labels: finance - general, investment - general, stock markets - india, markets - general
Games promoters playnews
Rex Mathew
28 March 2005

Massive media campaigns by small companies about their financial performance should be viewed with suspicion. They are designed to mislead you.

Before the '90s even in the '90s when the Indian stock market came into its own, promoters who manipulated share prices were considered market- friendly and even admired. Stocks of such companies were the favourites of investors and traders alike. Many large and respected industrial houses were masters of this game. The few corporate groups who stayed out were considered conservative. With hardly any restrictions on insider trading, such promoters had a free run till SEBI came around and made life tougher for them by controlling insider trading and imposing better disclosure standards.

The ever increasing influence of foreign investors and the emergence of private domestic mutual funds, who do not view market manipulation very kindly, have forced the managements of many frontline companies to change their functioning. But companies and managements at the bottom of the ladder remain more or less the same. Despite all the regulations introduced by SEBI and better monitoring by the exchanges, they continue to indulge in questionable practices and profit from them. Many of them have devised ingenious and clever methods to remain on the right side of the law even when their intentions are questionable.

Those who watch business television channels regularly, would have noticed a sudden increase in advertisements by obscure companies ever since the market started moving up. These advertisements are not about the products or services marketed by these companies but about the companies themselves.

There is nothing wrong in corporate advertisements as long as they stick to general information about companies. But when they start talking only about financial performance and orders in hand, doubts arise about the purpose of such advertisements and who the target audiences are. The fact that such advertisements are absent when the market is weak reinforces doubts about them.

These are companies which not many people have heard of or know about. Very often they are very small with sales of a few crore and profits in lakhs. The advertisements usually talk about the astounding growth rates in their sales, profits and, sometimes, even misleading figures of earnings per share. They often mention increases in sales and profitability in percentage terms to hide their miniscule absolute numbers - an increase in sales from Rs2 crore to Rs3 crore and profit from Rs10 lakh to Rs20 lakh would be presented as sales growth of 50 per cent and profit growth of 100 per cent!

The ads also list the impressive line of customers and orders received from them. Now an order for Rs1 crore may not sound very impressive, so they present it as Rs10 million, which sounds more impressive than a mere crore to investors not used to the western numeric system.

Recently, there was an advertisement by a small sugar company based in a northern state, which is not a traditional sugar growing area. The ad featured the promoter himself, talking highly about the company and its future plans. Sugar stocks, as a sector, have seen tremendous appreciation in their stock prices in the recent past. But somehow, this company's stock had not moved as much as some of the other stocks in the same sector. Now this is a profitable company but too small when compared to others. After the ads came out the stock started moving up. What did the promoter do? He promptly sold millions of shares in the market and made some quick money. One can understand it when a promoter sells some shares to meet personal needs. But why would he sell so much if he is so confident about the company?

Many companies carry out advertisements announcing their financial results in the print media as well. During the results season, leading financial newspapers see many small companies coming out with large advertisements. As per guidelines a company has to its issue financial results in a newspaper within 48 hours of the board meeting approving the results.

To keep repeating the ads, some companies add a footnote, 'this is not a statutory release'. These ads go much beyond results and talk about new order wins, future plans, preferential allotment to strategic investors, technological tie-ups, etc. Making matters more curious ads are released months after such orders or strategic tie-ups actually take place.

Recently a small company, supposedly engaged in manufacturing telecom equipment, has been running an aggressive campaign in all the leading financial dailies. One such ad announced that a company, with a strikingly similar name to one of the largest Indian corporate houses, was picking up a strategic stake. The Nigerian identity of the investing company was mentioned almost like a footnote. The stock of the company in question has turned highly volatile with large trading volumes.

Similarly, a Southern Indian company, claiming to offer a wide range of telecom services including BPO solutions, seems to have mastered the art of getting its press releases published easily. Till recently, one could see a press release every other day about fresh orders from reputed companies. This stock also saw extreme price swings and high volumes. Unfortunately for investors who bought the stock, the company could not achieve more than a couple of crore in sales even with those orders.

It helps that many of these shares have a face value of Rs1 or Rs2, quoting in single digits. This gives a completely false notion of an under-priced scrip to the retail investors about these shares being cheap. Many investors do not check the face values in the frenzy, not realising that a share with a face value of Rs1quoting at Rs5 is the same as a Rs10 share quoting at Rs50. 'If it is quoting at Rs5 it should be cheap' goes the reasoning , attracting them to the scrip.

Don't shareholders, other than promoters, also benefit if the share price moves up because of such advertisements? In theory yes, but in reality the majority of lay investors are not smart enough to cash out at the right time. Those investors who buy the shares after seeing the ads are worse off as they lose heavily when the prices go back to earlier levels. The worst part is that it is the company, partly owned by the retail shareholders, which paid for the advertisement and the promoter who reaped the benefit.

If promoters sell a substantial part of their existing holdings to take advantage of a surge in stock price, their stake in the company would go down. Risk of a very low promoter stake should logically dissuade them from heavy selling. But promoters do not have such worries in the new liberalised world as they have the absolute freedom to issue warrants and make preferential allotments to themselves at any time of their choosing.

Such issues do not involve any immediate cash outflow for the promoters as the warrants are converted some time in future. At the same time their aggregate shareholding, including the outstanding warrants, remains high even if they sell a part of their current stake in the market. SEBI or any other authority has no control over this practice.

So what can you, a small investor, do when you see such advertisements? If you are have the time and resources to probe the stock and the company, then do it before you invest. And if perchance you do stumble upon a rare gem in the clutter of worthless stocks then invest if you are convinced about it. But the safe and sensible thing to do is stay away from such stocks.

*A professional cost accountant, the author is a stock analyst and indepenent market trader

Disclaimer: The author doesn't have any position in the stocks specifically mentioned above at the time of writing this article. This analysis/report is only for the purpose of information and is not an investment advice. Readers are advised to consult a certified financial advisor before taking any investment decisions. While efforts have been made to ensure the accuracy of the information provided in the content the author or publisher shall not be held responsible for any loss caused to any person whatsoever.

also see : The lurking danger of a small stock bubble
Manipulated equity research reports

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