Penny stocks: Buy a pig in a poke
Industry grows 3.8% in May
Golden rules for postal privatisation
Essar Steel to consider loan-equity conversion
Sebi supersedes UP stock exchange board
GE Shipping plans to raise $ 140 m for fleet expansion
Planners root for bigger public investment
A dash of RBI sweetener to tea loans
Crisil poser on India Inc accounting practices
Foreign Exchange, Bullion, Stock Indices

Mumbai, July 12: 
Pigs go bottom fishing — that sums up a recent trend on bourses where gullible investors are being beguiled into buying cheap, often dud, shares by operators preying on the urge to make a fast buck.

Penny stocks, as they are called in the market, are peddled at the height of a rally but often turn into a worthless sheaf of paper once the stock surge peters out.

Investors who missed the rally in mid-caps are looking at such bargains to make some quick money. At their peak, they would have been out of small investors’ each.

The penny stocks take off from where the mid caps left. Investors fall for them because they are dirt cheap and high on volumes. Crafty operators pushing these stocks into investors’ portfolio do everything possible to make sure they are traded briskly and remain on the boil.

That is going to change soon, though. The Securities and Exchange Board of India (Sebi) and bourses have geared up to make it difficult for operators and brokers to carry on with this game of deception.

In a circular issued on Thursday, the Bombay Stock Exchange (BSE) has warned investors against companies that come out with a rash of bonus issues and whose shares are quoted at ridiculously low prices.

The exchange said it is viewing with concern the rising number of announcements related to buyback and bonus issues. Members and investors have been asked to check the credentials of a firm before taking the plunge.

Sebi has also made it compulsory for deals in 13 scrips to be executed on a trade-to-trade basis, meaning all transactions would have to be backed by delivery. This has sparked fears of a contraction in volumes. The measures have been announced to limit speculation and keep investors from being ambushed by operators.

Moh Limited, Manna glass, Nexus, Rashil Agro, Rinki Petro, Sound Craft, Sun Info, Vatsa Education, Esatr Info, SMR Unisoft, Accurate Exports, Amtek Auto, Database Fin, Fourth Gen, Genisus Commn, Guffuc Bio and Media Matrix are among the penny stocks. Trading data for some of them have confounded experts. For instance, the Ishwar Medi scrip clocks an average a volume of 35-55 lakh every day.

The likes of Transgene Biotech, which disappeared after the 2000 rally, have made a comeback; the share is clocking healthy volumes and trading at Rs 10, up from its 52-week low of Rs 2.

“It is prudent to avoid scrips of firms with unknown fundamentals,” says a fund manager affiliated to a prominent stock brokerage. The movement in penny stocks, he says, is the best indicator of how active the small investor is.

The chaotic activity in most of these stocks have forced many small investors to plunge headlong into these stocks.

Barring a few, most stocks in the mid and small-cap segments are no longer attractive from a short-term view, say analysts.

However, every rally would witness new entrants as the stocks change hands at higher rates with the seller laughing away to the bank. The buyer, if one is lucky enough, looks for a new sucker.


New Delhi, July 12: 
Recovery is well and truly on its way — and for the first time there are indications of a turnaround in the troubled manufacturing sector.

The Central Statistical Organisation has reported a 3.8 per cent increase in industrial production in May compared with 1.7 per cent in the same month last year.

The recovery in the manufacturing sector is significant as this could lead to an overall industrial revival. The sector, which accounts for two-third weightage in the Index of Industrial Production (IIP), grew 3.7 per cent compared with 1.8 per cent last year, the Quick Estimates of IIP released by the CSO stated.

During the first two months of the current financial year (April-May) too, the industry grew 3.8 per cent over 2.1 per cent growth registered in the corresponding period last year.

In the manufacturing sector, the recovery has come mainly in the basic goods and consumer non-durables categories. Basic goods registered a growth of 4.7 per cent in May this year as against 1.3 per cent last year while the cumulative growth stood at 4.2 per cent and 2.6 per cent during first two months of this year and last year.

