Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

iShares MSCI ACWI ETF / Technical Analysis

<ul>
<li>There continues to be little traction above $93 on MSCI ACWI (ACWI-US), which remains the top-end of our anticipated 2023 trading range. Important downside targets are $86, $84, and $75-77.</li>
<li>Additionally, the EURO STOXX 50 remains below 2-year resistance at 4400-4415.</li>
<li>We remain overweight Europe, Japan, and India, and we prefer to only add exposure on a pullback -- especially in Japan where indexes are bullish yet extended.</li>
</ul>


There continues to be little traction above $93 on MSCI ACWI (ACWI-US), which remains the top-end of our anticipated 2023 trading range. Important downside targets are $86, $84, and $75-77.
Additionally, the EURO STOXX 50 remains below 2-year resistance at 4400-4415.
We remain overweight Europe, Japan, and India, and we prefer to only add exposure on a pullback -- especially in Japan where indexes are bullish yet extended.


No Traction Above $93 on ACWI-US or 4400-4415 on EURO STOXX 50. Buys in Defensives/Japan/EM

Specialist in Indian Banking and Economic Research

Hemindra Hazari

Government banks have been derided for indulging in ‘phone banking’ (being instructed on the telephone by ruling party politicians and civil bureaucrats to lend to specific unworthy companies). But what the Enforcement Directorate’s (ED) affidavit in the Delhi Court (as disclosed by the media -- <a href="https://www.hindustantimes.com/india-news/71-loans-given-in-kapoor-s-tenure-turned-bad-ed-101633976406867.html" target="_blank" rel="noopener">here</a> and <a href="https://economictimes.indiatimes.com/industry/banking/finance/enforcement-directorate-says-bank-loan-fraud-was-mutually-beneficial-to-avantha-yes-bank/articleshow/86699558.cms?from=mdr" target="_blank" rel="noopener">here</a>)  reveals is that senior executives from the private sector <a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">Yes Bank (YES IN)</a> were no different from their government counterparts. The only difference is that the concerned senior executives at Yes Bank were excessively paid, and were highly qualified persons from premier institutions, as compared with government bankers. The ED’s charge sheet alleges that senior executives at Yes Bank knowingly engaged in sham transactions, and the accused Yes Bank officials put the onus on the transactions on the now jailed Rana Kapoor, the erstwhile founder-Chief Executive Officer (CEO), Yes Bank. Despite their educational qualifications, previous work experience and the senior positions they held, they allowed themselves to  be reduced to being low-paid clerks – or worse, since the latter at least know enough not to engage in fraudulent transactions. The entire edifice of Yes Bank’s credit appraisal, independent risk management and board oversight was a myth, as nobody recorded strong objections to giving loans to a shell company and structuring a product whose sole objective was a spurious show of compliance with regulatory guidelines.   Stakeholders, media and analysts rarely get to see the inner working of a bank and how loans are appraised, independently evaluated by risk management and subsequently monitored. The ED’s affidavit, as reported by the media, provides such a rare inside knowledge view of how a poor quality loan for a dubious purpose was conceived, structured and approved by an over-qualified and overpaid team, solely on the basis of instructions from the CEO. What is equally disturbing, but also telling, is that three of the accused have left the bank, and have taken up fresh engagements with their new organisations – who, presumably, were impressed with these persons’ work credentials at Yes Bank, and wanted them to continue the same practices for their new employers.What is worrying is that Yes Bank’s practice of having senior executives with impressive qualifications, stellar resumes, and imposing titles, knowingly engaging in such transactions may not be the exception in the private financial sector. Regulatory agencies have investigated or are currently investigating similar transactions at <a href="https://hemindrahazari.com/2021/06/16/cg-power-loan-scandal-indusind-bank-pioneers-lending-without-documents-to-a-firm-with-no-assets/" target="_blank" rel="noopener">Indusind Bank</a>, <a href="https://hemindrahazari.com/2021/06/23/aditya-birla-finances-loans-to-a-shell-company-another-reason-why-corporates-shouldnt-be-allowed-to-control-banks/" target="_blank" rel="noopener">Aditya Birla Finance</a>, <a href="https://economictimes.indiatimes.com/prime/corporate-governance/how-an-eur44-million-loan-from-stanchart-put-murugappas-cg-power-between-sebi-and-a-hard-place/primearticleshow/83285540.cms" target="_blank" rel="noopener">Standard Chartered Bank</a> and <a href="https://hemindrahazari.com/2021/08/31/sebi-exposes-kotak-mahindra-mutual-funds-policy-of-investing-blindly/" target="_blank" rel="noopener">Kotak Mahindra Mutual Fund</a>. This indicates that the situation may be systemic. It appears that, for all their experience and seniority, key senior executives in the private financial sector are paid inflated packages precisely for engaging in the intellectually undemanding task of ‘phone banking’. The valuations of private financial firms may need to be reassessed in the light of these disclosures.

