Deutsche Avoids Losses as Gold Lender Plunges

Indian units of Deutsche Asset Management and BlackRock Inc. are among investors who avoided losses by dumping stakes in Manappuram Finance Ltd. before the lender this week plunged 31 percent.

The finance company, which accepts gold as collateral, had its biggest two-day drop since May 2003, after it told one brokerage on March 18 about a potential loss, citing a slide in the prices of the yellow metal. It informed a wider community of investors the following day. The company made a detailed exchange filing after trading hours yesterday. Deutsche Asset sold all the 1.25 million shares it owned in the company as of Feb. 28, according to data compiled by Bloomberg.

The uneven disclosure of information prompted a unit of Banco Espirito Santo SA, Portugal’s biggest publicly traded bank, to lower Manappuram’s corporate governance rating to the lowest level and recommended investors to sell the stock. Bank of America Corp.’s Merrill Lynch unit slashed the price target by 58 percent yesterday. The Indian lender said declining gold prices may trigger an increase in defaults and forecast a 500 million rupee ($9.2 million) loss in the quarter.

“Corporate governance is a bigger concern for the stock, as it will be very difficult to believe in the management,” Nidhesh Jain, a Mumbai-based analyst with Espirito Santo Securities Ltd. said in an e-mail response. Manappuram had earlier given different explanation about a decline in yields on loans and profitability in the third-quarter to disparate market participants, Jain said.

The lender dropped 0.4 percent to 23.85 rupees in Mumbai today. Rival Muthoot Finance Ltd. advanced 2.2 percent. The benchmark S&P BSE Sensex fell 0.5 percent.

Rated Red

Manappuram is the second company to be rated red on the disclosure score by Espirito Santo among the 34 finance firms and banks it tracks in India.

The company first spoke to Ambit Capital Pvt. seeking help in “guiding the market about fourth-quarter results and future outlook,” Manappuram said in a filing to exchanges yesterday. “The statement that the company has selectively shared some information with some investors is false and baseless.”

V. P. Nandakumar, managing director and chief executive officer of Thrissur, India-based Manappuram, didn’t answer four calls made to his mobile phone today. Managing Director I. Unnikrishnan didn’t respond to three calls on his mobile phone.

DSP BlackRock Investment Managers Pvt. sold 158,168 shares, data as of Feb. 28 show. Goldman Sachs Asset Management dumped Manappuram in November, the data show.

Linus Chettiar, a spokesman for Deutsche Bank AG in Mumbai, said the company won’t comment on why its asset management unit sold Manappuram’s shares. Arun Rajendran, a spokesman for DSP BlackRock, did not answer a call to his mobile phone.

‘Show of Hand’

The asset management unit of Swedish bank Skandinaviska Enskilda Banken AB bought 1.1 million shares of Manappuram, according to a Dec. 31 filing. DNB Asset Management AS purchased 500,000 shares last month, the data show.

In August, the company passed a special resolution by “a show of hand” to change its Articles of Association, according to exchange filings. Institutional Investor Advisory, a proxy adviser, had asked investors to reject the amendment that gave four investors the right to veto proposals in shareholder meetings and decide whether the founders could sell their stake.

“There is an expectation from a listed company that its information dissemination would be more even-handed,” Amit Tandon, managing director of Institutional Investor Advisory, said in an interview. “One of the problems with the mid-caps is that sometimes they are closer to one set of investors.”

Collateral Value

The company, which had outstanding gold loans of more than 100 billion rupees as of Dec. 31, may lose part of the interest due on it because a drop in prices of the yellow metal has reduced the value of the collateral, the company said in an analyst conference call on March 19.

The security for loans amounting to 15 billion rupees disbursed in the three months to December 2011, may not be adequate to cover the interest accrued on it due to a high loan to value ratio, it said in the exchange filing.

“Everyone knew that there are significant slippages in the gold loan business but 15 percent of disbursements turning bad has alarmed investors,” said Espirito Santo’s Jain.

In March last year, India’s central bank asked non-bank finance companies to cap loans at 60 percent of the value of the gold kept as collateral. Before the rule, Manappuram was lending as much as 85 percent of the value of the gold, according to Ambit Capital.

Gold Price

“Fundraising for lending is anyway constrained for these gold loan companies,” Vibha Batra, New Delhi-based senior vice president at ICRA Ratings Ltd. said by phone. “If the asset quality also declines, then there is a negative equity sentiment, which might make incremental funding harder.”

Gold in India has dropped 3.4 percent this year. Prices of the metal have increased every year since 2005. Prices may decline another 2 percent, according to Bhargav Vaidya, director of B.N. Vaidya & Associates, a Mumbai-based gold traders advisory.

Manappuram’s “guidance has been inconsistent and the risk to future earnings is high,” Veekesh Gandhi and Rajeev Varma, analysts at Bank of America said in their note to clients yesterday.