New Delhi:Portfolio management company Equity Intelligence, whose investors' wealth was eroded by almost 44 per cent in current fiscal year, has apologised to its investors admitting that investing in LEEL Electricals Ltd (formerly Lloyd Electric Engineering) was a mistake.When contacted by news agency IANS, Porinju Veliyath confirmed that he had written note saying: "I write to my investors whenever I feel like communicating something in natural course of service."In a private letter to investors on Friday, a copy of which is with IANS, portfolio manager Mr Veliyath, founder and CEO of company, said damage had already been done through "flawed investment" and that attempting to liquidate investment now would only lower realisable value, and won't make any material positive impact to NAVs (net asset values).He said he continued to hold stock amid a selloff triggered by company arbitrarily writing back profit from sale of its consumer durables division to Havells in May, 2018 "to shock of entire minority shareholders", including Equity Intelligence, in hope of a better exit, eventually given value in company's operations and assets, illiquidity at counter and portfolio's significant holding in company.The company stock fell from Rs 215 to Rs 127 in five days.
As per data from market regulator Sebi (Securities and Exchange Board of India), while Equity Intelligence continued to hold stock, its portfolio value fell 11.9 per cent in May, 12.3 per cent in June and 20 per cent in September last year.
Till December, investor's wealth was eroded by 43.7 per cent in financial year 2018-19.Alleging fraud and siphoning off company's wealth for personal enrichment by LEEL promoters, Mr Veliyath said he had filed a complaint with Sebi seeking a forensic audit of books of accounts of LEEL Electricals, without which suspected fraudulent actions of promoters and senior management to siphon off company's wealth for personal enrichment cannot be proven legally."Our investment in LEEL has witnessed a significant capital erosion and I admit that in hindsight it looks a mistake.
My assumption that siphoning off in a changing regulatory environment would be difficult appears faulty," he wrote in letter.He said LEEL share price was nearly 80 per cent lower from cost in most of accounts."Rare but costly misjudgements like LEEL resulting in permanent loss of capital are humbling and thought provoking for us in our pursuit to create wealth for our investors through long term value investing.
Such flawed investments though big enough to be a drag on our investment journey, I am confident, would not deter us from creating wealth going forward," he added.Mr Veliyath said he invested in LEEL on behalf of his investors taking into account that company had received Rs 1,550 crore in cash from sale of consumer durables division to Havells and was trading at a market cap of Rs 1,000 crore (now Rs 200 crore), had a good long-term operating track record and had just sold brand "Lloyd" along with associated intangible assets but had retained operating assets of company, including eight manufacturing facilities in India and abroad.He added that being cash-rich after sale, most logical path for promoters who had been in business for around three decades would have been to take company to higher orbits.He said he was also under impression that under new circumstances, with reforms like Goods and Services Tax (GST), demonetisation, amended Companies Act and various Sebi initiatives, likelihood of LEEL promoters siphoning off cash received from sale of consumer durables division was low.Mr Veliyath had accumulated nearly 5.4 per cent of LEEL by October2017.
The company reported a Rs 946.43 crore profit from sale of consumer durables division in second quarter of FY18 and confirmed this in Q3."We continued to buy LEEL.
By end of February 2018, we held nearly 8 per cent of company's equity," he said.He added that after LEEL's promoter Brij Raj Punj passed away in December 2017, his son Bharat Punj, who took over reins of company, and other senior management continued to "sound optimistic about business and future of company, in line with our investment rationale".Mr Veliyath said Equity Intelligence reached out to management of LEEL for clarification and seeking more transparency after latter arbitrarily wrote back profit from sale of consumer durables division in FY18 annual results to Rs 663 crore, and also diverted nearly Rs 340 crore to promoter entities including listed debt-laden entity, Fedders Electric Ltd, as capex and loans for buying land and factories of their own plants."We are hopeful that given circumstantial evidences of fraud involved, regulator (SEBI) would act judiciously, protecting interests of entire minority shareholding community of company, and set an exemplary precedent.""While we cannot rule out a possibility of eventual recovery in share price, as on date damage has already been done.
Value of LEEL, in most of accounts have fallen below 3 per cent of account NAV.""Attempting to liquidate investment at a time without liquidity in counter will only lower realisable value and this would not make any material positive impact to NAVs," Mr Veliyath wrote.