This is an interesting story about a listed company in India. First let me tell you something about its history before we come to the real story.
The company was a BFSI focused IT products Company doing really well in its business. But as with most of the companies/promoters, the hunger for growth and large size, led the company to do lot of debt funded acquisitions which backfired. Company had to resort to debt restructuring and eventually banks/lenders took control of the company. In spite of repeated efforts, debt woes could not be solved and hence lenders decided to sell the cream of the business (software product) to a private equity player for recovery of their dues. Finally, post the sale of software product business, debt woes abated and company started looking to the future positively but with poor quality IT services business left in it and without any promoter, given that most of the shares were with lenders.
The real story begins with appointment of the new MD and CEO. We will call him Mr. A. The task of Mr. A is to take the company to the next level and he is given free hand to adopt his own strategies. The quality of business left with the company is really bad and Mr. A has a tough job at hand. Mr. A is an extremely intelligent and energetic person. If anyone can do the task, it seems like, he is the one. However there is a problem. Mr Buffet once said “In looking for people to hire, look for three qualities: integrity, intelligence and energy. And if they don’t have the first, the other two will kill you.” This seems to be perfect example of his saying. Let me prove my point.
The company had around 9.5cr number of stock options with strike price of INR 10 per share. However, Mr. A realized that it would be really hard for the stock options to turn profitable (given the quality of the business) and it was legally not possible to revise the strike price downwards. So he used his intelligence to do a financial miracle.
He got regulatory approvals for scheme of consolidation/reduction of shares. Under the scheme, holders of 10 shares of the company, got 1 share of the company, resulting in total number of shares reducing by 90%. But this reduction/consolidation, do not have any impact on total real value of the company. Hence, same value of the company is now divided into lower number of shares, resulting in market price per share being substantially higher than it was before the scheme. Prevailing legal rules mandates reduction in number of stock options proportionate to reduction in number of shares pursuant to the scheme but they do not mandate adjustment to the strike price. Now, as a result of this scheme the senior management including MD has fewer stock options (95lacs instead of 9.5crs) but all of them are profitable because share price is substantially higher due to reduction of capital. Instead of having large number of unprofitable stock options, senior management have lesser but highly profitable stock options. As per my calculation, total profit on all the stock options now stands at around 23crs!! Had the management not done this financial jugglery, stock option would have been under the money by 62crs!! Stock option are supposed to generate money when the real value of the company increases but in this case, options turned profitable without any change in real value. This is an amazing financial jugglery to make money out of nothing.
But, this is just one of many red flags. There are frequent write offs in the books of the company in spite of repeated claims of “all is done”. There are accounting changes to just show artificial profits without real money. List is long.
Given, that most of the shareholding is with lenders who have mindset of recovering only their loans (which they have already), they do not care much about what’s exactly happening in the company. The real sufferers as always are minority shareholders. Its “buyers beware” market and it will always be like that.
