Caveat Emptor

Dummy Industries Ltd. is a company in paper manufacturing business. The company was earlier listed on some regional stock exchanges but got listed on BSE sometime in 201X. Due to location of its plants, judicious use of agri-waste, backward integration and large proportion of sales to state boards, its operations are extremely efficient and profitable, as compared to many competing paper companies. From a competitive positioning, this company would look extremely strong to any diligent and careful investor. You will also not find any material related party transactions to be worried about. Financial statements also look clean and there are no signs of manipulation. But, here comes the googly. Promoters are selling and public seems unaware that they are!!

The company was started by Mr. AS way back in 1990s. Mr. AS has 2 sons, Mr. CS and Mr. DS. Mr. CS is completely involved in this paper business while Mr. DS has its own unlisted textile business. The textile business of Mr. DS has expanded over time and I wondered how he managed to get all the capital for the expansion given cash guzzling operations of his textile business.

Dummy Industries Ltd. has group of 5 shareholders in form of companies. These corporate shareholders are in turn owned by Mr. G, S, RG and RK (collectively called as Shadow Shareholders). But following facts indicate that these corporate shareholders are nothing but just the front of the promoters.

1. Pre 2018, these corporate shareholders of Dummy Industries Ltd. were partially owned by Mr. AS and his family members and post 2018, the stakes were transferred to these four shadow shareholders
2. These corporate shareholders have directors who are also associated with Dummy Industries Ltd., its promoters and connected entities
3. RK is an employee in textile business of Mr. DS

But what substantially establishes the relationship with promoter family is the flow of money. These corporate shareholders are selling their shareholding in Dummy Industries Ltd. in open market to public shareholders since last few years. The money generated from the sale of these shares is being invested into textile business of Mr. DS in form of equity/debt instruments. Clearly, the promoters are selling stake in the company through its shadows to finance the textile business of one of the family members.

Public must know about promoter selling in open market but the shadow shareholding masks the liability for disclosures. At one time, these shadow corporate shareholders owned 41% of the company which has now come down to 15%. No wonder share price has gone nowhere since last 3-4 years due to the heavy selling by shadows of the promoters.

What can I say except Caveat emptor!!