Amira Foods (ANFI) is a century-old company founded by the Chanana family in India that produces and distributes rice products. Its main source of income is from the sale of Basmati rice, a long-grain varietal found in India, as well as other specialty rice and related food products. Amira went public in October 2012 and shortly thereafter began to attract interest from investors as a high-growth consumer company. Short-sellers, however, saw a target ripe for manipulation, schemed against Amira, and drove the shares of Amira’s stock down 75% of their value or around $400 million in market capitalization. Even now, after Amira’s stock price has partially recovered, the company still is at a loss of over a $180 million in market value. Amira claims the short-sellers’ attacks were based on false statements and has sued them in Federal Court.
The defendants in the case are Prescience Point Research Group (further known as PPRG). Amira claims that PPRG released two optimally timed reports to make good on their short positions. Those reports used “interviews” with supposed Amira “insiders” who railed against the company’s finances. However, Amira alleges that those “insider interviews” are fraudulent and that the short-sellers’ claims of malfeasance on the part of the company are nothing more than a collection of lies. Amira’s defense was confirmed by the independent forensic investigation conducted by BDO LLP, who looked at the key allegations made by PPRG and found that they were without merit.
The defendants include Prescience Partners, Prescience Investment Group, Prescience Capital, and Spruce Point Capital Management. Prescience was co-founded by Eiad Asbahi and Ben Axler. At the time of the case filing, Amira concluded that the complete list of defendants was unknown and referred to them as “John Doe Defendants 1-10” in the document. Short-sellers very often create a short position in a company’s stock before releasing “research reports” about the company and then profit as its share price drops following their research report’s release. This is exactly what Amira claims Prescience did.
Amira Nature Food is currently under the leadership of Chairman and CEO Karan A. Chanana, the fourth generation of his family to lead the company. Amira went public in October 2012, raising $90 million at $10 per share. Mr. Chanana owns 75% of the company’s shares. Mr. Chanana has not sold any shares and has in fact purchased shares in the open market since the IPO. The company has more than doubled its EBITDA from $40 million in 2012 to $100 million in 2015. Due to this growth, Amira was widely considered one of the most promising companies in India, as acknowledged by numerous consulting and consumer groups.
However, as early as winter 2014, members of PPRG were plotting to short Amira. PPRG conducted a series of interviews with industry participants and even claims to have interviewed key executives, former board members and other one-time insiders of Amira (although these individuals are on record stating that they were never interviewed by PPRG or anyone who identified themselves as working for PPRG). PPRG used their interviews and other questionable industry analysis as the basis of a report that would cast Amira and the Indian rice industry in a suspicious light. PPRG then sat on this report waiting for an opportune time. Amira’s launch of a $225 million bond offering and a $35 million revolver was precisely that moment.
On February 9th, the day that Amira’s investment banks had told the market they would close the books on Amira’s bond deal, PPRG released an “investment research report.” The report was titled: Fraud Cap Redux—Amira Nature Foods: A Collection of Lies with Leverage on Top. PPRG disseminated the report with maximum disruption, as was their intent. The report claimed that Amira overstated its revenue by 100%, didn’t disclose related party transactions and had other numerous red flags. PPRG used APEDA, Agricultural & Processed Food Products Export Development Authority, as one of their main sources of evidence. APEDA’s export data showed Amira as ranked 14th on their Basmati report. PPRG noted that Amira’s sales and revenue should have them much higher than 14th and that the company’s exports of Basmati rice were much less than what PPRG estimated Amira’s international sales of Basmati rice to be. However, Amira defended itself by saying that it doesn’t even report its international sales of Basmati rice, and thus can’t overstate this number. Furthermore, it claims that APEDA only tracks exports of Basmati rice from its Indian entity, which has nothing to do with the company’s sales of Basmati rice internationally to 60 countries around the world by its various non-Indian operating entities. Amira also points to their public filings which show that they rely on third parties for significant amounts of their production needs, including some that are not based in India. It also said that there are products it markets as Basmati that do not meet APEDA’s strict definition of Basmati. PPRG claimed that a close look at Amira’s competitors demonstrated that their international Basmati sales match APEDA data, yet Amira’s complaint proved that PPRG supported their analysis with false data.
