This is one of the finest investor education mails I have come across in this group
Everything in the mail seems to be true
Can any one guess all the correct names?
Thanks Ravi
SM
--- In sharetrading@yahoogroups.com, Ravi <saharsh1@...> wrote:
>
> 7/06/10
>
> CUT & PASTE FROM NET
>
> *How Promoters Cheat Shareholders*
>
> Siphoning off cash, dumping expenses, selling scrap for cash...dozens of
> live examples of the ways companies cheat:-Source:HKG
>
> Indian promoters manipulate accounts and market prices for two
> (opposite) reasons. The first is a traditional game, which the majority
> of them play -- siphoning money from the coffers of a listed company for
> personal gains. However, in a bull market, a reverse trend starts. Many
> of them are not interested in suppressing profits. They want to
> overstate revenues and profits because this boosts their market-cap in a
> rising market; it helps them to raise 'free' money. In the past three
> years, I have repeatedly expressed doubts about the genuineness of the
> financial figures of many companies, although foreign institutional
> investors (FIIs) and many renowned domestic institutional investors
> (DIIs) were shareholders of precisely such shady companies, even as many
> brokerage houses, print and electronic media wereflashing 'buy'
> recommendations on them. I mainly track mid-cap and small-cap companies.
> Large companies are smart enough to camouflage their figures. It is much
> easier to find flaws in the accounting of small- and mid-cap companies.
> What is the arsenal of tricks employed by promoters to siphon off money
> or fudge their accounts? How do they pump up their share prices and dump
> them on the public?
>
> Here are few examples of how promoters do it. These are actual examples,
> but we have opted to change their names because the idea is to educate
> investors about management tricks.
>
> Suppress Income:Consider textile companies. All of us believe that they
> don't make money. This is not true. It is only that the promoters are
> adept at hiding margins. Some listed companies have at least 15-20
> private limited companies, two or three proprietary firms, five or six
> partnership firms in the promoter's wife's name, in his in-law's name,
> in the married daughter's name or even in the names of trusted employees
> who have been working with the promoter for 20-30 years. It sells
> finished products to private firms that are directly or indirectly owned
> by the promoters at cost price or even a small loss. Those private
> firms, in turn, sell the products to the dealer, wholesaler or
> distributor and make huge profits.
>
> I can definitely say that listed companies like Ramdiya Mills and Karma
> Fabrics or Synth Fabrics -- have adopted this practice since inception
> and continue to do so even now. If you look at their cost structure, it
> will become very clear. Ramdiya Mills and Karma Fabrics have large
> reputed brands. Since they buy hundreds of crores worth of yarn every
> year, they get it at the lowest possible price. They get an additional
> price benefit by making cash payments to suppliers. Since the product
> they sell is a premium product, these companies ought to have a net
> profit margin of at least 12%-15% whereas they hardly show a margin of
> 2%-3%. Text100 Mills is one of the oldest and reputed cotton textile
> mills with significant exports. But if you look at the segment-wise
> results, the cotton division always shows losses. Where is the money
> going? Most promoters either invest it in real estate or benami accounts
> in India or transfer the money abroad. Of course, each promoter has a
> different way of looting the company and siphoning off money. The
> promoter of Ramdiya Mills is a hands-on guy who looks after practically
> everything. They do not have senior professionals in purchase, marketing
> or branding. Since the promoter takes all decisions, overheads are also
> not large. In this category fall companies, like Gofar and other
> powerloom companies, whose expenses are those of a powerloom, but
> selling price is akin to the organised sector.
>
> In some cases, shareholders' money goes to support the promoter's
> lifestyle. Look at a famous textile company like Monde Fabrics. It has a
> higher cost structure -- the bigger the brand name, the higher is the
> number of employees. Monde's production cost is slightly higher but not
> high enough to show losses. Also, they should be able to show very
> decent profits because they have the latest technology, wastage is low
> and the quality is very good. Their polywool fabric is the most
> expensive in India but their profit is negligible. Where is the money
> going? The promoter's daily expense is in lakhs of rupees which is all
> debited to Monde's corporate account. So, although the selling price of
> Daygod Mills is 20% lower than Monde's, its margin is higher.
>
> Under-reporting of revenues is also rampant in the steel industry. Each
> listed company has at least six or seven unlisted companies through
> which they do a lot of adjustments, depending on the opportunity. They
> decide where to show profits and when to disguise them. In this category
> are companies like Prism Steel and Modern Metals. Look at Modern Metals
> and compare it with River Electricity, a company with a similar profile.
