Tuesday, January 3, 2012

Cals Refineries - What Next After SEBI’s Confirmatory Order?

StockExplain queried Cals Refineries’ management today to find out what the future holds for the company, after yesterday’s SEBI order.

India’s top securities regulator, Securities and Exchange Board of India (SEBI) has issued a confirmatory order on Cals Refineries Ltd (BSE: 526652) and six other listed companies, that confirmed its earlier order of September 21st against these companies for alleged GDR manipulation. 

In the confirmatory order, SEBI’s Whole-time Member Prashant Saran who is overseeing the investigation of this case has conveyed the idea that the submissions made by Cals Refineries and other companies are not enough and that investigations will continue. The original order was an interim ex-parte order, and the current one is a confirmatory order, and a final order is awaited after the conclusion of investigation.

SEBI’s order basically prevents further equity expansion by these seven companies, as the regulator feels there has been serious manipulations in the previous equity expansions of these companies through Global Depository Receipts (GDR), as well as in their later cancellations to create underlying Indian shares, that caused the share prices of these companies to crash. 

Yesterday’s order has come as a serious setback for Cals Refineries which has been long planning to set up a refinery in Haldia, but couldn‘t make much real progress on the ground, due to its own resource crunches. 

StockExplain queried Cals Refineries’ management today to find out  what is next after the latest SEBI order.

On our query whether SEBI has asked for any further information, Cals has replied that, “We have not been asked any info.”

Also Read: Cals Refineries Latest News on – SEBI, CCEA, FIPB, Hardt, EPCC, Bayernoil, West Bengal, SHP

Asked about their probable actions after this confirmatory order, Cals informed us about two steps they have already taken. The Company replied that, “We have requested today for reconsideration (of the order).”

And what if it is not allowed by the regulator? Cals has replied that, “If this is not acceded we requested for de-linking our case & passing of Final Order.”

A request for de-linking looks like a reasonable proposition, as SEBI itself has made it clear in both the reports that though the alleged manipulative strategy has been the same in all seven companies, Cals’ case is different, as in the other six companies, SEBI has clearly identified a set of ‘operators’ comprising of the same GDR arranging Investment Bank, same FII Sub Accounts that cancelled and sold off these GDRs, and the same set of domestic entities that facilitated these sells through synchronised buying.

But in the case of Cals Refineries, the sells were by relatively better reputed FIIs like Taib Bank and Merrill Lynch Capital Markets. Unlike in the other companies, it is also noteworthy that SEBI has still not initiated action against these two FIIs that massively sold off Cals Refineries’ GDRs that caused the price crash.

Similarly, the request for the Final Order, if granted, will not only enable the retail investors in this counter to get the suspense cleared, but may enable the company to go in for an appeal at the Securities Appellate Tribunal (SAT).

StockExplain also asked Cals Refineries whether they are planning to move SAT without waiting for the Final Order as two companies had already done. Cals has replied that, “We are evaluating. Already one party has moved and got a direction from SAT for completion of investigation by February 2012. We may also get the same relief only. It appears that all the cases will be completed by end Feb’12 / early March’12.”

Our next question was regarding whether there was any Plan-B by the company. Basically, SEBI has barred only the equity expansion. But that doesn't mean these companies will cease their operations. But in Cals' case the order has caused a virtual cessation of operation, as the Hardt equity expansion was crucial for Cals. 

But things being in a standstill as of now, our question was this: Is there a Plan-B even if the equity expansion is not allowed or it takes months or years to resolve this issue? Like downsizing the project to a smaller refinery, maybe through Bayernoil scrap equipments?

Cals Refineries’ reply shows there is no Plan-B, at least as of now. They have replied that, “As the project needs money, there is no way out other than getting an exoneration from SEBI.”

Our next question was on the current outlook of Hardt Group towards the project. Cals had obtained FIPB approval for a Rs. 1425 crore FDI from Vienna based Hardt Group, which was basically an equipment-against-equity deal. Hardt was to be allotted equity  against supply of two used refineries. Later on SEBI Order, FIPB withdrew its recommendation to CCEA regarding Cals’ FDI proposal.

Our question was whether Hardt Group is still with Cals, waiting for this issue to resolve? Cals has replied in the affirmative, saying, “Yes. They are in the process of getting some co-investors.”

Our last question to Cals was whether there is anything to report on other fronts of the project like the planned EPCC deal, buying Bayernoil scrap equipment, and extending the deadline from the West Bengal Government for securing Financial Closure (FC) for the project. Cals has replied in the negative. 

To our earlier queries on the same subject, Cals had replied that there is no progress to report on those fronts as partners and agencies would be waiting for the Final Order from SEBI on this issue.

In a nutshell, SEBI’s final decision has become crucial for Cals Refineries, at this stage. From the wordings of the confirmatory order, SEBI seems to be quite serious in pursuing this case based on the prima facie evidence before it.

The Regulator notes in its latest report, "In many of the cases, no specific indication has been given as to how the GDR proceeds were used for the projects for which the GDRs were issued. Thus, on the face of it, it appears to be a strategy by which the issuing companies in connivance with certain arranger/lead manager/FIIs/counter parties in India managed to create worthless shares which are sold among Indian investors. This is an extremely serious matter involving the very integrity of the issuance process and the Secondary Market."

For Cals Refineries, this would mean that they would need to convince the Regulator regarding the health of their used refinery deals like Bayernoil, Petro Canada, Ark City, Caltex etc, which were done using the original GDR proceeds of around Rs. 800 crore.

The silver-linings are few in the gathering dark clouds. The only ones visible are that Cals Refineries’ case is somewhat distinct from the other six listed entities, and that the Regulator is extending a promise regarding a fair and speedy trial.   

Quoting from the SEBI report, "The investigation in the matter shall be completed as expeditiously as possible and if the same is not able to arrive at any adverse findings against the companies, appropriate directions would be issued at the relevant point in time. In view of the above observations, I am of the considered view that the interim ex-parte directions ordered against the companies should continue, till further directions."


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