Stage-managed takeovers and circular funding put Stellar in poor light!

Obscure companies issuing shares at exorbitant premiums, original promoters selling the shares at hefty discounts, murky corporate entities creeping in as new promoters followed by bumper bonus issues and eventually going for listing at a moderate premium are the hallmark of many a BSE-SME. The latest to join the bandwagon is the Delhi-registered Stellar Capital Services.

The 1994-incorporated Stellar presents Ashish Bansal (26), Vikram Sharma (41) and Technofab Constructions Pvt Ltd as its promoters. Nevertheless, the promoters took the control of the 19-year-old company only a year ago. Surprisingly, the promoters and their group propose to stake in less than 27% equity. In fact the two individual promoters hold just 0.37% (60,000 shares)!

Until 2010 Stellar’s capital was only Rs 25.50 lakh. On the last day of fiscal 2011, the company issued 3.8 lakh shares on preferential basis at an exorbitant price of Rs 500 and collected a premium of Rs 18.62 cr. Once again, on the last day of next fiscal, the company made another preferential allotment at the same price and collected another Rs 8.27 cr as premium. Strangely, the obscure companies that subscribed to Stellar shares at Rs 500 in March 2011 and 2012 sold a significant chunk to the new promoters at a discounted price of Rs 350 per share!  

Within six months, the new management declared a bumper bonus of 14:1 thereby enhancing the capital from Rs 80 lakh to over Rs 12 cr. The bonus issue reduced the cost of the individual promoter-holding to less than 10 paise and the corporate-promoter (Techofab) to Rs 7.43.

Interestingly, Technofab was incorporated only in September 2011 and was taken over by Ashish Bansal and Vikram Sharma in October 2011! Technofab claims to hold Rs 3.84 cr worth of Stellar’s equity. However, the company’s own net worth is only Rs 51 lakh. This two-year-old company does not have credible financials to acquire Stellar’s shares.  Also, the individual promoters do not seem to have enough financial muscle to fund their companies. Then, how did they manage to acquire Stellar?

Though there is no direct answer available for the above query, the manner that the shares have been issued and transferred among private companies and the public company’s ‘advances against investment’ do indicate that circular funding cannot be ruled out.

Of the total Rs 32 cr funds employed, more than Rs 30 cr is deployed in short term loans and advances whose details are not available. As a matter of fact, Rs 11.21 cr has been locked in advance against investments. Why should an asset-financing company starving for funds divert such large sum to undisclosed investments? 

Stellar has a net worth of more than Rs 27 cr in last two years. Yet, its bottom line was worth only Rs 10 lakh in fiscal 2013. What’s more, the company has never had a positive cash generation from operations in the past five years. Stellar now proposes to increase its capital base from Rs 12 cr to Rs 16.56 cr. With the current profitability how will the company service the large equity is anybody’s guess.  But, the mute question is, when will the regulators wake up from their slumber and save investors?