ValuePickr Forum

Ugro Capital - Opportunity To Invest in a Fintech-like Company Below Book Value

Thanks for this thread. Picked up a small position(some even at 90!). For reasons already mentioned above, I do think this is an interesting calculated risk to take. I see this as an opportunity to invest in a startupesque business, with scale, tech and a good promoter. Not too many chances for retailer investors in India, unlike in the US where platforms like seedinvest allow you to do so. I also think it is less risky than a startup because at the given price point and book size, the market hasn’t overbought/factored the story completely yet(?). If npas remain low, even with slow growth, we can expect this to be rewarding.

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NPAs will show less than actual as assets will grow too fast.

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This looks like promising opportunity in the making. What should be target valuations for this company from 5 year perspective- in line with growth ambitions presented by their chairman?

Considering the company has been disbursing loans for just 4 quarters now there isn’t a lot of information out there. There are 2 years worth of. Concall and presentations and 1 annual report. However, there are 3 long interviews of Mr. Nath available and I’d recommend anyone interested in the company to watch all 3 of them. Linking them below with a bit of info regards what to expect in each of them

  1. This interview is from last July. With this you’ll understand the overall business along with how covid is an opportunity for them since they have a huge advantage due to starting post the liquidity crisis and with a huge capital base. It will also show you how ugro isn’t a fintech… Rather an Nbfc which has embraced digital to improve the underwriting and disbursal process :
  1. This interview is from last August and will give you a clear understanding regards the corporate governance in place and why the method of listing was chosen and Mr Naths fantastic understanding of the economy and lending and the use of tech to facilitate the same. You’ll also learn about how and why he took on PE investors and why he gave them the company for cheap(and we are getting it cheaper)
  1. This interview is the most recent ie from Jan 2021 and will give you a personal insight into Mr. Nath and why he chose to become an entrepreneur along with how he struggled to raise capital for 3 years before he could create ugro and why he hates the word fintech… Especially when it comes to credit. You’ll also understand his 10 to 15 year plan to create a generational institution

I won’t summarise any more. The videos are fantastic and considering the little information available on the company they are must watches as far as investing in it is concerned.

Even though I’m fully done studying every aspect of this company that I can(there really isn’t that much to study in public domain) I won’t post my personal thoughts here to avoid clutter and to let the videos speak for themselves

Disc: I am invested. I am not a sebi advisor. Not buy or sell recommendations. Please do your own due diligence before investing.

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I just wanted to point out that a bet on a lender is primarily a bet on them being able to grow while maintaining quality of the book. Otherwise one can end up in a yes bank style scenario with all equity wealth getting wiped out. For this reason, past performance of lender serves as a good proxy for how they handled stress in the past. Without that past performance, we are investing with “hope”. Absolutely nothing wrong with that, but we must be prepared for our capital to be wiped out, and thus size the position appropriately.

With a 1 year lending track record (gathered that from this thread), it means that a very large part of their lending happened post covid, after they knew which sectors had been hit the hardest and what the status of each lender post covid was. Despite that, their GNPA is 2.3% and 3.9% of the book has been restructured. Restructuring provides a handy tool to hide stress IMHO and is a risk that investors must consider.

Traditionally, MFIs are able to absorb 8-10% credit costs because they have 15-16% NIMs. With a target 8% NIM, what kind of NPAs can Ugro capital absorb comfortably? Given that covid second wave is yet to hit, how much more stress can we expect to build on ugro books? I think these are pertinent questions all potential investors must ask themselves.

For me personally, I am still trying to decide whether to study the co in detail or not (have only read the VP thread until now). Even in a best case scenario where i absolutely love the co, i would not invest more than 1-2% of net worth in an unproved lender since it can blow up dramatically if asset quality cannot be maintained (growing 20x in 5-6 years while maintaining quality of book is not something that everyone can do, digital or not). An unproved NBFC is essentially exactly like a PE investment. Please ask PE firms whether they invest 5-10% of net worth into 1 investment. Just wanted to add a word of caution :smiley: hope nobody would mind. Also thanks to @Admantium for starting this thread.

