Why small cap stocks valuations are rotting?

Erstwhile promoters of some of the companies which have changed management tell us - why.

MUDRA LIFE STYLE LTD was sold by the Indian Promoters to a Korean Company earlier this year. The company has now reported a loss of Rs 199.29 cr in Q2FY12 on a sale of Rs 44.90 Cr. The loss looks extraordinary by any standard. In fact they are. But if you read the notes below the tabulated result, the reason for the loss is write off/ down the values of inventories taken over by the new promoters at the time of acquisition. And one of the reasons for write off is NON EXISTING INVENTORY found during the course of stock audit conducted by the independent auditors. This not only a poor corporate governance but it is a FRAUD. This is similar to Satyam where the promoters had inflated cash and here Mudra Lifestyle inflated stocks. Erstwhile promoters have been inflating inventory and showing stocks which were not there to show not only higher profit but also to take loan from banks as well.

Somewhat similar issue is also there in case of ISPAT INDUATRIES LTD as well. Subsequent to the takeover by JSW, the company made a provision of over Rs 1180 Cr within 6 months of taking over the company by the new promoters under various heads. The point is, how come these amounts which were good till 6 months back, can become bad immediately on change of management. Simply, these were bad earlier also but shown to be good to keep balance sheet healthy. Else, how would someone explain for these provisions just because promoter shareholders have changed?

More recently, the new promoters of THE ANDHRA PAPER MILLS LTD also had to make provision of Rs 26.50 cr subsequent to taking over charge.

However, all small cap stocks cannot be bad. One is required to make proper research before making investment decision but sometime it is really difficult and for common investors, it is just impossible.