Investor FRAUD at Piramal Healthcare

Posted on May 10, 2011

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At first one didn’t believe it! This is one of the BEST managed groups with very high standards of corporate governance and ethics. An icon for Indian business promoters.

And then I chanced upon this post in Capital Mind, a reputed blog by a respected professional, Deepak Shenoy

here are a few extracts-

Piramal Healthcare has been in the news recently for having sold their formulations division to Abbott, for about 17,000 crores.

With the cash, they bought back about 4 crore shares out of the 20 odd crore shares they had outstanding (20% buyback) at Rs. 600 per share, so they spent about 2,400 crores there. After that, and taxes, they’re left with about Rs. 11,000 crores in cash. This adds up to cash per share (of the remaining 17 crore shares) of Rs. 650 or so.

The current share price is Rs. 421. Looks like a great opportunity, no? Wait.

Today they announced in a board meeting that:

  • Piramal Healthcare (PIRHEALTH) will buy two promoter owned companies in the real estate investment management space for 225 crores.
  • They would also buy a division of Piramal Life (another company promoted by the Piramals) at an equity swap rate of 1 PIRHEALTH share for every four PIRLIFE shares.
  • PIRHEALTH will set up a company in the financial services space with a seed fund of 1000 crores.
  • They’ll pay a dividend of Rs. 12 per share.

After screaming “FRAUD!” (my first reaction), I think we should analyze the action in some detail. It’s not as bad as it sounds. Especially since the stock has fallen 8% – or 40 rupees – today. That’s a market cap reduction of Rs. 650 crores. Does this make sense.

and then again!

Promoter Company Buys

PIRHEALTH is buying out two companies – Indiareit Fund Advisors Pvt. Ltd. and Indiareit Investment Management. Together, they manage about 3,800 crores of real estate assets, and they’re getting 6% of assets as the price.  Assuming they charge 2% of assets as mgmt fees, it’s 3x revenue, not counting any profit share.

Promoter purchases are usually linked to promoters siphoning off cash from the company. But the 225 crores is like 2% of the overall cash available and less than Rs. 15 a share. That’s piddly. Tiny. Very small. Yes if they did 20 or 30 such buys one might be worried, but one shouldn’t hurt so much.

not to be outdone: here are a few comments from the same blog

first one asking the question– “I know a few financial deals with the Piramals from the past where things have been, er, a little murky, so I’m a little skeptical here”
can u elaborate on this point/give some links? because as far as i searched i could not anything like tat….

Regards
Jagadees

second one answering, well almost- if Piramals are doing own development business and also fund management business it should be a cause of concern for the retail investors in the funds because Piramal as controlling shareholder of the funds can influence investment decisions and can divert attractive deals to own business. World-over investors dislike such conflicts and like to invest with independent fund managers. 
No wonder the stock tanked, the market knows when there’s a promoter making a quick buck, and when they are actually creating value.

The market knows these things, and discounts such news, but isn’t it time there were some regulations for guarding the interests of minority shareholders in such cases? is SEBI listening?

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Posted in: Investor concerns