A few fast bulletins earlier than I start immediately’s submit.

1. Masterclass – Pondering Clearly in A Market Disaster: I’m internet hosting this Masterclass tomorrow, Saturday, nineteenth April 2025, 7 PM IST Onwards. The underlying thought is that will help you cope with the messiness of market panics and crises, so you’ll be able to defend your wealth, peace of thoughts, and long-term targets. I had 100 seats obtainable for the Masterclass, and now simply 20 stay. Click here to know more and join.

2. Relaunch of Worth Investing Almanack: I’ve relaunched my premium e-newsletter, the Worth Investing Almanack (VIA), which subscribers have referred to as “…the very best supply in India on Worth Investing, for each learners and consultants.” Click here to read more and subscribe to VIA at a special launch price (obtainable just for the primary 100 subscribers). Additionally, in the event you want to try the March 2025 VIA subject earlier than deciding to rejoin, click here to download.

The Investor’s Information to Recognizing Dangerous Promoters Earlier than It’s Too Late

We Indians love tales. From Ramayana to Reliance, we’re a rustic moved by narratives. And on the subject of investing, maybe no story sells higher than that of the visionary promoter — the larger-than-life determine who claims to be fixing massive issues and creating generational wealth for shareholders (don’t ask, which) within the course of.

Now, I don’t imply right here that every one such tales that Indian promoters inform us are dangerous. Some are real. However most are simply well-packaged, and some are designed to do only one factor — take you for a trip. And whenever you peel again the layers of a few of these tales, what you typically discover shouldn’t be innovation or integrity, however obfuscation, opportunism, and in some circumstances, outright fraud.

The issue isn’t that we don’t see it, however that we regularly refuse to. As a result of hope, available in the market, tends to talk louder than proof. Typically, mockingly, hope turns into our investing technique.

One current instance that captured consideration, after which disillusionment, is Gensol Engineering. What began as a promising photo voltaic and electrical mobility play, quickly started to indicate cracks that we have now seen far too many instances earlier than. From questionable related-party transactions to preferential allotments at steep reductions, from opacity in monetary disclosures to the exits of board members and auditors, the Gensol case has unfolded like a slow-motion model of a promoter script that many people have watched earlier than. And but, it labored, till it didn’t.

The crux of the fraud was that public cash was being utilized in ways in which disproportionately benefited entities linked to the promoters. The complexity of those transactions was excessive, however the intent, because it got here to mild, was painfully easy. The promoter was within the driver’s seat, however minority shareholders have been simply passengers alongside for the trip, and someplace alongside the way in which, belief was left by the roadside.

Now, the issue isn’t simply Gensol, and so I don’t need to delve a lot right here. The actual drawback is systemic. Our markets are crammed with examples the place promoters have handled listed firms as non-public fiefdoms. Whether or not it’s Satyam, Sure Financial institution, DHFL, Karvy, or Religare, the playbook stays remarkably constant.

The widespread thread is that of promoters who considered the corporate not as one thing they have been entrusted to construct, however as one thing they owned solely, together with your cash.

Float just a few non-public entities. Use the general public firm to fund them. Maintain disclosures murky. Maintain the board compliant. Fireplace the auditor in the event that they ask too many questions. By the point minority buyers realise what’s taking place, it’s typically too late. The wealth has already been transferred, and the injury already performed.

What’s extra troubling is how we, as minority shareholders, have in some way satisfied ourselves that slightly little bit of manipulation is okay. That if the inventory goes up, every little thing else may be forgiven.

Ask round and also you’ll hear issues like, “Sab karte hain,” or “A minimum of he’s rising the enterprise.” And that’s the mindset that’s costing us buyers essentially the most. We don’t search for clear companies anymore. We simply search for these which are much less soiled (the ‘lesser evil’).

If a promoter is chopping corners, mendacity in footnotes, or treating the corporate like his household’s piggy financial institution, it’s solely a matter of time earlier than one thing breaks. And when it does, it’s not the promoter who pays, it’s you and me, as a minority shareholder. At all times.

And but, it doesn’t must be this fashion. There are Indian firms that play it straight (on the “centre of the court docket” as Buffett would have mentioned). They disclose clearly, and deal with minority shareholders like house owners. These firms exist, it’s simply that they’re not often those making headlines, and their founders usually are not on enterprise channels or podcasts with one million views.

Principally, what we want is a mindset shift. We have to cease asking, “How briskly is that this firm rising?” and “What sort of return can this inventory give?” and begin asking, “How pretty is the enterprise being run?”

That’s why I imagine, greater than ever, that administration high quality isn’t simply one of many issues to have a look at whereas analysing an organization. It’s the factor. You may be off in your valuation. You possibly can miss an business pattern. You possibly can overpay slightly. However in the event you’ve backed a criminal or a clean talker with no conscience, no monetary mannequin will prevent. The numbers might look positive immediately, however the rot often begins someplace within the footnotes and the disclosures no person reads.