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@sahil_vi
In the latest Concall they said that restructuring could go up to 6 percent. I’d add another 2 percent to that too to be safe since covid 2.0 wasn’t so severe pre concall. BTW the company began disbursals in Jan 2019. So they had a full year pre covid. So they were as exposed to covid as every other institution when it hit. Considering that I’d say the npas and restructuring is well within limits especially for someone looking to invest at cmp. That being said you are right. The risks here are insane. I have tried typing out the risks above.
One needs to accept that they may never see their capital again here since almost everything is forward looking with barely anything to look back on and covid being the only real test to the company. However, with their current capital adequacy and cash in hand at cmp that risk is softened a bit though it could come roaring back a year or two from now when they scale. Considering the illiquidity exiting post a poor quarter/another ilfs or similar situation in the nbfc space could be a nightmare if large amounts are put here so one should only put capital here they are willing to forget about for the long term.

Disc: I am invested. I am not a sebi advisor. Not buy or sell recommendations. Please do your own due diligence before investing.

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On the contrary, as per the FY20 AR, Mr Nath’s salary was as high as Rs 3.19cr and Mr Abhijit Ghosh’s salary was Rs 1.52cr.

Mr Nath does not have any shares individually, but he is a designated partner of Poshika Advisory Services LLP which had 4.28% of the shares in March 2020. There are other funds/corporates among the top shareholders, but I did not check Mr Nath’s ownership in those.

Mr Ghosh resigned as CEO and Director with effect from 30th April.

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Correct. There are no shares allotted directly to Shachindra Nath and neither to any of his team. But they do own shares indirectly but which have layers in between. I’d recommend watching the corporate governance video above for more info. It’s structured in such a way that everybody has patience and nobody is tempted to sell or pledge shares until the company is up and running after a few years. Considering the margin call madness that was edelweiss this is a relief. That being said yet again the information out there is limited and I have managed to assume some of this based on their presentations and videos. Think of mr nath as a strict parent who isn’t letting anyone ie the PE investors, his team and himself touch the shares until the company is built and functioning. Until then him and the team obviously have salaries to take home due to this. Mr ghosh resigning is discussed above. There would be safer better career prospects for someone who isn’t willing to take a risk for sure. His LinkedIn shows that 3 years is usually his limit working anywhere. He has worked for under a year at capital first and Icici earlier and only worked for more than 3 years at religare(8 years) so his stint here was about average(and considering he was with mr nath at religare that’s 11 years with him in total)

Disc: I am invested. I am not a sebi advisor. Not buy or sell recommendations. Please do your own due diligence before investing.

Mr Nath’s is not a one-time payment. This is not ‘salary just to survive’. Where is the risk with such huge salary every year even before the company has got built and functioning? Particularly during a pandemic, I expect better from the company during FY21. It is also a matter of personal philosophy but promoters of similar pedigree and stage of company are known to have taken much smaller salaries.

I am not too hung up on it though. Huge salary may also indicate that the company is in more mature stage than is apparent.

In the investor presentation, we notice the prominence of Mr Nath’s profile, whereas the CEO and the whole senior management members are presented within a single page with only their names and company logos, but no bio. In many companies, CEO has most of the powers, but it does not seem to be the case with this company. Mr Nath’s prominence can also be noticed in various media releases which include his comments.

What may be reason for the resignation of Mr Ghosh as CEO? We don’t know but it does leave questions about the company management. A prudent investor will watch out for the appointment of the next CEO.

Disclosure: I have a tracking position in the stock.

