Monday, June 1, 2009

Raise, don't Earn - seems to be the motto of the street

Indian stock market's sentiment turned bullish from (a prolonged) bearish one in the month of May. Single event responsible was the Left parties failure to gain any significant seats in the parliament to influence government formation or its policies. The 'Dalal' street was euphoric with this development. They perceived it as a major boon to our economy. Now government would be able to implement privitisation in many select sectors (even upto 100%), and disinvestment of many Public Sector Undertakings (PSUs). This would eventually lead to more foreign money in form of FDI and FII coming into Indian markets. So far they have not been wrong. Awash with fresh capital, thanks to trillions of dollars pumped into the system by developed countries, insitutional investors (FII) brought in record 3 billion dollars in just 2 weeks, with 1 billion dollar in a single day. Result was obvious, major stock market indexes have run up 25 - 30% in this time.

With so much of 'hot' money sloshing in the markets, everyone is racing to grab it. After over one and half years of severe winter we have seen spring. No one knows how long it would last till next winter sets in. So just get your hands filled with whatever you can! Raise, don't earn is the new motto of the street these days. Today no one is talking that are going to earn this much in coming season or if companies earn this much then markets would rise these many points. All the talks are in the lines of we are going to raise this much or market pundits saying if markets can raise this much then it would rise these many points. Suddenly it looks like future earnings no longer play any role in valuation or growth of a company.

Around two years back, some promoters of some companies were raising capital, today these are the very ones who are once again back to raise more. That time taking advantage of bull market, these shameless promoters sold worthless papers to gullible and greedy investors. When tide turned these promoters went into hibernation, nothing was heard from their companies in announcements as what their future plans are. What happened to the capital raised - no clear answers were provided. Meanwhile the investors holding their paper scrambled to dispose it. Now when (it seems) that market is out of woods, these very promoters are coming out of their hidings, again making the same old lofty announcements and using same old cheap tricks out of their dirty bags to once again raise the money.

We all remember these promoters issued themselves warrants worth millions of dollars when the market was bullish. Their 'purported' argument was that they believe in long term growth of the company and are committed to invest their money at some future. When market tanked and the price fell below the warrant issue price, they let it lapse. Talking about long term investment horizon of these people! They were just interested in cashing in the bull market, believing that market price would be higher than issue price at the time of conversion. Just after a month of getting their warrants lapsed, they are again issuing themselves these warrants albeit at a lower price. Who are they kidding! With so ease they let these warrants lapse (and then re-issue, like a library book) that some time I wonder that do they really make the upfront payment of 10% at the time of issue. No serious investor would let his hard earned money go down the drain this way.

So trick is so easy, claim to invest some by issuing warrants to themselves, then bring in more money by QIP and hope market price remains high. It mostly does in a bull market as issue price is higher than the current market price. If things don't go as planned then renounce the warrants and start the exercise all over again.

I think issue of warrants to promoters should be banned. If money is to be raised then it should be done the right way, i.e. let all shareholders participate via 'rights issue'. In many ways, I see these warrants are much worse than stock options scheme.

Well, till there are loopholes in the system which lets promoters take their company and rest of the shareholders for a ride, all we can do is be more watchful of events happening around us. With all focus shifted to raising money and earning none, be wary of such companies and promoters. We burnt our fingers once, but lets not do it twice.

Earning growth may remain muted for some years to come, as lot of trash piled up in the street has to be cleared first, which would take time.

So till then remember:
The higher they rise, the harder they fall!


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