Altaf Siddiqui, CEO and MD of Enrich Advisors, is a rare kind of investor who does not trade in listed stocks at all. Usually, traders of delisted, unlisted and pre-IPO stocks have a share in listed stocks too, but not Siddiqui. It is a tough and risky investing strategy, and involves a lot of leg work and having clear boundaries on the risks he is willing to take.
Many traders in delisted stocks enter through the unlisted space and Siddiqui did too. Delisted stocks are stocks that drop out of the exchange either voluntarily or because of a Securities and Exchange Board of India (SEBI) order, and unlisted stocks are those that were never listed.
Around 2010, RBL Bank was in the unlisted market. Whenever it raised funds in the primary market, the private equity holding in the bank fell below the statutory cap of 5 percent (IS THIS RIGHT?) and private equity (PE) funds would want to buy more. It wasn’t an easy thing to do because the bank’s shareholders were in thousands and they were scattered across the country. Siddiqui and his team used this logistical opportunity and bought holdings from these shareholders and sold it forward to the PE.
“You can get the details of the shareholders, that is their address, phone number, and so on, by writing to the company secretary. If we found a shareholder in, say Kolhapur, we would also reach out to others in that area through him… we sourced shares worth several crores for three to four years till it got listed,” he said.
After this, he has been trading in delisted stocks too.
It isn’t easy to find an opportunity here. “Finding good quality delisted stocks is like finding a needle in a haystack. The universe is very big but the area we operate in is very small,” said Siddiqui, who largely sticks to companies which delisted voluntarily.
“I don’t go by tip-offs. In fact, I am generally suspicious of them,” he said. If any idea looks promising, it is run through the team’s checklist, which has about 13 conditions that a stock must fulfil.
The first few are broadly on corporate governance. “I see if there is any litigation, say on the promoters, the parent or subsidiary companies… and not just in the company I am considering, even in other companies the promoters are associated with. Second, I check if the companies follow law by the letter or law by the spirit, (and pick the latter). Third, if they are treating their vendors fairly, like paying them on time. Our team talks to the vendors for this. Fourth, we check how they are treating their employees. We even scan social-media posts for this. Then, I go through the auditor reports and look at their comments, if they are the usual that the auditors record for peer companies or if they are out of the ordinary. Since we don’t have direct access to the management, these things help.”
Corporate governance isn’t a one-time check for him. It is an ongoing one. It is a hard lesson he took from a bad experience in the unlisted holding of a stock exchange, because he believed that there was space for a third stock exchange. “It had passed our checklist, but there were corporate governance issues that were being reported consistently. We ignored it and that bet went badly,” he said.
Usually, delisted stock owners tackle corporate-governance issues through litigation. They treat it as an occupational hazard. But Siddiqui steers clear of it. “I never go to litigation. If there is a red flag in corporate governance, I dump the stock. I don’t chase value there, even if it is a Rs 100 stock selling at Rs 10,” he said.
It isn’t easy to drop a stock or an investment idea. Finding an opportunity in such a wide universe filled with duds involves a lot of research, and the tendency is to justify the effort by backing it. “The human mind plays such tricks… but one thing I remember clearly from my education is that you don’t throw good money after bad,” he said.
One easy way to ensure that corporate governance standards are maintained is to buy into companies with foreign holding, according to him. For example, Philips India.
In the late seventies, the late George Fernandes who was then the industry minister pushed foreign companies to dilute their stakes in their Indian operations to 60 per cent. The foreign companies grudgingly did so and many exited the stock market through delisting at the first opportunity.
These stocks are valuable in the delisted space.In general, the checklist seems to have worked because promoters he has associated with have been fair and responsive to the demands of the minority shareholders.