> River Electricity did not have captive mines and neither did Modern. But
> profit margins of Modern have been very low. Their profits are vanishing
> through their unlisted group companies.Dealing in cash is very common in
> the steel industry. Cash sales take place and are not reflected in the
> books. That is why you will find that raw material costs rise
> disproportionately. I knew a person who used to be with a sponge-iron
> company near Mumbai. He told me that every year they sell Rs500 crore
> worth of sponge-iron from their plant, in cash. But all purchases and
> expenses are being fully accounted in the books along with the
> promoter's personal expenses.
>
> Take the example of Kanaka Leaf. Why did that company become sick? I
> know a manager of one of its factories. He tells me that he used to take
> out 90% of the stock in cash and pay excise duty only on 10% of the
> goods. That is one reason why this firm got into legal trouble and that
> factory had to be closed. He was no longer on the payroll; but the owner
> was still paying him Rs25,000 per month. You always know which companies
> are selling in cash by sniffing around at the commodity markets. Look at
> the textile company ABC. If you go to the textile market any time, you
> can buy ABC products in cash. There used to be a company called Garvi
> Fils which closed down. It used to sell most of its production in cash.
> In any textile market, you can get a list of companies which will sell
> yarn in cash. All of them book expenses fully; sell in cash and claim
> that costs have gone up. This is how they fool investors.
>
> One major way in which promoters enrich themselves is by selling waste
> (or passing off even quality material as waste) in cash and pocket the
> money. This is rampant in the metals and cable industry. Jewel Steel is
> the king of this. It sells waste as well as fresh material as waste. It
> even sells zinc which is used for galvanising. You can go to any metal
> merchant in Delhi and enquire how much zinc Jewel Steel is selling and
> how much copper Melton Cable is selling in the open market. This is a
> common feature of the metal traders in Delhi where almost 80% of the
> business is done in cash. Companies sell to wholesalers; wholesalers
> sell to small converters and so on. There is an active cash market and
> promoters are able to sell as much of quality finished goods, raw
> materials, by-products or waste.
>
> Fake Bills:The most common practice among corporates is to buy fake
> bills for a small price, make the payment against these bills by cheque
> and instead of receiving goods, ask for the money back in cash. This is
> a common practice among the marwari business houses of Kolkata. They buy
> bills of Rs10 crore or Rs20 crore ostensibly for raw material purchase
> and pay for it by cheque. The material never comes to the warehouse;
> instead they get the money back in cash, minus a tiny commission for the
> fake bill. Naturally, the companies show losses or meagre profits. They
> are not inefficient companies, neither are the promoters fools. They
> simply siphon off cash by buying the bills and under-report sales. This
> leads to losses.
>
> When Laltane Solutions made its IPO, some Delhi-based operators
> regularly contacted me to say that the stock would list at Rs500 against
> an issue price of Rs250. They offered me shares at Rs400 and openly
> admitted that they belonged to the promoter. That is how they made money
> in the stock market. When you think of operators, don't think of shadowy
> individuals. They could well be institutions with a big name and shining
> public image.
>
> Visher Agro buys wheat from the market, converts it into flour and sells
> it to a food company selling branded atta. It is also into rice milling.
> It is not selling anything under its own brand name. It is just a
> converter. The promoter entered into an agreement with an operator and
> his share price rose to Rs200+ from just Rs15; it has now dropped 70%
> from the highs. He claims to have set up an unlisted company which will
> set up a 20MW co-generation power plant for which he is in talks with
> Blackstone. He was making up this story but he could not succeed in
> raising the money as the operator quit the counter.
>
> Another trick by Indian promoters is to announce a joint venture (JV)
> for a new project. After a while, there are reports about differences
> between the JV partners. The money invested in the JV is never
> recovered. It is written off over five or seven years. All this is
> well-planned. The JV is floated precisely to siphon off money by taking
> away money invested in the JV. For instance, Albert Hotels of Bengaluru
> paid Rs15 crore as its share in a JV with a Pune-based company to set up
> a five-star hotel in Pune. It later pulled out of the venture due to
> differences over management control and said it would file a lawsuit to
> recover its investment. But industry sources told me that the promoter
> has already taken back the money in cash and written off the investment
> in its books. This is a popular trick among marwari companies. They lend
> money to unlisted companies owned by the promoters either directly or
> indirectly and the money is never recovered.
>
> As all these examples show, Indian promoters are not stupid or less
> intelligent or don't know how to run their businesses. They are actually
> a step ahead of other professionally managed companies. They are much
> more intelligent, savvy and street smart. They know how to negotiate
> with suppliers for the lowest possible price, how to cut costs and how
> to siphon off money. Most of them have trusted people or relatives in
> key strategic posts to prevent pilferage. Even while selling, they know
> how to negotiate hard to get the highest price. They work hard and make
> a lot of money but they don't want to share it with you.
>
Happy Trading,
United we grow!!!
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