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First Global Stockbroking: Are they victims or villains?

One name that has been making it to the front pages of Indian newspapers after the payment crisis on charges of hammering down stock prices, has me totally foxed. It is First Global Stockbroking, a firm headed by a bright and dynamic duo -- Shankar Sharma and his wife Devina Mehra.

Theirs would seem the most romantic success stories in India - one based on guts, entrepreneurship, vision, research and hard work. Their background: Sharma is an MBA from the Asian Institute of Finance, Manila, who worked in Citibank until he chucked his staid investment banking job after 1992 to turn stockbroker. He started as a sub-broker and slowly worked at acquiring his own broking membership.

Devina Mehra, heads First Global's research, is a gold medallist from Lucknow as well as IIM Ahmedabad. She met and married Shankar at Citibank and chucked her safe job to join the hurly-burly world of stock broking.

Their background already made them unusual, but they quickly attracted notice with a hard hitting, well-researched, sarcastic, irreverent and often funny report on companies and the capital market. That was just five-six years ago.

Meeting them only re-confirmed the image conveyed by their research letter: that their business was underpinned by high quality research and fundamental values. In the next five years, they were on the road to rapid success and First Global had notched up an unbelievable growth record.

By 2001 it was among the top five stock broking firms in the country. It was by far the favourite broker of many foreign institutional investors (FIIs), had opened offices at London and Dubai, obtained deemed FII status themselves (recently scrapped by Sebi) and were in the process of getting themselves international trading memberships at London and the New York Stock Exchange. Their research had also turned global and they were now focused on the world economy.

The couple alternately wrote a highly readable and holier-than-thou column in at business weekly Business World, which frequently reiterated their belief in research, fundamentals and the bottomline. By then they had built up a reputation of getting "75 per cent" of their stock calls right.

They were also diversifying. When I last met them, they were incubating and nursing the ace car designer Dilip Chhabria's company (DC Motors) towards a splashy listing -- they claimed it would be "better than Infosys".

They had also made another innocuous investment that has now turned famous - they acquired a five per cent stake in Tehelka.com, the website that has shaken up the Indian political establishment for the last few weeks. The stake was later hiked to 15 per cent and Sharma was working at organising the second round of funding for Tehelka. But more about that later.

As their business grew (they reportedly paid taxes of Rs 500 million last year), their image developed a few big cracks.

To me, the first sign of their rhetoric not matching their actions was the private placement of Himachal Futuristic Communications (HFCL), a controversial company run by Vinay Maloo and Mahendra Nahata. As sole coordinators, Devina and Shankar raised Rs 7.35 billion ($ 161 million) through a private placement of 10 per cent of Himachal's equity at Rs 1050 a share.

Himachal's chairman Vinay Maloo is a close friend and associate of Ketan Parekh, the big bull operator who is at the centre of the massive payment crisis that hit Indian stock markets in the last few weeks. He is accused of ramping up the prices of a couple of dozen scrips to unwarranted and unsustainable highs leading to the ultimate collapse.

First Global put out an unconvincing research report which started out admitting that Himachal was a high risk scrip - it had fallen 85 per cent in 1996 and soared 2000 per cent in the year 2000 when they were flogging it. Himachal, which touched a dizzy Rs 2553, has again fallen to a low of Rs 187 on March 27, 2001.

Sharma claims that he still got his clients the best deal, buying the stock well before its peak and exiting before the crash. It also earned them a fat fee, but the deal was certainly out of line with the image they projected.

There is more. While they hotly argued that they were the first to predict the global down turn in Information Technology and had advised their clients to get out of the sector - one of their favourite stocks remains Global Tele-Systems. It is another controversial scrip, which is among the five favourites of Ketan Parekh. Global Tele moved from nowhere to Rs 3550 and has dropped to Rs 204 on March 27, 2001, but has remained a buy recommendation of First Global.

Similarly, even while they were bearish on information technology, Shankar Sharma, in a televised discussion declared NIIT the stock of the century - an endorsement that probably stunned the NIIT management as well.

These contrarian picks would have been fine too, but for the fact that the same duo was extremely bearish on blue chips such as Infosys and Hindustan Lever.

Their first sell recommendation on Infosys was in July 1998 when at Rs 2317 they asked investors to take their gains - the scrip went relentlessly upwards to touch Rs 13,000 without the stink of ramping. Though affected by the tech downturn, it continues to be at Rs 4600 plus at the time of writing that a bonus and a stock split - this effectively means an effective current price of around Rs 20,000! They recently called a sell again at Rs 8000 plus.

They similarly dismissed Hindustan Lever as a sell at Rs 500-550, far back in 1997 when it was a Rs 10 share. They have never really revised their opinion on HLL even when it rose relentlessly and delivered on performance. It is now quoting at Rs 210 after a split (effective price of Rs 2100) and high dividends.

