Give and Take

Indiabulls and corporate groups like Reliance, DLF collaborated to turn hundreds of crores of public money into private wealth: PIL in Delhi HC

Indiabulls Housing Finance Limited, the flagship company of the Indiabulls group, collaborated with large conglomerates including the Reliance Anil Dhirubhai Ambani Group and the DLF Group to divvy up vast amounts of public money by rerouting it through shell companies, according to a public-interest litigation submitted today in the Delhi high court. The PIL stated that IBHFL borrowed large sums from various private and public banks, and used a complex maze of shell companies to extend loans to the tune of thousands of crores to firms owned by these large business groups. In turn, the petition said, the groups invested money in entities owned by the promoters of Indiabulls, including its founder and chairman, Sameer Gehlaut. “The intent of all these methods is to create private wealth out of public money,” the PIL noted. It termed these transactions “round tripping” and a “scam” of those carried out by the ICICI Bank and Dewan Housing Finance, in which a “huge amount of public money involving lakhs of crores is being looted.” The PIL stated: “The clout of the promoters of these companies is such that the regulators have closed their eyes to these frauds happening right under their noses.”

The companies named in the PIL include Anil Ambani’s Reliance ADAG; the DLF Group, promoted by Kushalpal Singh; the Americorp Group, promoted by Harish Fabiani, a Spain-based non-resident Indian; the Vatika Group and the Chordia Group, both real-estate companies. According to the petition, IBHFL loaned close to Rs 9,248 crore to these five companies. It stated that Reliance ADAG received Rs 1,580 crore in loans and invested Rs 570 crore back in Indiabulls, while DLF received Rs 1,705.54 crore as loans and invested at least Rs 66 crore in a company owned by Gehlaut. IBHFL lent a whopping Rs 4,601.01 crore to 51 companies of the Vatika Group, owned by Gautam Bhalla, the petition said. It further stated that many Indiabulls shell companies have been indulging in various other malpractices, involving several thousand crores of rupees.

The PIL was filed by the Citizen Whistle Blowers Forum, a civil-society group that aims to provide a platform to whistleblowers and to litigate on their behalf. The “round tripping” of funds by IBHFL and its promoters is in violation of statutes relating to income-tax evasion, Reserve Bank of India regulations and the rules of the Securities and Exchange Board of India and National Housing Bank, the petition stated. It demanded a special investigation team look into Indiabulls’ finances and the “illegalities, violations and siphoning” committed by the IBHFL’s promoters.

IBHFL is the second-largest home-finance company in India, with 220 branches in 110 cities and towns. According to the PIL, it contributes roughly eighty percent of the group’s turnover. The PIL described IBHFL’s financial status based on documents in the public domain: in the financial year 2017–18, IBHFL disbursed loans worth Rs 1,22,578 crore, a growth of 34.3 percent from the previous year. Its revenue grew by 25.1 percent from the previous year, to Rs 14,640 crore, while its profit after tax was Rs 3,847 crore. However, the PIL noted, the company’s outstanding debt was Rs 96,204.58 crore. As of March 2019, its liabilities stood at Rs 1,13,463.50 crore—about thirteen crores higher than the previous year. Its net worth is Rs 17,258.92 crore. The PIL emphasised that IBHFL had borrowed from a number of public-sector undertakings. This means that “public money is at stake, along with the money invested in IBHFL by its shareholders and investors,” the PIL said.

The petition presented an analysis of the loans IBHFL extended to five companies—although more exist—and the shell companies through which these transactions were carried out. It noted that many of the companies that IBHFL loaned money to have “a small-paid up capital”—the amount that a company receives from its shareholders by selling shares on the primary market—“do not have any fixed assets and are not even engaged in any business activities.” Several companies had a paid-up capital of a few lakhs, but had received loans worth tens of crores. The directors and the office addresses of many of these companies are also common, the petition noted. A majority of these borrower companies have also failed to file charges with the ministry of corporate affairs, the petition said. (A charge is a type of security created on some property of the company to secure a loan and every company has to register the charges created by it on its assets with the registrar of companies.) The petition noted that hundreds of companies are registered at the same address as that of Indiabulls, “thereby showing a staggering number of dummy companies having been created by Indiabulls.”

