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Last Updated : Jul 26, 2013 05:43 PM IST | Source: Moneycontrol.com

LIC's investment in Gitanjali Gems under FinMin scrutiny

Shares of the branded jewellery firm Gitanjali Gems, which boasts of A-list Bollywood stars as its ambassadors, have been on a downward spiral since June 21 with only sellers. From a peak of Rs 637 on April 22, the stock is now down to Rs 85, but there are no buyers in sight still.

 
 
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The Finance Ministry is looking into Life Insurance Corporation’s investment in Gitanjali Gems, reports CNBC-TV18, quoting an unnamed official in the ministry.


Shares of the branded jewellery firm, which boasts of A-list Bollywood stars as its ambassadors, have been on a downward spiral since June 21 with only sellers. From a peak of Rs 637 on April 22, the stock is now down to Rs 85, but there are no buyers in sight still.


According to the official, there is no formal enquiry at this stage; only the details of the investment have been sought from the financial institution. As on June 30, LIC held 4.89 percent in the jewellery firm.


LIC's investment has drawn attention most likely since the financial institution was among the handful of institutions that increased stake in the company during the June quarter, buying 4.84 lakh shares.


The insurer had started building a position in Gitanjali Gems since mid-2012. In the July-September quarter last year, LIC bought 1.95 percent, increased the stake to 2.93 percent in the December quarter and to 4.36 percent in the March quarter. It then added some more shares last quarter.


Between July1 to April 22, the stock price more than doubled from Rs 300 to Rs 637.


Assuming a conservative average purchase price of Rs 400 per share, LIC would have forked out roughly Rs 180 crore for the stake. On paper, the value of the stake is now down to Rs 38 crore. But whom will LIC sell the stake to?, there are simply no buyers. 


The company had planned to raised around USD 250 million through an foreign currency convertible bond (FCCB) issue in February this year with a conversion price of Rs 570, but had to defer the plan owing to lack of demand from overseas investors.


The downtrend in the stock is said to have been triggered by unwinding of pledged shares after the owners of the stock were unable to fulfil the margin obligations. Sentiment for jewellery shares in general soured after the RBI tightened norms on gold imports, pushing up working capital requirement for these companies.


While other jewellery shares stabilized after the initial hammering, Gitanjali Gems shares continue to hurtle downhill. The fact that there are no buyers for the stock despite the 86 percent fall in three months shows that the problem is no longer an overhang of pledged shares. Most likely, investors don’t believe the company's numbers.  


A couple of weeks back, Sebi banned 26 entities, including Gitanjali Gems promoter Mehul Choksi, and broking firm Prime Securities, for allegedly manipulating the stock price.


To be fair to LIC, it was not the only high profile institutional investor to back the stock. Others like GMO, Credit Suisse, Goldman Sachs, Macquarie, Morgan Stanley, Fidelity, College Retirement Fund, and Stichting Pension to have/are still invested in the stock.


Yet, if some skeletons tumble out of the closet in the coming days, somebody will have to answer some uncomfortable questions.

Posted by Santosh Nair
Twitter handle: @sant0nair

First Published on Jul 26, 2013 11:03 am
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