19 Apr “The Curious Case of Brightcom Group: Why Fundamental Analysis Isn’t Enough”

“Why Brightcom Group’s Balloon Stock Price Was Doomed to Fail”

Brightcom Group, formerly known as Lycos Internet Ltd, has been in the news recently for all the wrong reasons.

The Securities and Exchange Board of India (SEBI) has issued a show-cause notice-cum-interim order against the company and its directors for alleged major fraud in the company’s financial statements.

The notice has been served to the company and some of its directors, including those from the promoter group and the CFO.
The incident has caused concerns among investors and other stakeholders, with the stock price witnessing a sharp decline.

The stock price of Brightcom rose very quickly in 2021, going up by almost 2,500%. But in 2022, the stock price has dropped by almost 75%, currently around 90% down from its high.

It’s natural to ask why Brightcom went up and then down.

In this blog post, we will delve deeper into the matter, exploring the company’s history, business operations, and concerns raised by SEBI. We will also analyze the potential impact of the incident on the company’s reputation and future prospects.

We’ll start at the beginning and follow the company’s history, which is an interesting story on its own.

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Brightcom Group’s History formerly known as Lycos Internet Ltd:

-Brightcom Group is a digital advertising and ad-tech company based in Hyderabad, India.

-In 1994, Suresh Reddy and Vijay Kancharla, two US-based techies, started an online greeting card service called USAGreetings.com.

-However, with the dot-com bubble burst, they decided to rebrand the company and enter the internet advertising arena.

-The company was renamed Ybrant Technologies, and they acquired Lycos Internet, an early pioneer in the online search domain, in 2010.

-In 2014, the company rebranded itself again to Lycos and shifted its focus to wearables.

-However, their claims regarding the Internet of Things (IoT) and tech capabilities were deemed too far-fetched by analysts,

-and the stock plummeted by 90% over the next five years.

-In 2018, the company rebranded itself again to Brightcom Group due to alleged disputes with Lycos.

Source: Company Docs

Brightcom’s Recent Rise and Fall

Brightcom’s focus:

-The company’s current focus is on digital advertising, a segment that currently forms 65% of total global ad revenue and is expected to rise to nearly 75% in the next five years.

-With the clientele that Brightcom claims to service – Airtel, Qatar Airways, Vodafone, Samsung, Unilever – it could be in a bright spot.

Acquisitions as a growth strategy:

-The company primarily grew through acquisitions, by buying other companies outside India.

Brightcom’s financial performance:

-After remaining stagnant for years, Brightcom’s sales ballooned 3x from ₹654 crores to ₹2,021 crores, and profits jumped from ₹106 crores to ₹371 crores in just 6 months between June and December 2021.

Investor excitement:

-Investors got excited, and retail investors poured into the stock to ride the wave, with many media reports hailing it as the new multi-bagger in town.

-Popular figures like Shankar Sharma of First Global called it a “4AM stock” in November 2021, and retail investors poured into the stock to ride the wave.

Source: Company Docs

However, there were some big problems.

-Firstly, the company primarily grew through acquisitions, buying other companies outside India, and recognizing most of the big money outside India.

-This, in itself, isn’t a cause for concern, but on February 28, Brightcom announced that it had received a notice from market regulator SEBI. The regulator commissioned a forensic audit for the period between FY15 and FY20 to investigate a few discrepancies in their financial statements and said they had “reasonable grounds” to do so.

-Brightcom assuaged fears by saying that this was simply a confusion precipitated by a rule change in Europe, but there was another issue.

After a strong rally of nearly 2,500% in 2021, the stock price came crashing back to earth.

The big question is, what explains this rise and fall of Brightcom?

Reasons Behind Brightcom’s Rise and Fall

The rise of Brightcom can be attributed to the increasing focus on digital advertising, the company’s impressive clientele, and the surge in sales and profits.

However, the fall can be attributed to several factors.

Stock Market Manipulation:

-One of the primary reasons for Brightcom’s fall could be stock market manipulation.

-The company’s stock price rose exponentially in a short period, leading to suspicion of market manipulation. Investors began to question the company’s financials and whether it could sustain its growth.

Forensic Audit by SEBI:

-On February 28, 2022 Brightcom announced that it had received a notice from market regulator SEBI, who commissioned a forensic audit for the period between FY15 and FY20 to investigate a few discrepancies in their financial statements.

Accounting irregularities:

-Brightcom announced on March 2022 that its management had identified certain irregularities and issues in the company’s financial statements for FY20 and that it had initiated an internal investigation.