Government banks have been derided for indulging in ‘phone banking’ (being instructed on the telephone by ruling party politicians and civil bureaucrats to lend to specific unworthy companies). But what the Enforcement Directorate’s (ED) affidavit in the Delhi Court (as disclosed by the media -- here and here)  reveals is that senior executives from the private sector Yes Bank (YES IN) were no different from their government counterparts. The only difference is that the concerned senior executives at Yes Bank were excessively paid, and were highly qualified persons from premier institutions, as compared with government bankers. The ED’s charge sheet alleges that senior executives at Yes Bank knowingly engaged in sham transactions, and the accused Yes Bank officials put the onus on the transactions on the now jailed Rana Kapoor, the erstwhile founder-Chief Executive Officer (CEO), Yes Bank. Despite their educational qualifications, previous work experience and the senior positions they held, they allowed themselves to  be reduced to being low-paid clerks – or worse, since the latter at least know enough not to engage in fraudulent transactions. The entire edifice of Yes Bank’s credit appraisal, independent risk management and board oversight was a myth, as nobody recorded strong objections to giving loans to a shell company and structuring a product whose sole objective was a spurious show of compliance with regulatory guidelines.   Stakeholders, media and analysts rarely get to see the inner working of a bank and how loans are appraised, independently evaluated by risk management and subsequently monitored. The ED’s affidavit, as reported by the media, provides such a rare inside knowledge view of how a poor quality loan for a dubious purpose was conceived, structured and approved by an over-qualified and overpaid team, solely on the basis of instructions from the CEO. What is equally disturbing, but also telling, is that three of the accused have left the bank, and have taken up fresh engagements with their new organisations – who, presumably, were impressed with these persons’ work credentials at Yes Bank, and wanted them to continue the same practices for their new employers.What is worrying is that Yes Bank’s practice of having senior executives with impressive qualifications, stellar resumes, and imposing titles, knowingly engaging in such transactions may not be the exception in the private financial sector. Regulatory agencies have investigated or are currently investigating similar transactions at Indusind Bank, Aditya Birla Finance, Standard Chartered Bank and Kotak Mahindra Mutual Fund. This indicates that the situation may be systemic. It appears that, for all their experience and seniority, key senior executives in the private financial sector are paid inflated packages precisely for engaging in the intellectually undemanding task of ‘phone banking’. The valuations of private financial firms may need to be reassessed in the light of these disclosures.