The good performance in the consumer goods segment was mainly due to high growth registered by the consumer non-durables at 12.3 per cent in May compared with 1.4 per cent last year. The consumer durables segment, however, registered a negative growth of 1.2 per cent over 7.1 per cent last year.

The mining sector also grew significantly at 7 per cent during May compared with a negative growth of 0.5 per cent in the same month last year. The cumulative growth in the first two months stood at 5.6 per cent over 1.4 per cent in 2001-02.

The electricity sector, however, witnessed a decline of 2.4 per cent compared with 3 per cent during May while the two-month growth was up at 3.8 per cent as against 2.2 per cent last year.

The first two-month growth also in consumer durables plunged to 2.2 per cent this year over 6.8 per cent in the same period last year. The cumulative growth in the consumer non-durables stood at 10.6 per cent as against 1.6 per cent last year.

The intermediate goods segment also registered a decline and posted a negative growth of 0.4 per cent over 2.6 per cent during May. Capital goods registered a growth of 0.6 per cent in May compared with a negative growth of 3.9 per cent last year and the cumulative growth improved marginally but remained negative at 0.4 per cent against the negative growth of 4.1 per cent last year, the CSO figures said.


New Delhi, July 12: 
The industry has asked the government not to botch up the eventual privatisation of the postal department and that it should learn from the mistakes that were made in the power and telecom sectors.

It has also suggested a separate regulator for the postal system and separation of ownership and policy-making functions from operations of the government-owned utilities. This model already exists in power and telecom sectors and can be replicated in the postal department.

The trend since the early nineties in the utility regulation has been to separate ownership and operation, as in telecom and electricity, and set up an independent regulator to license operators and prescribe standards of service.

With the Indian Postal Office (Amendment Bill, 2002) likely to be discussed in Parliament, the Federation of Indian Chambers of Commerce and Industry (Ficci) has sent a letter to communications minister Pramod Mahajan urging him to reconsider a few vital issues and incorporate their suggestions in the Bill. The amendment Bill proposes more changes in the Indian Post Office Act, 1898.

“The proposed Post Office (Amendment) Bill 2002 does not make provision for this elementary separation. The operating arm of the post, which should have been treated as a deemed registered body, has been confused with and treated as the central government itself, short of establishing an independent regulatory body,” says the Ficci letter sent to Mahajan.

“The least that should have been done was to separate the regulatory functions of the government to another ministry or department. If the secretary to the government in the department of posts is the head of the operating arm, it will neither be equitable nor fair that an appeal against the order of suspension of revocation of registration should lie with him,” it added.

Ficci has urged that instead of a Bill to further amend the Indian Post Office Act of 1898, it should have been a Bill to replace it. It has suggested that the title of the Bill should be changed to Indian Postal and Express Services (Operation and Regulation) Act 2002.

“This is most appropriate since operation and regulation of the government-owned-and-operated post office and the couriers are proposed to be regulated,” sources in the chamber said.

While recognising the existence and operation of the courier industry, which has grown without government help or regulation, the Bill seeks to introduce control of the incumbent dominant operator over the courier industry through the provision of registration.


Mumbai, July 12: 
Essar Steel will consider a proposal to convert loans given by promoters and other unsecured creditors into equity at its July 19 board meeting.

The company wrote to exchanges today that its board of directors will consider the unaudited financial results for the quarter ended June 30 and the loan-to-equity swap.

Officials did not give details of the move, including the price at which these loans would be converted into equity. Insisting that giving away more at this stage would not be proper because the board is yet to take a decision. “The move will strengthen the company’s balance sheet,” sources close to Essar Steel pointed out.

Sources said the bulk of these funds were brought in by the promoters in 1998 after financial institutions, which have an exposure of over Rs 1,500 crore to the company, asked them to do so. If the loans are indeed converted, the Ruias’ holding in Essar Steel, which currently stands at a little more than 37 per cent, may go up.

