The Securities and Exchange Board of India (Sebi) sermonising to Baba Ramdev for talking up Ruchi Soya during a yoga session is missing the wood for the trees.
For one, Ramdev is at best only a brand ambassador for the company. He does not directly own shares of either Ruchi Soya or its parent company Patanjali Ayurveda. For another, nothing he said can be seen as “price-sensitive” information that violates insider trading norms. Yes, one could argue that he should not be recommending shares when he is not a certified financial advisor, but that’s the lesser of the sins. Most promoters and bankers make a pitch to clients and the press ahead of a public issue; it will be naïve to assume that their messaging isn’t meant to entice investors into buying into the story.
There was a bigger, more blatant case of price manipulation in Ruchi Soya, which the regulator seems to have overlooked entirely. How can we say that? Well, if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.
The way Ruchi Soya shares have behaved since its re-listing gives away the story. For starters, Patanjali acquired Ruchi Soya, valued at Rs 4,350 crore, from National Company Law Tribunal (NCLT) in November 2019 despite not being the highest bidder. Considering 99% of the company’s equity (the old company) was extinguished, the per share value corresponding to the acquisition value for the new company was Rs 145, which should ideally have been the re-listing debut price.
However, since re-listing in early January 2020, Ruchi Soya’s stock rocketed from Rs 17 to Rs 1,500, literally out of thin air, okay, let’s say thin volumes.
The stock had a negligible float—98.90% with the promoters, of which 99.97% was pledged with lender banks. At Rs 1,500, the company commanded a market cap of Rs 45,000 crore. And then what followed was predictable—the stock took a U-turn and nosedived to Rs 400 levels last September.
After this crazy yo-yoing, the stock has again climbed up to Rs 1,000 levels, which translates into a market cap upwards of Rs 30,000 crore over the last one year. Now, as the company gets a clearance for the follow-on public offer to reduce the promoter shareholding to below 75% to comply with regulations, the pricing benchmark is comfortably set around current levels. It will be interesting to see what the final sale price will be for this book-built issue.
Price manipulation in thinly traded stocks is quite common. Retail investors often get caught on the back foot and end up losing money. But this market manipulation tactic becomes a more serious concern when it happens in a stock that is bound by regulation to make a public offer and then a negligible stock holding is used to set the benchmark price and create perception value. Ruchi Soya has to bring down the promoter stake and enhance public shareholding in the company to 25% within three years. Now, a company that was valued and bought for Rs 4,350 crore in December 2019 is making a public offer to raise an equal amount for a significantly smaller, partial stake in the company.
Ruchi Soya was never a bad business. It was only badly managed, which landed it in the financial trouble it had found itself in. It clocked a revenue of Rs 16,132 crore in FY21, up from Rs 13,042 crore in the previous year. Net profit nearly tripled during the fiscal to Rs 680 crore, which is curious for a company that has never made this level of profit in its history, even when its revenue was significantly higher.
On a separate note, what is also worth pondering over is the raw deal that the lenders got during the sale. A deal was forged when Patanjali was not even the highest bidder and lenders ended up taking a 52% haircut. Well, Ramdev is not a financial advisor, but he has played it ‘fairly’ smart so far. Sebi would do better to raise better questions.