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Pump and dump strategy? Erosion of GSFC's Rs 250 crore investment in Canadian firm

A Karnalyte site in 2013 
By AK Luke (IAS (retd)
Having earlier worked there in 2003-06, I became aware of the Gujarat State Fertilisers and Chemicals’ (GSFC's) Canadian investment through a chance conversation with two of its employees some time in 2012 and its follow up information (click here).
As it transpired GSFC would later invest Rs 250 crore in M/s Karnalyte in Canada, some time in January 2013, by buying 5.49 million of its shares, 20%, for 8.15 Can$ then worth Rs 250 crore. Subsequent investment value would be determined in future by the share price which may fluctuate. Thus this investment rested on very slippery foundations and was not project based, as I earlier had thought (click here).
The MD GSFC announced that this investment was in return for a promise by Karnalyte to supply 350,000 tons of Potash sometime in an unspecified future (click here).
Karnalyte had no potash production facility then. It appears the potash promised would be from a potash mining project to be set up in future. Thus, Karnalyte's promise was like issuing a cheque on an account which had nil balance.
It was for this shadowy promise that GSFC invested Rs 250 crore. in a distant land of which it knew nothing commercially.
The GSFC then appears to have considered investing a further $ 700 million to fund the proposed project. This mercifully did not happen (click here).
But apparently it did buy more shares of Karnalyte later, it is not known when and at what price. It now holds 38% of Karnalyte, and is now the biggest shareholder of Karnalyte, in effect GSFC has the controlling interest in this company in Canada.
To invest any sum in the shares of a company in the hope that it would set up a production facility to supply raw material in future is inexplicable. Even if Karnalyte had a functioning potash production unit, not a single rupee should have been paid for what was a commercial promise, to be paid for by purchasing material when available.
What about the investment of Rs 250 crore in Karnalyte shares? Shares purchased for $ 8.15 each are today valued at $ 0.24, the investment of Rs 250 crore. is now worth less than Rs 10 crore (click here). The entire Rs 250 crore was transferred in one day sometime in 2013.
How was the share purchase price determined? This is not clear but the share price of Karnalyte in January 2013 was approximately $7. Looking to the share price movement graph after 2010, it is possible that this price moved up anticipating GSFC arrival. Once GSFC entered buying 5.49 million shares, the share price sharply dropped with GSFC holding the almost worthless paper. It has the appearance of a classic ''pump and dump' strategy.

Not a scarce commodity

Was potash ever a scarce commodity for GSFC? GSFC's requirement of this material was not large and the material was freely available in international markets. GSFC has never faced and does not face any shortage even now with the promised Karnalyte supply vanishing. Today there is a reported glut of potash in international markets. 
GSFC investment rested on false reasoning that a promise to supply material in future had to be paid for now by buying company shares
What is the financial performance of Karnalyte, the company in which GSFC invested Rs 250 crore for 20% stake seven years ago and subsequently paid more to increase its stake to 38%?
a. For the last 12 months it had no revenue or profits.
b. It has three employees.
c. No meaningful market capitalization.
d. GSFC now owns 38% of its shares.
e. The potash project is still at the conceptual stage, not yet taken up. The company now talks of a Proteus Nitrogen Project, which is not a potash project.
The source of this information is the online corporate portal (click here) for investors, “Simply Wall Street". Its assessment of Karnalyte made sometime in June 2020 is as follows:
“Every investor on earth makes bad calls sometimes. But you have a problem if you face massive losses more than once in a while. So take a moment to sympathize with the long term shareholders of Karnalyte Resources Inc. (TSE:KRN), who have seen the share price tank a massive 90% over a three year period. That might cause some serious doubts about the merits of the initial decision to buy the stock, to put it mildly. And more recent buyers are having a tough time too, with a drop of 49% in the last year. Furthermore, it’s down 15% in about a quarter. That’s not much fun for holders.”
Is this portal talking specifically about GSFC as seems likely? "That might cause serious doubts about the merits of the initial decision to buy the stock, to put it very mildly" -- a harsh judgement indeed on GSFC... 
Karnalyte board of directors: Site visit 2016
The Karnalyte CEO at the time of this investment by GSFC was Robin Phinney. He was removed from his post in 2018 by the company. The circumstances of this as reported on the Karnalyte site suggests some ethics issue as the cause (click here). The new CFO is Christie Gradin. The new CEO is not known.
The Chairman of the Board now appears to be V Nanavaty, DC Anjaria is also on the Board (click here).

Summing up

GSFC saw almost all its entire investment eroded.
The primary purpose of the investment in shares of Karnalyte was an assured supply of potash. Not one ton appears to have been received.
The investment rested on false reasoning that a promise to supply material in future had to be paid for now by buying company shares. 
The Canadian share market has rated the company very negatively; this is a conclusive business judgement.
The interests of the GSFC have suffered and the credibility of GSFC and by implication the Gujarat government dented.
Though the events described here began in 2013, there has been no public comment on this matter till my online article in January this year. Public response to it was not significant.
All the material presented here is from open sources and no confidential government or official documents are used. Anyone with a computer and a net connection could have prepared this report. Yet no one did which puzzles me. The material unearthed by me is disturbing and distressing. It would be even more so if the GSFC, Gujarat government and the business savvy people of Gujarat did not respond appropriately to these revealed facts.
---
This article is based on letter emailed by AK Luke (1975 batch Gujarat cadre IAS official, who resigned from the service in 2006) to Chief Secretary, Government of Gujarat, Anil Mukim, and CMD, GSFC, Arvind Agrawal, on November 2, 2020

Comments

Anonymous said…
Thank you very much for your dedication and determination in finding out exactly what has happened with the GSFC / Karnalyte Resources debacle, Mr Luke.

A thorough investigation into both companies regarding the erosion of almost $60 million dollars in the last 7 years is certainly welcome by Karnalyte shareholders.

With the addition of Mr. Anjaria to the Karnalyte board, I was hopeful he would expose the root of the problems, but so far that has not been reported.

Keep up the good work sir, and all the best to you in your quest to expose the truth.
A. K.. Luke said…
Thank you. What you express is a hope but perhaps nothing more than that. Let us see

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