This move comes at a time when domestic steel prices have shown an upward trend and companies have jacked up prices three times in as many months. Many expect the upsurge, which comes after a long spell of depressed global steel prices, to last till the year-end.

In the late 90s, steel companies were hit by falling realisations, surplus supply, lacklustre growth rate in domestic consumption and lower-than-anticipated demand.

At a time when the industry was reeling under such a price regime, Essar Steel had initiated various steps including divestment of the power investments, spin-off of its pellet business to a joint venture company, cost reduction, equity infusion with a view to strengthen the balance sheet and provide a sharper focus to the business.

Analysts point out that these measures undertaken in the past have yielded positive results, even as the huge debt in its books is a matter of concern.


Mumbai, July 12: 
The Securities and Exchange Board of India today superseded the board of Uttar Pradesh Stock Exchange Association Ltd (UPSE) for irregularities and appointed M.N. Sabharwal, a retired IPS officer, as its administrator.

A Sebi release said the exchange was superseded under section 11 of the Securities Contracts (regulation) Act, 1956, (SCRA) following several complaints from the public, directors of the exchange, its own nominees and its own inspection reports.

This is the third stock exchange after Magadh and Pune to be superseded for irregularities.

Sebi said some of the irregularities cited by the inspection reports were alleged unauthorised carryforward transactions, continued non-compliance of Sebi directives, interference by elected directors and brokers in the functioning of the exchange and preventing the executive director from discharging his functions effectively.

There were also delays by UPSE in considering and redressing deficiencies pointed out in its inspection reports and forwarding compliance reports, board meetings not being conducted as per rules and not rectifying the lacunae existing in the trading software and settlement mechanism.

Sebi was of the view that it was essential to adopt immediate measures so as to ensure the safety and integrity of UPSE, transactions on the exchange were carried out as per the regulatory framework and interest of investors was not jeopardised further.

Sebi said following these deficiencies, it had issued a notice to the UPSE board on September 3 last year, asking it as to why the exchange should not be superseded.

They were given a hearing on November 19 and March 15 this year.

Thereafter on March 26, in a letter, Sebi called upon the exchange to inter alia comply with the conditions and submit a compliance report within one month failing which Sebi would be constrained to take such measures as it deem fit, including supersession.

Subsequently, Sebi again in a letter on May 17 informed UPSE that since the undertaking given by it pertaining to the conditions as directed by Sebi in its letter dated March 26 were found to be unsatisfactory, Sebi would be constrained to take action against the exchange which might include supersession of the board.

However, the board did not rectify or address these issues and failed to ensure proper governance, implementation of provisions of SCRAS as well as rules and notifications issued thereunder, byelaws of exchange and Sebi directives.

Besides, the president and vice-president, who were brokers have not resigned from their posts despite the clear directives of Sebi and the exchange appointed the executive director without prior approval of Sebi and have not made him quit despite several communications both verbal and written by Sebi.


Calcutta, July 12: 
Great Eastern Shipping Ltd, the second largest shipping line in the country, has decided to raise $ 140 million through the external commercial borrowing (ECB) route to part finance its fleet expansion programme. The company will acquire two Aframax crude carriers and two product carriers in the next financial year.

Confirming the move, company sources said the new add-ons would help the company control a larger market share in the global movement of crude and petroleum products’ derivatives

“More importantly, the domestic demand for the crude and petroleum products too will rise substantially following the deregulation of the oil sector. This has thrown up a new challenge as well as strong business prospects for companies like us,” they said. The company already has two Aframax and seven medium range product tankers besides one Suezmax.

Sources pointed out that the $ 140-million fund, the company is planning to raise, has already been committed. “We will take the fund at the time of delivery of the vessels in order to avoid unnecessary interest,” they said.

The company has already placed orders with Hanjim Heavy Industries of Korea for the two product carriers.