On the flip side, they were relentlessly bullish on Telco at Rs 239 with a target price of Rs 1000 (July 1999) -- the scrip continued to decline and is down to Rs 69 (March 27, 2001).

Then there is Vikas WSP, which was relentlessly pushed for months, even though it had neither a professional management or even a wage bill worthy of a decent company - the stock price indeed moved to Rs 1400 but the price today has collapsed to Rs 26 (after a split, which is effectively Rs 260) despite spectacular profitability.

Lets now look at their Tehelka investment. A week before the tapes shook up the nation, First Global was identified among the few broking firms which allegedly indulged in massive bear hammering - a charge which the firm has vehemently denied. Coincidentally, the Tehelka tapes were released at exactly the same time that the Parliament was debating the payment crisis on the stock markets.

The question that is being asked is - did Shankar and Devina know about the Tehelka investigations? Was that why they were bearish? And were the tapes released at the same time as the debate in parliament in order to scuttle it?

Shankar Sharma vehemently denies all three charges. In fact they even held a press conference to make their case and deny any bear hammering.

There is no doubt at all that Tehelka revelations on cricket as well as defence deals are among the most sensational pieces of reportage in India. But niggling doubts remain.

1. Sensational as the tapes are, the sloppy mistakes, absence of basic fact checking (at the Jaya Jaitly meeting, how could the Tehelka reporter not find who he was handing over Rs 200,000 in cash to a person?) and the lack of research would not have been tolerated even from a rookie reporter. Allowing the bragging and bravado of well-known fixers to tarnish reputations also involves doubtful ethics and would have been edited out by most publications. Tehelka's reporter Mattew Samuel's statements and retractions about the home ministry, (dismissed by Tarun Tejpal as "loose talk") are also curious. One would conclude that the team was under severe pressure to release the tapes without clean up and editing. Which only points again to their hasty release during the parliamentary debate on stock markets - but more about that later.

2. Devina Mehra asserted on television that they are minority shareholders of Tehelka (just 15 per cent). That is immaterial. First Global is Tehelka's sole financier and the stake was in line with dotcom funding at the peak of the mania. By Shankar's own admission, Tehelka's revenues are in the region of Rs five to ten lakhs - probably not enough to cover the CEO's salary, let alone finance elaborate sting operations like Cricketgate and Armsgate. (The defence sting alone is understood to have cost over Rs 3 million, excluding the burn up of money in running the portal, expanding it and funding the wage bill and expenditure). All of us know that the financier in all businesses, especially, dotcoms does call the shots despite the minority stake.

In fact, Shankars' claim that had they known about the sting job, they would have stopped it, is a dead giveaway - it proves he had that power. The problem is that Tehelka has plenty of plans, (its director Aniruddh Bahal had claimed in an interview that it planned overseas listing, syndication, had won a $ 2 million design contract and planned an IPO for overseas listing on the Nasdaq which would all fetch $ 30 million next fiscal) and it now has the reputation and visibility to implement them, but financially speaking, Tehelka is all expenses and hardly any revenues. And that will be the key to its continued survival.

3. At one stage, First Global tried to organise funds for Buffalo Network Pvt Ltd, Tehelka's parent company from KVP Ventures - the headline-hitting venture fund set up by Ketan Parekh, Vinay Maloo and Kerry Packer. Shankar tells me that negotiations fell through and KVP refused to fund the venture. Instead, Zee Telefilms has agreed to come in as a financier and acquire a 26 per cent stake sometime in April. As it happens, KVP may not have invested in Tehelka, but Zee Telefims did. Zee, which took the lead in broadcasting the tapes to the world, is a KP favourite. Its scrip scaled a dizzy peak of Rs 1574 before dropping to Rs 131 (it had even touched a low of Rs 98).

Whatever the truth about First Global's role in Tehelka or in hammering stock prices, the investigations they face are indeed ironical. Sharma has been confident enough to support all forms of speculation in his column. He blasted the ban on badla trading. He thought rolling settlements were wrong for India because they would chew up liquidity and was against uniform trading because it would affect speculation. These romantic arguments ignored basic weakness in our judicial and supervisory structure. Here is what he said on one of his columns:

"Let's stop hating the speculator. Regulate him, but eliminating him removes essential liquidity lubricants from the system. India today is one of the most liquid markets in the world. Let's keep it that way. Let's stop experimenting with the truth and reality of speculation."

In any case, life has dealt the guy a hard hand by making him a speculator. Imagine the general derision at his introduction line at a party: "I am a speculator", as opposed to saying he's a poet, banker or even, a broker! Isn't that punishment enough?"

By that token, the investigation against Sharma and his company on charges of "bear hammering" would seem severe punishment indeed. So what are they - victims or villains?

Sucheta Dalal

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