Veritas claims Indiabulls group gypping public shrholders

Moneycontrol Bureau

Shares of Indiabulls group companies crashed 5-10% in morning trade after Canada-based research firm Veritas accused the promoters of dubious accounting practices and poor corporate governance.

In a stinging report, Veritas said all norms were violated to enrich the controlling shareholders of the group, and suggested that investors should file a legal case to "to claw back the ill-begotten gains of the controlling shareholders".

Over the last year, Veritas analyst Neeraj Monga and team have flayed the managements of Reliance Industries, Reliance Communications, Kingfisher Airlines and DLF for similar violations.

Catch the full transcript of the exclusive interview: HERE

Among other things, Veritas alleges that the merger of Indiabulls Infrastructure Development Limited (IIDL) with Indiabulls Power was intended at enriching promoters at the expense of the public shareholders of Indiabulls Power.

"Given the exchange ratio of 3.37 shares of IBPOW for each share of IIDL established by the board of Indiabulls Power/Indiabulls Real Estate, post-closing, the ownership of Indiabulls Real Estate and by extension public its investors in of Indiabulls Power declined from 62.34%to 52.54%. To add insult to injury, at Indiabulls Power's current stock price of approximately Rs 13.6 per share, FIM and Hexagram (which were allotted shares in IIDL last year) earned a return of 4.58 times the original investment in less than a year," the Veritas report says.

The research firm has further alleged that two promoter-owned entities, IIC and IINFC, have been set up to serve as a conduit for the controlling shareholders to siphon funds via loans and advances from Indiabulls Real Estate and of Indiabulls Power into other privately owned entities, which then subscribe to warrants and/or buy shares of IndiaBulls Financial Services.

"Moreover, given that warrants amounting to Rs 528 crore in Indiabulls Real Estate and of Indiabulls Power have been forfeited by management since FY08, some of the loans and advances to these entities routed through IIC and IINFC are a write-off, thereby calling into question the recoverability of loans and advances on the books of Indiabulls Real Estate and Indiabulls Power," the Veritas report says.

And Veritas is equally skeptical of some of the loans given out by Indiabulls Financial Services.

"22% of the book equity of Indiabulls Financial Services (IBULL) 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 IBULLs loans and advances," the Veritas report says.

And there are more damaging allegations:

"The intricate web of related party dealings woven by the CS(controlling shareholders) is almost impossible to unravel. 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. Investors seeking reliable and credible information on Indiabulls Real Estate and Indiabulls Power cannot depend on the reported financials of the two companies," the report says.

At 11:00 am, Indiabulls Power shares were down 5% at Rs 12.70, Indiabulls Financial Services shares were down 4% at Rs 205.50, and Indiabulls Real Estate shares were down 4% at Rs 53.75.