The curious case of Gitanjali Gems8217; falling stock,LIC8217;s share rush

LIC is now sitting on losses amounting to almost 80 per cent of its investment value.

Over the past 12 months,even as the government and RBI pushed to curb the import and domestic consumption of gold,state-owned LIC kept buying shares of the Mehul Choksi-promoted Gitanjali Gems Ltd.,and is now sitting on losses amounting to almost 80 per cent of its investment value.

In the four quarters beginning June 2012,Life Insurance Corporation of India continuously bought Gitanjali Gems shares,raising its stake in the company from almost nil to close to 5 per cent now.

In June 2012,the total holding by domestic institutional investors DIIs in Gitanjali Gems stood at 0.06 per cent. By December that year,LIC had raised its holding to 2.93 per cent.

On June 30,2013,the state-owned insurers stake in the company stood at 4.89 per cent. The total investment,calculated by multiplying the number of shares bought in a quarter to the average closing price during the quarter,stood at Rs 202.5 crore.

The current value of its holding,however,is just Rs 40.3 crore,barely a fifth of LICs total investment. The losses amount to Rs 162 crore.

Everyone knew that people were playing in the stock and that the stock price was being taken to unreasonable levels. Either there was a huge judgement lapse by LIC or there is something wrong, said the head of a leading brokerage firm,who spoke on condition of anonymity.

Capital market regulator SEBI and the National Stock Exchange recently barred 26 entities,including Gitanjali Gemss promoter Mehul Choksi,from trading. The trading activity of Prime Broking Company and a set of clients in Gitanjali Gems are under investigation.

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The trend was clear and the market was nervous. Even if LIC wanted to raise its stake,I dont understand who the LIC fund manager thought he would sell the stake to, the CEO of a broking firm said.

LIC did not respond to a question about its investment in Gitanjali Gems.

Over the last two months,as the governments actions started impacting companies in the gold business,the price of Gitanjali Gems shares fell sharply from Rs 650 levels April 2013 to Rs 89.6 on Wednesday.

The promoter has been pledging and releasing his shares on a continuous basis. The un-pledged holding has dropped from 35.88 per cent 3.3 crore shares on June 18,2013 to 34.65 per cent 3.19 crore shares on July 20,2013.

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On July 5,CARE downgraded Gitanjali Gemss rating on Rs 5,800 crore-worth bank facilities/instruments both long and short term,and placed it on credit watch. The revision in the ratings takes into account stressed liquidity position of Gitanjali Gems Ltd as evidenced by full utilisation of the existing working capital limits,which along with the recent RBI guidelines on gold import for domestic purpose would further put pressure on its liquidity position, CARE Ratings said.

Religare Finvest pared its holding from 5.4 per cent in June 2012 to 1.4 per cent in June 2013. Prime Broking too reduced its stake from 2.89 per cent in September 2012 to 1.85 per cent in June 2013.

However,LIC is not the only one sitting on losses. Macquarie Finance took its holding to 3.26 per cent from less than 1 per cent in the company in the quarter ended June 2012. Macquarie Bank raised its stake from 1.04 per cent in September 2012 to 3.9 per cent in June 2013.