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Mr. Nath is the company. The whole basis of investing is him. If he leaves I leave basically. No ceo that wants to build his own name will come here since it really is Mr naths ship. So I hope they just hire someone who is capable and loyal and good at executing in the direction mr nath needs. I’m not too fussed what happens with this position tbh. Even in one of the interviews above he brought Mr ghosh along and it was pretty obvious it was the nath show and nobody else could get a word in. I would leave too if I was mr ghosh. However, As an investor I’m happy since I’m investing due to Nath :slight_smile:

Also, They aren’t getting salaries to survive… Looking at his previous profile he is getting a salary he should receive with his qualifications. He is the star player in this team and everything hinges on him and he has taken a risk leaving religare to pursue this so paying him a small salary wouldn’t work. He also spent 3 years without much in the way of income(relatively speaking) when he left religare and took small positions(and created the aforementioned poshika) while looking for funding to create this baby of his so I’m OK with him being paid now. I personally believe he isn’t in this for the money(though that’s a bit too idealistic… Obviously money matters too and hence the compromise) . He actually wants to build something great and has taken huge risks to be here. His linked in profile literally just says “Building a institution”. He is a man obsessed and that gives me Comfort

And you are right… This company isn’t a small company. They have got most of their chess pieces in place and have a networth of 950 crores. They are basically a 3000 cr mcap company just waiting for the sales and profit to catch up so that the outside world values them as such. They could spend all their spare cash today and built their balance 200+ branches and increase leverage but they are actually very Conservative so they are taking it slow. So internally they are an established institution. It’s just that it will take a few years for the results to be seen on the outside.

I personally haven’t seen any nbfc start off in such a fantastic position with the funding they’ve got(it is a record btw) . They’ll really have to go out of their way to mess this up considering they’ve been given all the cards in their favour. That adds one more bit of Skin in the game(it’s not just no. Of shares owned as many of us as investors narrow it down to) . Mr Naths reputation is on the line now. He is still young… Blowing up ugro with so much funding in play wouldnt bode well for the rest of his career or his name.

Disc: invested. Not a sebi advisor.

Edit: I have noticed a strange correlation between this thread and the volumes traded in the company. The volumes already began peaking and today has hit highs I haven’t seen before. As of now I am going to stop posting about the company in a public forum since there really is a danger that the posts here are moving the company due to the low liquidity and the increase in number of site visitors and I do not want to get this site or me in trouble. Cheers.
Re disclosure: I am invested. I am not a sebi advisor. Not buy or sell recommendations. Please do your own due diligence before investing.

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I think I understand the reason for the very low valuations by studying the investor presentation. They borrow at 10% and lend at 15% making a 5% spread. NIMs appear high only due to low leverage. But without leverage they won’t get the desirable ROEs. With a 5% spread a pure SME lender would find it very difficult to make respectable ROEs. Even if we assume a steady state CII of 40%, a larger spread of 6%, steady state credit costs of 2-3% (since theirs is a pure MSME book), it is hard to see them make more than 2% ROAs and 10% ROEs. Companies that make 10% ROEs are generally priced at book value, so I can see why the company trades at low valuations. Despite all the big talk about AI and ML, they have 2% GNPA and 4% restructuring. Conservatively, half the restructured book can slip into NPAs. How would they support 4% GNPA with 5% NIMs?

I would continue to monitor but as of right now, I do not see a sustainable business model here.

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@sahil_vi I had a whole response ready for your queries above… But the volume jump and huge liquidity today kept bugging me and it made me feel something wasn’t right(my initial gut instinct about the low liquidity). So I did a deeper dive and now I’m annoyed with myself. I went all the way back to 2015 when studying the company and even studied a listed competitor that has a similar ownership structure to check for red flags but I dint go any further back in time until now. so I have been doing a deep dive into every employee and their history. Most of them are from Religare. So I began looking at religare… Now here’s the problem. I heard about ranbaxy… However, I had no idea that religare was connected to that same scam since I had no deep understanding about it. In my head religare was a good company for some reason so it dint even cross my mind…

Now Mr. Shachindra nath wasn’t in the company when it broke out… He left in 2016 and the scam took place in 2017. However, he was the group ceo. Surely he would have had to have known something?
So I went deeper. I found this from 2010:

A bribery case and Mr nath was asked to comment. Fine. I then went even deeper into court records and found this:

https://indiankanoon.org/doc/46588754/

The acting ceo during the scandal Mr godhwani Saying that Mr. Nath knew about the loans but dint think they were RTPs

Now there are two ways to look at this…

  1. Mr. Nath was duped and hated the religare brothers and left the company to start his own
  2. He was in on it

Considering he managed to raise funds and hasn’t had any charges against him I’m willing to believe point 1.
After listening to him in all his interviews I really want to believe point 1 since he seemed like someone I could really get behind…
But there’s a nagging doubt about point 2 now.
I’m willing to wait even a decade for a business to flourish… I’m not willing to wait for a decade if there’s a hint of corporate governance issues though and I’m beginning to feel I understand why ugro looks too good to be true… Because maybe it is?

