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Sebi order against promoters puts question
mark on corporate governance…
The Securities & Exchange Board of India (Sebi) has banned the
promoters and promoter entities of Welspun Corp from trading in their
own and group companies’ shares. The directions were issued under
section 11 of the Sebi Act.
As per the Income Tax department, there was an agreement between
entities promoted by Sanjay Dangi and dummy companies promoted by
the promoters of Welspun Gujarat to rig the share price prior to the
FCCB, ADR/GDR, QIP placement, preferential allotment or loans and
pledge or revocation of promoter shares.
The regulator barred the promoters and group companies of Welspun
Corporation from dealing in their shares till further notice. This was due
to collusion with share trader Sanjay Dangi and his associates and the
Ashika Group in rigging the stock price of their respective companies.
It emerged in the preliminary examination by Sebi that Welspun had
raised funds through QIP/FCCBs during 2007-2009. Also, the Dangi group
had been observed to be trading substantially in the shares of these
companies around the same period. In addition, the entities related to the
promoter/promoter group of the identified companies viz. Welspun, were
also trading in the shares of their respective companies.
Welspun Trading Ltd (one of the promoters of Welspun) had a stake in
Dangi group entities viz. Amit Business Ltd, Pacific Corporate Services
Ltd and Ivory Consultants Pvt Ltd. Another promoter entity, GRG
Cosmetics Ltd had a stake in Amit Business Ltd (now merged with Pacific
Corporate Services Ltd), a Dangi group entity.
The Dangi group entities traded through a large number of stock brokers.
The primary among them were Ashika Stock Broking Ltd, Sanchay
Fincom Ltd/ Sanchay Finvest Ltd and Systematix Shares & Stocks India
Ltd/Systematix Shares & Stock Brokers Ltd, Anand Rathi Financial
Services Ltd/ Anand Rathi Shares & Stock Brokers Ltd.
The analysis revealed that the Dangi Group entities had actively traded in
the scrip during May 2009 till November 2009. During this period, the
share price of Welspun kept rising from levels of | 100 to above | 250 in
September 2009.
For example, in Welspun, Sanjay Dangi had accumulated approximately
10,237,782 shares (5% share capital in Welspun) as on March 31, 2010.
Later on, he sold approximately 81 lakh shares to Life Insurance
Corporation of India for | 268 on April 8, 2010.
Entities belonging to the Welspun Group are Krishiraj Trading Ltd,
Welspun Trading Ltd, Welspun Wintex Ltd, Welspun Mercantile Ltd,
Welspun Polybuttons Pvt Ltd and GRG Cosmetics Private Ltd.
Despite the fact that the abovementioned developments raised doubts
about corporate governance issues at Welspun, we do not see any major
negatives in the business model of the company due to multiple country
strategy and increased capacities taking care of robust demand from the
oil & gas sector.
Oil prices are expected to remain firm, thereby giving impetus to new
projects. Going forward, more order inflows can be expected from the
gas-based pipeline projects and water segment.
Welspun’s foray into the infrastructure segment through acquisition of
MSK Project is also likely to help the company to improve and integrate
its pipe business with the EPC projects in road, industrial construction and
PPP.
We are optimistic about its future growth, which is likely to come from its
multi-country operations. However, we prefer to remain cautious due to
the promoter and group nexus with respect to the price rigging, thereby
raising doubts over corporate governance.
As a cautious measure, we advise our clients to pare their existing
positions by 50% in light of the abovementioned developments although
we still remain positive on the fundamentals of the company and the
industry.
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