Tata Finance: Mounting losses

The fiasco of Tata Finance’ (TFL) wholly owned subsidiary, Niskalp Investments has dragged down the stock price of TFL along with the company’s image. We had earlier written an article on this matter. We update the investors about the latest happenings in the company. Allegedly, one of the directors of Tata Finance Mr. Talaulicar is investigated by the SEBI for insider trading in the company’s stock. Mr. Talaulicar is also the director of Tata Sons, Tata Industries and the Chairman of Niskalp. He is suspected to have sold his entire personal holding of 0.1 m shares in TFL on the last date of March ’01 (broker’s contract notes for sale transactions are however back dated). This is also the first day of opening of TFL’s right issue. The price at which he divested his holding in TFL was double at Rs 69 per share when the scrip was quoting at Rs 32 per share on the BSE. Being a chairman of Niskalp, Mr. Talaulicar was already aware of the carry forward losses made by Niskalp. Consequently, he liquidated his position in TFL in anticipation that share price of TFL would take a beating in the markets once the information becomes public (through rights document).

TFL’s managing director Mr. Pendse is also accused of incurring carry forward losses for the company to the extent of Rs 300 m in the June quarter of FY01. This loss was incurred on account of heavy investment in selective K-10 scrips including Global Tele, Zee and Pentamedia. Total loss on carry forward suffered by Niskalp in FY01 was to the tune of Rs 460 m. Further unauthorised transactions by Mr. Pendse have caused TFL a total loss of about Rs 1.5 bn. In brief both the directors have conspired a fraud upon the 9% convertible preference share investors for which rights document was issued.

Mr. Pendse is also accused of cheating regulators like the Reserve Bank of India (RBI) and SEBI. He had violated RBI's prudential norms by maintaining a lower than 12% capital adequacy ratio (CAR) and lending over 25% of TFL's networth to Niskalp. Mr. Pendse and his accomplices allegedly devised a scheme to cover up the losses by bringing out a convertible preference share issue.

Meanwhile, with fresh issue of shares worth Rs 400 m of Niskalp to Ewart Investment (a wholly owned subsidiary of Tata Sons) on June ‘01, Niskalp has ceased to be a TFL subsidiary. Ewart picked up a shade over 50% in Niskalp for Rs 398.5 m. The company claims the move to de-merge Niskalp was to improve the CAR of TFL.

Transaction done by TFL through Niskalp has also affected its financial image to borrow money from the markets. Bank of India (BOI) is already planning to restructure loans of Rs 3.6 bn (both funded and non-funded) given by it to TFL (Rs 560 m loan is shown in Niskalp’s books).

The crisis in the company has affected its fixed deposit programme also. TFL has decided to bring down its outstanding public deposits of Rs 9 bn and has already stopped renewing deposits.

At the current market price of Rs 24, Tata Finance is trading at a P/E of 6x March quarter annualised earnings. Transaction by TFL’s directors has shaken the investor confidence in the Tata group, which is perceived to be one of the most conservative groups. This could also affect the group’s plans in raising funds from the markets at a cheaper cost. For the retail investor who is already marred by US-64 and the financial institution fiasco has no safe avenues left for parking his funds other than government securities. (Considering the fact of current uncertainty in the equity markets.)