Veritas: The David who takes on corporate Goliaths

Canada-based research firm Veritas has gotten under the skin of India Inc and the investing community in the last one year as it dared to touch upon issues that most brokerages would otherwise choose to ignore in order to preserve their relationship with India’s corporate houses.

Stock research in India generally focuses on only short-term prospects for price movements rather than bigger and more critical issues of corporate governance and accounting practices . But this Canadian equity research firm has just done that- it has written a number of scathing reports about India’s largest companies, questioning their corporate governance and making a slew of enemies on its way.

The latest is Indiabulls Group, a Mumbai-based company which began in broking but branched out to real estate and other businesses. Veritas has accused the real estate group of poor corporate governance and irregularities in its accounting and financial practices. It said the sole purpose of Indiabulls Real Estate is to benefit select investors. “Disclosures at Indiabulls Real Estate Ltd and Indiabulls Power Ltd are unreliable and the sole purpose of Indiabulls Real Estate Limited is to bilk institutional and retail investors for the benefit of select insiders,” Vertias alleged.

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According to Veritas, “Investors seeking reliable and credible information on Indiabulls Real Estate Ltd and Indiabulls Power Ltd cannot depend on the reported financials of the two companies.” Soon after investors began showing their concern by dumping stocks of group companies.

[caption id=“attachment_413741” align=“alignleft” width=“380”]  hatever be the intention, Veritas’ aggressive approach underlies the importance of improving the standards of reporting and corporate governance in India[/caption]

Indiabulls responded on Thursday by filing a police complaint against Veritas. Hindustan Times reported that Indiabulls accused the research of “malafide intentions” and “intentional profiteering.” However, Veritas, on its website, says its “research is completely objective and Veritas is not affiliated with any long or short funds, nor do we accept research fees from the companies that we cover.”

Neeraj Monga,executive vice-president and head of research at Veritas, in an interview with CNBC-TV18 reiterated that their reports are based on publicly available data, such as the company’s regulatory filings. The firm has not contacted Indiabulls before or after the research was published. “We sell research for a subscription fee, as is the industry practice in India and the world over. We are regulated and licensed by the relevant financial service authorities to do so,” Monga told Economic Times.

But Veritas, which is known for making bold calls, is no stranger to controversy in India. Earlier it had taken a dig at India’s richest businessman and alleged that Mukesh Ambani’s Reliance Industries (RIL) had caused loss of 25,000 crore to its shareholders by demerging its communications business and subsequently transferring it through a series of transactions to younger brother Anil five years ago. Flushed with cash, RIL was not impacted much by the report, but Veritas’ second allegation against brother Anil Ambani’s Reliance Communication did hit investors and the management hard.

It recommended a “Sell” on Reliance Communications, expecting a significant additional downside in the stock and values it at Rs 15 per share. In a report titled, “A house of cards,” Veritas said RCom’s accounting policies are “whimsical” and don’t provide a clear picture of the underlying operating and business trends, and added that the firm’s governance practices were “sub-optimal.” The research firm said the company is entering a phase of maximum uncertainty.

The question of how the Ambani family shareholding had gone from 38 percent to 63 percent in the change of Reliance Communications ownership defied logic, Monga told Outlook earlier this year.

But Monga didn’t stop short at the Ambani brothers. His next target was easy - aviation- and debt-ridden Kingfisher was the obvious choice. One look at the airline’s accounts and Monga termed it as an insolvent entity whose value was zero. He even said that the company should be delisted from the BSE for flouting Indian accounting standards.

We all know how that story has played out so far. Mallya’s airline today is essentially owned by banks, while he frets around looking for an investor to save the airline rather than put in more of his own money.

After ripping apart the Ambanis and Mallya, Veritas also trained its guns on the murky real estate sector and decided to make DLF its next target. In March, it said DLF is a crumbling edifice and valued its share at not more that Rs 100 apiece, adding that claims made by the management about its ability to execute projects were fanciful.

In his defence, Monga says " “Anybody who has any experience of India knows the Indian real estate market is rife with underhand dealings… In India, dealings with ‘related parties’ are the norm, and most ‘related party’ dealings are a means to siphon funds from the publicly traded entity for the benefit of majority owners. We highlight this.”

Currently, Veritas markets its research only in in Hong Kong and Singapore, both being places where a lot of India’s foreign capital comes from. “With RCom, we had many special requests from international investors because it interests multiple stakeholders,” Monga told CNBC TV 18 earlier this year.

Whatever be the intention, Veritas’ aggressive approach underlies the importance of improving the standards of reporting and corporate governance in India. If more research houses do follow Veritas’ lead and turn the spotlight on corporate governance , more transparency will become the order of the day.

However, while Veritas-like boldness may prove to be a catalyst, transparency can only be assured when the nexus between politicians and businessmen is broken since all regulators and laws are made subservient to political whims and fancies. And secondly, as _Firstpost_ said earlier , the inability of promoters to segregate their personal interests from corporate interests leads to the shortchanging of minority shareholders.