In this edition, we talk about the new scams and frauds that stock market regulator SEBI has unearthed. We also talk about the raging debate in the mutual fund industry over investments in midcap and smallcap stocks, and the RBI’s moves to lift growth.
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When the going gets tough, the tough get going and the not-so-tough pack up their bags. What happens when the going gets easy? Everyone tries to make a quick buck.
Apparently, that’s exactly what has been happening in India in recent years. At least that’s what some recent orders of the Securities and Exchange Board of India show.
The spectacular rise in the stock markets, especially after the March 2020 crash due to the Covid-19 pandemic, has prompted millions of people to invest in shares and equity mutual funds.
And now the chickens may be coming home to roost. Over the past few months, SEBI has unearthed several stock market scams and other instances of violations that have hurt small investors. While the most notable one is the scam involving Ketan Parekh, which we wrote about in our newsletter on Jan. 3, three more cases have come to light in recent days.
Let’s begin with LS Industries Ltd. It’s perhaps the quickest instance of SEBI action on an errant company; the regulator’s Feb. 11 order came on a news report published on Feb. 3!
Here’s what SEBI noted. LS Industries is a textile company registered in a village in Himachal Pradesh. It listed on the BSE in November 1994. Trading in its shares was suspended on Dec. 30, 2013. The suspension was lifted on July 23, 2024.
The company’s shares jumped from Rs 22.50 on July 23 to Rs 267.50 on Sept. 27, an increase of 1,089%. This propelled its market cap to Rs 22,700 crore. Then, the shares changed course. The scrip hit Rs 42.39 on Nov. 21, a fall of 84% from its high. The price started increasing thereafter and rose to Rs 136.87 on Dec. 23, up 223% from the November low.
Here’s the kicker: the company reported revenue of just about Rs 50 lakh each in the last three financial years and barely anything in the three quarters of FY25. SEBI noted that the stock surge coincided with the company’s announcements that it ventured into artificial intelligence and set up a Dubai subsidiary in the fields of “robo chefs” and “hydroponic farming”. SEBI also noted several other suspicious transactions and ordered a detailed investigation.
A second case that SEBI ruled on involved Asmita Patel, who called herself as the ‘She Wolf of the stock market’ and ‘options queen’ on social media. Patel claimed to manage assets worth over Rs 140 crore. In its order, SEBI noted that Patel was providing investment advisory services and research analyst activities without registering with the regulator.
The SEBI action came on complaints filed by 42 people who had enrolled for her courses. These people alleged that they invested as much as Rs 35 lakh and that Patel guaranteed high returns to them if they invested in certain stocks. They also alleged that Patel told them to sell their mutual fund investments and gold and to borrow money if needed.
SEBI has now barred Patel, her husband Jitesh Patel and their company Asmita Patel Global School of Trading Pvt Ltd from accessing the stock markets and directed that Rs 53.67 crore be impounded from them.
In another order, SEBI banned Brightcom Group and its promoters for widescale fraud conducted over several years. In a nutshell, Brightcom and its promoters hid the company’s losses, misstated financial statements and fooled investors. Trading in the stock is now suspended. This has left retail investors, who now own almost 64% of the company, and even some large investors such as index funds managed by Vanguard in the lurch.
All these cases highlight the importance of detailed research before investing in any company. So, please stay away from get-rich-quick schemes and people who promise you millions.
Genuine Fear or Fear-mongering?
Stocks like Brightcom and LS Industries are perhaps among the reasons why some market observers and fund managers have started voicing concerns over stretched valuations of midcap and smallcap companies. This debate got a whole lot louder this week when one of India’s biggest and most experienced mutual fund managers jumped into the fray.
Sankaran Naren, chief investment officer of ICICI Mutual Fund, said in a speech at an event that midcap and smallcap stocks were extremely expensive and trading at very high price-to-earnings multiples. He said investors should preserve the gains made over the past five years, move out of these companies “lock, stock, and barrel”, and instead consider shifting their investments to largecap, flexi-cap, and hybrid funds.
Naren also said that, by investing in midcap and smallcap companies at high valuations, retail investors are taking on the risk which was earlier borne by large institutional investors. He noted that these companies previously relied on bank loans for their expansion or capex requirements but are now floating IPOs or selling shares on the secondary market that retail investors are lapping up.
The remarks created a storm. Some other fund managers dismissed Naren’s concerns. Radhika Gupta, CEO of Edelweiss Mutual Fund, said such arguments shouldn’t deter investors. “Don’t fall for fear-mongering or 10-day debates,” she posted on social media. Other fund managers said that SIPs remained a good tool for investors to deal with market volatility and that they should continue to invest for the long term.
To be fair, Naren’s speech wasn’t all about gloom and doom. He also said that India’s economy remained resilient and will continue to grow in the long term. He also offered a piece of advice to investors.
Naren said that, considering the risks, investors should follow a diversified asset allocation strategy comprising equities, debt, real estate, and precious metals like gold. Now, that’s a suggestion nobody can disagree with.
Proof in the Numbers
Naren may have faced a barrage of criticism for voicing his opinion but latest data show he may just be right. The midcap and smallcap indices on both the BSE and the NSE have fallen about 20% each since touching record highs in September last year. Many smallcap stocks have slumped as much as 40-50% or more.
As for the midcap and smallcap mutual funds, all such schemes are in the red. According to ValueResearch data, midcap and smallcap funds have fallen in a range of 5% to 16% over three-month and six-month periods.
