Thursday, January 31, 2013

Goldstone Infratech Ltd. - Another open open-offer!!

The market is full of apparent opportunities, where the hidden risks are huge. A lot of times, the risks become clear only after we have incurred a loss in such opportunities!! (i.e. in hindsight)
Goldstone is another such apparent opportunity, where the risks need to be given due consideration. It is an opportunity which has arisen simply due to legal compulsions and is not backed by proper fundamentals and valuations.

Background

Goldstone Infratech Ltd (GIL) is a Secundarabad based company, manufacturing insulators of various types.  Absolutely no comments on the business/fundamentals of the company or the quality of management. (Enough said?!) Currently, the promoters of the company are fighting a case against SEBI in the Supreme Court. The subject matter of the case is an open offer made 4 years ago.


Facts of the case and time-line

A promoter company, Goldstone Exports Ltd (GEL) (renamed as Trinity Infraventures Ltd) used to hold 9.51% stake in the company.
January 25, 2007: GIL’s Board considered issue of 1.5 crore share warrants to GEL, convertible @ Rs.22/share. (Equity at that time consisted of 2.1 cr shares of Rs.4 each). This would take GEL’s stake to 47%, if converted.
February 24, 2007: GIL holds an EGM where shareholders approve the issue of warrants. GEL pays 10% of the amount for the warrants, which are convertible within 18 months.
October 28, 2008: GEL pays remaining amount to get the warrants converted into equity shares.
October 29, 2008: GIL’s Board allots the requisite 1.5 crore shares to GEL. Takeover Code (old) is triggered since GEL’s stake increases from 9.51% to 47%.
November 4, 2008: GEL makes public announcement and comes out with open offer for 20% shares @ Rs.23/share. Price is calculated as per takeover code.
November 17, 2008: GEL files draft letter of offer with SEBI through their merchant banker Saffron Capital Advisors.


SEBI se punga!
  • While calculating the open offer price, GEL considered January 25, 2007 as the relevant date. This was the date on which the Board had authorised the issue of warrants, hence, open offer price as per GEL's calculation was Rs.23/-.
  • SEBI objected to this, saying that the relevant date for open offer price calculation should be taken as October 29, 2008. This was the date on which the Board authorised the issue of shares. Open offer price as per SEBI calculation came to Rs.43/-.
  • GEL felt aggrieved and filed an appeal against SEBI's contention with the Securities Appellate Tribunal. (SAT appeal no.9 of 2009). SAT upheld SEBI's contention in their decision.
  • GEL continued to feel aggrieved and appealed to the Supreme Court against SAT's order. (Civil appeal no.7666 of 2009)
  • The case went in a tareeq-pe-tareeq mode from then on, until recently. In the hearing which took place on August 13, 2012, the case has been listed for final disposal. Although that hearing has not yet happened, whenever it does happen, the final decision of the case will be very near.

The opportunity (?)

  • If the result of the case is in the promoter's favour, open offer will come at Rs.23. 
  • If it is in SEBI's favour, open offer will come at Rs.43 (plus interest). In the meanwhile, the stock price has slid to Rs. 10.5/-. 
  • Promoters hold 50.75% and they have to make an open offer for 20% of the public holding of 49.25%. Interesting!

The risks

Event risk: There is virtually no event risk. The promoter has bought the shares and increased his stake, hence open offer has to happen. The promoters have also given a bank guarantee of Rs.7.5 cr. (Total equity capital of the company is 3.6 cr equity shares of Rs.4 FV).

Time risk: Now this is the most important and very material risk. The whole opportunity is hinged on a court case. We all know that court cases in India can live longer than characters of Saas Bhi Kabhi Bahu Thi. There is absolutely no logical call one can take on when will the case be decided. 1 year more? 2 years more? Dunno! However, in this case, at least an announcement for final hearing has come. So its like one can see the destination, but one still has no idea how far it is!

Shareholder risk: 2 pure financial investors hold about 10% of the company. Now if these big guys start selling for whatever reason, the price will take a massive hit. Since I am unable to value the company, that would result in a really uncomfortable position.


All-in-all, quite an interesting case, with a lot of interesting risks! Before taking any buy/sell call on the stock, please give proper thought to 2 things; your risk appetite and what kind of portfolio allocation should you give to this, if any! Do not rush to buy it. If you buy without much thought, later there will be similar rush to sell without much thought! And when you buy as well as sell without much thought, the end result is usually not very pretty! :-)


Cheers and happy investing!!!







Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) As a professional investor, I may have positions in stocks discussed.
4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours! 

21 comments:

Anonymous said...

Hi Neeraj,

How about this risk? SEBI wins the case and the promoters after that just raise their hands up saying that they do not have the money needed to execute the open offer.
Then we go into several other risks that cannot even be visualised at the moment.

Thanks.

Neeraj Marathe said...

100% agreed anon,
Risks are quite high here. If promoters dont go for the open offer, it will be contempt of Supreme Court, which i think has very dire repercussions and i am doubtful if any1 will wana go down that way.
Also, there is a bank guarantee of about 8 cr, which covers some part of the open offer.
In addition to these, thr may be other risks, which we cant visualise now..i totally agree!
cheers!
Neeraj

Anonymous said...

Is this case appearing on supreme court cause-list?

Neeraj Marathe said...

Hi anon,
Yes it appears in the cause lists periodically, but then, it does not come up for hearing due to large number of cases lined up before it.
cheers!
Neeraj

BOND said...

Hi Neeraj,

Enjoyed reading your article.I am planning to write when i stumbled here

SEBI is great who knows everything and does nothing.

Have you gone through the Balance sheet over the last 4-5 yrs. I have and it does not show anything vague to doubt the books.

1)Many have said why did it keep cash on hand and not retire the debt.