The petition noted that five Reliance ADAG companies received loans worth Rs 1,580 crore from IBHFL: Reliance Inceptum received a loan of Rs 106 crore; Reliance Big Entertainment received Rs 210 crore, Reliance Communications Enterprises received Rs 200 crore; Reliance Interactive Advisers received Rs 908 crore; and Zapak Digital Entertainment received Rs 156 crore. The former four are all registered to the same address, in Santacruz, Mumbai. The petition also stated that Reliance ADAG companies invested Rs 570 crore back into nine companies owned or promoted directly by Gehlaut, or through group subsidiaries. It noted that the money was invested using a financial instrument called optionally convertible debentures, at a nominal interest rate of 0.01 percent. These debentures are debt instruments where the lender has the option of converting the loan amount to equity.

According to the PIL, Reliance Capital, under Reliance ADAG, invested money in six subsidiaries of Indiabulls: Iphito Properties received Rs 10 crore in loans; Iphito Real Estate received Rs 20 crore; Myrina Real Estate received Rs 10 crore; Myrina Builders received Rs 10 crore; Orthia Real Estate received Rs 35 crore; and EMU Constructions received Rs 50 crore. Further, Reliance Corporate Advisory, also under Reliance ADAG, lent to three subsidiaries of Indiabulls, the petition said: Galax Minerals received Rs 50 crore; Meru Minerals received Rs 185 crore; and Paidia Conconnection received Rs 200 crore. The petition noted that Galax Minerals is owned wholly by Sameer Gehlaut, and that its balance sheets do not show the security necessary for securing such a loan.

Galax received Rs. 726.50 crore in all, the petition said—Rs 50 crore from Reliance Corporate Advisory; Rs 589 crore from Myrina Real Estate and Rs 87.50 crore from Iphito Real Estate. The loan from Reliance Corporate Advisory is in the form of debentures carrying 0.01 percent interest per annum, the petition said. “However, Galax Minerals’ books of accounts show there are no current assets or insignificant current assets available except for investment which is not charged. Thus, the security is an eye wash leading one to conclude that the transaction is round tripping.”

According to the petition, IBHFL loaned more than Rs 1,705.54 crore to 48 companies of the DLF Group. It noted that many of these firms have “negative worth” and all are “pass-through companies which have been used to garner huge sums of loans and use them for purposes other than intended ones.” For instance, the petition said, “Despite a negative worth, IBHFL gave the company a loan of Rs. 173.40 crore to Atherol Builders & Developers Pvt. Ltd, subsidiary of Felicite Builder & Constructions … The loan money was used to buy land and give loans to group companies.” It added that EMU Realcon, another company owned by Gehlaut, received an infusion of Rs 66 crore from three companies under the DLF group as “preference shares”—where the holder is entitled to a fixed payout and where the holder’s payment takes priority over ordinary shareholders.

The petition said that IBHFL lent Rs 4,601.01 crore to 51 companies of the Vatika Group, owned by Gautam Bhalla. Forty of these companies are registered to the same address, it stated, while many have a paid-up capital of only Rs 1 lakh. These companies were given loans ranging from Rs 16 crore in the case of Garin Developers to Rs 184.50 crore in the case of Timor Developers. “Most shocking is the case of Shivsagar Builders,” the petition noted. “Though the company has a paid-up capital of Rs. 25 lakh only, IBHFL found it worthy of granting a loan of Rs. 1575 crore.” It is clear that IBHFL “did not do any due diligence and went about giving huge loans for reasons known only to the promoters,” the petition said.

