FCCB scam

Picture this:

Company A does a Zero coupon FCCB - INR/$ = 40

Amount raised = $100Mn

Fee allowed = 6%

Tenure - 4 yrs

Conversion price is set at 300/-

CMP - 180/-

Gain for the $ lender - he gets an upfront interest of 6% which translates into an annualised yield of 1.56% over 4 years which is 156 basis points more than any competing product in the $ world of Fixed income!!

Result : People start buying the share as there is confidence shown in the company by FII's

Reality : Shares held by the management is sold continuously ERGO the price just doesnt rise BUT falls continuously.

Company A then says that it is not able to repay its FCCB and the price crashes all the way to 10-15/- a share. It is here that the same people who sold the shares at 180 come and buy back the shares.

Suddenly on the appointed time for redemption the said FCCB's are miraculously redeemed and the share makes a stratospheric rise back to levels of 200+. 

Considering the total loss to the company is the forex loss of say INR15/$ ie 150Cr, all they have to do for  the above is to net a profit for them from the price manipulation on the average traded volume of shares to be  in excess of 150Cr. For a company with market cap in excess of 2000Cr this is but a 7% of its total shares outstanding for the price manipulation of 90%. In reality more than 35-40% of the shares are "spread" on gullible investors.

The break even for this works at even higher levels of 20% of shares outstanding.(lower the breakeven - higher the payout as managements with lower shareholding can also engage in this)

Of course where the intent is not to have a business going forward then with all the shares being "spread" the management can one fine day file for a CDR and make a comeback if the sucker bankers give them a break OR just file for bankruptcy and walk away to start the next scam all over again.

The list of shares that are caught in the FCCB mess makes interesting reading. The epitaph on the scheme can be only written when the last of the o/s FCCB's are closed successfully or otherwise. Watch out for those which show a miraculous repayment not supported by any operating flows. In other words the FCCB money was never deployed for what it was meant to do BUT the same was diverted to subsidiaries worldwide to make these illegal trades on the company's share where the real money making lies for the promoters.

Once this is done successfully the next time would be only easier!!

How to nail these cases?

1. Trace all those who bought the shares in 2 years prior to the FCCB announcement

2. Trace all those who sold this company's shares since the time of the FCCB became public knowledge

3. Find the quid pro quo between these seemingly unrealted parties and the management

4. Trace all those who are currently buying the shares prior to the miraculous repayment of the FCCB

5. Find the quid pro quo between these seemingly unrealted parties and the management

Caveat:

There is of course the very simple reality of coincidence making its presence felt as each of the above event is a buy low sell high event - followed by any self respecting investor - the only difference is that the size of the bets in relation to their remaining genre of investing is the give away.