Yes Men at Yes Bank, and Elsewhere: ‘Phone Banking’ in the Private Sector

Senior executives are rushing for the exit door at Aditya Birla Finance Ltd. (ABFL), the non-bank finance company (NBFC) subsidiary of <a href="https://www.smartkarma.com/entities/aditya-birla-capital-ltd" target="_blank" data-smartkarma-citation="entities:27031:1" rel="noopener">Aditya Birla Capital Ltd (ABCAP IN)</a> (ABC), the holding company for all the financial services business of the Aditya Birla group. Since May 2021, at least five senior officials in-charge of business verticals and control functions including the Chief Financial Officer (CFO) have quit. Coincidentally, the Securities and Exchange Board of India (SEBI)  <a href="https://hemindrahazari.com/2021/06/23/aditya-birla-finances-loans-to-a-shell-company-another-reason-why-corporates-shouldnt-be-allowed-to-control-banks/" target="_blank" rel="noopener">issued</a>  a show cause notice to ABFL as the regulator was investigating the NBFC’s dubious role in structuring and disbursing loans to a shell company linked to the erstwhile promoters of CG Power wherein the funds were used to transfer liabilities from the erstwhile promoter companies to the listed CG Power. The SEBI show cause notice cited by ET Prime specifically mentioned the role played by <a href="https://www.adityabirlacapital.com/about-us/leadership-team/ajay-srinivasan" target="_blank" rel="noopener">Ajay Srinivasan</a>  (non-executive director, ABFL and group CEO, ABC) and <a href="https://abfl.adityabirlacapital.com/pages/individual/about-us/peopledescription.aspx?ItemID=67&amp;TeamType=SM" target="_blank" rel="noopener">Devang Rawal</a> (then Head - Corporate Finance and subsequently promoted as Head – Corporate and Institutional, ABFL).Interestingly, ABFL is led by two CEOs, <a href="https://www.adityabirlacapital.com/about-us/leadership-team/rakesh-singh" target="_blank" rel="noopener">Rakesh Singh</a> (Managing Director and CEO, ABFL) and <a href="https://www.adityabirlacapital.com/about-us/leadership-team/tushar-shah" target="_blank" rel="noopener">Tushar Shah</a> (CEO for infrastructure business) and all the five individuals who have resigned reported to the former. Incidentally, Devang Rawal’s division which is currently being extensively investigated by SEBI also reports to Rakesh Singh.ABC declined to respond to queries sent by this analyst to enquire why these executives had quit and whether the board of directors at ABFL and ABC, especially the independent directors were informed of their departure.Stakeholders are concerned when there is a flurry of exits by senior executives in any firm as was seen in the recent case of <a href="https://www.newindianexpress.com/business/2021/sep/02/top-level-exits-irk-investorsof-au-smallfinance-bank-2353132.html" target="_blank" rel="noopener">AU Small Finance Bank</a>. That such an event at ABFL coincides with agencies investigating dodgy deals at a NBFC belonging to a prestigious industrial house should send alarm bells ringing.

Senior executives are rushing for the exit door at Aditya Birla Finance Ltd. (ABFL), the non-bank finance company (NBFC) subsidiary of Aditya Birla Capital Ltd (ABCAP IN) (ABC), the holding company for all the financial services business of the Aditya Birla group. Since May 2021, at least five senior officials in-charge of business verticals and control functions including the Chief Financial Officer (CFO) have quit. Coincidentally, the Securities and Exchange Board of India (SEBI)  issued  a show cause notice to ABFL as the regulator was investigating the NBFC’s dubious role in structuring and disbursing loans to a shell company linked to the erstwhile promoters of CG Power wherein the funds were used to transfer liabilities from the erstwhile promoter companies to the listed CG Power. The SEBI show cause notice cited by ET Prime specifically mentioned the role played by Ajay Srinivasan  (non-executive director, ABFL and group CEO, ABC) and Devang Rawal (then Head - Corporate Finance and subsequently promoted as Head – Corporate and Institutional, ABFL).Interestingly, ABFL is led by two CEOs, Rakesh Singh (Managing Director and CEO, ABFL) and Tushar Shah (CEO for infrastructure business) and all the five individuals who have resigned reported to the former. Incidentally, Devang Rawal’s division which is currently being extensively investigated by SEBI also reports to Rakesh Singh.ABC declined to respond to queries sent by this analyst to enquire why these executives had quit and whether the board of directors at ABFL and ABC, especially the independent directors were informed of their departure.Stakeholders are concerned when there is a flurry of exits by senior executives in any firm as was seen in the recent case of AU Small Finance Bank. That such an event at ABFL coincides with agencies investigating dodgy deals at a NBFC belonging to a prestigious industrial house should send alarm bells ringing.