Harish Fabiani, a non-resident Indian based in Madrid, is the promoter of the Americorp Group, four of whose subsidiaries received loans worth Rs 151.9 crore from IBHFL. According to the petition, the money was ploughed back into Indiabulls Group companies through equity investment, which the petition calls a case of “round-tripping.” Two Americorp subsidiaries—Jasol Investment & Trading Company and Joindre Finance—invested Rs 254.87 crore in five Indiabulls subsidiaries. Indiabulls Ventures received Rs 39.58 crore; Indiabulls Housing Finance received Rs 22.88 crore; Myrina Builders recieved Rs 31 crore; Iphito Real Estate received Rs 44 crore; and Indiabulls Real Estate received Rs 117.41 crore.

Three subsidiaries of the Chordia Group, which operates in real estate, received Rs 1,209 crore from IBHFL. “This loan was squared up through money diverted from Mahalunge Land Developers (group Company of Chordia) from the amount borrowed from IBHFL,” the petition notes. “In addition Rs. 50 crores was paid as professional fee to Indiabulls Real Estate Limited.”

In all, these five corporate groups received loans worth Rs 9,248 crore. “In other words, borrowing companies bestow huge benefits to the key shareholders and Chairman of IBHFL for the favour they get in the form of loans from IBHFL,” the petition said.

In April 2016, Gehlaut’s name appeared in the Panama Papers, a leaked database of the documents of the Panamanian law firm Mossack Fonseca that includes attorney-client information of millions of offshore entities. “Sameer Gehlaut had bought three top London properties through a web of intermediary companies all leading to SG Family Trust owned by the parents of Divya Gehlaut, wife of Sameer Gehlaut,” the petition noted, citing an Indian Express report.

The petition detailed some other malpractices by Gehlaut-promoted companies. One of the main irregularities it cited was the issuance of compulsory convertible debentures, or CCDs—debt instruments that should be compulsorily convertible to equity. However, these had been left optional and have been used to “route public money into private equity,” the petition said. It named 18 companies promoted by Indiabulls or Gehlaut, including EMU Realcon and Galax Minerals, as well as Myrina Real Estate and Myrina Builders.

The petition noted that EMU Realcon, which is owned by Sameer Gehlaut and received Rs 66 crore from three DLF companies, made investments using CCDs at almost a nil rate of interest. “The terms of using this vehicle is contrary to and in violation of standard practices. Although these debentures are compulsory in principle, the holder of these CCDs has the liberty to exercise the option of redeeming them. The money is being moved from one company to another without any encumbrances, such as payment of interest and taxes chargeable thereupon,” the petition said.

According to the petition, the financial practices of IBHFL and its promoters are fraudulent, and violated various sections of the Companies Act of 2013, Sections 403, 406 and 420 of the Indian Penal Code—misappropriation of property, breach of trust and cheating, respectively—as well as various guidelines of the Reserve Bank of India and National Housing Bank, the regulatory authority that oversees housing-finance institutions. It named the NHB as a respondent, alongside other regulatory bodies such as the Serious Fraud Investigation Office and the Security and Exchanges Board of India, as well as the ministry of corporate affairs. The petition condemned these institutions for “complete inaction” against IBHFL, and demanded an immediate order for a thorough investigation.

“The instant scam follows close to the heels of scams such as those perpetrated by ICICI Bank, IL&FS and Dewan Housing Finance Limited,” the petition said. “It illustrates how promoters and persons in charge of large NBFCs”—non-banking finance corporations—have looted public monies invested in them and diverted them to their own companies using shell companies.” Any inaction, the petition stated, could “result in jeopardizing and undermining of public interest, rule of the law and the regulatory structure besides probable loss to the public exchequer.”

China's Golden Corridor – Gold Reserves And Negative Yield

Earlier this year, gold prices hit all-time highs in most major currencies.

The British Pound… the Canadian Dollar… the Australian Dollar… the Indian Rupee… the Japanese Yen… the Chinese Yuan… the South African Rand… and more.