While one product carrier will be supplied in January, the other one will come in April next year. For the Aframax crude carriers, orders have been placed with Sambo Heavy Industries and Samsung Shipbuilding. Sambo will supply the vessel in May and Samsung will supply in January 2004.

Both the Aframax have a capacity of 105.50 DWT (dead weight tonne) each while the product carrier will have a capacity of 45.50 DWT each.

A senior GE Shipping executive said the crude and product carrying capacity of the company would increase appreciably once the new vessels come to its fold.

The company is also in the fray for Shipping Corporation of India (SCI) which has been put on the block by the government. But, even if SCI does not come into our fold, we have no problem handling the rising demand in domestic oil sector as we are getting ourselves prepared for it, he said.


New Delhi, July 12: 
Pump-priming talk is back in the air. The Planning Commission today emphasised that the government will have to ratchet up public investment in at least the first few years of the Tenth Plan if it is serious about achieving the goal of 8 per cent growth.

“The Tenth Plan target can only be met if there is a strong revival of demand which, in turn, needs capital investments. Due to high unutilised capacity at present, private investment will require more time to rise to the desired levels,” Planning Commission deputy chairman K.C Pant said at his first formal meeting with the new finance minister Jaswant Singh.

The plan panel chief said the government would have to provide for higher gross budgetary support. “Even in the later stage, public investment would be needed both to sustain the level of aggregate demand and provide the necessary infrastructure capacities,” he added.

Pant also briefed the new finance minister about the pressure on the savings of the government, both Centre and states, and urged him to take measures for better tax administration to increase the tax-GDP ratio. He also emphasised the need for state-level reforms.

The Centre has already taken initiatives like fiscal reforms facility, accelerated power development and reform programme, accelerated irrigation benefit programme, development and reform facility and urban development facility. Pant also drew attention to the inter-state barriers to trade in the form of entry taxes levied by the government.

“These measures seriously restrict the creation of an economic space within the country and thereby retard economic activity. The economic impact is damaging as the country liberalises its external economic relations further,” he said.

He stressed the need for both finance ministry and Planning Commission to work together to ensure that such measures are not rolled back. He suggested faster creation of nationwide VAT to create a common economic space for Indian firms.

DRF for laggards

The development and reform facility (DRF) will primarily focus at the developmental programmes and policies to accelerate growth for backward areas which would help reduce imbalances.


Calcutta, July 12: 
The Reserve Bank of India (RBI) has set up a committee that will work out a restructuring package for the slump-scarred tea industry.

The panel was formed after a meeting between the Reserve Bank and members of the Indian tea industry on July 10. The conclave was also attended by the representatives of different banks like Uco, United Bank of India, State Bank of India, Syndicate Bank and others.

A restructuring package will be presented in two weeks by the panel, which comprises members of different banks, representatives of the Tea Board, members of the Consultative Committee of Planters’ Association and representatives of the South Indian tea industry.

“The tea industry needs some relief immediately for its survival. We have submitted our proposal to the Reserve Bank. We hope that we will get some breather from banks and financial institutions,” Indian Tea Association chairman Bharat Bajoria told The Telegraph.

On the top of the list is a demand for rescheduling loans (more time to repay), a waiver of interest rate and a moratorium on interest payment. In addition, there is a clamour for cheaper loans from banks and FIs.

“Most estates in India have ageing tea bushes. They must be replaced with new ones. But it takes at least five to seven years for the first crop. Therefore, the gestation period for getting a return is quite long. Therefore, we have asked for a subsidised loan so that the industry does not become burdened,” tea industry officials said.

Executives said companies are struggling to service loans taken earlier from banks and FIs at higher rates of interest, especially as the cost of money is falling now. Some of these loans were contracted at rates of 16-17 per cent. “We have asked banks to bring down the interest rate at least by 4 per cent,” the officials said.

Tea companies in the south have been the worst hit in recent times, having to sell their output at prices which are below their cost of production and fight for survival.

