Promises And Lies - Pyramid Saimira Theatre

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'Don’t blame the market, it is always right,' goes a saying in the stock market. Well, it is right to say so since the price that a scrip commands is an indicator of an investor’s perception about the company. Hence performers get the premium, while the non-performers don’t. Similar seems to be the story of the Chennai-based entertainment company Pyramid Saimira Theatre (PSTL), which made lot of buzz with its IPO in November 2006 and was an instant hit among the investors.

The company got termed as ‘concept stock’ as it ushered in the new proposal of digitalisation of theatres in the exhibition business, which it made a thumping debut with in January 2007, and thus had a dream run on the bourses.

In the first year itself it touched an all time high of Rs 549 over its issue price of Rs 100. But it seems that now it has turned to be one of the biggest flops considering that the company is coping with an embarrassment that has turned its roots red. Though the issue has escaped the attention of many, it surely has raised a lot of eyebrows. Questions are not only being raised about the efficacy of the company’s management but also about the functioning of the regulator, SEBI itself. But between this push and pull affair the ones who have had to bear the pain are the investors since the scrip lost more than 70 per cent just in a month’s time and a whopping 95 per cent from its 52-week high of Rs 433.

The SEBI Fake Letter
It’s sad but true. The events that occurred in PSTL over the last one month look like a cheap copy from a plot in a B-grade Hindi film. It all started in the month of October 2008 when PSTL Chairman and Managing Director P S Saminathan proposed to acquire a 24.91 per cent stake from co-promoters Nirmal Kotecha and N C Ravichandran at a price of Rs 200 per share. The date proposed for the acquisition was November 28, 2008. It wasn’t surprising that the core promoter wanted to increase his stake, but it certainly came as a surprise to see him buy it at Rs 200 per share when the market price was around Rs 60.

Somehow nobody questioned this and everything looked well and fine until December 21, 2008 when news broke in the media circles about a SEBI order asking the PSTL chairman to make an open offer for 20 per cent at Rs 200 per share. [PAGE BREAK]

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The letter also asked the chairman the rationale behind acquiring Kotecha’s stake when it was being held for less than three years and inter-se transactions between promoters require a mandatory three-year holding period. The letter also sought clarification on the purchase of 4 lakh shares on November 19, 2008 at a much lower price than the proposed price of Rs 200. We may assume here that the letter was genuine. However, a twist occurs here. The so-called SEBI letter was dated December 19, 2008 which was a Friday but there were instructions to Blue Dart Couriers to deliver it only on Monday, December 22, 2008 (SEBI usually faxes letters to companies). Till that time this letter was also deliberately leaked to the media as well and but naturally, it created headlines all over. While PSTL didn’t comment immediately on the issue, the news set the counter in momentum as investors thought they could gain immensely from the open offer considering the fact that the scrip price then was just Rs 75. However, SEBI sat on the issue for an entire day and on December 23, 2009, through the media, denied sending any letter to the company, although PSTL claimed that it did receive the letter from SEBI. According to Pyramid Saimira’s statement to the stock exchange, it confirmed that the courier company had also produced evidence that the sender was SEBI itself. This then revealed that the SEBI letter was indeed a forged one leading to investors exiting the scrip. This led to a sharp fall in the scrip from a high of Rs 82 on December 22, 2008.

The scrip is currently at Rs 22.30, down 73 per cent and has been consistently hitting the lower circuit.It’s more than a month now that this case has been under investigation and the police are still clueless as to ‘Whodunnit?’ The police have already picked up a public relation executive Rakesh Sharma, who claims to be a mere messenger unaware of the forgery.

Sharma also admitted meeting one of the promoters who gave him the letter and asked for media coverage. Though Nirmal Kotecha was called for questioning there is no update on that front as well. This doesn’t look like a complex case, but then why is it taking so long to be solved when the police have already got the leads?