It also broke above $1,500 in dollar terms. The highest it’s been in 6 years.

This shouldn’t come as a total surprise…a trade war between global economic powers, global debt spiraling out of control…

Iran and North Korea building up weapons…

The world is in uncharted waters.

Are the chickens going to come home to roost?

Today I’ll share a few of the major key themes that every investor needs to be aware of right now.

The Chinese Yuan is in Freefall

Given the recent onslaught of tweets from Donald Trump, you’d think the Chinese Yuan had just started falling.

In reality though, the Yuan has been depreciating since 2014.

This trend was further magnified when the Chinese government let the Yuan fall below its symbolic threshold of 7 Yuan per U.S. dollar.

When this happened, the #POTUS tweeting machine went out in full force, labeling China a currency manipulator.

Below is a chart which shows the historical exchange rate between the Yuan and the U.S. dollar.

Currency devaluation aside, it makes a lot of sense to own assets which hold their value.

Physical assets like gold, art and vintage wine all make for excellent hedges against currency devaluation.

But it’s tough for major institutions or governments to buy enough art or wine to truly protect themselves. This leaves gold as the number one acquisition.

It should come as no surprise that central banks have been very active in buying gold.

Especially China’s…

The Chinese Central Bank is Buying TONS of Gold

And I mean that literally.

Just so far this year, the Chinese have acquired 2.7 million ounces (92.5 tons) of gold. Using a spot price of $1,500, that’s $4 billion worth of bullion.

Below is a chart showing Chinese Gold Reserves.

As a country focused on exporting more than it imports, it’s no surprise China wants to keep its currency value low. I could see the Chinese accumulating more gold over the coming months if their currency continues to weaken due to the trade war.

The U.S.-China trade war has not only impacted the American and Chinese economies, but the entire pattern for global trade as well.

Leading global economic indicators like national Purchasing Manufacturing Indexes have only recently begun to nosedive. And this could easily be just the tip of the iceberg.

To make matters worse, it’s getting harder and harder to find somewhere safe to park cash.

In times of chaos, government bonds are usually a standard go-to investment.

However, times are changing.

Right now, many government bonds actually have a negative yield.

You read that right – if you invest $100 into negative yield or a government bond in almost any European nation, you’re going to get back less than $100 in 10 years’ time.

How crazy is that?

Below is a table which shows the current yields on government bonds in nations around the world. The darker the red, the more negative the yield.

I don’t see this changing anytime soon either.

I believe there’s more devaluation to come.

Below is a chart which shows the soaring amount of negative yield government debt. It has recently surpassed $15 trillion.

More alarming is the amount of corporate debt that has also hit negative yield. Currently there is over $1.2 trillion in negative yield corporate debt.

Just a few years ago there was virtually none. Below is a chart showing this dramatic increase.

Unquestionably there is blood in the streets of the bond market. Investors have no choice but to look for other places as stores of value.

That’s when investors look to the famous “pet rock” and “barbarous relic” for some wealth protection.

After all, it’s that or slowly lighting your money on fire buying bonds in countries with negative interest rates.

With bond yields the least attractive they’ve been in years, investors and central banks are turning to gold.

And with the recent surge in the Commitment of Traders long positioning and the price of gold smashing through $1,500… many pundits are saying “THIS IS IT!”

The technical chartists are all coming out with their best head and shoulders, bull flag, sliding wedge and upside-down watermelon patterns that determine the next leg up in gold.

To be honest, I couldn’t care less what the talking heads say their target price is.

From a fundamental perspective gold is very strong right now.

With nearly two decades of experience managing a fund focused on the commodity sector… I know that being positioned in the best gold developers and gold producers offers tremendous leverage to rising gold prices.

My subscribers and I are up over 100% on one of my strongest conviction investments so far this year.

Many of our other positions are up over 50% so far this year. Our portfolio is incredibly well positioned to profit from the global market chaos.

