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Indiabulls reacts strongly to critical Veritas report

Indiabulls reacts strongly to critical Veritas report

Bangalore: Veritas Investment Research Corp., the Canadian firm that’s made a name for itself in India with its hard-hitting reports on large companies, has targeted Indiabulls Real Estate Ltdand Indiabulls Power Ltdin its latest, and said the purpose of the former seems to be to bilk institutional and retail investors for the benefit of select insiders.

In an email response, Indiabulls said: “The company will initiate appropriate criminal proceedings on the authors of the research report for publishing false and factually incorrect data, to create sensation and entice people for benefiting through trading, for the sole purpose of selling their research reports for money."

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A report by Veritas Investment Research Corp alleges that Indiabulls Real Estate is bilking investors for the benefit of select insiders. Mint’s Madhurima Nandy tells us more.

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“In our opinion such intentional error on basic factual data is resulting into loss for thousands of shareholders," it added.

In a second email, Indiabulls also refuted some of the specific issues raised by Veritas, citing filings to stock exchanges, financial statements and annual reports. Mint couldn’t independently verify the claims made by Veritas.

According to Indiabulls, the Gurgaon police has registered a first information report (FIR) against Veritas on a complaint by Indiabulls.

Indiabulls started life in 2000 as a brokerage firm. Indiabulls Financial Services Ltdcame a few years later. It was followed by Indiabulls Real Estate, which started life as part of Indiabulls Financial Services before being spun off as an independent company. Then came Indiabulls Power that started life as part of Indiabulls Real Estate before being spun off as an independent company. Interestingly, the Indiabulls group has no holding firm.

“The controlling shareholders are running the organization as a piggybank, while proclaiming propriety and espousing credibility. The association of reputed institutions, individuals and organizations with the company is vexing to say the least," analysts Neeraj Mongaand Nitin Mangalof Veritas said in their report titled Bilking India.

Veritas has, in the past, published similar reports on Kingfisher Airlines Ltd(saying in a September report that the firm was “teetering on the verge of bankruptcy"), Reliance Industries Ltd, Reliance Communications Ltdand DLF Ltd(calling it a “Crumbling Edifice").

In Indiabulls’s case, Veritas said the merger of Indiabulls Infrastructure Development Ltd with Indiabulls Power is a means of transferring value from public shareholders of the latter to a select few and that any boost to the net worth of the latter as claimed by management post-merger is unverifiable. The company said in its email that the merger actually increased Indiabulls Power’s net worth by 1,045 crore. Mint couldn’t independently verify this.

It added that the application filed in the Delhi high court in March for merging Indiabulls Infrastructure Development with Indiabulls Power contains statements that can be characterized as misleading.

According to the Veritas report, the three controlling shareholders of Indiabulls Real Estate own 29.25% in the ratio 50:25:25.

“We believe that in order to profit at the expense of the shareholders of Indiabulls Real Estate, Indiabulls Power and Indiabulls Properties Investment Trust (IPIT), (the) management has promoted two flow-through entities, namely IIC Ltd (IIC) and IINFC Ltd. IINFC is a 100% subsidiary of IIC. The ownership of IIC is split between the controlling shareholders in the same proportion as their equity ownership in Indiabulls Real Estate," said the Veritas report.

It also claims that IIC and IINFC serve as conduits for the controlling shareholders to siphon off funds via loans and advances from Indiabulls Real Estate and Indiabulls Power into other privately-owned entities, which then subscribe to warrants and/or buy shares of Indiabulls Financial Services, Indiabulls Real Estate and Indiabulls Power from the open market, thereby boosting the stake of the controlling shareholders in the public entities.

“It is our contention that by not consolidating many subsidiaries in its publicly-filed financial statements, management has cherry picked profits and excluded egregious losses from its publicly-filed consolidated financials," Monga and Mangal wrote.

The analysts also warned financial institutions lending money to Indiabulls Power to check the company’s “reported net worth with a fine tooth comb" because Indiabulls Power doesn’t have the funds to meet its capital commitments to complete its projects and, therefore, is dependent on financial institutions for funding.

“Twenty-two per cent of the book equity of Indiabulls Financial Services is exposed to the Employees’ Welfare Trust, which doesn’t have the cash flow to service its debt, thereby calling into question the credibility of Indiabulls Financial’s loans and advances," the report said.

Indiabulls said in its first email that the allegations have ignored disclosures in the public domain made through the annual reports of FY11 and FY12, which have also been circulated to all shareholders.

Its second email cited extracts from its annual report for 2011-12 to claim that the Employees’ Welfare Trust had the ability to service debt.

Indiabulls Real Estate has in recent years aggressively bought land, including the 8.3-acre Bharat Mills in August 2010 for 1,580 crore from National Textile Corp. Ltdand, last month, the adjacent Poddar Mill on 2.3 acres for 498 crore.

Two Mumbai analysts, who did not want to be identified, independently said that Indiabulls Real Estate’s disclosures weren’t adequate. One of them said his firm could not put out a detailed report after the company announced its results for the quarter ended 30 June because the company hadn’t made adequate disclosures about sales and price realization among other things.

Also See | How they fared in intraday trade (PDF)

PDF by Ahmed Raza Khan/Mint

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