An Insider At Work?
The case so far has only been raising a lot of questions for which there aren’t any justifiable answers. [PAGE BREAK]

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First and foremost, can this be an insider job in SEBI itself? How can any person get access to the regulator’s letterhead unless he or she is a person within the organisation? In fact our suspicion gets only stronger if one can look at the letter (Refer: copy of the fake SEBI letter) where it gives other details that a standard SEBI letter would contain. According to the PSTL statement, Blue Dart has produced evidence that the sender was indeed SEBI. So if this is assumed true then who was this person who sent this letter from within the SEBI office? Though SEBI has clarified about not sending any such communication, it’s time SEBI looks into the strengthening of its internal systems and processes. Besides, as far as the functioning aspect is concerned, SEBI hasn’t scored there as well. It took almost a day to confirm that no such letter was sent to PSTL. Secondly, according to the media reports, SEBI filed an FIR on January 1, 2009. Why did SEBI take eight days to file a FIR with the police when they came to know about the forgery on December 23, 2008? What the rationale was behind this delay isn’t known. It certainly seems that SEBI has been caught on the wrong foot here.

A Date Dilemma
What’s the relevance of the date - Nov 19, 2008? This is certainly a question that has troubled our minds. The missing link of this is that Saminathan had re-negotiated the acquisition price with Kotecha to buy his stake at Rs 200 or market price, whichever is lower. This new clause ‘or market price, whichever is lower’ wasn’t part of the previous October 2008 announcement. This was intimated to the exchanges and the new date of acquisition was revised to December 22, 2008. Logically, we can conclude that Nirmal Kotecha with this deal had lost out on the gain he would have made on the previous price of Rs 200 per share, while at the same time Saminathan stood to gain due to the fall in price. Hence considering that advantage to Saminathan, Kotecha might not have wanted to sell his stake to Saminathan at the revised price and instead offload it in the market. Besides, there is a possibility that many in the market knew about this.

This could be seen from the momentum in the PSTL scrip, where it moved up from a low of Rs 35.5 on December 1, 2008 and more than doubled to touch an intra-day high of Rs 83 on December 22, 2008. Thus it could be Kotecha who could have sent the letter to thwart the deal. This case here becomes stronger as Rakesh Sharma claimed that he met one of the promoters and the police called Kotecha for questioning. [PAGE BREAK]

This indicates that Kotecha was the promoter whom Sharma met and he gave the letter for media coverage. He clearly looks like the beneficiary here from the entire fiasco. This is because Kotecha immediately started to offload his shares steadily from November 19, 2008 onwards. He first sold 18.36 lakh shares or a 6.49 per cent stake worth approximately Rs 10.89 crore in the open market from December 18-29, 2008. Then he again offloaded another 43.81 lakh shares or a 15.49 per cent stake worth Rs 17.96 crore from December 30, 2008 till January 7, 2009. According to our calculations, Nirmal Kotecha, since he first sold in June 2008 and to date, made 692.50 per cent or around Rs 57.55 crore over an investment of a mere Rs 8.3 crore in the PSTL IPO. Had this letter not being there would this deal have gone past unnoticed?

More Than A Letter
Ever since this letter came to light on December 21, the scrip has lost 71 per cent from its price, which is huge, but the fall hasn’t started just a month ago. The scrip has continued to drop since it reached its peak of Rs 433 in February last year.

This is partly due to the prevailing market conditions then and partly due the company’s performance which deteriorated in three consecutive quarters starting from March 2008. One of the reasons for this was the film ‘Kuselan’ which bombed at the box office. According to media reports PSTL had acquired worldwide release rights for a whopping Rs 60 crore, but ultimately suffered a huge loss of Rs 20 crore. Besides the lessons learned from ‘Kuselan’, PSTL also announced in September 2008 that it was going slow on its expansion in wake of the high inflation, lull in demand for entertainment, and margin constraints. In fact, PSTL had also shelved its plans for the big budget film ‘Marmayogi’ starring Kamal Hassan. All these factors put pressure on the counter leading to a continuous one way slide. Now there is a possibility of PSTL posting weaker numbers in Q3FY09 and we expect more selling pressure on the counter. We believe that with such problems dogging the company now, this scrip doesn’t deserve to be in one’s portfolio and hence investors are advised to stay away from this counter.