The unrest in China, the trade war and the rise of negative yield debt aren’t likely to be cleanly resolved anytime soon.

And in the meantime, many will flock to the safest haven they know – gold.

The Disconnect Between The Markets & Economy Has Grown

A couple of years ago, I wrote an article discussing the disconnect between the markets and the economy. At that time, the Fed was early into their rate hiking campaign. Talks of tax cuts from a newly elected President filled headlines, corporate earnings were growing, and there was a slew of fiscal stimulus from the Government to deal with the effects of 3-major hurricanes and 2-devastating wildfires. Now, the Fed is cutting rates, so it is time to revisit that analysis.

Previously, the consensus for the rise in capital markets was the tax cuts, and low levels of interest rates made stocks the only investment worth having. 

Today, rates have risen, economic growth both domestically and globally has weakened, and corporate profitability has come under pressure. However, since the Fed is cutting rates, hinting at expanding their balance sheet, and a “trade deal” is at hand, stocks are the only investment worth having.

In other words, regardless of the economic or fundamental backdrop, “stocks are the only investment worth having.” 

I am not so sure that is the case.

Let’s begin by putting the markets into perspective.

Yes, the markets are flirting with “all-time highs.” While this certainly sounds impressive, for many investors, they have just started making money on their investments from the turn of the century. As we noted in “The Moment You Know You Know, You Know,” what is often forgotten is the massive amount of “time” lost in growing capital to meet retirement goals.

This is crucially important to understand as was something I addressed in “Stocks – The Great Wealth Equalizer:”

“By the time that most individuals achieve a point in life where incomes and savings rates are great enough to invest excess cash flows, they generally do not have 30 years left to reach their goal. This is why losing 5-7 years of time getting back to “even” is not a viable investment strategy.

The chart below is the inflation-return of $1000 invested in 1995 with $100 added monthly. The blue line represents the impact of the investment using simple dollar-cost averaging. The red line represents a “lump sum” approach. The lump-sum approach utilizes a simple weekly moving average crossover as a signal to either dollar cost average into a portfolio OR moves to cash. The impact of NOT DESTROYING investment capital by buying into a declining market is significant.”

“Importantly, I am not advocating “market timing” by any means. What I am suggesting is that if you are going to invest into the financial markets, arguably the single most complicated game on the planet, then you need to have some measure to protect your investment capital from significant losses.

While the detrimental effect of a bear market can be eventually recovered, the time lost during that process can not. This is a point consistently missed by the ever bullish media parade chastising individuals for not having their money invested in the financial markets.”

However, let’s set aside that point for the moment, and discuss the validity of the argument of the rise of asset prices is simply a reflection of economic strength.

Assuming that individuals are “investing” in companies, versus speculating on price movement, then the investment process is a “bet” on future profitability of the company. Since, companies derive their revenue from consumption of their goods, products, and services; it is only logical that stock price appreciation, over the long-term, has roughly equated to economic growth. However, during shorter time-frames, asset prices are affected by investor psychology which leads to “boom and bust” cycles. This is the situation currently, which can be seen by the large disconnect between current economic growth and asset prices.

Since January 1st of 2009, through the end of the second quarter of 2019, the stock market has risen by an astounding 164.90% (inflation-adjusted). However, if we measure from the March 9, 2009 lows, the percentage gain explodes to more than 200%. With such a significant gain in the financial markets, we should see a commensurate indication of economic growth.

The reality is that after 3-massive Federal Reserve driven “Quantitative Easing” programs, a maturity extension program, bailouts of TARP, TGLP, TGLF, etc., HAMP, HARP, direct bailouts of Bear Stearns, AIG, GM, bank supports, etc., all of which total more than $33 Trillion, the economy grew by just $3.87 Trillion, or a whopping 24.11% since the beginning of 2009. The ROI equates to $8.53 of interventions for every $1 of economic growth.

Not a very good bargain.

