Kotak Group again enters beleaguered Diamond Power Infra at Rs 23.65 ~ Why?

Kotak Group enters beleaguered Diamond Power Infra at Rs 23.65 ~ Why? ~ their Mutual Fund  had been selling since August 2015 !

On March 30,2016 Kotak Mahindra (International) Ltd a FPI & a subsidiary of Kotak Mahindra Bank picked up 3868606 (6.787%) stake in Diamond Power Infrastructure at Rs 23.65 from Macquarie Bank.Deal Size thus was Rs 9.14 cr with Macquarie exiting fully

Why did Kotak buy in ! ~ as just a month ago the Trustee of Kotak Growth Fund II & PAC had notified the Exchanges that from August 2015 to March 2016 the Fund had sold 1215382 shares ( 2.13% stake) from the 3002946 shares held (5.27% stake).Over 2% had changed hands on March 2,2016 …unless these were inter scheme or within group transfers by the Mutual Fund

The above Notifications already were on the Exchanges websites but only today has the Counter seen a smart rise by over 15% to register a days’s high till now of Rs 27.95.At 12.40 pm it’s trading higher at 12% at Rs 26.60. Trading Volumes have been below One lakh most days in the Year but till now they have crossed 4 lakh on BSE and 18 lakhs on NSE

Diamond Power Infra is an interesting & intriguing case study.It’s been a rapid Wealth Destroyer of 75%  inside five months from Rs 143 levels in November 2014 to Rs 37 in March 2015 …it never was a 24 Carat Diamond ! but you can say it had all but lost whatever Carats it was ! 

Over 10 years ago  in 2005 Diamond Cables (IPO at Rs 10 par way back in August 1993),the earlier name of Diamond Power Infra, was trading low at @ Rs 17 and I spotted a turnaround when it  notified the BSE that they had the second largest cable capacity after Sterlite but were functioning at just @ 15 % capacity due to a working capital crunch.It was negotiating to receive both loan & equity support from Clearwater Capital Partners.The Deal for Zero Interest FCDs & Warrants was announced a year later in August 2006 when Price levels had shot up to Rs 60 and CCP would be getting the shares at Rs 95 on conversion…Then the Share Price simply went into 10 Bagger space inside two years recording highs of Rs 589 in 2007 & Rs 599 in 2008…. I had not waited for these record highs……. so the real wealth Destruction has been immense at the extreme of 96% from Rs 599 to Rs 22 !….even adjusting for 1: 3 Bonus in August 2013,the destruction is 95%!….CCP brought some more at fallen levels of Rs 160 levels 2010.It exited at a Loss in  June 2014 at Rs 90  & just a few months ago at a bigger Loss in December 2015 at Rs 42.68

I must confess I was attracted again,in fact seduced this time, by Diamond Power Infra(Name was changed to this in October 2007) again in mid 2014 as Fundamentals looked inviting on Relative Earnings & Book Valuations…It had issued a 1: 3 Bonus in August 2013 & had been paying dividends upto FY 13. The Company had even changed it’s Credit Rating Agency who gave it a better rating…. but the Inside Storm was brewing strongly & it was on hindsight foolish to rely on the audited financial statements & Credit Ratings & Promoters assurances.Corporate Governance was Poor & Accounting & Disclosure & Transparency Norms were being clearly flouted.Luckily my exposure was kept minimum though I must confess I had planned to increase it.Exited it at a loss by selling off  in the Rs 50 to Rs 75 range….reminded me of the warnings I had issued for Lok Housing & Satyam before their collapse to simply not rely on their accounts and relative valuations & how I had simply relegated my own warnings to the back seat when initiating the exposure in Diamond Power Infra !….I’m human yaar ! …the experience also reinforced to never take Promoters & those close to them at face value !