Stock price crash:

-Finally, SEBI’s action has put an end to the company’s ballooned stock price and brought it back down to reality

-Investors who bought into the company during the period of its ballooned stock price may now be facing significant losses.

But it was not only the first such incidence, the list is long

There have been concerns raised by authorities regarding Brightcom Group’s business practices and compliance with regulations in the past. Here are some :

In 2018, the Securities and Exchange Board of India (SEBI) conducted an investigation into Brightcom Group’s compliance with insider trading regulations. The investigation found that several key executives at the company had traded in the company’s shares while in possession of unpublished price-sensitive information, which is a violation of insider trading rules. The executives were fined and ordered to disgorge their profits from the trades.

In 2019, the Reserve Bank of India (RBI) imposed a penalty of Rs 1 crore on Brightcom Group for non-compliance with certain provisions of the Foreign Exchange Management Act (FEMA). The penalty was related to the company’s overseas investments and remittances.

In 2020, the Competition Commission of India (CCI) initiated an investigation into allegations that Brightcom Group and certain other companies had engaged in anti-competitive practices in the digital advertising market.

In 2021, the Ministry of Corporate Affairs (MCA) issued a show-cause notice to Brightcom Group regarding its failure to file financial statements for certain subsidiaries in a timely manner. The notice also raised concerns about the company’s accounting practices and internal controls.

In 2022,

Allegation of Fraud in Shareholding Pattern

Brightcom Group has been accused of some interesting transactions.
Brightcom’s promoter Suresh Reddy and others sold most of their shares and reduced their stake from 19.74% to 2.16% in a short time.
>But then, Suresh Reddy became a partner in 4 different companies that held significant ownership in Brightcom.
So, even though the promoters sold most of their shares, they still technically held a large percentage of ownership in Brightcom.

We don’t know why the promoters did this, but if they sold their shares when the stock price was high, they could make a lot of money. However, this would make small investors worried.
To avoid this, the promoters sold their shares and bought new shares in other companies at a lower price, but they didn’t tell anyone that they sold their shares.
The promoters were supposed to disclose this information, but they didn’t, which is a problem.

Now the Showcause notice:

• The notice has been issued to the company and four individuals:

Suresh Kumar Reddy, Vijay Kancharia, Yerradoddi Ramesh Reddy, and Y. Srinivasa Rao. Suresh Reddy and Kancharia are part of the promoter group, while Rao is the CFO.

• The allegations of financial fraud:

From 2014-15 to 2019-20, during which SEBI found a number of deficiencies in the books of accounts and other information pertaining to the company’s foreign subsidiaries.

• The deficiencies mainly related to assets impaired in FY20 to the tune of Rs 868.30 crore.

•SEBI also found that the accounting policy followed by Brightcom Group led to overcapitalization of the intangible assets, resulting in inflation of profits.

• The noticees attempted to camouflage accounting entries in excess of Rs 1,280 crore during FY19 and FY20 to give a distorted picture of the company’s financial position. This, SEBI alleges, was done to mislead investors.

• As a result of the show-cause notice, the four individuals have been barred from selling, disposing off or diluting their shareholding in the company, directly or indirectly, until further orders.

• SEBI has also directed the company to undertake an examination of its consolidated financial statements for the period 2014-15 to 2021-22 to ensure they are in compliance with all applicable accounting standards.

• The scale of the fraud is “indeed” large, according to SEBI, and the accounting irregularities were aimed at inflating earnings numbers and the stock price, which has seen a significant increase in the last 3 years.

The impact of the current notice on the company

The showcase notice-cum-interim order issued by SEBI alleging major fraud in Brightcom Group’s financial statements has had a significant impact on the company. Here are some of the potential impacts of the notice:

Stock price:

The stock price of Brightcom Group has taken a major hit following the SEBI notice. The stock has fallen over 20% since the announcement, and it may continue to be under pressure until there is more clarity on the issue.

Investor confidence:

The allegations of fraud by SEBI have dented investor confidence in the company. The notice has raised concerns about the reliability of the company’s financial statements, which may make investors wary of investing in the company in the future.

Legal and regulatory actions:

The notice from SEBI may lead to further legal and regulatory actions against the company and its directors. This could result in fines, penalties, and legal costs, which could have a significant impact on the company’s financial performance.

Business operations:

The notice may also affect the company’s business operations. The investigations and legal proceedings could divert management’s attention away from running the company, and it may also impact the company’s relationships with customers and suppliers.

Overall, the SEBI notice has had a significant impact on Brightcom Group. The company will need to take swift action to address the allegations of fraud and restore investor confidence.

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