Wednesday, February 29, 2012

KS Oils May See More Distress as Citigroup Continues Selling



Ramesh Chand Garg,
CMD, KS Oils Ltd

By Staff Reporter

Distressed edible oil maker KS Oils Ltd (BSE: 526209, NSE: KSOILS) on Tuesday witnessed continued selling by one of its earliest private equity backers, Citigroup Venture Capital International Growth Partnership II (CVCIGP II), with 27.68 lakh shares amounting to 0.65% of the total shares in the company.

Earlier, on Friday, this Citigroup arm had sold off 35.17 lakh shares, amounting to 0.83% of the total shares, which takes Citi’s total sell within three trading days to 62.85 lakh shares or 1.48%.

Interestingly, on both days, there were no identifiable institutional buyers or promoters, as counterparties to the sells, which means that the massive sale by Citi was picked up by the wider market.

Citigroup Venture Capital had turned a major seller in KS Oils in September 2010 quarter, even before the mustard oil manufacturer ran into a web of problems last year. In Q2 of FY’11, Citi had made a dramatic exit of at least 3.95% stake when the average quarterly price was Rs. 53.45, preempting the serious corporate mis-governance and financial mismanagement that later emerged in KS Oils.

After that exit, Citi never became a net buyer in KS Oils’ Indian shares on a quarterly basis, as it never surfaced with a +1% stake in KS Oils’ Indian shares.

However, it continued to hold substantial shares via the GDR route. As of FY’12 Q3 end, KS Oils had 10.54% of its total shares as Global Depository Receipts. 

On Tuesday, KS Oils had also disclosed to BSE that Citi had converted 5.84 crore shares from GDR form to underlying equity shares. This transaction was done on 7th February and intimated to the company on 13th February.

It is out of this new pool that Citi has sold around 62.85 lakh shares or 1.48% on Tuesday and Friday.

However, there seems to be a discrepancy in either the Q3 SHP or the Citi conversion filing by KS Oils, as Citi’s converted shares itself shows that they were holding around 13.73% through GDRs, whereas as SHP shows total GDR holding at 10.54% only.

Apart from Citigroup, other prominent holders of KS Oils GDR included Baring Private Equity, another early backer of the company.

Interestingly, Baring PE had on Monday disclosed to BSE that it had converted its entire 2.20% stake in KS Oils GDR to equity. Institutional investors usually do this GDR cancellation to sell the underlying shares in the Indian market, when the GDR trading volumes in foreign exchanges have dried up. The actual transaction by Baring took place on 3rd February, more than 3 weeks before the mandatory disclosure on Monday.

Clearly, foreign institutions like Citi and Baring seem to have the same call on KS Oils now, and taking cue from each other’s actions.

With the last conversion, Baring PE is holding 3.57 crore shares or 8.4% in the company.

Combining Baring’s 2.20% stake or 92.24 lakh shares with Citi’s remaining 5.21 crore shares, a new pool of 6.13 crore shares has emerged, which can pose a serious oversupply in the market if these institutions do follow-up sales.

Another motivation for GDR cancellations might be acquisition of voting rights. This has become crucial as media reports about takeover of KS Oils as well as forced liquidation of the company’s assets by lenders have surfaced recently. 

However, despite the investment bankers of KS Oils floating many national and international names for acquiring KS Oils, evidently no buyer has completed due diligence on KS successfully.

Liquidation fear by lenders has re-surfaced as KS Oils has been unable to satisfy one condition put forth for Corporate Debt Restructuring (CDR), which is disposing off their wind farms. Media reports indicate that no player, including Suzlon, had come forward to take over these assets.

This is not surprising as the once high-flying KS Oils had burnt its fingers badly during most part of 2011, with multiple problems including high cost overseas acquisitions, income tax raids, massive unaccounted losses, intelligence report of promoters collusion with market operators, mounting quarterly losses and erosion of networth, free-falling share prices, and massive share pledges gone haywire that resulted in promoters losing two-thirds of their holding. The current promoter holding is only a little over 9%. 

Other major investors in KS Oils include PE fund New Silk Route (NSR), Siva Trade Consultancy (of serial entrepreneur Sivasankaran), Sykes & Ray Equities, Ratha Infrastructure, and Deutsche Securities.

Despite Citi’s sell, KS Oils ended Tuesday’s trade in NSE up by 2.56%. On Wednesday, KS Oils opened up by 2.50% in NSE, and is now trading up by 2.50%.

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