We additionally must cease pretending we’re victims. We’re not. We allow this technique each time we run after the following sizzling inventory or theme with out asking fundamental questions, like:

• Who’s the promoter?
• What’s his monitor file?
• Does he have a historical past of treating shareholders effectively?
• Has he performed this recreation earlier than?

If the reply feels off, you don’t want a forensic audit. Go away the sunk prices of effort and time behind, and easily stroll away.

How Do You Spot a Shady Promoter Earlier than It’s Too Late?

This raises a pure query — is there something within the numbers, bulletins or regulatory filings that may allow you to spot a promoter who’s not taking part in clear?

Nicely, as per my expertise and understanding, whereas no metric is ideal, there are just a few indicators that usually present up early, in the event you’re paying consideration. And, by the way in which, they won’t present up within the headlines, however within the annual report footnotes and a few patterns.

For instance, frequent related-party transactions, particularly when the corporate is promoting items or companies to entities owned by the promoter’s household, ought to instantly elevate eyebrows. These offers could also be authorized on paper, however they typically sign the place the actual worth is being siphoned. Equally, if the promoter’s non-public firms are common suppliers, landlords, or “consultants” to the listed entity, know that one thing is off.

Then, be careful for giant loans or advances to “others” on the stability sheet, particularly when the recipient isn’t clearly named. That “different” is usually one other pocket of the promoter’s trousers.

Additionally, regulate exits of auditor and board members. If unbiased administrators or auditors resign with out clear causes, or in the event that they’re being rotated each couple of years, that’s typically the canary within the coal mine.

One massive crimson flag is when the corporate exhibits sturdy reported earnings however constantly weak or detrimental money flows. This disconnect is the traditional signature of accounting video games. If money isn’t following earnings, it’s time to query what these earnings actually signify.

Then there’s the sample of frequent fairness dilution by means of preferential allotments, which is usually performed at costs decrease than market, and to ‘pleasant’ events. If the promoter is issuing increasingly more shares whereas the story is heating up, likelihood is you’re funding the occasion.

Lastly, take a look at promoter share pledging. Whereas pledging isn’t unsuitable by itself, excessive ranges of pledged shares mixed with erratic company behaviour is a harmful mixture. If the inventory falls, the promoter might lose management, and you possibly can lose your shirt and every little thing else.

Now, none of those indicators must be considered in isolation. However whenever you see just a few of them collectively, don’t look away. Don’t dismiss it as “enterprise as normal.” As a result of when the promoter is laying traps, it’s often the minority shareholder who walks into them.

Choose Character Extra Than Money Flows

Investing in India requires a thick pores and skin and a sharper eye. You possibly can’t simply take a look at income or revenue progress. It’s a must to perceive capital allocation. It’s a must to learn between the traces in annual reviews. It’s a must to watch boardroom exits such as you’d watch a fireplace alarm when your home is on hearth. And most significantly, it’s a must to decide character, which is the toughest factor to quantify, however an important factor to know.

A promoter who cuts corners in good instances will intestine the enterprise in dangerous instances. And one who builds on belief will defend the enterprise prefer it’s their very own.

Right here, I keep in mind this quote from Thomas Phelps’s 100 to 1 within the Inventory Market: 

Do not forget that a person who will steal for you’ll steal from you.

The irony is that we all know this deep down. All of us have tales of that one inventory the place we ignored the crimson flags and paid the value. We additionally know that the very best compounding typically comes from clear companies that buyers typically overlook whereas chasing that ‘pot of gold’ on the finish of the rainbow.

It’s excessive time (once more!) we begin seeing company governance not as a facet dish, however as the principle course. As a result of in India, the place promoter management is usually absolute, governance shouldn’t be non-obligatory…it’s every little thing.

A promoter who treats the enterprise like their private checking account is rarely going to create lasting worth. You may earn cash for some time when the tide is rising, however you’ll by no means sleep effectively and should end up bare when the tide goes out.

Lastly, if there’s one hard-earned fact in Indian investing, it’s that the promoter is the enterprise. In the event you can’t belief them, nothing else issues. No projections matter, not the business tailwinds, not even the monetary statements. As a result of these can all be massaged. However character, as soon as misplaced, not often comes again.

Peter Bernstein wrote in his sensible e-book Towards the Gods:

Survival is the one street to riches. Let me say that once more: Survival is the one street to riches. You must attempt to maximize return provided that losses wouldn’t threaten your survival and when you’ve got a compelling future want for the additional positive factors you may earn.

In a market like ours, attempting to guard your self from the injury that unscrupulous promoters may cause isn’t simply good, however important for survival.

It’s rational to keep away from companies the place integrity is handled as non-obligatory and governance is made a mockery of.

What isn’t rational is believing which you can outsmart a promoter who’s already three steps forward, and particularly when your personal guard is down, and your questions are silenced by greed or FOMO.

So, study to say no. Be taught to stroll away from ‘fishy’ promoters. And above all, study to respect the self-discipline of those that play by the foundations, even when nobody is watching. That’s the place actual compounding occurs.