A few fast bulletins earlier than I start in the present day’s submit.
1. Masterclass – Pondering Clearly in A Market Disaster: I’m internet hosting this Masterclass tomorrow, Saturday, nineteenth April 2025, 7 PM IST Onwards. The underlying concept is that can assist you take care of the messiness of market panics and crises, so you may defend your wealth, peace of thoughts, and long-term targets. I had 100 seats obtainable for the Masterclass, and now simply 20 stay. Click on right here to know extra and be a part of.
2. Relaunch of Worth Investing Almanack: I’ve relaunched my premium publication, the Worth Investing Almanack (VIA), which subscribers have referred to as “…the very best supply in India on Worth Investing, for each newcomers and consultants.” Click on right here to learn extra and subscribe to VIA at a particular launch value (obtainable just for the primary 100 subscribers). Additionally, in the event you want to try the March 2025 VIA subject earlier than deciding to rejoin, click on right here to obtain.
The Investor’s Information to Recognizing Unhealthy Promoters Earlier than It’s Too Late
We Indians love tales. From Ramayana to Reliance, we’re a rustic moved by narratives. And in terms of investing, maybe no story sells higher than that of the visionary promoter — the larger-than-life determine who claims to be fixing huge issues and creating generational wealth for shareholders (don’t ask, which) within the course of.
Now, I don’t imply right here that each one such tales that Indian promoters inform us are unhealthy. Some are real. However most are simply well-packaged, and some are designed to do only one factor — take you for a journey. And once you peel again the layers of a few of these tales, what you usually discover will not be innovation or integrity, however obfuscation, opportunism, and in some instances, outright fraud.
The issue isn’t that we don’t see it, however that we regularly refuse to. As a result of hope, out there, tends to talk louder than proof. Typically, sarcastically, hope turns into our investing technique.
One current instance that captured consideration, after which disillusionment, is Gensol Engineering. What began as a promising photo voltaic and electrical mobility play, quickly started to indicate cracks that now we have seen far too many occasions earlier than. From questionable related-party transactions to preferential allotments at steep reductions, from opacity in monetary disclosures to the exits of board members and auditors, the Gensol case has unfolded like a slow-motion model of a promoter script that many people have watched earlier than. And but, it labored, till it didn’t.
The crux of the fraud was that public cash was being utilized in ways in which disproportionately benefited entities linked to the promoters. The complexity of those transactions was excessive, however the intent, because it got here to mild, was painfully easy. The promoter was within the driver’s seat, however minority shareholders had been simply passengers alongside for the journey, and someplace alongside the way in which, belief was left by the roadside.
Now, the issue isn’t simply Gensol, and so I don’t wish to delve a lot right here. The true downside is systemic. Our markets are stuffed with examples the place promoters have handled listed corporations as non-public fiefdoms. Whether or not it’s Satyam, Sure Financial institution, DHFL, Karvy, or Religare, the playbook stays remarkably constant.
The widespread thread is that of promoters who considered the corporate not as one thing they had been entrusted to construct, however as one thing they owned fully, together with your cash.
Float a couple of non-public entities. Use the general public firm to fund them. Hold disclosures murky. Hold the board compliant. Hearth the auditor in the event that they ask too many questions. By the point minority traders realise what’s taking place, it’s usually too late. The wealth has already been transferred, and the injury already executed.
What’s extra troubling is how we, as minority shareholders, have in some way satisfied ourselves that just a little little bit of manipulation is okay. That if the inventory goes up, the whole lot else will be forgiven.
Ask round and also you’ll hear issues like, “Sab karte hain,” or “At the least he’s rising the enterprise.” And that’s the mindset that’s costing us traders probably the most. We don’t search for clear companies anymore. We simply search for these which might be much less soiled (the ‘lesser evil’).
If a promoter is reducing corners, mendacity in footnotes, or treating the corporate like his household’s piggy financial institution, it’s solely a matter of time earlier than one thing breaks. And when it does, it’s not the promoter who pays, it’s you and me, as a minority shareholder. All the time.
And but, it doesn’t should be this manner. There are Indian corporations that play it straight (on the “centre of the court docket” as Buffett would have mentioned). They disclose clearly, and deal with minority shareholders like homeowners. These corporations exist, it’s simply that they’re not normally those making headlines, and their founders should not on enterprise channels or podcasts with one million views.
Mainly, what we’d like is a mindset shift. We have to cease asking, “How briskly is that this firm rising?” and “What sort of return can this inventory give?” and begin asking, “How pretty is the enterprise being run?”
That’s why I consider, greater than ever, that administration high quality isn’t simply one of many issues to take a look at whereas analysing an organization. It’s the factor. You will be off in your valuation. You’ll be able to miss an trade development. You’ll be able to overpay just a little. However in the event you’ve backed a criminal or a clean talker with no conscience, no monetary mannequin will prevent. The numbers might look high-quality in the present day, however the rot normally begins someplace within the footnotes and the disclosures no person reads.
