'Excess securities'

The Securities and Exchange Board of Indai (Sebi) has remarked in a recent discussion paper that it has come across cases where listed companies had more shares in the system than their listed/issued capital. This is startling, to say the least.

Prithvi Haldea of Prime Database points out that having this is tantamount to having forged currency in the system.

This is simply because the funds generated by the issue of the additional capital has not been accounted for in the company’s paid-up capital. With most companies now having shifted largely to the dematerialised format, the primary beneficiary of such forged currency would be the promoters. Haldea points out that when physical share certificates were being used, fake certificates could be printed by anyone and not necessarily the promoter group. Under the demat system, however, additional shares can be issued only under instructions by the company.

But the problem of ‘excess securities’, as Sebi calls it, needn’t always be because of such mala fide intent. According to Sebi, in some cases, the ‘excess securities’ may only be a temporary phenomenon arising out of the fact that the company has made further issue of securities and dematerialised such fresh capital without having received the listing approval from stock exchanges. Once the necessary approvals are received, these shares get regularised. But whatever the cause, there needs to be a clamp down on the practice of having excess securities.

Although Sebi has tried to tackle this issue earlier, there continue to be violations. The earlier system of putting a large responsibility on listed companies and stock exchanges clearly hasn’t worked. According to the discussion paper, Sebi’s latest move is to put some of the onus on depositaries to ensure that the dematerialised securities are not in excess of listed/issued capital of a company. This would go a long way in dealing with the problem of ‘excess securities’.

Standing tall
Tantia Constructions is among the few recent IPOs that is trading at a premium to its listing price. In fact, with a return of 140% over its issue price, Tantia is the best performing stock that hit the markets since April this year (See table).

The huge outperfomance of the stock since listing is backed by a robust growth in revenues and earnings for the year ended March 2006. Tantia, a Kolkata-based construction company with a strong presence in East India, reported a 57% increase in its revenues for the year ended March 2006 to Rs 162 crore, and a 51% jump in operating profit. What’s more, due to flat depreciation and tax charges, profit after tax jumped by 200%. For the quarter ended March this year, revenues grew by a robust 140% to Rs 66 crore, thanks to the maximum number of billings which took place in the quarter. Fourth quarter revenues accounted for 40% of the whole year’s sales.

The outlook for the near term is good, with the company sitting on an order book of Rs 650 crore. This works out to four times the company’s sales for financial year 2005-06. Also, the company’s market capitalisation is Rs 188 crore and its enterprise value (EV) is estimated at a little over Rs 200 crore. Considering that the company has an order book of Rs 650 crore, the EV/sales ratio is less than 0.33 times, which is considerably lower than large-cap peers in the construction industry. The markets are probably waiting for the huge order to get reflected in the company’s earnings. Using the company’s expanded equity base after the IPO, Tantia has an EPS of just Rs 3.7. Its current share price of Rs 121 discounts this diluted EPS by as high as 32 times.

Contributed by Mobis Philipose & Pallavi Pengonda.