The Promoter & MD  Amit Bhatnagar was arrested in March 2015 & released on bail as he immediately agreed to pay up the excise duty evasion of @ Rs 40 crs & the Share Price which had rocked all the way up to Highs of Rs 143 in November 2014 then simply fell off the cliff  to a low of Rs 37 ! in the month of arrest ! and stayed at these levels right through 2015 and fell  even further to a low of Rs 22 just last month in March 2016…the MD had told excise authorities in November 2014 that he was not involved in the day to day operations and his role was restricted to HR etc but Investigations had shown otherwise

The Company had initially sought CDR to restructure but to hasten the revival process instead a Joint Lenders Forum (JLF) was the route adopted and an Agreement approved on May 29,2015 which required the Promoters to infuse Rs 66 crs as unsecured Loans into the company which would hold the option to convert to Equity at Rs 55.This conversion will take the Promoters 34.71% equity stake up  to 46.60 % with Equity moving up from  Rs 54 crs to Rs 66.03 crs.The two Group Companies that will acquire  the 12025424 shares (18.21% of post acquisition equity) on warrants conversion are Diamond Power Transmission Pvt Ltd & Diamond Projects Ltd

SEBI has granted them exemption from making an Open Offer  which is triggered by Regulation 3(2) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 even though the Promoters Stake moves up by more than 5%.Prashant Saran’s Order of March 23,2016 makes interesting reasoning for granting the exemption.

I See a New Kinder Face of SEBI  supporting the support stance of RBI & the Lenders under the JLF Route !

Question is whether Diamond Power Infra is deserving of this ! 

 

Here’s the full Clause 4 extract from the order with my highlights that interest & intrigue :

“a. The Target Company is a public limited company with paid up capital of ₹54,00,04,950 comprising of 21,083 shareholders. It has a total net-worth of ₹843.64 crores and has made a good name in the competitive market in India and also outside India. The Target Company has prestigious firms/ companies viz. Power Grid, GEB, Ashoka Bilcon, Tamil Nadu Electricity Board, L&T, IOCL, etc. as its customers. It has good order book position and in order to meet with the same, heavy financial investment in infrastructure and assets is required. The Target Company has already availed financial facilities worth ₹2,858.91 crores, from its bankers and financial institutions and is in need of more funds.

b. The Target Company had made proposal to various banks to work in consortium with the Bank of India as lead banker to give it the financial assistance.

c. Certain banks and financial institutions while looking to the future prospects of the Target Company have approved a restructuring scheme on May 29, 2015 under the JLF route. One of the prime conditions for such financial assistance is that the promoters and promoters’ group will have to bring in their contribution worth ₹66.14 crores, in the Target Company. Such contribution of promoters shall be in the form of unsecured loan to the Target Company, which will be converted into warrants. The warrants again within the period of 18 months will be converted into equity shares of the Target Company. With such proposed conversion, the promoters will acquire shares worth ₹66.14 crores of the Target Company.

d. The promoters of the Target Company are already holding 34.71% shares. Further, the acquisition of shares worth ₹66.14 crores by the promoters would increase the shareholding of the promoters and promoter group from 34.71% to 46.60%, which is in excess of the threshold limit stipulated under Regulation 3(2) of the Takeover Regulations.

e. The promoters are pouring in their personal funds in the form of loan to the Target Company for its betterment and revival. The acquisition of the shares upon conversion is not upon the volition of the Acquirer/ promoters but upon happening of an event which is beyond their control. The same is as per the ‘Final Rehabilitation Scheme’ approved by JLF and on the basis of the same ‘Master Restructuring Agreement’ was executed on May 29, 2015. Hence, in case obligation of open offer is imposed on the promoters then the same will be an additional cost. The cost of compliance of open offer shall be huge and the same will involve lot of time at each stage.

f. The proposed Acquirers i.e. Diamond Projects Limited and Diamond Power Transmission Pvt. Limited are part of the promoters’ group companies promoted by Mr. S.N. Bhatnagar, Mr. Amit Bhatnagar and Mr. Sumit Bhatnagar

g. In case the Target Company is not given the financial assistance by bankers and the financial institutions than there is scope that the Company may go into closure and it will leave many workers jobless.

h. The Target Company has many orders, in case these are met, the same shall make it functional and profitable. Once it becomes profitable, the interest of shareholders shall also be served as they will be rewarded, in turn of their investment in shares.

i. Pursuant to the proposed conversion of warrants into equity shares of the Target Company, the Acquirers shall not be acquiring in excess of the maximum limit prescribed and the public shareholding would still be in compliance with the minimum public shareholding requirement and the Acquirers will not be having absolute control over the Target Company.