Flurry of Senior Level Exits at Aditya Birla Financial Services

The ET Prime 3-part series based on the Securities and Exchange Board of India’s (SEBI) show cause notices to <a href="https://economictimes.indiatimes.com/prime/corporate-governance/how-an-eur44-million-loan-from-stanchart-put-murugappas-cg-power-between-sebi-and-a-hard-place/primearticleshow/83285540.cms" target="_blank" rel="noopener">Standard Chartered Bank</a>, <a href="https://economictimes.indiatimes.com/prime/corporate-governance/how-a-usd40-million-loan-to-cg-power-arm-in-gift-city-put-indusind-bank-under-sebi-glare/primearticleshow/83342665.cms" target="_blank" rel="noopener">Indusind Bank</a>  and <a href="https://economictimes.indiatimes.com/prime/corporate-governance/sebi-slaps-show-cause-on-aditya-birla-finance-for-realty-loans-to-a-shell-firm-to-help-thapars/primearticleshow/83518285.cms" target="_blank" rel="noopener">Aditya Birla Finance</a> highlighted the manner in which these institutions allegedly ‘evergreened’ their exposure and shifted their loans from the unlisted Thapar group entities to the listed CG Power and Industrial Solutions (CG Power) in 2017-2018. These transactions, if proven, would demonstrate the misuse of their banking and non-bank finance company license In all three cases a similar structure (see Annexure) was adopted: transactions were layered by providing loans to a shell company, thus eventually shifting liabilities from founder/promoter unlisted companies to CG Power and Industrial Solutions (CG Power), a publicly listed company. Obviously, this adversely affects the minority shareholders of CG Power.The modus operandi of providing foreign exchange loans to a foreign subsidiary of an Indian company to repay rupee loans of the parent, thereby ‘evergreening’ the loan, was not new. This analyst had first highlighted it in a research note in August 2012, when he was Head of Research and banking analyst with a sell-side firm. The dubious practice in these cases by the mentioned entities, apart from alleged ‘evergreening’, was the use of this route to shift liabilities from an unlisted company to a listed company. The ET Prime scoop has perhaps for the first time made public documentary proof of specific cases of the money trail and of routing funds through various companies to achieve the objective.The purpose of lending in foreign exchange to a foreign subsidiary of a domestic company, and layering the transactions through various companies, was to confuse auditors and regulators, and to hide the objective of the end-use of the loans. The brazenness of these transactions (transferring the funds to other companies within the same day or in a few days) and the possible violation of the Reserve Bank of India (RBI) <a href="https://rbidocs.rbi.org.in/rdocs/notification/PDFs/15MDC8CEB9A7BDE64745B9BE1DCEC3293CA1.PDF" target="_blank" rel="noopener">norms</a> for the end-use of external commercial borrowings indicate that these banks believed the regulators would not catch them, and it is therefore possible that it was a common practice.That these transactions were systemic, with a top-down approach, and not the work of ‘rogue’ employees, is visible in the fact that these dubious loans were cleared by the risk department and key divisional heads at Indusind Bank and Aditya Birla Finance, far from being punished for structuring the loans, were rewarded through promotions (<a href="https://hemindrahazari.com/2021/06/16/cg-power-loan-scandal-indusind-bank-pioneers-lending-without-documents-to-a-firm-with-no-assets/" target="_blank" rel="noopener">here</a> and <a href="https://hemindrahazari.com/2021/06/23/aditya-birla-finances-loans-to-a-shell-company-another-reason-why-corporates-shouldnt-be-allowed-to-control-banks/" target="_blank" rel="noopener">here</a>) and allowed to retain their jobs. It can therefore be presumed that these transactions had also been approved by their boards of directors, and they have to be held accountable.The important fact is that the three entities targeted by SEBI are not some fly-by-night operators. Rather, they are well established banks and an NBFC belonging to the house of Aditya Birla. If this analyst in 2012 was confident to publish and inform investors about such practices, as the facts were well known within banking circles, why was the banking/NBFC regulator not taking action against senior officials? It is on account of the lack of action by the RBI that senior officials in these entities were brazenly structuring such loans in 2017-2018. Sadly, to date, the Reserve Bank of India (RBI) has not exerted its considerable muscle to bring the key officials and the boards of directors in these institutions to account. So far the RBI has been content with levying monetary penalties on errant institutions; whereas in fact the regulator in the cases unearthed by SEBI should not only sack the key senior executives but render them unemployable in the financial sector, and also remove independent directors for their complicity. As long as the regulator mollycoddles errant senior executives and independent directors, such malpractices will continue to flourish as, understandably, the culprits have no fear of the regulator.