@Admantium you’d be the best person to ask this since you started this thread. Should we be worried about this? And when researching the company did you come across anything that could help remove this huge worry? @Rajesh1975 your input too please if possible since you were invested even before and was specifically due to the management team from Religare. Cheers

Edit:
Found this

Why would religare finvest(and religare enterprise shareholders indirectly) vote for a restructure that includes Mr nath and ugro if he too was guilty? I’m leaning towards negligence ie he believed the brothers wouldn’t steal from their own company more than anything else. There was never a case put against him and there’s no trace of him having benefitted. He was group ceo and this happened in the finvest arm which was headed by the guilty parties. Nath quit in March 2016 and the scam broke out when he was replaced with godhwani. The way I read it is he didn’t want to work for the company anymore since he must have suspected things were going wrong and he left and started his own venture. This could be a case of just a few bad apples. Willing to give him the benefit of the doubt here for now but if anyone can add anything more concrete that would be ideal.

Disc: Invested. I apologise for not doing my due diligence properly before posting on here and I hope this makes up for it. It dint even cross my mind to check the previous companies involved and for some reason religare seemed a safe company in my head. I got distracted with what a good business opportunity this looked like and should’ve looked deeper. Apologies again. Not a sebi advisor(obviously :frowning: )

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Hope you would have noticed March quarter results have been postponed from 26 May to 29 june.

Wondering why such a long postponement. Also given their tech expertise they should have declared results much earlier.

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@narenarora
With quarter results come commentary via Concalls and forward looking statements and a peak at performance during the ongoing quarter. Considering the severity of covid and the expected drop in peak by mid June postponing is the right choice since they’ll have a better idea regards the impact on their balance sheets going forward and would have better visibility by waiting and would be able to communicate better to their investors especially when it comes to this sector. They are in such an early stage that full communication is key and im glad il get a clearer picture instead of speculative one now. They’ll also be able to tell us more about how badly they’ve been hit in q1 so the later the better. Its nothing to do with tech. If they had postponed by just a few days I would have been annoyed. This looks strategic though. So this isn’t anything to be worried about imo

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@Malkd, thanks for posting about the Religare history.

The story is that Singh brothers used Religare to issue loans, and many of them ended up at shell companies owned by the Singhs or their associates.

There are four things to think about…

  1. Inside Story: How ex-promoters of Ranbaxy defrauded Religare of Rs 2,397 crore - India News is a nice read, and this excerpt caught my attention:

At the various points of time, the RBI cautioned them about Religare exposure to an unsecured loan. Reserve Bank of India, in 2012, flagged the manipulation and irregularities after an audit report but no action was taken as the top management were themselves involved in the conspiracy.

According to the details accessed, the RBI had specifically raised concerns about the promoters using their influence for disbursal of high-value unsecured loan to entities with no financial standings and this was a breach of corporate governance.

Even if the charge was after 2016, these warnings were given during Mr. Nath’s tenure. Surely the entire board, not just the Singhs would be aware of these warnings and there would have to be some discussion.

  1. This said, the business standard article you linked mentioned that the investigation surrounding the Religare loans took over a year and a half. If the investigators then found no reason to charge Mr. Nath at all, I’m wondering how much better we can do with less information. (Or perhaps just enough to establish whether it’s a safe investment) A Delhi court also said:

Applicant (Mahajan) miserably failed to discharge his duty and did not exercise due diligence amounting to criminality with respect to grant of loan by RFL to shell companies and only believed in the assurance of management and promoters for the approval of loans in respect of loan proposals.

How much of this judgement is also attributable to Mr. Nath as the group CEO?