We can look at this another way.

The stock market has returned almost 103.6% since the 2007 peak, which is more than 4-times the growth in GDP and nearly 3-times the increase in corporate revenue. (I have used SALES growth in the chart below as it is what happens at the top line of income statements and is not AS subject to manipulation.)

The all-time highs in the stock market have been driven by the $4 trillion increase in the Fed’s balance sheet, hundreds of billions in stock buybacks, and valuation (PE) expansion. With Price-To-Sales ratios and median stock valuations near the highest in history, one should question the ability to continue borrowing from the future?

Speaking of rather extreme deviations, another concern for the detachment of the markets from more basic economic realities, the deviation of reported earnings from corporate profits after-tax, is at historical extremes.

These sharp deviations tend to occur in late market cycles when “excess” from speculation has reached extremes. Recessions tend to follow as a “reversion to the mean“ occurs.

While, earnings have surged since the end of the last recession, which has been touted as a definitive reason for higher stock prices, it is not all as it would seem.

Earnings per share are indeed an important driver of markets over time. However, the increase in profitability has not come strong increases in revenue at the top of the income statement. The chart below shows the deviation between the widely touted OPERATING EARNINGS (earnings before all the “bad” stuff) versus REPORTED EARNINGS which is what all historical valuations are based. I have also included revenue growth, as well.

This is not a new anomaly, but one which has been a consistent “meme” since the end of the financial crisis. As the chart below shows, while earnings per share have risen by over 360% since the beginning of 2009; revenue growth has barely eclipsed 50%.

While suppressed wage growth, layoffs, cost-cutting, productivity increases, accounting gimmickry, and stock buybacks have been the primary factors in surging profitability, these actions have little effect on revenue growth. The problem for investors is all of the gimmicks to win the “beat the estimate game” are finite in nature. Eventually, real rates of revenue growth will matter. However, since suppressed wages and interest rates have cannibalized consumer incomes – there is nowhere left to generate further sales gains from in excess of population growth.

Left Behind

While Wall Street has significantly benefited from the Fed’s interventions, Main Street has not. Over the past few years, as asset prices surged higher, there has been very little translation into actual economic prosperity for a large majority of Americans. This is reflective of weak wage, economic, and inflationary growth which has led to a surge in consumer debt to record levels.

Of course, weak economic growth has led to employment growth that is primarily a function of population growth. As I addressed just recently:

“Employment should increase to accommodate for the increased demand from more participants in the economy. Either that or companies resort to automation, off-shoring, etc. to increase rates of production without increases in labor costs. The chart below shows the total increase in employment versus the growth of the working-age population.”

While reported unemployment is hitting historically low levels, there is a swelling mass of uncounted individuals that have either given up looking for work or are working multiple part-time jobs. This can be seen below which shows those “not in labor force,” as a percent of the working-age population, skyrocketing.

If employment was indeed as strong as reported by government agencies, then social benefits would not be comprising a record high of 22% of real disposable incomes. 

Without government largesse, many individuals would literally be living on the street. The chart above shows all the government “welfare” programs and current levels to date. While unemployment insurance has hit record lows following the financial crisis, social security, Medicaid, Veterans’ benefits and other social benefits have continued to rise and have surged sharply over the last few months.

With 1/5 of incomes dependent on government transfers, it is not surprising that the economy continues to struggle as recycled tax dollars used for consumption purposes have virtually no impact on the overall economy.

Conclusion

While financial markets have surged to “all-time highs,” the majority of Americans who have little, or no, vested interest in the financial markets have a markedly different view. While the Fed keeps promising with each passing year the economy will come roaring back to life, the reality has been that all the stimulus and financial support hasn’t been able to put the broken financial transmission system back together again.

Amazingly, more than two-years following the initial writing of this article, the gap between the markets and the economy has grown even wider. Eventually, the current disconnect between the economy and the markets will merge.

I bet such a convergence will likely not be a pleasant one.