, why are they still listed on the bourses? On contacting SEBI, its primary market division tells us that an in-principle approval is no guarantee of permission to list. It says that the SAT dismissed SVPCL’s appeal because it failed to obtain listing permission in 10 weeks, but does not say why the bourses find the shares so unfit to be listed.

Realty Reality

Talk to real estate developers around the country and they will tell you that demand for residential property remains robust at a price point of Rs35 lakh per apartment. They only admit to a 20% decline in prices from their peak levels. However, the truth is that few transactions are actually happening. The feel-good factor about the Indian economy has ended. While the government dithers over policy decisions, petrol companies are reporting losses and people are getting ready for petrol shortages and rationing. In fact, it is exactly the climate for a slowdown in realty. A clear indicator of the negative sentiment is in the pricing of the Emaar MGF’s Rs922 crore preference shares into equity at a paltry Rs300.

To understand the significance of this pricing, one must know the background of the company. The Emaar group is one of two mega realty companies, controlled by the Dubai ruler, entrusted with the incredible construction and development going on in that country. In February this year, its Indian joint venture -- Emaar MGF
-- was forced to abandon its IPO (initial public offering) plans when market sentiment weakened and there were no takers for its aggressive pricing of Rs610-Rs690 a share. The response was poor even after the price band was revised downwards to Rs530-Rs630 and it eventually withdrew the issue. The present conversion price of Rs300 is reportedly benchmarked to Citibank’s investment in Emaar MGF in 2006. We think that realty prices may also have to be benchmarked to that year’s level very shortly. Interestingly, two media companies -- Bennett, Coleman & Co, which publishes The Times of India and New Delhi Television Limited (NDTV) have a Rs25 crore investment in Emaar. Of these, while the TOI is open about its  “private treaties” with companies (where it offers steeply discounted advertising rates, media coverage and brand promotion equal to the group’s investment in a company), NDTV makes no such admission, raising questions about why a loss-making media entity would invest such a huge chunk of investors’ money in an unlisted company at market peak. Since these shares were issued at a valuation of $10 billion (as against the current placement at a valuation of $ six billion), both companies seem to be losing money on this investment.

-- Sucheta Dalal