  1. The only mention we have of Mr. Nath is from a bail application which says that he was a part of the committee that sanctioned higher ticket loans, but this committee also consists of one of the people who was charged. https://www.casemine.com/ is a more modern search engine, and all recent bail requests don’t mention Mr. Nath at all. The case you linked makes it seem like he was cooperating with the investigation.

  2. I’m thinking that Ugro would find it really difficult to raise 930Cr. and bring in marquee investors / board members if there was any hint of financial misconduct, but maybe their forensics teams could have got it wrong.


On a different note, the ratings report shared by @Admantium provides an automatic exit trigger. Let’s have a look:

In the event of non-payment by Ugro. Ugro shall execute an assignment agreement
wherein it would agree to assign the cover pool assets to […] a Trust on occurrence of a trigger event during the tenure of the facility.

The key trigger events are:

  • Failure of the Issuer to exercise or honour the call option on the Call Option Date;
  • Rating downgrade of the Issuer to BBB or below;
  • Rating downgrade of the debentures to a level of A (CE) or below;
  • Capital Adequacy of Issuer falls below 20 percent;
  • Gross NPA of Issuer exceeds 5 percent for any half yearly period;
  • Net NPA of Issuer exceeds 3 percent for any half yearly period;
  • Exit of Promoters/Change in Management Control;
  • Non-compliance of listing criteria of either equity or debt securities;
  • Issuer has defaulted in making any payments due on its financial indebtedness.

These are clearly a well defined set of monitorables going forward.


Disclosure: Have a small tracking position.

@Chins… Yup the more I read the more it seems like Mr nath would have known about the misdeeds. I really cannot understand how he managed to raise 900+ crores and that too with so many independant PE funds unless he has a totally clean chit. The problem is this will always remain at the back of one’s mind and will never go away even when ugro reaches scale since that’s when things like this can happen even more discreetly. And everytime the price crashes we ll wonder if its due to some malpractice.
I am honestly gutted by this since the thought of investing here excited me more than anything I’ve seen in the stock market. I may hold on to my 2 percent but I definitely won’t double it as I’d planned. I will be paying even more close attention to their balance sheets though and if it looks like anything is going wrong il exit. The market is smart and barely ever re rates anything which has a hint of poor corporate governance issues(again… Why would PE funds pour money here?). I really am gutted… . And il keep studying this over the weekend to find some sort of an answer… but you are right… What can we find that’s not already been found.

Disc: Invested. Not a sebi advisor.

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What makes sense now is their corporate governance model. It must have been what the PE funds insisted on when joining

Which includes approval of alco and the board for any related party loan of above 1 percent and the fully independent board includes navin puri form hdfc Bank and 10 other members of similar stature along with the way the promoters own shares. Theyve basically ensured that while Mr nath will be in charge of the operations he will not be in a position to tamper with anything(if he has ever done that before). So while I’m not sure if he was guilty before(again… Unproven) I’m pretty sure it will be difficult to replicate something similar here the way its setup.

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The case file that you linked earlier had his name spelled as Sachindra Nath, and I carried over the typo in my search thinking that was the way one spelled his name. I realised this only while reading through the old Religare annual reports. When I ran his actual name through the law database, we have one more hit:

This is one of the people who was arrested and charged. Here’s the relevant excerpt:

When the Petitioner joined RFL there was a clear understanding that RFL will remain a Retail SME Lending Company and other businesses will be demerged and taken out of this entity.

Capital Market Lending was run as a separate business for which another NBFC license was obtained from RBI under the name of Religare Finance Ltd. An announcement was also made to this effect to the entire senior management of Religare Group in February 2010 by Shachindra Nath, then Group Chief Operating Officer (COO) REL and further reiterated in the group announcement made in April 2010 by Shachindra Nath, who was by then elevated to the position of Group Chief Executive Officer (CEO)

Under his guidance and supervision the SME business loan book grew from Rs. 264 Cr. in 2009 to Rs.15,976 Cr in 2016. The total Revenue on the other hand grew from Rs.11 Cr. in 2009 to Rs.2,062 Cr. in 2016. However, not a single loan transaction under the SME business has come under any kind of scanner or investigation by the RBI and neither has been questioned in the investigation in the present case. In fact, while the Petitioners mandate was to handle the new SME lending business, it was the REL team responsible for managing the already existing Inter-Corporate Deposit (Later named as CLB) and loan against shares business, which were never under the control and supervision of the Petitioner, and in respect of which the Respondent has instituted the said criminal proceedings in the aforementioned F.I.R.

