Edelwiess Research is offering a ‘secured’ 15% return on investment over one year to investors via a share purchase and sale agreement for the shares of K Sera Sera (KSS). Look at the name again. This could be a scam.

A couple of our readers recently alerted us about a product offered by Edelweiss, which is offering investors a 15% return. What does this scheme offer? Investors would have to buy shares worth Rs10 lakh of K Sera Sera and enter into an agreement with Edelwiess, where the latter would gain possession of the shares by paying back the investment value to the investor with interest over a period of one year. A presentation sent out to prospective investors explains that, “The investor will get 25% at the time of signing of agreement from Edelwiess Research, remaining 75% would be paid at the end of the tenor. The investor would receive an interest of 15% on 75% of their investment on a quarterly basis through post-dated cheques. As a security, Edelwiess would keep 125% of the outstanding amount with Birla Capital and Financial Services (a Yash Birla company), the Escrow Agent in the agreement. This seems as a good offer to investors as they would earn a ‘secured’ 15% ROI. However, how credible is Edelwiess Research?
 

There is no website of Edelwiess Research, there is no official email id or telephone number where the company can be contacted. Birla Financial Distribution, a subsidiary of Birla Capital and Financial Services, seems confident about the product, considering the presentation circulated to investors promoting this scheme. In an email reply, Suresh Menon, vice president, secretarial & compliance, says that Edelwiess Research has conducted an in-depth analysis on the business plans and prospects of KSS. “Based on the business prospects and potential of K Sera Sera, in line with the past execution capabilities demonstrated on ground, Edelwiess Research – like many other research houses – is extremely optimistic on the successful implementation of the growth model being executed by K Sera Sera,” says Menon.
 

All that is fine. The problem is that Yash Birla is bankrupt and Edelwiess is not Edelweiss. Edelwiess Research Ltd, has nothing to do with Edelweiss Financial Services. Edelwiess Research, a registered company, has a spelling different to that of Edelweiss, but is it using the similarity in name to deceive investors?
 

According to the email circulated, KSS to plans to establish 500 Miniplexes in Tier 2& 3 cities of India and is targeting 3,000 screens for content (1920X1080 format) delivery via satellite across the country over next 3 years. The company has also ventured into e-classroom format, for facilitating e-education delivery in Tier 2 & 3 cities of India. K Sera Sera, of course, has been the target of speculators from time to time including 2001 scamster Ketan Parekh.
 

Investor (also known as the seller) would purchase Rs10 lakh worth of shares of KSS and convert it into physical form (not clear by this conversion is needed). Upon receiving a payment of 25% of the investment value from Edelwiess Research, the investor would then hand over the physical shares along with the transfer deeds to the escrow agent—Birla Capital and Financial Services, a company with no standing. Edelwiess Research will then issue post-dated cheques to the investors of the remaining 75% principal +15% interest which is to be deposited on the stipulated due date. On full payment to the investor, the shares would be transferred to Edelwiess. Till the last date of the agreement, the shares will be on investor’s name.
 

The investor would also have to issue an irrevocable Power of Attorney in favour of the escrow agent (Birla Capital and Financial Services) for the purpose of applying for extension of time for the validity of the transfer deeds and for execution of the transfer deeds.
 

What is the rationale for paying such high interest? In case there is a default in payment, what is the right of the investor?
 

In reply to these questions, Menon says, “In line with global best practices to safeguard the interest of shareholders who opt to enter into the agreement, adequate risk management measures have been put in place. For collateral security, Edelwiess Research shall provide collateral worth 125% of outstanding amount of shares with the escrow agent. If in any month, the average value of the security provided by the Company has become inadequate to cover the pending consideration, then the Escrow Agent shall call upon the Edelwiess Research to give additional security.”
 

He further mentioned, “While the fundamental research based analysis doesn’t foresee chances of a default, the highly improbable chance of a default has also been factored in the risk management framework to safeguard shareholders interest. The default in payment is well taken care of by way of an Escrow agreement where the Escrow agent shall be releasing the shares provided full settlement of the consideration amount is paid to the investor. The value of the outstanding amount is secured by way of shares kept as security and the interest amount is secured by ways of post dated cheques. Also, the security at any given point of time would be 125% so as to cover interest payable on the outstanding amount.”
 

There are too many unanswered questions, and various parties involved in this dubious deal are all shady. What surprises us is that why is Edelweiss not filing a complaint and publishing a notice?