The outlook for tea companies in the north is not bright either. According to Bajoria, prices at auctions are down Rs 15-Rs 16 per kg over the previous year. In fact, average auction prices at Calcutta during the period January to May was Rs 55 per kg against Rs 74.84 per kg in the corresponding period of the previous year.

The ITA chairman said prices are expected to stabilise between October and December. What has made things worse is that the price fetched by companies is falling even as the cost of production is rising substantially. “In this situation, we need a financial breather at the earliest,” veterans of the tea industry said.


Mumbai, July 12: 
Global Data Services, a wholly-owned subsidiary of credit rating agency Crisil, has blown the whistle on profit-padding practices of India Inc—and it doesn’t look pretty.

GDS, which specialises in balancesheet analysis, has panned the accounting practices of companies in India and found that 139 companies resorted to perfectly legit window-dressing methods to overstate profits.

The caveat first: “We are looking at balancesheets with an analytical perspective. We are not disputing anything signed by the company’s auditors. They are 100 per cent legal,” says Madhu Dubhashi of GDS.

So what is the brouhaha all about? GDS has discovered that several Indian companies have been merrily dipping into their general and special reserves to conceal expenses that would have otherwise shown up on their profit and loss accounts.

The result: they are able to keep these expenses out of the ken and state higher profits than what they might have otherwise stated.

Some of the biggest companies in India (see chart alongside) have had no qualms about dipping into reserves, showing investments in other companies as fixed assets on their books, and handing out loans to subsidiaries that are capitalised against future equity in the subsidiary.

Accounting practices all over the world have come under the scanner after a rash of US giants like Enron, Dynegy, Merck and Bristol Myers Squibb have been charged with using sharp practices to overstate profits.

“Too many corporate managers, auditors and analysts are participating in a game of nods and winks and, in the zeal to satisfy consensus earnings and estimates and project a smooth earnings path, wishful thinking may be winning the day over faithful representation,” says Arthur Levitt, former chief of the US market watchdog, Securities and Exchange Commission.

But while US accounting practices have come under the scanner, the Indian practices have not because they give companies a fair latitude in representing their accounts.

What this means is that the basis for comparison between the accounts of two companies in the same sector may become difficult because of the differing accounting methods that they might be using.

“The adjustments, though in accordance with the law, sometimes violate the spirit of the law,” says Dubashai. “Our intention is not to find fault but to restate the accounts in a manner that we feel gives a clearer picture of the company’s financial health.”

Not everyone feels the same way: R.C. Nandrajog, vice-president (finance) of Tata Steel, rebutted the findings of the study. “We have strictly followed the accounting standards and operated within the norms specified in the Companies Act. Where is the problem?”

There are several reasons why companies overstate profits. It brings down borrowing costs, improves the credit terms from suppliers and lenders and also directly overstate profits.

Others like Century Textiles understated profits by taking on board prior period adjustments. Several companies clean up their accounts when the markets are down so that they can catch the upwind when the market sentiment turns around.

Bombay Dyeing deducted loss on sale of investments directly from investment reserves instead of from the profit and loss account so as not to alter earnings per share (EPS).

Reliance Industries had shown incentives from the state government (like sales tax deferrals etc.) as income and not as capital subsidy, though there is nothing irregular about it.

GTC Industries showed its property time-sharing units as fixed assets and not as investments.

BPL Refrigeration went one better: it showed designs, drawings and product development, brand, and trademarks as tangible assets.

There have been criticisms about the accounting practices in India in the past. The Chartered Financial Analyst says in its March issue: “Those glossy annual reports, which investors looked forward to year after year, have more fiction than facts to tell. This negates the very purpose of corporate communication to the outside world.”

However, chartered accountants believe that everything is above board.

Says Shailesh Haribhakti: “I think auditors in India have been more strict in compliance with the Generally Accepted Accounting Practices (GAAP). Our legal framework and our regulatory environment have exercised strong restraint on mis-statement of profits. There is no cause for anxiety.”



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