Corporate Fraud/Misdemeanor - Public Domain - India lessons

We as investors should preferbusinesseswhich are physical product based along with a brand ( read moat in some cases ) and if possible should be very simple and boring :).

Such business will keep the cash flows coming , growth will sustain and even sub parpromoterwill be good enough to run them .

regards

ranvir

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This is a fromMoneylife though four year old but worth reading.

1). OnMobile

2). IRB Infra

3). Educomp

4). Deccan Chronicle

5). Tanla Solutions

6). Teledata

7).

8).

9).

10).

Akbar and Dhwanil )- role

The SKS Micro case clearly shows how even big names cannot make a difference if the underlying business is flawed or fraught with issues. Ultimately the underlying business and its fundamentals should be strong, and it should be run by a decent management. Moreover, when there is a hype or too much of fancy about a company and people chasing it, it would be Overvalued in most cases. In some cases the boosted value would be several times the Intrinsic value of the company.

Trusting the big names on the list of directors may not help much. If the management is strong with core experience in the sector, you will not find glamorous names like above…but the work done will speak for itself.

:))

http://www.moneylife.in/article/4/9883.html Link: http://www.moneylife.in/article/4/9883.html

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Hi Samir,

Moneylife is doing a good job of making investors knowledgeable and aware. Coming back to the topic of IPOs, let me tell you that its an open secret (among financial analysts and market experts) that an IPOs prime reason is to provide an exit to PEs, venture capitalists, previous long term investors, etc an exit or sale route so that they can take out their capital by selling it to IPO subscribers. This is a well known secret but wont be obvious.

This is true for any IPO including SKS. Recently we saw a nice positive response to the Just Dial IPO, but by this year end we will know if the financial numbers justify the price or not. In SKS the Murthys and Khoslas make a killing on their exit, and obviously they will not speak or get in to the mess and have smartly washed off their hands from this company altogether. Probably they should focus on their core business and give opportunities to other qualified independent directors who are seeking assignments.

The other big issue is when companies hire name-sake directors who are already on boards of half a dozen or even 20 companies. These people hardly spend time or add value, but just add their personal brand name to get an honorarium or sitting fees. Its time for companies to hire talented people and qualified people who know the ground level workings of the industry in India.

The SKS Micro case clearly shows how even big names cannot make a difference if the underlying business is flawed or fraught with issues. Ultimately the underlying business and its fundamentals should be strong, and it should be run by a decent management. Moreover, when there is a hype or too much of fancy about a company and people chasing it, it would be Overvalued in most cases. In some cases the boosted value would be several times the Intrinsic value of the company.

Trusting the big names on the list of directors may not help much. If the management is strong with core experience in the sector, you will not find glamorous names like above…but the work done will speak for itself.

SKS Microfinance:

:))

http://www.moneylife.in/article/4/9883.html Link: http://www.moneylife.in/article/4/9883.html

Talking about corporate misdemeanor/frauds in the Indian context. Here

are two links. These cover 3 companies in the listed space.

https://prudentequity.com/index/proudentdetail/id/6

https://prudentequity.com/index/proudentdetail/id/11

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Satyam is missing from this list. There are many others especially in the infra / power space.

1). OnMobile

2). IRB Infra

3). Educomp

4). Deccan Chronicle

5). Tanla Solutions

6). Teledata

7).

8).

9).

10).

Akbar and Dhwanil )- role

http://www.beyondproxy.com/avoiding-landmines-india

1). OnMobile

2). IRB Infra

3). Educomp

4). Deccan Chronicle

5). Tanla Solutions

6). Teledata

7).

8).

9).

10).

11). Satyam [ someone has mentioned above]

12). M S Shoes East

More information on MS Shoes here:

http://www.business-standard.com/article/specials/cbi-cracks-down-on-sbi-caps-sebi-officials-in-ms-shoes-case-197061901107_1.html

Pattern: High media attention, allure of high listing “pop” gains. This echoed many years later in a Power company IPO - probably no fraud in the latter case, but the investor burnt his fingers nontheless.

Satyam is harder to detect though - accounting scrutiny did not reveal anything amiss for many years. How does one catch such a fraud ?