Longer-term returns, however, remain far better. Over a five-year period—essentially the post-Covid era—top-performing midcap funds have generated annualized returns of 25-28%. Smallcap funds have performed even better.
Still, the recent market volatility has prompted mutual fund investors to rethink their strategies. Data released by Association of Mutual Funds in India (AMFI) this week showed that inflows into largecap schemes surged by 52% to Rs 3,063 crore in January. Inflows into midcap funds rose just 1.1% to Rs 5,148 crore and increased 22.6% in smallcap schemes to Rs 5,721 crore. Inflows into sectoral and thematic funds slumped 41% month-on-month to Rs 9,017 crore.
Overall inflows into equity mutual funds slipped 3.6% to Rs 39,688 crore from Rs 41,156 crore in December. SIP investments remained steady at around Rs 26,400 crore.
Positive Surprises
While SEBI has its hands full searching for stock market scamsters, the Reserve Bank of India under new governor Sanjay Malhotra also had a busy week. After cutting interest rates last week and providing a liquidity boost to the banking system the week before, the central bank this week surprised debt and forex markets.
The RBI announced an overnight repo auction worth Rs 2.75 trillion and another liquidity infusion of Rs 75,000 crore to inject funds into the banking system. It also caught forex markets off guard by heavily intervening and selling an estimated $10-11 billion to prevent the rupee from falling below 88 to the dollar. The dollar sales did halt the rupee’s slide for two days and pushed it back to near 86.5 versus the greenback, though it may not be a long-term solution.
Meanwhile, the central bank has taken more steps that would help boost bank credit in the economy after cutting rates. This week, it lifted its 10-month-old ban on Kotak Mahindra Bank from adding new customers via its website and mobile app as well as issuing new credit cards due to weaknesses in its digital infrastructure.
Kotak is the latest lender on which the RBI has lifted or eased restrictions imposed last year to improve compliance. Since September, the RBI has removed curbs imposed on at least seven non-banking financial companies—Arohan Financial Services, DMI Finance, Asirvad Micro Finance, Navi Finserv, ECL Finance, JM Financial Products and IIFL Finance.
The RBI’s decisions to remove those curbs will not help just those companies boost their businesses but will also likely aid in improving credit supply, reducing interest rates and, in turn, stepping up overall economic growth.
Market Wrap
India’s stock markets continued to trend downwards this week as foreign portfolio investors remained in an exit mode and international trade tensions weighed. The BSE Sensex and the Nifty 50 slipped about 2.5% each this week.
Only a handful of stocks managed to eke out any gains this week. Bharti Airtel and Bajaj Finserv were the top Nifty gainers, followed by cookie maker Britannia. Kotak Mahindra Bank rose after the RBI lifted restrictions on onboarding customers digitally and issuing new credit cards.
Eicher Motors was the top loser, falling over 12% as investors worried about its profit margins. Hero MotoCorp slumped nearly 9% on worries over stagnant sales of motorcycles and scooters while Mahindra & Mahindra fell over 7%.
All PSU stocks in the Nifty lost ground, with Bharat Electronics, ONGC and Power Grid falling by more than 7% each.
About a dozen other stocks fell by at least 4% each. These include Adani Ports, Adani Enterprises, Apollo Hospitals, Trent, Titan, and Bajaj Auto.
Earnings Snapshot
- Hindalco Q3 consolidated net profit surges 60% to Rs 3,735 crore
- Ashok Leyland standalone profit rises 31.3% to Rs 763 crore
- Hindustan Aeronautics consolidated net profit rises 14% to Rs 1,440 crore
- Steel Authority of India Ltd’s net profit slumps to Rs 126 crore from Rs 331 crore year ago
- Vodafone Idea consolidated loss narrows to Rs 6,609 crore from Rs 6,986 crore year ago
- Manappuram Finance consolidated net profit halves to Rs 282 crore, misses forecasts
- Muthoot Financee profit jumps 33% to Rs 1,363 crore
- Apollo Hospitals consolidated net profit soars nearly 52% to Rs 372 crore
- Crompton Greaves Consumer Electricals profit up 27.7% at Rs 110 crore, misses estimates
- Domino’s Pizza operator Jubilant Foodworks reports 35% fall in profit Rs 42.91 crore
Other Headlines
- PM Modi meets US President Donald Trump, says bilateral trade target $500 billion by 2030
- Govt increases budget for Gaganyaan spaceflight mission to $2.32 billion from $1.1 billion
- ONGC and NTPC Green Energy’s joint venture to acquire Ayana Renewable for $2.3 billion
- RBI bars New India Co-operative Bank from lending, suspends deposit withdrawals
- New income tax bill proposes govt access to taxpayers’ emails, social media accounts
- Tata Motors says planning to more than double electric vehicle charging stations to 4 lakh
- Adani Green Energy to withdraw from two proposed wind power projects in Sri Lanka
- Britain’s Prudential plans to list Indian joint venture ICICI Prudential Asset Management
- OpenAI says it does not use Indian media groups’ content to train ChatGPT, reports Reuters
- Retail inflation cools to five-month low of 4.31% in January from 5.22% in December
- Industrial output growth slows to 3.2% year on year in December from 5.2% in November
- Steelmaker ArcelorMittal looks to shift European support activities to India
- Adani family to invest Rs 6,000 crore on two health campuses in Mumbai and Ahmedabad
That’s all for this week. Until next week, happy investing!
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