The brokerage research report had described a positive outlook for the company’s debt syndication business

India Infoline, which arranged and helped transfer Rs446 crores from four hapless foreign institutional investors (FIIs) to Money Matters Financial Service, clearly did not do the due diligence on the company while pocketing fat fees.

Yesterday, Moneylife was the first to report that the Central Bureau of Investigation (CBI) was questioning Money Matters officials in a multi-crore scam (Read: 'Money Matters Financial raided by Central Bureau of Investigation' at http://www.moneylife.in/article/4/11505.html). We pointed out how Money Matters had managed to raise over Rs4,460 million from four foreign institutional investors (Morgan Stanley, Wellington, Fidelity and GMO) just a month ago, through a Qualified Institutional Placement (QIP) that was brokered by India Infoline (IIFL).

We gather that investors are incensed that IIFL did a shoddy job of the due diligence while making the QIP. FIIs are privately accusing IIFL of ignoring malpractices by Money Matters and pocketing merchant banking fees.

However, IIFL is arguing that it was not aware about how Money Matters really functioned, or the scam in the company. But this rings hollow. Moneylife has come across an IIFL report on Money Matters that was issued just four days before the scam was revealed. The report is a very positive one.

We also gather that IIFL is now arguing that it hasn't been able to communicate with the four QIP investors since the scam broke. One can be pretty sure that its phones are ringing off the hook with angry clients bent on discarding the broker from their empanelments.

This raises the question as to why merchant bankers should be allowed to collect fat fees for issues if this is the level of due diligence they offer? And why such a poor job on the due diligence should not be punished with the imposition of standard stringent fines, and suspending such entities from the market for some years at least?

It is very clear that either IIFL did not do the due diligence which it claimed it had done, or it did it so shoddily that it was not aware of how the company really functioned. For, it helped raise $100 million for Money Matters through a QIP concluded on 20th October.  Just a month later (in a report to institutional clients dated 22nd November), IIFL encouraged clients to buy the stock for a 24% upside. The IIFL report says: "Money Matters Financial Services (MOMF) is a niche player in loan syndication with strong origination and distribution capabilities, as evidenced by its volume of throughput and client roster. We believe the company is well-positioned to capitalise on strong demand for syndication over the medium-term, arising from large investment needs of the corporate sector, while its lending operations provide an added boost to earnings. We expect MOMF to deliver EPS CAGR of 33% over FY10-FY13, driven by a rise in syndication volumes, stable fee level, and high spread from down-selling."

The report contains a large graphs detailing the process that Money Matters follows for debt syndication and it claims that the "internal process reveals a complex web of processes, requiring client handholding by the syndicator at every step of the process."

http://www.moneylife.in/promotion/graphs/MM-Internalprocess.jpg
 
The IIFL report says that MOMF placed Rs440 billion of loan/debt during FY09-FY10 across various sectors. The company's debt syndication activity is principally concentrated in capital-intensive industries such as infrastructure, power, real estate and financial services. MOMF derived 88% of its consolidated revenue in FY10 from loan and debt syndication and loan restructuring activities and the rest from securities trading, lending and equity and debt brokerage.

MOMF's key competitors include banks with strong debt syndication capabilities, primarily SBI Caps, Axis Bank and YES Bank. The company has a well-established team of over 100 professionals for origination and placement activities, with strong corporate and institutional relationships. On the other hand, the company has seen considerable attrition at the senior management level during FY10.

MOMF had 9 million shares outstanding end-FY08. In FY09, the company undertook a rights issue at par, offering two shares for each share held, raising Rs180 million. In addition, stockholders were given one warrant for each new share, aggregating to 18 million warrants. The warrants were exercisable at a 20% discount to market price up to September 2010. Subsequently, the subscription period was extended to March 2014.

The management gave up its share of warrants in the third quarter of FY10, so currently there are 3.7 million warrants outstanding. MOMF undertook the QIP in Q3FY10 and raised Rs4,450 million, which it proposes to use for lending purposes. MOMF plans to capitalise on its client knowledge and flexibility vis-à-vis large banks, to provide loans to client where a regulatory arbitrage opportunity exists. The company eventually plans to sell down these loans to banks, to capture the spread. — Munira Dongre