300crs figure is respectable owing to the fact they used to repay borrowings in 2009, and implemented Buybacks

Many top companies do it to save on interest rate differential

but the RED FLAG with Deccan chronicle is they reported interest in Other INCOME and there was no breakup of how much it eventually earned.

The 2008 dip was primarily related to newsprint prices which shot up from 27,000 to 40,000 in 2009.

Forbes is also wrong on the calculation of 19% as they have calculated that figure only on Loan funds and have avoided the figure in current liabilities.


CARE is a hero to have stopped ratings post default.(they did not even have a option) BS for March 2012 was not provided. That was the time to cut the ratings.

Whats the point rating it junk once it

The biggest Red Flag was when it dint disclose the March 2012 Balance sheet.
If you check Sept 2011 BS it had max loans of Rs700crs with cash of 300crs (on BSE).

Its a open FRAUD and a shareholder could have done very little.
If SEBI used it power properly the awesome purchase of Intangibles worth 2905crs would be traced back to the Reddy family.

Coz if i go through financials upto Sept 2011 nothing shows a fraud upto 4,000crs. Effectively the debt has been raised since sept 2011 or has been hidden from everyone.

They are liable to be jailed for such a massive fraud.

Neeraj Marathe said...

Hi Bond,
Sorry for the late reply..i assume you are talking about Deccan Chronicle..got a bit confused since u have posted this comment at the wrong place by mistake, i believe.
Great that you could notice red flags in the previous years' ARs..i couldnt..
cheers!
Neeraj

PS: may i request you to plz comment under the proper post? becomes easier for me to manage and answer..thnx

Dhaval Parikh said...

Hi Neeraj

The case is still not coming up. HOw much more time you think will it take to get listed. any ideas?

Neeraj Marathe said...

Absolutely no idea Dhaval. I was in contact with their CS Mr.Adalat (thats his name, i am not joking) regarding the hearings, but he has resigned recently.
Neeraj

Dhaval Parikh said...

It comes up in the weekly causlist but it does not come up for hearing. I am not sure why its being delayed for so long. And by holding the stock will we really benefit?

Neeraj Marathe said...

Totally fair Dhaval..
But when in doubt, get out! That works in the market!
Cheers!
Neeraj

Gaurav said...

Hi Neeraj this is Gaurav here ~ discovered your writeup on Goldstone Open Offer dispute status because I covered on my blog http://www.gauravblog.com/?p=2695 one on Shree Rama multi-tech and Nirma which just got cleared by Supreme Court and a reader requested my insights on Goldstone Open Offer Status ~ come across some intriguing stuff while perusing GI's Fundamentals which leads me to believe that even if SEBI wins Trinity Infra will honour the Offer at Rs 43 ~ plan to cover this on my blog www.gauravblog.com

I cover Behavourial stuff in my Training Sessions and thoroughly enjoy the interaction and the responses of participants

Cheers and keep blogging

Gaurav


Neeraj Marathe said...

Hi Gaurav,
Nice to hear from you.
Ya Goldstone is an interesting case..i also feel that the open offer would be at 43, but the BIG question is..when?!
Cheers!
Neeraj

Anonymous said...

Neeraj,

Even if the company wins, I understand they will have to issue an open offer at 23 + interest. Can you pls confirm whether my understanding is correct.

Neeraj Marathe said...

Yessir, that is correct..
cheers!
Neeraj

Nirvana said...

I didn't see any open offer which has happened yet. Is there any update on it?

Neeraj Marathe said...

Nope, its still in tareekh-pe-tareekh mode. Nothing has happened so far.
Cheers!
Neeraj

Ch Prakash said...

Do u have any idea of the land holdings held by Goldstone Infra apart from the factory premises? The Balance sheet figure of Rs.42 Cr is a huge figure and the factory is only in a small area of 4-5 acres at suburbs of Hyderabad.

Neeraj Marathe said...

Nope, no idea whatsoever!

Pradeep Kanwar said...

Tell me if the assumptions are ok....promoter holds about 50% so they need to buy 20% of the remaining 50% implying the promoter will buyout 40% (20%/50%) of the public holding. Assuming the company stock goes to zero (argument sake!) then the breakeven buying price is 40%*23 = 9.2 & if SEBI wins then its 17.2 (=40%*43). The Civil Application showed up in supreme court list but does not show up anymore(http://courtnic.nic.in/courtnicsc.asp CIVIL APPEAL 7666 OF 2009)....any idea where we stand?

Pradeep Kanwar said...

SUPREME COURT OF INDIA

Case Status Status : PENDING

Status of : Appeal Civil 7666 OF 2009

TRINITY INFRAVENTURES LIMITED .Vs. SECURITIES & EXCHANGE BOARD OF INDIA

Pet. Adv. : MR. RUPESH KUMAR Res. Adv. : M/S. K. J. JOHN & CO.

Subject Category : COMPANY LAW, MRTP & ALLIED MATTERS - APPEALS U/S 15Z OF SECURITIES & EXCHANGE BOARD OF INDIA ACT, 1992

Listed 0 times earlier Appearing in Present Weekly

Last updated on Jun 27 2015

Unmesh D said...

Still Pending :)

SUPREME COURT OF INDIA

Case Status Status : PENDING

Status of : Appeal Civil 7666 OF 2009

TRINITY INFRAVENTURES LIMITED .Vs. SECURITIES & EXCHANGE BOARD OF INDIA

Pet. Adv. : MR. ABHINAV MUKERJI Res. Adv. : M/S. K. J. JOHN & CO.

Subject Category : COMPANY LAW, MRTP & ALLIED MATTERS - APPEALS U/S 15Z OF SECURITIES & EXCHANGE BOARD OF INDIA ACT, 1992

Listed 0 times earlier Likely to be Listed on : 23/03/2017