All the people who have been arrested say the same things; that the loans were never under their purview. Secondly, there’s a direct contradiction between the news article that spoke about the RBI warnings and this statement, but these are words said during a legal defense and are most definitely biased.


The Religare mission statement from their annual reports is enough to make one distrust any piece of document written by a company:

The Godhwani bail plea sheds some light on how this was all possible:

REL and RFL both had a distinct boards comprising of members majorly including relatives and friends (especially father in law of MMS-Sh. Harpal Singh) of the promoters who were always there to watch the interest of the erstwhile promoters MMS & SMS, and MMS/SMS have been stepping in and out of the board of different companies under the brand `RELIGARE’ as per their wishes and fancies.

On your recent post, the fact that they have these measures is comforting to a degree, but it brings with it the tradeoff that Mr. Nath can’t make decisions alone. We’ve seen with IDFC First Bank how certain goals/policies have changed recently while needing to cater to promoters, and the governance framework at Ugro is open to the same problems.

As investors we always have the benefit of watching a company over time, and we’ve arrived at Chapter 1 knowing what to watch for. There’s time to put all of these questions to the management. However, what bothers me is that ultimately this happened under his watch. One could talk about the complex nature of many subsidiaries, different boards and politics within it, his possible guilt vs negligence… At the end of the day, this happened under him, and the worry is of the ability to be cognizant of bad apples within the organisation. Perhaps this warrants a discussion on the people brought in from the RBI and SEBI.

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Hi, I was intrigued by you comment here for IDFC…“We’ve seen with IDFC First Bank how certain goals/policies have changed recently while needing to cater to promoters, and the governance framework at Ugro is open to the same problems”

Could you please elaborate a bit more on the IDFC changes you have noticed !?
Thanks

Thanks @Chins. Fantastic work. I rewatched all of mr naths interviews again. In context it all makes sense now regards why he talks about institutions acting responsibly both socially and financially so much and why he talks about corporate governance so much. There is the optimist in me that’s looking at the whole scenario in this manner… There is no way he dint know about what was going on but the way the system was setup and rigged in the favor of the brothers there was nothing he could actually do about it. Sometimes a thief can be so good that the victim looks at fault.
So he quit and decided to start his own company from the grounds up and set it up in such a manner that it would be difficult for anyone to replicate what happened at religare.
The fact so many employees from Religare followed him makes it look like all of them thought the same way and why would they leave the frying pan for the fire?
He did not want it private… Going public doesn’t make you safe obviously but it straight away included a lot more checks and balances. He brought PE funds on board and gave them majority share and it isn’t easy to do this if he had a hint of corruption. This way there’s no one major promoter running around and the structure is similar to what an hdfc Bank owould have where in its more of everybody’s entity and in control of no-one person but someone steers the ship in the required direction.
He also set up independant boards and setup the structure such that even he and his employees can’t mess with shares or loans.
This looks like a man who has seen the dark side of companies and is trying his best to set one up for the future such that what he has seen previously cannot be replicated again. Even one misstep would put his entire history under a microscope again and destroy his name in the industry.
He also looks like someone who is trying to rebuild his name, make people notice his work and not conjecture about his past and correct religares mistakes towards their shareholders… And this could be the biggest skin in the game anyone could have. The fact religare finvest shareholders proposed ugro take over their company just shows that even the religare current board trusts him even after all the madness that occurred.
All this doesn’t look like a corrupt man looking for his next gig.

I’m willing to give him the benefit of the doubt but as an investment this has become even more trouble than it could be worth since there’s already so much execution risk here.
There are so many variables to track and so many things that could go wrong… And now there’s an added layer of corporate governance issues and mistrust in the jockey.

Disc: same as above but somewhat begrudgingly so. Not a sebi advisor

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