Bulls, Bears and other Beasts by Santosh Nair
Fudging And Pleading
A loan-for-cash scam towards the end of November derailed market sentiment further. It involved Money Matters, an NBFC and some other corporations. By 10-11, Money Matters had made a profit of ₹75 crores that had sent its stock price through the roof. The company's growth made its founder, Rajesh Sharma a force to reckon with in the financial services industry. However, one of his rivals had snitched about his bribing practices and soon he was arrested by the CBI. The stock plunged straight from ₹663 to ₹130. While Lala had managed to make a decent profit, the regulatory glare in the wake of the scam had worried him.
The year 2011 had begun on a solemn note for the bulls. Ths high-profile arrests in the 2G spectrum scam had sent stock prices crashing. The mid-cap and small-cap companies had to bear the impact of the selling fury that took place.
After the Satyam fraud, SEBI had made it mandatory for companies to disclose the quantum of shares pledged by promoters. The promoters did not want this as their stocks would have become vulnerable to attacks by bear operators. Bears are forever known to be sniffing around for stocks where the promoters have pledged a substantial position of their holdings and are using the money to ramp up the stock prices. Some promoters would delay in reporting the pledge transactions to the exchanges to keep the bears wondering about the price at which the shares were pledged. As once the price was known, it became easier to smash the stock price.
In September 2011, Lala's attention was drawn to the stock of VST Industries (formerly Vazir Sultan Tobacco), which owned the Charminar brand of cigarettes. Radhakishan Damani was one of its stakeholders and among all the market- men on Dalal Street, he was the one that Lala respected the most.
Mid-cap companies raised funds through an instrument called the FCCB ( Foreign Currency Convertible Bonds) for capacity expansion, acquisitions and part retirement of expensive debt. The money was raised in a foreign currency and repaid in the same currency. FCCB had features of debt as well as equity. By that time, earnings had begun to come under pressure due to reasons such as high input costs and weakening demand. India's economic fundamentals had started to dwindle from 2011 onwards and thus the rupee had started to weaken against the dollar. This invited trouble for companies as they now needed more rupees to repay the dollars. By the end of 2011, a series of bad debts had left Lala shaken and he was worried that his skills were becoming blunt.