We additionally must cease pretending we’re victims. We’re not. We allow this technique each time we run after the subsequent scorching inventory or theme with out asking primary questions, like:
- Who’s the promoter?
- What’s his monitor file?
- Does he have a historical past of treating shareholders effectively?
- Has he performed this recreation earlier than?
If the reply feels off, you don’t want a forensic audit. Go away the sunk prices of effort and time behind, and easily stroll away.
How Do You Spot a Shady Promoter Earlier than It’s Too Late?
This raises a pure query — is there something within the numbers, bulletins or regulatory filings that may show you how to spot a promoter who’s not enjoying clear?
Nicely, as per my expertise and understanding, whereas no metric is ideal, there are a couple of indicators that always present up early, in the event you’re paying consideration. And, by the way in which, they won’t present up within the headlines, however within the annual report footnotes and a few patterns.
For instance, frequent related-party transactions, particularly when the corporate is promoting items or providers to entities owned by the promoter’s household, ought to instantly increase eyebrows. These offers could also be authorized on paper, however they usually sign the place the actual worth is being siphoned. Equally, if the promoter’s non-public corporations are common suppliers, landlords, or “consultants” to the listed entity, know that one thing is off.
Then, be careful for giant loans or advances to “others” on the steadiness sheet, particularly when the recipient isn’t clearly named. That “different” is commonly one other pocket of the promoter’s trousers.
Additionally, keep watch over exits of auditor and board members. If unbiased administrators or auditors resign with out clear causes, or in the event that they’re being rotated each couple of years, that’s usually the canary within the coal mine.
One huge pink flag is when the corporate reveals robust reported income however constantly weak or damaging money flows. This disconnect is the traditional signature of accounting video games. If money isn’t following income, it’s time to query what these income actually characterize.
Then there’s the sample of frequent fairness dilution via preferential allotments, which is commonly executed at costs decrease than market, and to ‘pleasant’ events. If the promoter is issuing increasingly shares whereas the story is heating up, chances are high you’re funding the social gathering.
Lastly, take a look at promoter share pledging. Whereas pledging isn’t improper by itself, excessive ranges of pledged shares mixed with erratic company behaviour is a harmful mixture. If the inventory falls, the promoter might lose management, and you could possibly lose your shirt and the whole lot else.
Now, none of those indicators ought to be seen in isolation. However once you see a couple of of them collectively, don’t look away. Don’t dismiss it as “enterprise as regular.” As a result of when the promoter is laying traps, it’s normally the minority shareholder who walks into them.
Decide Character Extra Than Money Flows
Investing in India requires a thick pores and skin and a sharper eye. You’ll be able to’t simply take a look at income or revenue development. You need to perceive capital allocation. You need to learn between the strains in annual reviews. You need to watch boardroom exits such as you’d watch a fireplace alarm when your own home is on fireplace. And most significantly, you need to decide character, which is the toughest factor to quantify, however a very powerful factor to know.
A promoter who cuts corners in good occasions will intestine the enterprise in unhealthy occasions. And one who builds on belief will defend the enterprise prefer it’s their very own.
Right here, I bear in mind this quote from Thomas Phelps’s 100 to 1 within the Inventory Market:
Do not forget that a person who will steal for you’ll steal from you.
The irony is that we all know this deep down. All of us have tales of that one inventory the place we ignored the pink flags and paid the value. We additionally know that the very best compounding usually comes from clear companies that traders usually neglect whereas chasing that ‘pot of gold’ on the finish of the rainbow.
It’s excessive time (once more!) we begin seeing company governance not as a facet dish, however as the principle course. As a result of in India, the place promoter management is commonly absolute, governance will not be non-obligatory…it’s the whole lot.
A promoter who treats the enterprise like their private checking account is rarely going to create lasting worth. You would possibly become profitable for some time when the tide is rising, however you’ll by no means sleep effectively and will end up bare when the tide goes out.
Lastly, if there’s one hard-earned fact in Indian investing, it’s that the promoter is the enterprise. When you can’t belief them, nothing else issues. No projections matter, not the trade tailwinds, not even the monetary statements. As a result of these can all be massaged. However character, as soon as misplaced, not often comes again.
Peter Bernstein wrote in his good e book In opposition to the Gods:
Survival is the one highway to riches. Let me say that once more: Survival is the one highway to riches. You must attempt to maximize return provided that losses wouldn’t threaten your survival and if in case you have a compelling future want for the additional features you would possibly earn.
In a market like ours, attempting to guard your self from the injury that unscrupulous promoters may cause isn’t simply good, however important for survival.
It’s rational to keep away from companies the place integrity is handled as non-obligatory and governance is made a mockery of.
What isn’t rational is believing you could outsmart a promoter who’s already three steps forward, and particularly when your personal guard is down, and your questions are silenced by greed or FOMO.
So, be taught to say no. Study to stroll away from ‘fishy’ promoters. And above all, be taught to respect the self-discipline of those that play by the principles, even when nobody is watching. That’s the place actual compounding occurs.