The ET Prime 3-part series based on the Securities and Exchange Board of India’s (SEBI) show cause notices to Standard Chartered Bank, Indusind Bank  and Aditya Birla Finance highlighted the manner in which these institutions allegedly ‘evergreened’ their exposure and shifted their loans from the unlisted Thapar group entities to the listed CG Power and Industrial Solutions (CG Power) in 2017-2018. These transactions, if proven, would demonstrate the misuse of their banking and non-bank finance company license In all three cases a similar structure (see Annexure) was adopted: transactions were layered by providing loans to a shell company, thus eventually shifting liabilities from founder/promoter unlisted companies to CG Power and Industrial Solutions (CG Power), a publicly listed company. Obviously, this adversely affects the minority shareholders of CG Power.The modus operandi of providing foreign exchange loans to a foreign subsidiary of an Indian company to repay rupee loans of the parent, thereby ‘evergreening’ the loan, was not new. This analyst had first highlighted it in a research note in August 2012, when he was Head of Research and banking analyst with a sell-side firm. The dubious practice in these cases by the mentioned entities, apart from alleged ‘evergreening’, was the use of this route to shift liabilities from an unlisted company to a listed company. The ET Prime scoop has perhaps for the first time made public documentary proof of specific cases of the money trail and of routing funds through various companies to achieve the objective.The purpose of lending in foreign exchange to a foreign subsidiary of a domestic company, and layering the transactions through various companies, was to confuse auditors and regulators, and to hide the objective of the end-use of the loans. The brazenness of these transactions (transferring the funds to other companies within the same day or in a few days) and the possible violation of the Reserve Bank of India (RBI) norms for the end-use of external commercial borrowings indicate that these banks believed the regulators would not catch them, and it is therefore possible that it was a common practice.That these transactions were systemic, with a top-down approach, and not the work of ‘rogue’ employees, is visible in the fact that these dubious loans were cleared by the risk department and key divisional heads at Indusind Bank and Aditya Birla Finance, far from being punished for structuring the loans, were rewarded through promotions (here and here) and allowed to retain their jobs. It can therefore be presumed that these transactions had also been approved by their boards of directors, and they have to be held accountable.The important fact is that the three entities targeted by SEBI are not some fly-by-night operators. Rather, they are well established banks and an NBFC belonging to the house of Aditya Birla. If this analyst in 2012 was confident to publish and inform investors about such practices, as the facts were well known within banking circles, why was the banking/NBFC regulator not taking action against senior officials? It is on account of the lack of action by the RBI that senior officials in these entities were brazenly structuring such loans in 2017-2018. Sadly, to date, the Reserve Bank of India (RBI) has not exerted its considerable muscle to bring the key officials and the boards of directors in these institutions to account. So far the RBI has been content with levying monetary penalties on errant institutions; whereas in fact the regulator in the cases unearthed by SEBI should not only sack the key senior executives but render them unemployable in the financial sector, and also remove independent directors for their complicity. As long as the regulator mollycoddles errant senior executives and independent directors, such malpractices will continue to flourish as, understandably, the culprits have no fear of the regulator.   

How Diversion and Layering Became a Common Modus Operandi, While the Regulator Slept