There are companies which are outright fraud while there are companies which went through bad patch. Also the companies which committed fraud are at some point good corporate citizen went bad due to greed. I would put Deccan Chronical, Educom in the category where it was ok initially and then greed led them to commit fraud. Then there are companies like Teledata, Riddhi Siddhi Gluco Biols, KS Oil which are outright fraud and there was no business model in place. Then there are companies like Onmobile, Anant Raj industries and IRB which were crushed under excessive debt.

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I have read all the above conversations and seen the links but not able to still figure out if there was actually any fraud in the case of Tanla. If yes, what was the nature of the fraud, can someone explain? Company may have link to politicians, but this is nothing new for Indian companies. Products may have been ‘pesky’ for customers. Some employees may be disgruntled. Their business may not have generated enough cash causing them to burn through the IPO proceeds. But all these cannot be termed ‘fraud’ or proof of wrong intentions/behaviour from the promoters, can they? Being in the telecom VAS space which is a fast changing industry, they seem to have been hit badly by changing marketplace trends and the global shift to smartphones which disrupted their earlier business model. Maybe there were other factors too which impacted the business, and hence the stock price to crash resulting in massive loss of shareholder weath.

But was there actual fraud? Are the promoters not trust worthy? Will be grateful if someone can answer this (or point me in the right direction)… am having a look at the company in light of the recent turnaround, and unethical behaviour is a big no-no for me, so looking for some answers. Thanks !

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Thanks very much Dhiraj. Very helpful. Couldn’t help but notice nearly all in tech and education.

@v4value, Please note that durind that period it would have very difficult to show textile or a metal company to show such high ROCE and other ratios. Hence, fraud would have become very apparent at first stage. In order for scheme to get built, you would require right sector. It was IT and education as rightly pointed out by you, if we would have got 2005/2006 list probably it would have Real Estate Infrastructure players. So I would not like to draw conclusion that fraud would happen only in selected sector. Like God, fraud is also universal, mother of fraud greed is universal.

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For more understanding on fraud, find enclosed a link from ACFE website. ACFE is US based society of fraud examiner. I have appeared and cleared their exam in past but not a member due to non completion of compulsory training hours.
http://www.acfe.com/fraud-triangle.aspx

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Eros

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One small company came on my radar was Pune based Rajkumar Forge Ltd, while going through the details, i have found that company sold close to 11000 Sq Mtrs plot at Rs 72 lakhs only. Its close to 2 acre plot. When i asked as a shareholder about the selling process and how selling price was fixed, i did not get any reply. Since i bought only 10 shares to track this company, i sold off and moved on.

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Thanks for raising this question which i was wondering for a long time? This is my first post at forum. I too have the same question? I am not an expert in value investing.

Not sure what kind of fraud, if any, ‘Tanla’ was involved with? I googled hard but was unable to find any thing on public domain. The company’s balance sheet looks improving for last several Qtrs and Co seems to be gaining lost ground. But stock is not moving in line with balance sheet (source screener.in). Its available attractively at almost 0.5 P/BV.
Is the balance sheet manipulated?

Would appriciate if some expert and senior member respond please?

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A close study of previous financial statements leads to conclude that the company intelligently used purchase of fixed assets in overseas subsideries as a media to siphon off funds and later wrote away those fixed assets. Assets were being acquired when business was quite down.Moreover one acquisition in Finland seems to be another way as the business was written off after a couple of years.

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How can an investor detect fraud based on the new IndAS disclosure system?

Here is a list of the recent fraud/unethical promotor behavior/minority shareholder un-friendly practices and my own novice interpretation of it-

LEEL Electricals- Change of guard from father to son. Siphoning off of sales proceeds. Even Porinju cannot detect this and he says only a forensic audit can reveal the fraud.

Zee Entertainment- Large cap with fair deal of visibility. Investing by MF’s as well. But promoter holding structure no disclosed or disguised so far and now market is taken by surprise leaving small investors high and dry.

Prabhat Dairy - Sale of dairy unit to a French unit. Small investors are surprised they will not get share of the profits/proceeds because of a convoluted promotor holding structure.

Sun Pharma - Only whistleblower complaints were able to detect the fraud which later put pressure on the management to issue a statement.

DHFL - Seems like a whole new level of sophistication with respect to the promoter holding structure level fraud (going by the Cobrapost revelations) and it is audited by a big 4- Deloitte!

Would like to know if there is a best practice /benchmark that can be used to identify a safe/fraudulent holding structure in advance.

Seeking responses from @phreakv6, @diffsoft, @hitesh2710 and/or anyone who is familiar with this matter.

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