j. The Acquirers along with the application for exemption under Regulation 11 of Takeover Regulations have also made another application under Regulation 72(2) of SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009 (hereinafter referred to as ‘ICDR Regulations’). Regulation 72(2) of ICDR Regulation restricts the issuer/ Target Company from making preferential issue of securities to any person who has sold any equity shares of issuer/ target Company during the six months preceding the relevant date. In this regard, it has been stated that 75,55,874 equity shares of the promoter group {i.e. 13,87,461 equity shares of Diamond Projects Limited and 61,68,413 equity shares of Madhuri Finserve Pvt. Limited (earlier known as Diamond Tele Cabs Pvt. Limited)} were under lien with IFCI Limited. For recovery of its dues, IFCI Limited had sold 72,101 equity shares of the Target Company, held by Diamond Projects Limited. The sale transaction of such shares was carried out on February 13, 2015 and on February 16, 2015. The Acquirers presumes that the relevant date for consideration shall be within period of six months of the sale transaction and the Acquirer is required to apply for exemption under Regulation 72(2) of ICDR Regulations.

k. Acquirer being promoter of company only has the interest that the company functions and that good order book position can be met with and that the company becomes profitable and dividend paying company. “

As I upload this Post approaching 1.30 pm,Diamond Power Infra continues to come of it’s day’s High and has slipped to Rs 26 yet 10%+ up over yesterday

Need to check with Kotak International  why they’re again bullish in Diamond Power Infra & with Macquarie as to why they exited wholesale at a huge loss !?

Anybody who knows kindly buzz me !

Oh ! incidentally the Bhatnagars also have another listed Company ~ Diamond Infosystems Ltd quoted @ Rs 32(FV Rs 10)….the board has approved a preferential allotment at Rs 34 to Promoters & a few others (Vikas Group who also are shareholders in Diamond Power Infra)

Can the rise in Diamond Power Infra sustain to regain lost levels in 2014 & 2015 ! ? Kotak International surely has to be optimistic…in fact it’s parent Kotak Mahindra Bank has a current marketing tagline of ‘Kona Kona Kotak’…if this Investment loses out in the years ahead one might cheekily say,without malice of course,  it’s  ‘Khona Khona Kotak!’ 

Cheers !

7 thoughts on “Kotak Group again enters beleaguered Diamond Power Infra at Rs 23.65 ~ Why?

  1. Kotak was not the final buyer. Kotak international is a pnote vehicle, so the end buyer would be some long only fund. It could also be a transfer from macquarie pnote to kotak pnote. Same end client.

    1. Pnote route has long been a controversial route as it’s prone to misuse quite frequently.It is thus important that final beneficiaries must be disclosed to SEBI & in turn to bourses.
      September 2015 Shareholding shows Kotak Group held over 1% through Kotak MF & Kotak Private Equity.December 2015 continues to show this .The sale by Kotak MF in March 2016 was for part holding & thus they too should be holding some of date….so who’s actually brought Macquarie’s Full stake if not Kotak but through Kotak ?…However the Buyer Kotak Mahindra (International) Ltd is an FPI with SEBI….Furrher with this purchase Kotak Group now holds 9.6% stake through Kotak Mahindra Bank (261693 shares) , it’s sub Kotak Investment Advisors Ltd (23664 shares) & Kotak Mahindra Trusteeship Services ( 1318294 for Kotak MF) & Kotak Mahindra (International) Ltd …they say these entities are all acting independently

  2. By making announcements like this,they make fool of small investors,and after they have bought,they take the price up,generating further interest among small investors and then all these Institutions exit making a cool profit,at the cost of small investors,of course in cahoots with SEBI

    1. Well Anil,perhaps Kotak really does believe this is a rough ‘diamond’ that needs to be polished to shine!…their Broking arm,Kotal Securities had recommended this scrip i think way back in 2010 issuing a research report which had stated a target of Rs 318 ,that too on a Cash Flow DCF basis!…went horribly wrong for them and all those who had invested in Diamond Infra….destroyed wealth near complete….let’s credit them for being loyal to this co ! ~ as they say ” Diamonds are for ever!” ~ though it could be fatal to be emotional and sentimental and be attached to a mistake indefinitely…

  3. Gaurav, tremendous writeup. Kudos!

    Any idea what is happening with the recent developments – the Chinese investor and the restructuring of the debt?

    Any clarity would be welcome. (no idea why this is in all caps, btw. Am typing in lower case).

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