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The Tata Finance fiasco

Aug 7, 2001

Tata Finance has reported a lacklustre financial performance for the March quarter. The company’s earnings dropped by a significant 77%, due to an 89% decline in other income. A substantial reduction in dividend from subsidiaries was responsible for lower other income. For the full year ended June ’00, Tata Finance received a total dividend of Rs 503 m from its subsidiaries. Out of this, dividend from Niskalp Investments was Rs 370 m, accounting for about 70% of total dividend income. Niskalp is a wholly owned financial subsidiary of Tata Finance. It is this subsidiary of Tata Finance which is under scrutiny. For the year ended June ’00, Niskalp had provided for loss of Rs 71 m on non-delivery based trading and Rs 15 m as provision for diminution in the value of investments.

Tata Finance has not given any break-up for other income in the nine months ended March ’01. The dividend from Niskalp in the current year is likely to be on the lower side, as the company is suspected to have incurred huge losses in the capital market operations. As a result, it may not be able to pay high dividend. (As per the newspaper reports, Niskalp is alleged to have lost about Rs 600 m in the recent stock market meltdown.)

At the time of its right issue SEBI had asked Tata Finance to clarify allegations of huge losses made by Niskalp in the secondary markets. However, the company has defended that it was the notional loss due to poor capital market conditions. Nevertheless, the bottomline is that Tata Finance’ earnings have taken a hit in the current year due to lower dividend income from this subsidiary.

Apart from this, Niskalp has non-convertible debentures (NCDs) of Rs 1.2 bn in its books as on September ’00. These NCDs are alleged to be have been taken from the Tata Finance and misused.

The accounts of Tata Finance are also not clean. Tata Finance had total investments of Rs 3.7 bn as on December ’00, as per its prospectus filed for the rights issue in March ’01. The document mentions that the company has not provided Rs 262 m for depreciation in the quoted value of its investments. Considering the current market scenario, the provisioning amount is likely to be on the higher side as on June ’01.

This mismanagement of accounts has forced the Tatas’ to file a police complaint against their former managing director, Dilip Pendse, and five others, for unauthorised transactions that led to substantial losses. The charges relate to fraud in the private placement in which Tata Industries and other group companies invested up to Rs 890 m.

Meanwhile, Crisil has kept the rating of the company’s NCD, fixed deposit and commercial paper under watch following the recent announcement by the company of unauthorised financial transactions and sizeable losses in Niskalp.

Tata Finance is currently trading at a P/E of 7x March quarter annualised earnings. The stock price has come down by about 50% since March ’01 and is trading at near to its 52 week low. The perception of the company is already impacted by its failure to manage investors’ funds. This would also affect its funding business and consequently its financials. Added to this, the Tata Group’s plans to enter the banking sector through Tata Finance have received a major setback. With this one more non-banking finance company (NBFC) has shaken the investor confidence, which is likely to restrict future inflow to this sector.

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