Yet another instance has come to light of the practice of disguising transactions by routing them through shell companies. As revealed by <a href="https://economictimes.indiatimes.com/prime/corporate-governance/sebi-slaps-show-cause-on-aditya-birla-finance-for-realty-loans-to-a-shell-firm-to-help-thapars/primearticleshow/83518285.cms" target="_blank" rel="noopener">ET Prime</a>, the Securities and Exchange Board of India (SEBI) issued show cause notice to Aditya Birla Finance (ABF) on the latter’s alleged role in transferring funds and assets from the erstwhile promoters/founders of CG Power and Industrial Solutions (CG Power) to CG Power. It has emerged that Ajay Srinivasan, non-executive director, ABF, and CEO, <a href="https://www.smartkarma.com/entities/aditya-birla-capital-ltd" target="_blank" data-smartkarma-citation="entities:27031:1" rel="noopener">Aditya Birla Capital Ltd (ABCAP IN)</a> (ABC), the immediate parent of ABF, was present at a meeting held in March 2016 with Gautam Thapar and his aides. The meeting was to discuss “Thapar Group Strategy” to close a loan facility of Rs 500 mn given to Graphic Paper Products, a step-down subsidiary of Ballarpur Industries, prior to extending further loans to the Thapar group. These revelations should send alarm bells ringing.  The transactions unearthed by SEBI can have only two explanations – (1) the board of directors of ABF was aware of these transactions and was complicit in the entire process or (2) the board of directors was kept in the dark by the executive management. The latter is difficult to believe, on account of the role of Ajay Srinivasan (a non-executive director) in the discussion on ‘Thapar Group Strategy” and in closing the Rs 500 mn loan facility.  Moreover, the size of each of the transactions to Blue Garden Estate Pvt. Ltd. (a shell company) would have required the board’s approval.In both cases it will imply that, in ABF, corporate credit appraisal, risk management, monitoring of end-use of funds and internal audit were non-existent. Thus it was able to approve and disburse Rs 3.9 bn spread over three loans to a shell company, where the security provided in the form of land parcels was dubious, as they were already encumbered. Hence the Reserve Bank of India (RBI), as the regulator for non-bank finance companies (NBFCs), would need to investigate ABF and ABC to determine whether these transactions were one-off or were there other similar transactions. That an individual of the stature of Ajay Srinivasan has been specifically mentioned in SEBI’s show cause notice adds to the gravity of the situation.Responding to a detailed questionnaire sent by this analyst, the official spokesperson of ABF said,<blockquote>Since the matter is sub-judice, it would be inappropriate for the company to respond to your specific queries. Aditya Birla Finance follows all applicable regulatory guidelines and the highest standards of corporate governance. Since your queries are based on incomplete and incorrect facts, any insinuations or conclusions drawn thereof, would give a distorted picture which would have the potential to cause harm to the reputation of the company and/or its officials. We are sure as a responsible analyst you would like to have correct and complete facts before publishing the story. </blockquote>Interestingly, <a href="https://www.linkedin.com/in/devangrawal/?originalSubdomain=in" target="_blank" rel="noopener">Devang Rawal</a> the then Business Head-Corporate Finance, ABF who probably initiated the transactions based on the March 2016 ‘Thapar Group Strategy’ meeting attended by Gautam Thapar and Ajay Srinivasan was elevated as Head–Corporate and Institutional Business in May 2018. His promotion is a testimony of the “highest standards of corporate governance” practiced by ABF.ABF is an unlisted company but its parent, ABC, is listed, and in both cases the equity and debt investors should be concerned at the manner in which these transactions were approved internally and by the board of directors. Far from setting the “highest standards of governance”, it sets a low bar in governance for a company belonging to the industrial house of Aditya Birla. It is precisely for such reasons as unearthed by SEBI at ABF that industrial houses should not be <a href="https://hemindrahazari.com/2020/11/23/rbis-working-group-recommends-foxes-be-put-in-charge-of-chicken-coops-cites-foxes-experience-management-expertise-and-strategic-direction/" target="_blank" rel="noopener">considered</a> for setting up banks, and their activities in the non-banking financial sector should be constantly monitored by vigilant regulatory authorities.

