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Nirmal Kotecha could have created a record for making quick bucks through pre-IPO investment. Although he missed out on netting a multi-bagger (23.5x returns within 1.5 years), he did end up with a decent return in Pyramid Saimira. According to VCCircle calculations, he made 4.5 x returns within 2.5 years as he almost entirely cashed out early this month from the Chennai-based firm, which is engaged in the digital distribution of cinema.

According to the disclosures by the firm, Kotecha, who resigned from the board last November, holds just 67,502 shares representing 0.24% of the firm as of January 9, 2009 as against his holding of around 24% last September.

VCCircle looked at previous public disclosures of his investments to work out his returns. According to the red herring prospectus for IPO, Kotecha held 8.48 million shares representing 42% stake as a person acting in concert before the IPO. More than half of these shares were picked from the co-promoters at face value of Rs 10 each. Our calculations show that he would have paid around Rs 9.5 crore to buy the shares in mid 2006. His investments gave him a board seat and made him the single largest shareholder of the firm at the time the firm floated the public issue in December 2006.

After sitting tight through the one year lock-in period for his shares after IPO, he bought 2 lakh more shares on 25th January 2008, apparently sensing an opportunity to shore up holdings after the January 21-22 (2008) global market crash. This would have cost him additional Rs 7-8 crore, taking his total invested sum to around Rs 17 crore.His combined stake was close to 30% and he remained the single largest shareholder of the company without actually being the promoter.

But the market turned turtle thereafter. He sold part of his holdings to one of the co-promoters PS Saminathan and some in the open market netting around Rs 37 crore in June. The September market crash, however, came as a dampener. He then entered into a deal with Saminathan to cash out fully at a transaction price of Rs 200 but this couldn't materialise as the stock price halved and kept going down further. Finally he is estimated to have sold off his remaining shares for around Rs 40 crore (as against Rs 140 crore if he had managed to sell to Saminathan at the agreed price).

All told, he has made around Rs 77 crore on his investments of Rs 17 crore which is 4.5 x returns. It would be actually higher factoring in that he invested half of it just last year. This surely beats most private equity/VC exits returns on an annualised basis but is modest compared to UTI Ventures 50x returns from ExcelSoft in seven years.

Interestingly, if Kotecha had exited Pyramid at the 52 week high price of the firm, he would have made Rs 410 crore for his 30% stake translating into 23x returns over 1.5 years?

The Hindu Business Line has a brief profile of Kotecha which you can read here. Kotecha also floated a venture capital firm called Kotecha Capital. According to a report last year, Kotecha Capital committed Rs 500 crore to a Bangalore based pizza company United Pizza. VCCircle's attempts to contact Kotecha to verify this development were not successful then..

The Other Promoters Who Made Money

The firm had three co-promoters V Natarajan, N Narayanan and PS Saminathan. Most of the shares were subscribed by the three between 2005-2006. Given their pre IPO hodings --Saminathan (11.08% or 2.19 million shares), Narayanan (7.53% or 1,49 million shares) and Natarajan (6% for 1.2 million shares) - would have invested around Rs 1.2-2.2 crore each.

Natarajan in particular, who was the chairman of the firm till he retired in April, apparently sold his shares (when the prices were still much high) for an estimated Rs 37 crore. This implies returns of 31x within three years. Natarajan didn't even come from an investment background. He has a history of film production, content and management and was involved with prominent South-based Gemini Studios.

The other shareholders are still holding on to their shares. For instance, Narayanan, a Delhi University graduate, still holds around 15 lakh shares which is now valued at around Rs 4.5 crore(cost price around Rs 1.5 crore).

While Saminathan bought some shares from Kotecha in 2008, his own shares were apparently pledged with financial institutions that have started selling after margin calls were triggered. His stake has dropped to 17.98% (end of December) from 24.45% (on Dec 5).

Pyramid Saimira has been in the news for all the wrong reasons. It was recently the target of a serious fraud wherein the company was sent a forged letter of SEBI asking Saminathan to make an open offer to minority shareholders. The company announced that SEBI had asked Saminathan to make an open offer to acquire 20% of shareholding at a price of Rs 250/share, more than four times the ruling market price. Later it was found that SEBI had not sent any such advisory and the letter was forged. The matter is still under investigation.

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