PPRG also claimed that Amira’s sales in India were inflated because its sales in India were too big given the size of the domestic Basmati rice market in India. Amira countered saying that PPRG made up its own market size for the domestic Basmati rice sales in India, instead of relying on publicly available market data that pointed to a market nearly three times the size of what PPRG claimed (PPRG claims a market size of just $766 million, while industry experts show a market size of $2 billion or more). Amira also pointed out that its sales in India consist of Basmati rice, non-Basmati rice, and other food products; so, it competes in a much larger market than PPRG is giving it credit for.
PPRG attempts to bolster its claims by quoting an interview with an unnamed executive from an Indian competitor – KRBL. In the PPRG report, the executive claims that Amira has no share and is not even relevant in Basmati sales in India. While in the court filings, Amira shows evidence of a letter from KRBL’s Chairman Anil Kumar Mittal emphatically denying that anyone from KRBL ever spoke with PPRG and that he has known the Chanana family for generations. Furthermore, the court filings also state that additional interviews with Mr. Wacha, Mr. Suneja, Mr. Nayar, Mr. Poddar and Mr. Malina were also falsified. The PPRG report also uses testimony from Subhendu Mishra, who they allege was the first CFO of ANFI, the public company, but this could not be true. Mr. Mishra never worked for the public company and in fact was terminated some six months before Amira’s IPO after a total of just two and a half months of employment. Despite PPRG’s claims to the contrary, Mr. Mishra could not speak intelligently about the company’s financial practices and disclosure policy as a public company because he didn’t work at the company when it was public and was never at the company long enough to be an insider.
Amira has accused PPRG of writing their reports with the malicious intent of defrauding the company and its shareholders for their own personal gain. At the time of the first report, PPRG and its collaborators had a short position of more than 5.2 million shares, a whopping 58% of the “tradeable float.” Since a short of this size would be impossible to cover unless there was a complete collapse at Amira, PPRG decided to take matters in their own hands and released their report at a time to be most damaging to Amira. Amira contends that PPRG was not satisfied with simply shorting the stock before their report, but also suggests that PPRG augmented their returns by trading in the options market immediately before the report’s release. Following the report, the stock fell 36% from $13.40 to $9.95 per share. In the wake of the report Amira was forced to cancel its debt offering and the company and its executives found themselves facing a class action lawsuit based on the PPRG report. PPRG has continually bragged on social media that it was the harbinger of Amira’s decline, even taking credit for blowing up Amira’s bond deal.
Amira appeared to recover despite the report and its pulling of its bond deal. An unusually large short position remained in place; however, and on July 30, 2015, the day before Amira was to release its 20-F (a foreign company’s annual report), PPRG released a second report claiming to have the “smoking gun” proving fraud at the company. The second report mimicked the first in nature, and so did the option trading before the report’s release. But the second report accomplished something else, PPRG named the company’s auditors and this ultimately had the impact of the auditors asking Amira to delay the filing of its 20-F until an independent forensic analysis could be completed on both PPRG reports. Amira delayed the filing of its 20-F and then ultimately terminated its auditor. Amira’s share price, not surprisingly, collapsed in the aftermath and hit an all-time low of $2.84 per share on August 20, 2015.
Amira announced that it hired new auditors and that it would hire an independent forensic firm to review key allegations made by PPRG. On November 10, 2015, Amira released a 6-K detailing the results of this forensic which was conducted by BDO, reporting that “BDO has independently concluded that [PPRG’s] allegations are unsubstantiated and/or unfounded.” The next day, on November 11, 2015 Amira’s stock jumped to $7.61 per share. Separately, Amira has also stated that it is continuing to work with its new audit firm, ASA & Associates, one of the leading independent audit firms in India and that it expects to file its 20-F as soon as practical. Management has continued to defend the veracity of its historical financial results and has said that it expects no material changes to those results when its 20-F is ultimately filed. Amira’s stock has recovered further and sits at $8.13 per share at the time of this writing. But with a trailing PE of just 5.4x, investors are clearly waiting for its audited results.
Amira is now seeking compensatory money damages, punitive damages, an order that the defendants remove all false statements from reports, websites, social media, etc., legal costs associated with this case and subsequent cases, and barring PPRG from disseminating any further falsehoods against Amira. We think this means this story is just getting started and it will be worth watching going forward.
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