Yet another instance has come to light of the practice of disguising transactions by routing them through shell companies. As revealed by ET Prime, the Securities and Exchange Board of India (SEBI) issued show cause notice to Aditya Birla Finance (ABF) on the latter’s alleged role in transferring funds and assets from the erstwhile promoters/founders of CG Power and Industrial Solutions (CG Power) to CG Power. It has emerged that Ajay Srinivasan, non-executive director, ABF, and CEO, Aditya Birla Capital Ltd (ABCAP IN) (ABC), the immediate parent of ABF, was present at a meeting held in March 2016 with Gautam Thapar and his aides. The meeting was to discuss “Thapar Group Strategy” to close a loan facility of Rs 500 mn given to Graphic Paper Products, a step-down subsidiary of Ballarpur Industries, prior to extending further loans to the Thapar group. These revelations should send alarm bells ringing.  The transactions unearthed by SEBI can have only two explanations – (1) the board of directors of ABF was aware of these transactions and was complicit in the entire process or (2) the board of directors was kept in the dark by the executive management. The latter is difficult to believe, on account of the role of Ajay Srinivasan (a non-executive director) in the discussion on ‘Thapar Group Strategy” and in closing the Rs 500 mn loan facility.  Moreover, the size of each of the transactions to Blue Garden Estate Pvt. Ltd. (a shell company) would have required the board’s approval.In both cases it will imply that, in ABF, corporate credit appraisal, risk management, monitoring of end-use of funds and internal audit were non-existent. Thus it was able to approve and disburse Rs 3.9 bn spread over three loans to a shell company, where the security provided in the form of land parcels was dubious, as they were already encumbered. Hence the Reserve Bank of India (RBI), as the regulator for non-bank finance companies (NBFCs), would need to investigate ABF and ABC to determine whether these transactions were one-off or were there other similar transactions. That an individual of the stature of Ajay Srinivasan has been specifically mentioned in SEBI’s show cause notice adds to the gravity of the situation.Responding to a detailed questionnaire sent by this analyst, the official spokesperson of ABF said,Since the matter is sub-judice, it would be inappropriate for the company to respond to your specific queries. Aditya Birla Finance follows all applicable regulatory guidelines and the highest standards of corporate governance. Since your queries are based on incomplete and incorrect facts, any insinuations or conclusions drawn thereof, would give a distorted picture which would have the potential to cause harm to the reputation of the company and/or its officials. We are sure as a responsible analyst you would like to have correct and complete facts before publishing the story. Interestingly, Devang Rawal the then Business Head-Corporate Finance, ABF who probably initiated the transactions based on the March 2016 ‘Thapar Group Strategy’ meeting attended by Gautam Thapar and Ajay Srinivasan was elevated as Head–Corporate and Institutional Business in May 2018. His promotion is a testimony of the “highest standards of corporate governance” practiced by ABF.ABF is an unlisted company but its parent, ABC, is listed, and in both cases the equity and debt investors should be concerned at the manner in which these transactions were approved internally and by the board of directors. Far from setting the “highest standards of governance”, it sets a low bar in governance for a company belonging to the industrial house of Aditya Birla. It is precisely for such reasons as unearthed by SEBI at ABF that industrial houses should not be considered for setting up banks, and their activities in the non-banking financial sector should be constantly monitored by vigilant regulatory authorities.

ABF’s Loans to a Shell Company: Another Reason Why Corporates Shouldn’t Be Allowed to Control Banks

India

Aditya Birla Capital Limited (ABCL) provides financial services. The Company offers life and health insurance, private equity, corporate lending, structured finance, asset and wealth management, currency and commodity brokerage, online personal finance management, housing finance, pension funds, and other financial services. ABCL serves customers in India.

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Aditya Birla Capital Ltd (ABCAP IN)

No Traction Above $93 on ACWI-US or 4400-4415 on EURO STOXX 50. Buys in Defensives/Japan/EM

No Traction Above $93 on MSCI $ACWI or 4400-4415 on EURO #STOXX 50. Continues to reinforce our view from early-January that $93 on ACWI caps upside...

Vermilion Research

Yes Men at Yes Bank, and Elsewhere: ‘Phone Banking’ in the Private Sector

It appears that, for all their experience & seniority, key senior executives in the pvt financial sector are paid inflated packages precisely for...

Hemindra Hazari

Flurry of Senior Level Exits at Aditya Birla Financial Services

When senior executives quitting an organisation coincides with regulatory investigations stakeholders should be concerned

Hemindra Hazari

How Diversion and Layering Became a Common Modus Operandi, While the Regulator Slept

As long as the regulator mollycoddles errant senior executives and independent directors, such malpractices will continue to flourish as,...

Hemindra Hazari

ABF’s Loans to a Shell Company: Another Reason Why Corporates Shouldn’t Be Allowed to Control Banks

SEBI’s investigations into ABF’s conduct underscore valid concerns about industrial houses being allowed to set up banks, as the opacity in...

Hemindra Hazari

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